Fisher & Paykel looks to twin futures as it readies for split

Friday 13th July 2001

Imagine if New Zealand entered the car manufacturing business. The "Kiwi Car" or "Kar" would face an incredibly difficult battle to become competitive against huge international manufacturers like Mercedes-Benz, BMW, Honda, Toyota and even Hyundai.

Chances are such a project would never get off the ground.

The analogy should apply as much to appliance manufacturing as motor vehicles, yet Fisher & Paykel has managed to hold its own against huge international competitors for decades.

Chief executive Gary Paykel refers to this in his report in the company's latest annual report.

"From 1934 to 1979 we were a private company, guided by our founders, Sir Woolf Fisher and Mr Maurice Paykel. From 1979 until later this year, Fisher & Paykel Industries has been a listed New Zealand company. The board has retained our founders' vision and culture ..."

He mentions this because Fisher & Paykel is about to go through a massive change, the separation of its whiteware and healthcare businesses into two standalone companies.

The impact of this on the company and its shareholders is such that the annual report looks as much to the future as to the previous 12 months.

The company has finished its 67th year in good shape. Net profit before abnormal items for the year to March 31 was a record $60.3 million, up 11%. Revenue was up 15% to $923.8 million.

Much of this growth was delivered by the fast-growing healthcare division.

The report shows a trading profit before exchange rate adjustments of $80 million, up 60% on revenue that rose by a third.

Appliances showed a more modest 22% gain on revenue up 11%.

However, the net result after allowing for exchange rate gains or losses affects the figures substantially.

Notes to the accounts show the healthcare division recorded $13.4 million in realised currency losses of $13.4 million and another $44.4 million in unrealised losses.

Appliances took hits of $12.7 million and $19.9 million respectively and also suffered $9.9 million in abnormal costs from restructuring and a writedown on loans to retail group Hill & Stewart.

After these, Fisher & Paykel's net profit was a mere $11 million, down 80%.

Mr Paykel points out that $64.2 million of currency losses are non-cash items and that "in future, foreign currency gains or losses will be reported separately from trading profits."

Where cash is concerned, the company is producing an excellent surplus from operations.

Financial statements in the report carry figures for not just the current year and the previous year but for a further year back. This allows some more meaningful comparisons to be made and avoids distortions caused by one-off items. It would be nice to see all listed companies follow this example.

In 2001, Fisher & Paykel received $873 million from customers and was left with $105 million after paying all its operating bills. This compares with $750 million and $88 million last year and $726 million and 62 million in 1999. Crunch these numbers and one finds net operating cash flow is growing faster than income - the sign of a healthy and well-run company.

Segmented figures show the appliance business, by far the largest part of the company, is not a high-margin business. Operating profit before abnormals of $44 million represents just 6.3% of sales. Healthcare has a more exciting margin of 42%, but its revenue only makes up 21% of the total.

The consolidated five-year summary shows the effect. Despite the meteoric rise in the healthcare division in the past few years, total company sales have grown a scant 20% since 1997.

Pre-abnormal earnings per share fell each year in 1997-1999 until picking up strongly last year and moderately in 2001.

The report shows a conservative, yet solid, company whose mature, low-margin core business is offsetting the exciting growth of another. Full marks to Fisher & Paykel's management and board for being brave enough to do something about it.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. Internet: www.mcewen.co.nz, Email: davidm@mcewen.co.nz

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