Half Year Results Announcement To 31 December 2005
AUCKLAND, 7 March 2006 – Tenon today reported (under New Zealand International Financial Reporting Standards – “NZ
IFRS”) an operating profit before interest, tax, depreciation and amortisations (“EBITDA”) (prior to a one-off
impairment charge of US$0.7 million for the complete exit from the Company’s European furniture development business,
but inclusive of a US$0.6 million contribution from Southwest Mouldings which was acquired in November 2005) for the six
months ended December 2005 of US$5.9 million, compared with US$7.8 million recorded in the preceding six months to June
2005. This result is in line with projections made to the market by the Company in November last year (1).
Commenting on the result, the Chief Executive, Mark Eglinton, said, “Although in line with market forecasts, the
Company’s performance over the period was negatively affected by a continuation of the very high NZ dollar exchange rate
against the US dollar (averaging almost 70 cents over the six months under review) which impacted our Taupo
manufacturing operations, and by the difficult trading conditions encountered by our 50% owned joint venture American
Wood Mouldings (“AWM”). While we believe we have seen the worst from both of these factors – in particular with the NZ
exchange rate now trading around 66 cents against the US dollar – we need to ensure that we can manage our business such
that it can withstand adverse operating conditions as have occurred over the past six months. Accordingly, our focus has
been to:
• Narrow Tenon’s activities to focus solely on the higher-margin North American opportunities
• Strengthen our market position by:
o Increasing the product offerings we can provide to our existing National Home Centre Customers in North
America
o Expanding our distribution activities beyond existing customers and into the high volume independent lumber
yard and national pro-dealer segments
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o Ensuring we have a low-cost manufacturing and sourcing network, able to provide high quality products at
internationally competitive prices.”
Highlights during the six-month period that reflected this focus included:
• The US$16.6 million acquisition of 51% of Southwest Mouldings – a Texas-based mouldings, stair parts and millwork
manufacturer and pro-dealer distribution business;
• Further investment in our USA distribution network through the purchase of the remaining one-third equity in Empire
for US$29.4 million;
• Commercialisation of Armourwood, an innovative primed and treated outdoor finishing product for the US housing market
that is gaining market acceptance and is already sold in over 100 stores;
• A 16% increase in operating revenue to US$167.4 million;
• The introduction of cost and service initiatives at AWM to turn around its disappointing six months result. These have
included the implementation of US$2.5 million of cost reductions and the re-engineering of its Mexico activities (which
incurred losses of US$0.6 million in the period);
• Agreement with Contact Energy to replace natural gas with geothermal energy at our Taupo site, with expected annual
savings of US$1.3 million (from 1 May this year);
• The re-negotiation of freight rates and routes to achieve a reduction in freight costs;
• The move of our executive office to the USA, and the consolidation of our corporate cost base appropriate to the
location, size and complexity of the ongoing business; and
• The exit from our European furniture market development with Zenia House in Denmark. An impairment charge of US$0.7
million was made in the period to provide for all exit costs.
Operating Performance
Operating revenue for the period totalled US$167.4 million, up US$23.3 million (16%) on the preceding six months to June
2005. The increase in revenue was due to increased sales volumes at Empire (US$7.4 million), additional sales from New
Zealand operations (US$7.6 million) and the first time inclusion of Southwest Mouldings (US$8.3 million).
Due to lower earnings and an increased investment in working capital, net cash applied to operating activities for the
six months to December 2005 was US$6.1 million, compared with an inflow of US$8.7 million in the preceding period to
June 2005.
Cash applied to working capital of US$8.2 million supported revenue growth at Empire while higher inventory levels were
required for the initial rollout of the new Armourwood product range in the USA.
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The Company invested US$49.1 million of capital expenditure during the period, primarily for the purchase of the
remaining 33% equity in Empire (US$29.4 million), the purchase of 51% of the equity and refinancing of Southwest
Mouldings (US$16.6 million) and various capital projects (US$3.1 million).
The Company had net interest bearing debt of US$33.4 million at 31 December 2005.
Development of US strategy
The period marked a strong period of strategic development for the Company. In September, the Company announced the move
to 100% ownership of Empire. The purchase secures the full economic benefits of ownership while retaining the existing
focused and highly-experienced management team at Empire.
In November, Empire purchased a 51% interest in Southwest, a Dallas based moulding and millwork distributor for the
large and growing Texas Pro Dealer market. The purchase enhances our North American distribution business by expanding
our product offering, diversifying our customer base and leveraging our procurement. We are continuing to evaluate
further opportunities of this nature.
Commercialisation of Armourwood, our new outdoor product, is a significant step in taking Tenon’s solid wood products
into outdoor applications. This innovative product moves commodity fibre into a branded product in a market
significantly larger than the mouldings segment. Further capital investment at our Taupo site has been approved, which
will enhance our Armourwood capability. Details of the new product can be found at www.armourwood.com.
AWM has reviewed the cost base underlying the service offering to its customers, and has now put in place cost-reduction
initiatives in its US-based operations amounting to US$2.5 million per annum to AWM.
The agreement with Contact Energy to provide a 27-megawatt geothermal plant at Taupo to replace the existing natural gas
fired boilers fits well with our stated strategy of having a low cost position in our core businesses. The project is on
time and on budget and will be commissioned in the fourth quarter of this financial year. It will generate expected
annual cost savings of US$1.3 million per annum.
Capital management
Despite the sound strategic moves the Company made in the period to establish a strong platform for Tenon in the future,
the share price has reflected the short-term negatives the Company has faced – particularly the on-going strength of the
NZ dollar and the difficult trading conditions at AWM.
Luke Moriarty, the Company’s Chairman, said “While it is the Company’s view that these issues are of short-term impact
only, it is clear that they have, together with a lack of liquidity in the stock, placed price pressure on Tenon’s
shares in the market. As the Board believes the current share price to be well below Tenon’s true value,
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and that the use of the Company’s funding capacity to acquire Tenon shares would be significantly value-creating for
shareholders, the Board has decided to undertake an on-market share buy-back of up to 5% of Tenon’s issued shares, in
accordance with the Companies Act and the NZX Listing Rules. Information outlining the buyback will be included in the
printed Interim Report to be sent to shareholders.”
Due to its strong Balance Sheet and financing capability, the Company is comfortable that it will be able to complete
the share buy-back and undertake further acquisitions which are consistent with its growth agenda.
Functional Currency
In July, the Company announced the adoption of the United States dollar as our presentation and functional currency.
This decision is an important one as we can now provide a more concise and transparent analysis of the drivers of value,
allowing us to report to our shareholders in the same currency we use to manage the Company.
Early adoption of International Financial Reporting Standards
The Company is an early adopter of the New Zealand equivalents of the International Financial Reporting Standards (“NZ
IFRS”). The most significant change for the Company is the requirement to recognise, as a deferred settlement liability,
the discounted cost of options to put to Tenon the remaining equity in non-wholly owned subsidiaries held by minority
shareholders (currently the 49% of Southwest that Tenon does not own). The detailed impacts of adoption, including a
reconciliation of the restatement of comparative periods, are set out in the attached interim report.
Earnings Guidance
In November 2005 the Company issued earnings guidance to the market, stating that (excluding unusual items) EBITDA for
the year ended 30 June 2005 was forecast to be in a range of US$17 – 20 million. This announcement was prior to the
Company’s acquisition of Southwest. Adjusting for this event and also for the exchange rate environment that has
prevailed over the past four months since that announcement, the Company expects that full year EBITDA (excluding the
Zenia House impairment charge) will be approximately US$21 million. The substantially better EBITDA expectation in the
second half of the financial year as compared with the first half (i.e. of approximately US$15 million against US$5.9
million) is driven by lower reset costs for home centre customers, a full period contribution from Southwest, the
rollout of the new Armourwood outdoor product range, lower operating costs at Taupo and a more favourable foreign
exchange environment.
FOR FULL ANNOUNCEMENT SEE …
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ENDS