Hills Limited, H1 results and transformative growth

Interviews

Hello I’m John Treadgold for the Finance News Network and joining me from Hills Limited (ASX:HIL) is its Managing Director & CEO Ted Pretty. Ted, welcome to FNN. 
 
Ted Pretty: Good afternoon John
 
John Treadgold: You’ve just released results for the first half of 2015, what were the highlights and what were some of the lowlights?
 
Ted Pretty: The highlight of the period was the underlying net profit after tax for the half which was $9.5 million. And the fully franked dividend we’ve declared at 2.1 cents a share. The lowlights, I think, were the comparison that some people made between this first half result in FY15 and the one we achieved in FY14 which included steel assets which we owned at the time. Now, if you net those out we’ve actually had a very solid performance and we sold those steel assets for $80 million to pay down our debt. So it’s a bit disappointing that the market didn’t understand the difference between the two halves.
 
John Treadgold: What contribution did acquisitions have on the first half?
 
Ted Pretty: On the core business, revenues were largely flat on an underlying basis, period on period. But the acquisitions which we had the benefit of this half accounted for an increase in revenues of 11 per cent.

John Treadgold: Your stock was heavily sold on the release of the H1 results. Were you expecting this, what do you intend to do to reverse this trend and would you consider a share buyback?
 
Ted Pretty: I think the situation with the results was this confusion around H1 14 against H1 15 and so that was disappointing. We were disappointed with the selloff because we’d telegraphed to the market as late as November last year that these 12 months would be challenging due to the significant decline in the Australian dollar. And we import a great deal of that product so we’ve seen a decline of about 20 per cent in the Aussie dollar and we’ve been able to pass some of that on through price increases and also cost cutting. This was well flagged to the market at the time of our AGM. What’s happened now is the share price has declined over the last two days; we’re now trading at around book value which is very cheap and so we announced today that we would reopen our buyback.
 
John Treadgold: What stage is the company now at in terms of evolving away from its non-core businesses?
 
Ted Pretty: We’re well down that path as we indicated in the results, we’re now in the process where all of the industrial assets have been sold. We’ve divested also the other non core assets which included the home hardware businesses and so we are largely a technology hardware and equipment company and now we’re looking for growth in related markets, particularly around health technology. The real question for us is when we’ll make the next large acquisition to confirm this strategy.
 
John Treadgold: What sectors have been the focus of your growth strategies?
 
Ted Pretty: Security is obviously a big sector; security and wellbeing. Health and health technology; the health market is growing significantly at double digit rates, with an aging population, with the increased costs of provision of healthcare within hospitals, within aged care facilities and the home. We think there are good markets out there that we can address both with our existing core products as well as this new range of health and monitoring products which we’re supplying into the markets today.
 
John Treadgold: You have said you haven looking at acquisitions; what sort of timing can we expect?
 
Ted Pretty: Look, I think we’re about six months behind where I would’ve liked to be, and I made that point to the market. I think one of the analysts said today that management should be given time to execute on that strategy, and I think that’s fair. I don’t want to actually specify a time when we’ll do that because it is more important to find the right acquisition rather than being compelled to fit within a certain time frame.
 
John Treadgold: What capacity do you have for these acquisitions?
 
Ted Pretty: Well, in terms of capacity we’ve just renewed our banking facilities. We’ve got a $110 million banking facility with three banks and we’ve also negotiated, but not yet signed, a further acquisition facility with the same banks. But just to emphasise the point, we’ve December 31 with no debt, we were actually net cash. So all of those banking facilities that are available are for working capital or acquisitions and together they would exceed $200 million.
 
John Treadgold: You’ve stated a preference for transactions offering higher returns, does that entail exposure to risk?
 
Ted Pretty: Look, I think if you’re moving into any high growth area there’s an element of more risk, and also if you’re expanding into new growth platforms. But at the end of the day, if we were to level the balance sheet again, we want to buy businesses with high growth profiles and characteristics, and we’d like to buy sold earnings as well. So, you’ll find us focussing on that healthcare area on businesses that have those particular characteristics. 
 
John Treadgold: You have revised your forecast NPAT target for FY15 to be in the range of $18.5-$19.5m. What is driving this andwhat do you intend to do?
 
Ted Pretty: Well, look with the Aussie dollar down in the high 70s which is about 20 per cent where it was 12 months ago, we are somewhat under pressure in terms of the products we are importing today. That’s driving, to a large measure, the reduced guidance for the year. Having said that, economic activity as confirmed by the Reserve Bank, is at a lower level than people anticipated thus the recent rate cuts that we’ve seen in the economy. Unless we see more federal and state infrastructure and commercial development, it is probably going to be a tough 12 months. We’ve flagged that to the market in November, I still thinks that’s the case and I suspect that most companies in the Australian market at the moment are nervous about the prospects of the economy over the next 12 months.
 
John Treadgold: Finally what do you see are the fundamentals of the business that you think investors should focus on?
 
Ted Pretty: The fundamentals are very simple; the restructure is complete, the balance sheet is clean, we finished December with no debt and in a positive cash position, we have ample banking facilities for acquisitions, we are still forecasting a net profit after tax (NPAT) of $18.5 - $19.5 (million) for FY, we are carrying a little bit of overhead to support potential acquisitions, we don’t believe we should reduce that in any significant way but we will make some cost adjustments if we need to, if those acquisition opportunities are delayed.
 
John Treadgold: Ted Pretty, thank you for the update from Hills.
 
Ted Pretty: Thanks very much.
 
Ends

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