Schaffer Corporation Half-Year Results Presentation: Dec-06 A focus - - PowerPoint PPT Presentation

Schaffer Corporation

Half-Year Results Presentation: Dec-06

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A focus on creating long term shareholder value

• Consistently earned a return on capital in excess of our target of 15% return on capital
• Continue high ordinary dividend payout ratio of approx 75%*
• Schaffer provides access to capital and leadership across all businesses
• Management experience
• Efficient operations
• Strong brand
• Integrate acquisitions
• Leverage innovation to pursue

– New markets (local, nationwide and global) – New products – New customers – New channels

• Acquisition and divestment opportunities
• Downstream and upstream opportunities

Capture new opportunities for growth Strengthen core business

Success driven by the Schaffer Approach …

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Our performance is not dependent on one industry sector because our core businesses operate in different markets

• World low cost producer
• Experienced management
• Skilled workforce
• Premium quality leather
• Local presence in US, Europe

and Asian markets High barriers to entry due to strict quality control Major competitors: Eagle Ottawa, Seton, GST and Boxmark Approved: Audi, General Motors, Ford, Land Rover, Toyota, Mazda $6b global market Automotive Leather

• Acquire prestigious properties at

below replacement value

• Refurbish and secure long term

leases

• JV partners are industry experts

Fragmented Commercial / Residential Property

• Market leader
• Technically engineered
• Strong brand
• Innovative

Fragmented Require scale Commercial / Residential $50m - $100 pre-cast pre- stressed concrete products (WA) Building Products – Delta

• Market leader
• Vast raw material reserves
• Quality product
• Distributed through Urbanstone

network Fragmented Commercial / Residential $250m - $300m natural and reconstituted limestone (national) Building Products – Limestone Resources

• Market leader
• Premium product
• Strong brand
• Innovative
• National distribution network

Fragmented Require capital and innovation to match Commercial / Residential $300m - $400m paving products (national) Building Products – Urbanstone

Value proposition Competitors Customers Market Business

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Profit rises on stable revenue

30%

12.4 9.3 EBITDA 4.8 4.2 Net interest cover (EBIT/Net Interest) 2.8 10.8 Cash flow from operating activities 18% 16% ROCE $0.25 $0.25 Ordinary dividend 116% 88% Net debt / equity 4.7 10.4 Cash reserves

42%

0.37 0.26 EPS

44%

5.2 3.6 Net profit

stable

73.9 73.7 Revenue

% change to Dec-06 to Dec-05 Half Year Ending 31 Dec (A$m)

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Increased earnings in Leather supported by another strong performance from Building Products

Operating EBIT (by Segment)

3.6 3.9 2.1 4.1 1.0 1.0 0.1 0.5 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 Dec-05 Dec-06 $m

Building Products Leather Investment Property Other Investments

6.8 9.5

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Dec-06 Debt Position

3.6 0.0 3.6 Property Freehold 40.8 40.8 Leather 4.7 Cash Reserves 59.8 Net Debt 64.5 56.2 8.3 Total Debt 19.6 17.5 2.1 Property JV’s 0.5 0.0 0.5 Building Products

Total Non- Recourse Recourse

• Debt is largely non-recourse to the parent company
• Cash reserves as at 30-Jun-06 were $13.6m. Applied during period to Limestone

Resources business and UrbanStone Central property acquisitions

• 31-Dec-06 undrawn debt facilities: $20m

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SFC Group Gearing Structure

• The Leather debt and JV Property debt are effectively ‘Structural’ debt with

low financial risk to the Group

• $38.7m of the Leather debt is a subordinated non-recourse Commonwealth

Government loan with a weighted average interest rate of 6.5%.

• The Government loan was initially provided as a grant in lieu of export

expansion initiatives and was subsequently converted to a loan. – Interest only until Feb-2008; – $2m per annum principal payments from Feb-2008; – Facility Term – 2012

Total Group Debt ($62.2m)

Subordinated Govt Debt - Leather, $38.7 Senior Debt - Leather, $2.1 JV Property, $19.6 F'Hold Prop & B'Products, $4.1

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Why actual gearing is significantly less than it appears

• Group gearing (Net Debt /Equity) per balance sheet @ 116%. Gearing
• verstated because properties are recorded at book value; not market value.

Substituting Market Value for Book Value would show Group gearing @ 85%.

• Reasons for not recording at market value

– Obliged to take unrealised value uplift thru P&L – distorting operating earnings – Cost of valuations that would be required at least annually – Prefer to take a conservative position and inform the market of our approach

• Debt against investment properties JV’s is specific to each property with debt

reducing only when individual properties are sold outright.

• Our Investment Property portfolio has a conservative loan to valuation ratio @

51% - well below typical LVR’s of 65% to 70%.

$1.7m $6.0m $3.0m 2 Subdivision JV’s $60.0m $20.5m $33.5m Market value $33.2m $14.2m $16.0m Book value $23.2m Total $3.6m 5 Freehold $17.9m 8 Investment JV’s Balance Sheet Debt Properties

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Cash flow

13.7 Acquisitions (L’Resources, Frobisher St, Canning Vale, Neerabup) 3.5 8.5 Dividends paid (8.9) (2.3) Increase (decrease) in cash on deposit 3.6 11.0 Total cash applied 1.6 2.1 Capital expenditure 3.6 11.0 Total cash generated 0.0 (0.4) Other (1.2) (1.0) Other changes in working capital (6.3) 2.7 Debt reduction/(increase) (2.7) 7.2 ALH change in trade working capital (2.7) (2.4) Tax paid (2.0) (1.7) Net interest paid 12.2 9.3 EBITDA

Dec-06 Dec-05 Half Year Ending 31 Dec (A$m)

Strong player pursuing profitable growth

Building Products

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Urbanstone, innovative national market leader commanding a brand premium

• Unmatched plant & design flexibility to satisfy residential & commercial sectors
• Embedded cost control culture
• Owned national distribution network established since 1993

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Strengthened by acquisition of Limestone Resources, a WA leader in natural and reconstituted limestone

• Revenue contribution $12 - $14m per annum
• Vast and centrally located reserves
• Potential for significant operational improvement
• Leverage Urbanstone national distribution network to drive sales

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Delta, leading the way in technically engineered concrete products in WA

• Low cost, profitable product
• Strong industry relationships and distribution
• Current projects include Bishops See, Century City and Ikea

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Building Products continues to ride robust WA economy

Building Products 15% 3.9 27.0 Dec-06 +10% +28% % change Dec-05 A$M 3.6 EBIT 17% EBIT Margin 20.8 Sales

• Sales grew with the first-time inclusion of Limestone Resources
• Improvement driven by the continued strength in WA of resource-fuelled

commercial and infrastructure projects where Delta is a major supplier

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Opportunities to grow Building Products

• Delta pursuing profitable, large scale, medium to long term projects
• Urbanstone and Limestone Resources 4,800m2 prestige showroom in Osborne

Park opening in May 2007. Osborne Park is one of Perth’s most central and popular home improvement retail destinations.

• Investigate acquisition and divestment opportunities that satisfy criteria for long

term shareholder returns

Leverage a solid foundation for growth

Leather

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Ford and GM sales have dropped while Japanese OEMs gain market share in USA

1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 # cars sold Ford General Motors Toyota Honda Nissan

Tough conditions in the automotive leather industry

• demand from US customers facing intense competition from Japanese OEMs
• Loss of BMW as a customer due to South African industry support scheme
• Production overcapacity within the industry
• Widespread cost cutting programs at OEM level

Source: National Automobile Dealers Association

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In response, Howe changed strategy to remain globally competitive

• Shifted labour intensive cutting operations to lower labour-cost countries of

Slovakia and China and to be closer to growth markets of Europe and Asia through a local sales and service presence

2005 150 Shanghai cutting plant 2005 250 Slovakia cutting plant Low labour cost State of the art design 1996 150 Mexico cutting plant Modern, global scale facility 1996 150 Howe & Co (Finishing) Australia has 4th largest cattle herd globally Secure supply of disease-free hides Range of hides to match customer needs 1996 50 Rosedale (Preliminary processing) Competitive advantages Commissioned Employees Manufacturing Sales Office

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Strengthening our position in the growth markets of Europe and Asia

Howe sales by region

31% 20% 30% 41% 24% 30% 14% 9% 0% 25% 50% 75% 100% Dec-05 Dec-06 North America Asia Europe Australia

$46m $42m

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We have performed well in a tough market

• ALH’s reported $4.0m EBIT was higher than the pcp due to:

– A significant reduction in redundancy expenses (pcp: $1.3m); – Removal of cutting duplication expenses – Currency: A$ was weaker against the $Euro @ 59.6 (pcp 62.4); and up slightly against the US$ @ 76.3 (pcp 75.2)

• Earnings sensitive to foreign exchange fluctuations:

– $Euro approx $400k per 1¢ appreciation in $A – $US approx $250k for every 1¢ appreciation in $A

Leather

9.3% 4.0 4.4 1.5 42.3

Dec-06

+95% +83%

• 61%
• 9%

% change

2.1 ALH EBIT 4.1% EBIT Margin

Dec-05 A$M

3.9 Furniture revenue 2.4 Automotive EBIT 46.4 Automotive revenue

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Pursuing growth opportunities to build scale

• World low cost producer
• Increased sales team in growth markets of Europe and Asia

Solid business generating shareholder returns

Property

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Valuable portfolio of assets with recurring income

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JV partners are industry experts with track record of success

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Strong earnings and cash flow contribution

51% 51% Loan to valuation (debt / market value) +20% 33.5 28.0 Market value +31% 17.9* 14.4 Debt +15% 16.0 13.8 Book value Investment Property 0.6 1.0 Dec-06 +18% +2% % change Dec-05 A$M 0.5 Cash 1.0 EBIT

* includes $0.7m in Subdivision debt resulting from the refinance of the IBM Investment Property which part funded the Neerabup acquisition.

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Strong demand for Mindarie Keys residential subdivision contributed to an improved EBIT

+0.3m 0.7 0.4 Debt Mindarie Keys JV Subdivision 1.7 0.5 Dec-06 +1.7m +0.4m $m change Dec-05 A$M Cash 0.1 EBIT

• Expect Mindarie to generate another $3.0m of EBIT and $4.0m cash over the

next 18 months after repaying $0.7m of associated debt.

• Set for future demand for industrial land

– Acquired 20% JV interest in 26ha property in Neerabup for release as an industrial subdivision starting in 3 – 5 years.

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Outlook - Earnings

• Building Products

– Integration of Limestone Resources producing:

• Significant operational improvement
• Sales and marketing synergies through Urbanstone national distribution network

– Opening of UrbanStone Central in Osborne Park will assist revenue growth – Delta, the Precast Division, will continue to leverage off the robust WA economy – Full year earnings should at least equal the $6.6m EBIT recorded in 2005/06

• Leather

– Restructuring is complete and immediate cost saving opportunities taken – Howe’s path to profit growth now rests with securing additional revenue – US market getting tougher; Still in decline; Expecting further pressure on US revenue and margins – Howe’s sales focus: Europe & Asia. Local manufacturing and sales presence in Kosice (Slovakia) and Shanghai (China) is improving revenue in these growth markets – Howe earnings will be lower in the second half but will be an improvement on last year’s $4.8m EBIT

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Outlook – Earnings (continued)

• Property

– Solid and steadily improving returns are expected from our Investment Property leasing activities – Mindarie earnings should be in line with the previous year but will depend

• n when stock is released to market (potentially resulting in a significant

portion of Mindarie earnings carrying over to 2007/08) – Neerabup (earnings neutral) – a land banking exercise for the next 3 years at

• least. Purchased at well below replacement cost
• At Group Level

– We expect full year earnings to be an improvement on the $8.1m NPAT reported for the financial year ending 30-Jun-2006

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Outlook - Dividends

• Interim Dividend

– SFC will pay a 25¢/share fully franked ordinary dividend – Ex Dividend Date: 8-Mar-07; Payment Date: 20-Mar-07

• Dividend Outlook

– SFC does not expect to lift its dividend payout ratio significantly beyond the 75% range in the medium term to conserve funds for growth – The Board’s payout ratio policy balances Schaffer’s shareholder returns

• bjective with our objective to fund organic growth in our Building

Products division and grow our Property portfolio.