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Tough first half for F&P Appliances sends shares plunging

Friday 25th November 2011

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Fisher & Paykel Appliances slashed net profit to $980,000 in the six months to Sept. 30 after provisioning for a battle over software copyright, an onerous Australian lease and unfavourable exchange rate movements.

The share price immediately fell almost 9 percent to 35.5 cents, its lowest point since May 2009, although still above the 25 cents a share seen before the company brought on Chinese whiteware manufacturer Haier as a cornerstone shareholder in early 2009.

The result compares with an $11.3 million profit in the first half of the previous year. On an earnings before interest and tax basis, the appliances side of the business made a loss of $4.92 million, offset by an operating profit of $12.5 million in the finance business, which continued to show strong results.

Total EBIT fell to $7.5 million, compared with $25.7 million in the same period a year earlier.

The company also reported improved gross margin, at 31.8 percent compared with 30.3 percent in the same period last year, on appliance sales and reported optimistically on a range of new product launches, improved processes for ensuring product quality, and increased capital spending in the year ahead as it repositions the F&P brand with assistance from Haier.

The company is warning soft trading conditions, particularly in Australia and Europe, make it cautious about the outlook for the year, with EBIT forecast to be around $42 million - $10 million from the appliances business and $32 million from its finance arm.

While the finance business would see less lending in New Zealand, this was not likely to have a significant impact on normalised earnings, and the finance business is well-placed for the end of the government retail deposit guarantee scheme next month.

“Due to an increase in growth-related capital expenditure for the coming year and a cautious approach to future market condition, the company has resolved not to declare a dividend at the half year,” the statement said.

The company plans capex of $53 million in the current financial year, of which $23 million was spent in the first half, compared with $9.6 million in the same period a year earlier.

One-off items that dragged down the half year result included $2.5 million on “onerous lease” costs in Cleveland, Australia, and a $5.9 million provision against legal costs and potential for an adverse decision in a case brought against the company by an American software developer, who alleges copyright infringement.

A decision from the High Court in New Zealand is expected shortly.

“While the directors believe on the information available to them that the claim is novel and lacks commercial merit, there are complex legal issues and a range of possible outcomes,” F&P Appliances said in statement to the NZX. “Accordingly, the directors consider it is now prudent to make a provision given this uncertainty.”

Also negative for the result were $20.3 million of “transactional hedging losses” incurred because of the rapid appreciation of the Australian dollar against the US dollar during the period, resulting in a one-off loss of earnings.

Had a new hedging policy agreed in March this year been in place, losses would still have been incurred, but much lower at $8.3 million. That was despite 4.8 percent growth in sales to $195.99 million in Australia, F&P Appliances largest market.

In New Zealand, appliance sales were down 4 percent to $78.18 million and slumped 28 percent in the depressed North American market to $89.88 million. European sales were off 22 percent at $29.31 million, while “rest of world” sales were up 14 percent to $37.93 million.

Freight, raw material and labour costs all weighed on the appliance business during the half year.

Group operating revenue for the period was down by 7 percent to $440.85 million, with the same proportional fall in operating expenses to $108.94 million.

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