FPA profit warning highlights bumpy road back to profitability

Friday 25th September 2009

Fisher & Paykel Appliances shares sank further below the price cornerstone investor Haier Group paid for most of its stake after the manufacturer said earnings would miss forecasts, forcing it to seek a waiver from lenders.

Depressed trading conditions in the US mean competition for sales of home appliances has been more intense than F&P Appliances had expected, the Auckland-based company said in a statement. It now predicts a net loss of $2 million to $5 million this year, compared with its prospectus forecast for a $11.7 million profit.

The earnings revisions is a setback for the company, which sold shares at a deep discount and convinced China’s Haier to take a 20% stake, raising about $200 million to strengthen a balance sheet stretched by offshore debt. At the same time it agreed a new $575 million facility with its banks.

The trading performance in the six months ending September 30 is expected to be “outside the 20% permitted adverse variance under the budget performance covenant,” it said today.

“It’s not good news but given the company’s situation there was always the possibility this was going to happen while they turn the ship around,” said Alan Moore, who helps manage $300 million at Milford Asset Management, including F&P Appliances shares.

A spokesman for Haier, which has two directors on the board of F&P Appliances, wasn’t immediately available to comment. It paid 80 cents apiece for 58 million shares and 41 cents for a further 28.4 million via rights and underwriting.

The shares fell 11% to 66 cents today.

“They didn’t buy the shares with an expectation in six months they were going to start to make money on the deal,” Milford’s Moore said.

The banks are likely to agree to the revised forecasts and covenant terms, acting chief executive Stuart Broadhurst. He stepped into the role after long-serving CEO John Bongard’s announcement that he will leave at the end of this month – three months earlier than planned, as he battles cancer.

The departure of Bongard and fresh blood on F&P Appliances’ board may stoke efforts to “clear the decks,” including possible disposal of assets, Moore said.

Former Brook Asset Management chairman Simon Botherway was named to the board last month, after the retirement of Norman Geary.

North American sales revenue in US dollars will be about 12% below levels assumed in its May prospectus, the company said today. Normalised EBIT for the full-year will be $19 million to $24 million below the $87.7 million forecast.

The under-performance in North America has prompted directors to review the carrying value of assets “for any possible impairment.”

Sales in New Zealand will be “comfortably ahead” of forecast this year and in Australia, revenue would “slightly exceed” its estimate in local currency terms.

Still, competition in both markets “remains intense and the pricing for some appliance models has been reduced as market price points have declined,” the company said.

“The sales mix has also been unfavourable relative to PFI as cooking and DishDrawer sales have slowed further in the current economic conditions and this trend is expected to continue for the remainder of the fiscal year,” it said.

“The price reductions and unfavourable sales mix variances have impacted margins.” F&P Appliances plans to spend $3.5 million more on marketing in Australia and New Zealand than its prospectus envisaged.

The depressed North American market has bumped up costs at its manufacturing plant in Reynosa, Mexico, it said.

One-time costs associated with its Global Manufacturing Strategy will exceed forecast by about $4.5 million.

Broadhurst said projected earnings over the second half “indicate a significant recovery, relative to the first half, as the benefits of the Global Manufacturing Strategy and cost down are fully realised.”

Businesswire.co.nz

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