Fisher & Paykel Appliances, John Bongard

By Jenny Ruth

Monday 2nd May 2005

Fisher & Paykel Appliances Holdings' shares have slumped from more than $4 to below $3 since the company warned in February that its net profit for the year ended March 31 would be between $63 million and $68 million, about 14% lower than its previous guidance. The company blamed the high New Zealand dollar and record prices for steel and plastics.

Sharechat: What measures are you taking to deal with the high New Zealand dollar and high commodity prices?

Fisher & Paykel Appliances managing director John Bongard: What we're doing there is concentrating on the things we can change. We certainly can't change the high value of the Kiwi dollar or do anything about high commodity prices. What we're focusing on is cost out. That can be anything from studying alternative materials or looking at different supply sources, efficiency within our own plants, logistics - just everything in the day to day business.

SC: Will the increases in costs be a permanent problem, particularly for steel and plastic?

JB: The answer to that question is that it's unlikely. Simple supply and demand economics will take over. What we're seeing now is that capacity for steel is growing. Simple supply and demand economics will show as capacity grows and the price will eventually turn back down again. The other important on is oil which plastics are made from. For everyone who's saying the days of cheap oil are over, there are others saying that's nonsense. We sit on the end of that. The other thing is China demand. That's something we can't do much about so we sit on the end of that too. We're price and quantity takers rather than makers. We're too small to affect the supply and demand curve.

SC: Are any solutions in place to recover the share price?

JB: All I can say is our business is still a very robust one. The only thing that's changed in recent times are unprecedented increases in raw materials costs and the high New Zealand dollar. Nothing internally has changed. The business is still very robust. At the end of the day, you have to chose whether you have a long term view of the business. The market will decide that.

SC: What production and marketing strategies do you have in place to compete with the cheaper competition from Asia, especially China?

JB: I think innovation is the key there. Without a doubt we have to continue to produce and market new innovative products that offer real value for customers. The other advantage I think we have is that we live in and know New Zealand very well. We therefore design products that are made for this market specifically.

SC: What will be the impact of free trade agreements with these countries?

JB: We entered that debate early on. The government and the public are quite aware of our view. We remain sceptical that the overall national good is being served here. If you put that political issue aside, the key criteria we're looking for in the negotiation of FTOs is a continuation of our tariff phase down which the government's already announced. If the negotiations are successful, it won't have any impact because we had planned that reduction.

SC: What further expansion plans do you have for markets outside New Zealand and Australia, including US and Europe?

JB: The USA is our key focus for expansion at the moment and will be for the next two or three years. After that, a full launch of products into Europe is planned.

SC: Will the reduced profitability result in a lower dividend payout? What proportion of profits do the Directors anticipate paying as a standard in the future?

JB: I can't really comment on that - that's a full board decision which is taken at the year end result which the 19th May anyway. All I can say is the policy of the board is that the payout will be in the order of 60%. There's been no announced change to that.

SC: To what extent will the expansion in North America and Europe offset the contraction being experienced in Australia and New Zealand in company sales.

JB: We are currently compensating from a sales point of view which is reflected in the numbers we've announced. (The company said in February that while New Zealand sales were down 7.9% and Australian sales were down 3.1% in the April to December period last year, US sales were up 50%. Overall, sales were up 2.6%. Fisher & Paykel began exporting to the US in 1999 and it is now the company's second biggest market behind Australia.)

SC: Is Fisher & Paykel Appliances likely to start manufacturing in China or elsewhere in Asia? If so,will the quality be the same?

JB: You can never say no to a question like that, but at this stage there's no plan to manufacture in Asia. When we look at the globe, we consider our Australian and New Zealand plants really are located in the Asian area as the world looks at us.

SC: Who are your main competitors in China and Korea and are they expanding exports?

JB: The main Korean competitors are LG and Samsung. The main Chinese player at the moment is Hayer. Are they expanding exports, yes they are globally, without a doubt. We've seen a bigger expansion of those brands in Australia than in New Zealand.

SC: Are the costs of integrating DCS running to plan? Will DCS continue to produce OEM products?

JB: DCS is on target and it will continue to make OEM products. We still OEM quite a bit. We make GE refrigerators into Japan and the Philippines, the Electron brand into Israel, Sharp and Sanden chest freezers into Japan and, of course, Whirlpool DishDrawers into Europe.

SC: What percentage of the business is it?

JB: It's a pretty low overall percentage. That's the key, to make sure that the tail doesn't end up wagging the dog.

SC: Why is it a good idea to have Whirlpool selling DishDrawers under the Whirlpool brand?

JB: Just to clarify, it's the Bauknecht brand into Europe and KitchenAid into the US. We're not giving (the technology away), we're getting well compensated for it. It sort of legitimises the technology to have a well known brand in some of these markets selling the same technology. It's also part of the US market that Fisher & Paykel just can't access, the very loyal pool of Whirlpool customers who wouldn't consider another brand anyway. There's also additional factory throughput. There are a lot of reasons from our side as to why we would want to do that.

SC: Why do your refrigerators have limited appeal in the US? Will you be developing models specifically for that market?

JB: Frankly, they're just too small for the US. They like em big and beautiful. I don't want to sound too precious here - I guess we will have to wait and see. But as that question points out, that opportunity is quite obvious.

SC: Why don't you identify Fisher & Paykel in marketing your Q cards?

JB: The main reason is that the Q card is used for a wide variety of products. In some cases, that includes competitors' products. We didn't want to send confused messages to customers. We felt it was better to have its own identity rather than being linked to a brand that is whiteware only. We didn't want to limit the potential for choice. We didn't want customers running around thinking they could only use Q cards for whiteware purchases.

SC: (From a site reader) I bought my F&P Appliance shares 18 months ago at $4.21 share, today they are tracking at around $2.70 - why should I continue to hold on to them instead of quitting my losses and bailing out now?

JB: It's a personal decision. That reader has to weigh up the short term situation which is mostly things we can do nothing about, that is the high currency and commodity prices, and the longer term that individual may or may not see in the business.

SC: The share price drop makes last year's fuss about the option plan look ironic?

JB: It makes them look pretty silly. Our hurdles for the options are way ahead of that. You can be assured that we're not doing this on purpose. The whole market is down.

SC: Isn't it a fact that the business is cyclical and always will be and the only way to offset that is to expand geographically?

JB: We just can't rely on the Australasian economies because they do cycle. If you had a look at the performance of our competitors, it's still the most profitable appliances business in the world. That's because we've been able to spread those risks. If we were sitting here today still solely reliant on the Australian and New Zealand markets, we wouldn't be nearly as profitable. We can't see an appliance company anywhere in the world that gets the returns we get. It puts it into perspective.

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