From 2016 Annual Report
Shareholder Value Announcements
- Strategic Review progressing –
- The Blue Wolf Capital (“Blue Wolf”) offer received on 29 August for Tenon’s North American operations –
- US$110 million purchase price
- Implied FY’161 EBITDA2 multiple of 7.3x (adjusted for the LSCFP3)
- Offer to go to Tenon shareholders for approval in November
- Will be combined with large shareholder pro-rata capital return
- Grant Samuel to prepare an independent report for Tenon shareholders
- All Tenon debt to be repaid on closing
- Separate Review process in relation to Australasian Clearwood assets continuing
- Tenon final dividend4 of NZ6.50 cps announced, up 30% on last year’s final dividend
- Circa 50% Total Shareholder Return5,6 (share price gain and dividends paid, adjusted for FX movement) since announcement of Strategic Review in August 2015
Financial and Operational
- Improved operational earnings performance –
- Revenue7 of $430 million, up 9% (cpp8 $396 million excluding forest/log sales7)
- A goodwill write-down of $31 million recorded in relation to the Blue Wolf offer along with $3 million of Strategic Review costs expensed, saw a reported net loss after tax of $(21) million
- Excluding both those items, net profit after tax more than doubled, to $13 million (cpp $6 million), and this was after expensing $3 million of restructuring / impairment costs in North America and Australasia (refer EBITDA commentary below)
- Gross margin expanded to 26% (cpp 24%, adjusted for forest and log sales)
- Operating Profit lifted 130% to $23 million (cpp $10 million) and EBITDA2 doubled to $26 million (cpp $13 million), prior to the $31 million goodwill write-down noted above in relation to the Blue Wolf offer, $3 million of Strategic Review costs, and $3 million of restructuring / impairment costs
- Key operational initiatives were completed –
- The two NZ manufacturing capital projects, totalling $7 million, were concluded –
- The optimising edger was commissioned in August / September ‘15, the ripline project was commissioned in April / May ’16, and both are achieving targeted benefits
- Annualised EBITDA benefits projected to exceed $4 million pa
- Texas warehouse consolidation completed –
- 367,500 sq ft building was completed in Texas in June ‘16
- Houston and Dallas facilities now consolidated into this new mega-facility
- Logistics, efficiency and rental gains to be realised moving forward
- New procurement and forecasting system (Data Profits) now in place
- New business won –
- New, and extended, National Home Centre product programmes won (eg hardwood boards and commodity boards)
- Territories expanded –
- Pro-dealer regional expansion implemented (e.g. Louisiana and New York)
- Balance sheet strengthened -
- Net cash from operating activities lifted materially, to $35 million (cpp $2 million)
- Closing debt (net of cash balances) reduced by $22 million, to $36 million (cpp $58 million), reflecting –
- Cash flow from operations, less –
- $3 million expenditure on the completion of the NZ manufacturing projects, and $2 million in other capex (e.g. IT-related spend in NA distribution activities)
- $5 million in shareholder dividend payments
- $3 million in financing costs
- US housing market to continue to improve
- NZ$:US$ cross rate forecast to decline again from current levels as the year advances
- Operational initiatives put in place in FY’16 to be reflected in FY’17 earnings
- EBITDA2 and Net Earnings targeted to improve9 further
1 Tenon’s fiscal year is 30 June, so FY’16 refers to the 12 months ending 30 June 2016.
2 EBITDA (ie Earnings before Interest, Taxation, Depreciation and Amortisations) is a non-GAAP earnings figure that equity analysts tend to focus on for comparable company performance, because that number removes distortions caused by differences in asset ages, depreciation policies, and debt:equity structures. Refer also to Note 7 of our 30 June 2016 Consolidated Financial Statements. Tenon’s EBITDA is calculated as Net Profit after Taxation of -$21 million (cpp $6 million), plus Tax Expense of $4 million (cpp $nil), plus Financing Costs of $3 million (cpp $4 million), plus depreciation and amortisations of $3 million (cpp $3 million). We incurred restructuring/impairment costs of $3 million in the period, Strategic Review costs of $3 million, and a goodwill write-off in relation to the Blue Wolf offer of $31 million (cpp $nil), meaning that EBITDA pre these costs was $26 million (cpp $13 million).
3 LSCFP refers to the Lowe’s supply chain financing programme, which had a balance of $20 million at 30 June 2016.
4 Imputation credits will not be attached to the dividend, due to Tenon’s current non-tax paying position in New Zealand.
5 Adjusting for share price, FX movements, and dividends.
6 This is for the period from 28 August ’15 through to the writing of this report, adjusting for the November and April dividends.
7 Revenue historically includes the sale of logs at the NZ (Taupo) manufacturing site under back-to-back forest stumpage arrangements. As planned, these arrangements terminated during our FY’15 fiscal year. Whilst additive to revenue, these log sales were carried out at zero margin and did not contribute to Net Earnings. The log sales number included in revenue in FY ’15 was $6 million. Revenue also includes the sale of residual forest assets (from time to time) that the Group holds. The revenue from the sale of forests in FY’15 was $4 million. Revenue excluding both forest and back-to-back stumpage sales was $396 million for FY’15. There was no revenue in FY16 relating to either of these items.
8 cpp refers to the corresponding prior period – ie the comparable 12-month period to 30 June 2015 (ie FY’15).
9 Future actual earnings, cash flow, net debt and dividend payment outcomes will be dependent upon continued US housing market recovery, interest rates, NZ$:US$ cross rate, and the Strategic Review (amongst other drivers, many of which are beyond Tenon’s control). In particular, the guidance noted herein assumes no adverse changes in either macro-market conditions, and assumes a NZ$:US$ cross rate level similar to that which prevailed in FY’16.