Hellaby Holdings

by Jenny Ruth

Thursday 20th December 2007

Hellaby Holdings is forecasting earnings before interest, tax, depreciation and amortisation (EBITDA) will be about $45 million for the year ending June 2008. EBITDA fell 28% to $34 million for the year ended June this year and the net result was a $4.7 million loss, reflecting an $18.8 million write-off of goodwill on its BBQ Factory retail chain. The company has also changed its dividend policy to paying about 50% of after-tax operating profits and that dividends will only carry imputation credits available from current tax payments. Previously, Hellaby's dividends were about 80% of net profit and the company paid fully imputed dividends by pre-paying tax to generate the required imputation credits.

Sharechat: What sort of feedback have you had from shareholders about the change in dividend policy?

Hellaby Holdings managing director John Williamson: To date, we've had little feedback. I guess the institutions or potential institutional investors are less interested in dividends generally. Our hope would be that the market will understand that 50% of NPAT (net profit after tax) is more realistic. The traditional 70% to 80% historical payout has just been too high for an investment company. Previous payouts eventually stretched our balance sheet. It's certainly my hope that there will be a degree of realism about the dividend policy.

SC: Why do you think the share price has continued to decline since the AGM?

JW: There was a combination of the 2007 year end announcement in terms of reduced profit, the BBQ Factory write-down and the nil dividend payout and also communicating a new dividend policy. That combination was a reasonably significant event, although the share price had been tracking down for some time before our year end announcement. Hellaby obviously has new leadership. We've signaled that there will be a change to the way we do things going forward. My perception is that the market likes what it hears but actions speak louder than words. The market's probably waiting for our half-year result to check we're on track. In addition, there was a technical adjustment at the end of November to the Morgan Stanley Capital index which has affected about 15 New Zealand stocks. Hellaby, Infratil and Tenon were dropped from the small cap index.

SC: Why do you think the BBQ Factory business can be turned around?

JW: We believe that the BBQ Factory can be positioned as the backyard expert, the destination retailer for the backyard and, secondly, that store locations and layouts can be improved over time. We have a new BBQ Factory CEO (Tim Wilson ) who is a New Zealand retail expert. Our new store layouts and where we've opened new stores are working. A lot of our locations are simply out of date in terms of where bulk retail has now moved to. But there's a long way to go still.

SC: How long do you expect it will take for the BBQ Factory to break even?

JW: I'm not prepared to give a firm date. We will achieve break even when we achieve break even. I'm just not wanting to give a date at this stage.

SC: Will it be up for sale at that point?

JW: I've previously indicated to the market that we would certainly consider selling the BBQ Factory when it's demonstrated break even.

SC: This year and last year, Hellaby wrote off a combined $23.9 million on the BBQ Factory. Is there any book value left?

JW: The book value is now essentially the net working capital which is the inventory which is approximately $12 million to $13 million.

SC: I understand you're taking legal action over the BBQ Factory. Who is it against and what is Hellaby alleging?

JW: There is litigation pending. It involves various parties who were associated with the sale of the BBQ Factory to Hellaby. That litigation relates to issues related to the initial transaction.

SC: How long do you expect it will take to divest all the remaining non-core assets?

JW: We haven't communicated either a time line or a list of so-called non-core businesses. We will from time to time divest businesses that either don't fit the portfolio at the time or which attract a premium if we sell it. We're unlikely to make any specific divestment process public going forward. There isn't a firm list to be sold. I said at the AGM that there are no sacred cows in the portfolio. What fits today in the portfolio may not fit tomorrow. We will review it from time to time.

SC: Given the company's relatively stretched balance sheet, should you be even thinking about making more acquisitions?

JW: It's an appropriate question. Realistically, we will only consider bolt-on ones to existing businesses until the balance sheet is in a better position. The two packaging acquisitions in July were well-planned and executed, but we're not currently contemplating other acquisitions. Our appetite for acquisitions will change as we strengthen the balance sheet.

SC: How will targeting working capital help improve performance?

JW: Working capital optimisation or improvement improves the return on funds and reduces debt so it's something we should do.

SC: How have staff in your various divisions reacted to more hands-on management?

JW: The response from management to a more hands-on leadership style has been positive. My CEOs are still running their businesses. That hasn't changed. I have a good team. Everyone has a different style. I'm not saying my style is better than anyone else's. It's just that Hellaby is very actively engaging with the businesses that have further operational improvements to make. It hasn't changed the accountabilities of the CEOs at all. We're certainly focusing on accountabilities that need to be focused on.

SC: How will the slowing economy affect Hellaby's future performance?

JW: The economy is certainly tough and lumpy. It's uneven in terms of where the economy's strong or tight at the moment. One of the strengths of Hellaby is the diversity of our portfolio. Some examples of that are retail conditions are very flat but TRS, our tyre and wheel business, is very strong at the moment on agricultural demand. The key driver for the automotive parts business is the age of the vehicle fleet in New Zealand as much as the state of the economy. If tighter emission standards are brought in to New Zealand, that will benefit our business.

SC: Does that mean the older the fleet, the better it is from your point of view?

JW: Correct. With our recent packaging acquisitions, we've widened our market exposure from retail and rubbish bags to a wider mix of primary products packaging plus consumables. We have a better mix which is more of an insulator to a tighter economy. Materials handling is benefiting from very strong construction sector demand. That's for equipment like diggers and road rollers. There's reasonably strong capital investment in fork lifts at the moment. The economy is tough and uncertain but the portfolio diversification is a strength for Hellaby. The expectation is that while some sectors will be down, others will be up.

SC: Last year, all four of your main divisions had a down-turn at the same time. When did that last happen?

JW: I have no idea. I think it's a fairly unique event and long may it stay that way. It's not what we're experiencing at the moment. The tough part of the economy for us at the moment is retail. That's just flat.

SC: How are the retail businesses performing heading in to Christmas?

JW: Trading conditions at the BBQ Factory are tough. For our shoe businesses, although market conditions are flat, we're performing reasonably well presently. The performance of Hannah's in particular has improved over recent months. Trading conditions could be a lot better. Because we're a diversified investor, 75% of our profits are from non-retail assets.

SC: Is it your view that shoe retailing isn't a long-term proposition for Hellaby?

JW: As we've said before, we're unlikely in future to signal a divestment process before it occurs.

SC: Was it a mistake to signal earlier this year that Hellaby might sell the shoe businesses?

JW: I'm not saying that at all. It certainly won't be our usual habit going forward to signal a divestment before we actually do it. Shoes have been a good investment for Hellaby over the past decade since we acquired Hannah's. It's likely, however, that future new investments will be in non-retail assets. That's something we've made pretty clear to the market.

SC: How much exposure does TRS Tyre & Wheel have to dairy farming?

JW: Probably around 20% of TRS's sales. As well as industrial sales, they have a large client base in sheep and beef, cropping and horticultural (farms). I think nonetheless that the Fonterra effect is having an impact across agriculture at the moment which is beneficial for TRS.

SC: The company has never attracted much institutional interest. Do see that changing?

JW: Certainly, there's interest and already some dialogue. As our turn-around gains some traction, I would expect greater institutional commitment to investing. A greater mix of institutional and retail investors would be good for Hellaby.

SC: You've been on the board since May 2005. Why did you accept an executive role?

JW: I think it was a good decision. When I left Fletcher Building, I didn't intend to take up another leadership role in another public company. I enjoy operational turn-arounds. I also like the strategic challenges in re-shaping a business. Plus I like the portfolio diversity. In that sense, Hellaby is right in my space.

SC: The annual report shows your companies bought 1.16 million of Hellaby shares at an average price of $4.09 per share in the year ended June 30 and you've bought quite a few since then at prices above the current share price. Do you regret making those investments?

JW: No regrets. I'm in Hellaby as an investor for the long haul. I see Hellaby ultimately as a capital growth stock. The short-term issues for Hellaby are largely operational but the medium term opportunities are more tactical and strategic. At that point, I believe, we will be in a position to create greater shareholder value. Hellaby shareholders should see my investment in Hellaby as a firm and shared commitment. We all share a desire to substantially improve shareholder returns.

SC: You've kept buying even as the share price has fallen?

JW: Absolutely. I only have certain windows when I can do it.

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