Two main factors behind Scott's 63% profit plunge

Scott Technology meat industry robotics, at work at Silver Fern's Finegand plant. Photo by Stephen Jaquiery.
Scott Technology meat industry robotics, at work at Silver Fern's Finegand plant. Photo by Stephen Jaquiery.
Listed Dunedin manufacturer and exporter Scott Technology has reported a more than 60% profit plunge for its first-half trading.

The strong New Zealand dollar and Australian mining sector downturn have played a part in eroded profit margins.

Revenue for Scott - involved in automated production line manufacturing, mining sector work and robotics in the meat industry - was down 5.7% to $25.3 million, for the six months ended in February, while profit dropped 63%, from $2.2 million a year ago to $820,000.

A market update by Scott chief executive Chris Hopkins in mid-February, flagged to shareholders the erosion on profit margins. Scott was reviewing in-house costs, looking to buy more components overseas and continuing its use of forward hedging contracts to try to mitigate the high kiwi, which had appreciated almost 25% against its Australian counterpart in recent months.

Leasing, rather than selling, equipment to the mining and meat sectors was a new initiative for Scott.

Scott shares were unchanged at $1.55, following the announcement. The interim dividend is 2.5c per share.

Yesterday, in a release by Mr Hopkins and chairman Stuart McLauchlan, the pair said activity and sales across the business were at strong levels, but due to the high New Zealand dollar and the competition to win project work, margins were lower than historical levels.

''The global economic environment is such that many of our customers, particularly in the mining sector, have slowed, or in some cases, ceased, their spend on capital equipment and fixed assets,'' Mr Hopkins said.

Chris Hopkins
Chris Hopkins
Craigs Investment Partners broker Peter McIntyre said Scott was in a good position to ''weather the storm'', of the high kiwi, with a strong balance sheet, cash in hand and the confidence to maintain its dividends.

''Like many in the manufacturing export sector, they are doing well, but feeling the dollar [exchange] pain, when translating sales back to New Zealand,'' he said.

''The mining sector in particular has gone from hero to zero for Scott,'' Mr McIntyre said.

Mr Hopkins said the mining sector was ''hit the hardest'' during the global economic downturn.

''We have seen a significant slowdown in this sector, particularly in Australia, and this is closely linked to the cyclical movement in the price of relevant commodities, such as gold, nickel and zinc,'' he said.

While Scott's reported sales for the first half fell from $26.8 million to $25.2 million, Mr Hopkins said if adjusted for the negative effect of the exchange rate, sales would have been higher than the previous year.

He said Scott's balance sheet remained strong, with total working capital of $18 million at the end of February, up from $16.5 million a year earlier.

Revenue for Scott's previous full year to last August declined from $63.7 million to $60 million, while after tax profit declined from $6.1 million the year before to $5.14 million; the $6.1 million profit having been a record for the 100-year-old company.

Mr Hopkins said the appliance-line manufacturing division performed strongly in terms of sales and forward work and ''significant'' contracts were won with customers in North America, China and Germany.

''However, the rapid increase in value of the New Zealand dollar and the associated higher cost of manufacture in New Zealand has impacted on the margin we are able to obtain and deliver,'' Mr Hopkins said.

''The directors are aware of the difficulties of the current economic environment, but are confident that the initiatives we have in place and have planned will deliver the required results for all stakeholders,'' he said.

On its meat processing equipment, Mr Hopkins said Scott delivered several new systems to Australian and New Zealand companies, including two new processing systems, and interest and level of inquiries continued to grow in Australasia and further afield.

Scott's presence in the Chinese market, with an office in Shanghai, had produced positive results, with several appliance sales contracted, directly within China.

''These sales are incremental and the company expects this area of the business to show strong growth,'' he said.

Scott has continued to invest in new products and technologies, one such area being the development of a robotic milking system, at present in late stage production trials on a working South Canterbury farm.

''This development is nearing the performance specifications that will provide the confidence needed to install additional systems, which will precede full commercialisation,'' Mr Hopkins said.

- simon.hartley@odt.co.nz

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