'Key attributes' keep Scott's star rising

Scott Technology managing director Chris Hopkins has been chosen as the Otago Daily Times Business Leader of the Year: 2011. Against a backdrop of unprecedented global economic volatility, Simon Hartley examines Scott's change in direction, diversification and fortunes over the past three years.

Scott Technology managing director Chris Hopkins with a Rocklabs sample preparation machine ...
Scott Technology managing director Chris Hopkins with a Rocklabs sample preparation machine designed for all precious metals testing, bound for delivery to a Chilean customer. Photo by Gregor Richardson.
Diversification into niche markets during successive economic downturns, a strong belief in teamwork and research and development are "key attributes" contributing to the prosperity of listed Scott Technology, according to managing director Chris Hopkins.

Mr Hopkins joined Scott in 1997, having been with its owner, Donaghys Group, for the previous four years, and was involved in Scott's relisting on the stock exchange in 1997.

His earlier experience with accountancy giant Deloitte and then Donaghys gave him a "solid grounding" in front-of-business operations, before going on to tackle Scott's in-house workings of finance, commercial and purchasing operations.

"The Donaghys' group of five divisions was broken up and Scott split off. Because of my experience [going with Scott] was a logical choice," he said.

Mr Hopkins soon became Scott's chief financial officer on relisting.

Whether dealing with board members, staff, suppliers or foreign customers, Mr Hopkins' ethos is to treat every individual as if they were a customer requiring immediate attention.

The old adage of "don't ask anyone to do something you are not prepared to do" still holds true for Mr Hopkins, who enjoys working alongside all staff members on the multitude of projects under way in the large workshop.

Mr Hopkins joined Scott in an era of prosperity and expansion and by the late 1990s Scott's revenue from mainly assembly line manufacturing had leapt 50%, from $20 million to a targeted $30 million.

"It's fair to say this was a period of comfortable results. We didn't face the competition we have now," he said.

However, when the United States economic crisis and recession hit in 2001, it wiped out many of the gains, knocking Scott back to about $16 million in sales.

The downturn represented a nadir for Mr Hopkins, one which led to redundancies and the loss of engineering knowledge as Scott adapted to straitened circumstances, including financial losses to its shareholders, he said.

Scott, with its conservative board, well-managed debt and reliable cashflows, embarked on ways to diversify its manufacturing base, in a bid to become not only a global player, but also a leader in niche markets.

"That [2001 recession] really prompted the diversification period. We began looking at other markets, with high volumes and high value, such as the meat sector, aluminium and local packaging," Mr Hopkins said.

It was at this time Mr Hopkins was asked to become a director on Scott's board and came under the guidance and mentoring of long-serving directors Graeme Marsh and Graham Batts, who between them have more than 70 years' experience with Scott.

Mr Hopkins said the company started looking for ways to bolster its mainstay assembly line income, which this financial year is forecast to return 60% to 70% of total revenue, with other "bolt-on" acquisitions, and also through increased research and development.

Most of the acquisitions turned out to be earnings and cashflow positive from the outset. While initially small in terms of output, they benefited immediately from Scott's investment, which boosted company growth.

While research and development has cost Scott tens of millions of dollars over the past decade, Mr Hopkins was quick to point out both the New Zealand and Australian governments had contributed to that cost and joint venture partners also had borne some costs.

He maintains research and development is the "lifeblood" of the company, with $8 million spent during 2010-11 alone.

"The money we spend is well targeted ... driving our innovation aspirations," Mr Hopkins told more than 60 shareholders at their annual meeting in Dunedin earlier this month.

Scott now has three divisions: its joint venture meat robotics project with Silver Fern Farms in Dunedin; its assembly line manufacturing facility in Christchurch; and manufacturers of mechanised and automated mine sample preparation equipment Rocklabs, in Auckland.

Scott has 225 staff in New Zealand, about 50 in China, five in Australia and agents in two US states and another in Italy. About 12 places are available at its New Zealand operations and five apprenticeships are on offer.

Its recent acquisitions and strong commitment to research and development have provided stability during what has been a volatile period for Scott, which now exports 90% of its products, mostly in US dollar-denominated contracts.

The contract periods could extend from 12 to 24 months from concept stage to delivery and, with the US dollar denomination, had caused some "lumpiness" in Scott's cashflow, Mr Hopkins said.

However, successful foreign exchange hedging had assisted in levelling out some of the troughs and peaks over the years and with "little or no debt and reasonable cashflows, losses were made more palatable" as Scott adapted, he said.

"Key milestones" for Scott were the purchase of 41-year-old Rocklabs and the meat industry robotics joint venture with Silver Fern Farms.

Rocklabs contributed about $14 million in revenue in the year to August 2009.

"Mining [products] have less competition than other divisions and some great growth opportunities, but these are tied to metal prices, such as gold and copper which, depending on China, can quickly take a fall," Mr Hopkins said.

The Rocklabs machines are used in mining exploration and take core samples, or blast samples, and refine them to a powder for final assay analysis.

In separate processes, and using a large number of laboratory technicians, the machines crush the core, pulverise the material almost to dust, then divide it into samples for assay.

Scott and Rocklabs have co-developed separate robotic and linear (automated processing line) versions of the three-machine process to link up the systems, working towards sales to customers in the Pacific, United States and South America.

Mr Hopkins said the research and development involved in the joint venture with Silver Fern Farms took longer than anticipated and the board and shareholders started to become concerned over the pace of progress.

Since then, the technology has been commercialised and sales are under way. Online footage of the use of the robotics at Australian meat plants is part of the company's bid to increase sales.

Mr Hopkins acknowledged diversification, research and development and mergers and acquisitions each carried relatively high levels of risk, possibly accentuated during a recession or downturn.

"Yes, we run a lean team, but [those activities] did stretch us at times over the years," Mr Hopkins said.

The more recent global financial crisis and worldwide recession had also reduced Scott's orders, but it had been able to continue with mergers and acquisitions activities and, through the board's conservatism and sound debt management, build revenue and bottom lines, which had dipped into the red.

"The global financial crisis struck and hit the mining sector particularly hard," he said.

However, Scott had continued with its research and development and was filling gaps in the product ranges in both the mining and meat sectors, with some sales increasing as the mining sector recovered.

Mr Hopkins said most of the $9.5 million raised during the past financial year was used to pay debt incurred as a result of the purchase of Rocklabs, HTS-110 Ltd and Malcolm Smith Reference Materials. Malcolm Smith is involved in the calibration of mine-sample testing machines and has contributed $2.5 million in sales during the past financial year.

Scott has returned $21 million to shareholders since relisting on the stock exchange 14 years ago, and has almost $15 million in prospective forward orders.

Its profits are up from $5.5 million two years ago to $7.3 million for the past year, and it has raised $9.5 million during the past year.

Shortly after the capital raising, Scott paid almost $1 million for a 75% share in China-based Teknatool International Ltd's subsidiary, Qingdao Teknatool Machinery Manufacturing Co Ltd, which specialises in lathe technology and energy-efficient motors.

While Scott has scheduled an inaugural board meeting in China for March, Mr Hopkins is wary of talking China up too much, but notes its ability to supply parts and its future potential as a manufacturer.

In early April, Scott paid $4.4 million for a 50.65% stake in Wellington-based, Crown-owned company HTS-110 Ltd, which specialises in manufacturing electromagnets using high-temperature superconductors.

As with Scott's 2008 $10 million cash and scrip purchase of Rocklabs, HTS-110 was both earnings and cashflow positive from the outset.

In August, Mr Hopkins said Scott was in a "good" cash position and had $24 million in banking facilities on hand, of which about $8 million was a short-term cash facility.

He said the recent Scott Separation Technology purchase of intellectual property and a new joint venture agreement, which cost the company less than $400,000, was an investment in the honey industry, but also in centrifuges with applications in other sectors.

While scaling back its mergers and acquisitions activities, Scott was still looking at opportunities and was in talks with a company here and another in Australia, he said.

This financial year, Mr Hopkins forecasts revenue growth in Scott's assembly line and mining divisions, with meat robotics offering the best opportunities given the lack of competition.

However, while markets looked "relatively bright", manufacturing exporters' fortunes were prey to the European banking crisis and China's economic growth trends.

Mr Hopkins said work being done in the superconductor division and on dairy sector automation, being tested at present, could see commercialisation by the end of 2012.

"If all goes well, the dairy division could develop into a big division for us."


- Chris Hopkins -

• Married to Denise, with three children.
• Born: Dunedin,July 1962
• Schooled: Former St Paul's High School Dunedin; head boy, captain rugby First XV and Otago secondary representative. Otago rowing rep, Gold medal winner at New Zealand rowing championships 1982.
• 1982-84: University of Otago Bachelor of Commerce; double major in accounting and information systems.
• Professional memberships: New Zealand Institute of Chartered Accounts, Institute of Directors in New Zealand 1997-present: joins Scott Technology as chief financial officer in 1997 (the year Scott relisted on stock exchange), then general manager then in 2006 to present managing director-chief executive.
• 1994-1997: Corporate services manager at Donaghys Ltd, a period when Scott Technology was a subsidiary.
• 1984-94: Deloitte's in Dunedin; 80% financial and management consulting and 10% audit services, with clients including former Southern Regional Health Authority, Ministry of Health, Otago Area Health Board, Dunedin City Council, Otago University. (Period includes two years Deloitte's in London; manager position)

- Acquisition trail -

Scott's acquisition trail of more than $9 million during the past three years.

• Rocklabs - 2008: $10 million cash and scrip purchase.
• Malcolm Smith Reference Materials - October 2010: $1.5 million purchase.
• HTS-110 Ltd - April 2011: $4.4 million for a controlling 50.65% stake.
• Qingdao Teknatool Machinery Manufacturing Co Ltd - June 2011: almost $1 million for 75% stake.
• Scott Separation Technology - late-2011: $400,000 investment into centrifugal machine joint venture partnership.
• Purpose-built $5 million headquarters and workshops opened in Kaikorai Valley, Dunedin, 2008.

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