High kiwi dollar stole $5M gains from Tenon efficiency drive

Thursday 21st February 2013

Finished wood products manufacturer Tenon says it's on the cusp of profitability as the prolonged slump in the US housing market comes to an end, but its cost-cutting and efficiency investments in New Zealand have been completely eroded by the high kiwi dollar.

Tenon reported a reduced US$2 million loss in the six months to Dec. 31, down from US$6 million the year before. The company turned to positive earnings on an earnings before interest, tax, depreciation and amortisation basis, reporting a US$1 million surplus for the period from a US$2 million loss in the same period last year.

"The big picture environment for Tenon is now changing," said chairman Luke Moriarty and chief operating officer Tony Johnston in a statement to the NZX. "The US housing cycle is at last turning in our favour."

This "pre-recovery" was so far only affecting housing starts rather than the renovation market and the pick-up would be "a little bumpy", but "it appears clear now that we are heading out of the deep cycle trough that has plagued the industry for too many years now."

Tenon boasts substantial penetration of major US hardware and renovation chains, but has suffered in a historic seven year slump in US housing activity since the sub-prime debt crisis, which preceded the full-blown global financial crisis.

It expects the strong upturn in activity, which is already affecting sales, tightening supply chains and raising input prices, to become more apparent in the next six months, and the company's share price has lifted around 57 percent in the last six months. Directors upgraded their outlook for the sector last November.

Tenon shares closed at $1.02 yesterday, down on a recent 12 month high of $1.11, although a report by independent research house Edison suggested a fair value range of $1.79 to $2.05. The company would be "addressing this issue further as the year continues."

However, it is giving no specific earnings guidance, beyond saying "our expectation is that the company's North American financial performance in the second six months of the year will comfortably surpass that recorded for the six months just completed."

Tenon believes that under future mid-cycle conditions and assuming a 70 US cents exchange rate, the company is capable of producing ebitda of $35 million a year.

"The frustratingly strong and strengthening NZ/US dollar cross-rate and resolution to the US fiscal cliff issue (are) the two immediate factors that could chart a significantly different course than we currently anticipate."

At balance date, the kiwi dollar cross rate was at 82 US cents and had risen beyond that since.

"Internally, we think of this adverse currency movement as representing a 5 percent gross profit margin decline in the profitability of our New Zealand manufacturing activities, which we must make up with further cost-out initiatives across the group.

Gains from a $5 million profit improvement initiative at its Taupo manufacturing plant last year "have now effectively been 'stolen' by the strengthening New Zealand currency."

Total revenues were up 7.4 percent to US$174 million in the period, with growth in sales volumes and margins in key US sectors, while product from Taupo was also shipping to European and Chinese markets, and efforts to tap the Australian market ramped up during the period.

Debt on the balance sheet at US$44 million was down from the one-time peak of US$90 million, but was unlikely to fall further as the company requires additional working capital to meet anticipated sales growth and to help fund acquisitions yet to be identified in the Chinese and US markets to accelerate growth.

BusinessDesk.co.nz

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