By Jenny Ruth
Tuesday 14th December 2004
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ShareChat: The company still has a very lazy balance sheet, even after the Kleencare purchase and your plant upgrades don't seem to be adding any strain. What are you going to do about that?
Taylors managing director Maurice Nicholson: In February, we're reviewing how much capital we need, how much we need for acquisitions. We have $10 million or $15 million a year in cash flow. We need to build a couple of new plants - in Christchurch and one in Wellington. We're just doing a review of all that. How much we need and how much is left over for shareholders. We will weigh up our options in February and se what we do.
SC: Has Spotless reviewed the possibility of bidding for the minority shareholdings?
MN: (Refers to a newspaper report back in 1994 when Australia-based 66% shareholder Spotless last offered to buy out the minorities.) While he (Brian Blythe, 65) is chairman, we will never do it again. He was accused of being an Australian ripping off poor Kiwis.
SC: Are further acquisitions likely? Will the company look at acquisitions outside the laundry business?
MN: It's hard to get anything of any size. That's the main problem. We could look at something outside the laundry sector, something that's in a service-related industry.
SC: How close a fit would it need to be?
MN: You couldn't fit it, probably. The problem we've got is that Spotless are in all those areas that are complimentary to Taylors. We could look at security, waste management, grounds management, healthcare supplies. Something that Spotless aren't in. We've got Taylors to the level where it will produce cash, but it's not going to grow unless there's a big acquisition.
SC: Your depreciation rate looks excessive given the company's very high cashflow. Does your stock really deteriorate that fast?
MN: Sheets, pillow cases and towels used to be pre-paid and written off over three years. It doesn't last much longer. The advantage at the moment is that depreciation is higher than the cost of buying with the higher dollar. The plants themselves are written off over five to 10 years and they last much longer than that.
SC: Given the above, why is the dividend payout ratio still so low?
MN: You're dead right. We're looking at that. That's all we can say. It is pretty conservative. The problem we've got is we've got all these imputation credits which aren't much good to the Australians. That shouldn't stop us.
SC: Is there no way of passing the imputation credits on to the New Zealand shareholders?
MN: They're looking at that now. There doesn't appear to be. But that's not stopping us paying out (more). It's just a conservative approach to dividends. We've got two big laundry contracts coming up for renewal in two to three years. We need to spend money upgrading our plants to make sure we keep those contracts. But again, there's a lot of cash produced each year.
SC: Just how important are energy costs in relation to the company's total costs?
MN: They've certainly gone up one or two percent of turnover, added three or four hundred grand to the cost. That's why we're trying to modernise the plants to have less dependency on gas and power. In effect, we will just be treading water. We're looking at whether we should go back to diesel - gas is just so expensive. We used to use coal and we could convert the boilers to diesel.
SC: Have you got a better idea yet of how much the Holidays Act has added to the company's costs?
MN: It's going to cost us some money. How much is difficult, but it could cost us a hundred grand. About 70% of our plants work on public holidays, especially the hospital ones. The Holidays Act gives them double time. Most of our awards are structured with double time because they're old government contracts. It's the day in lieu (that's the problem). If they work Christmas Day and Boxing Day you have to pay for another two days as well.
SC: How much ability does the company have to pass these increases on to its customers?
MN: None. The price is nominally subject to re-pricing each year. You have to wait for the CPI to move up. We certainly can't turn around and say, this is an extra. With the hospitality contracts we will try and not work on those days and deliver extra stock ahead. It's not like a restaurant that can put on a 15% surcharge.
SC: You have a sinking lid on your hospital contracts?
MN: There's an adjustment for price every two years which takes into account the length of the contract and which nominally gives us a nil increase. They say we have less labour than we used to have, which is true.
SC: So you're running to stand still?
SC: Is there much more potential for you in Queenstown?
MN: The South Island's just fantastic. It's just a matter of getting the prices right. The volume in the South Island is enormous. We're going to extend the Invercargill plant and build a new plant in Christchurch to take up the volumes. Healthcare is the biggest part (of the business). Industrial and hospitality is about equal. Industrial is pretty good, but NZTS is dominant in that. We have maybe 35%.
SC: What cost savings are likely from the amalgamation of the three Auckland plants?
MN: Better service and more profitability is the quick answer. That's the reason we did it. It's yet to be proven but theoretically it should.
SC: What will be the impact of the plant modernisation?
MN: Some of the plant at Taylors is pretty old and needs replacing. It doesn't give you any more profitability, but if you don't do it, you don't keep what you've got.
SC: How much more potential do you see in the tourism market?
MN: There's enormous growth in the tourism market. The only problem is a hospital changes the sheets every day. Sometimes the sheets in a hotel are only used three days a week so you've got a higher cost of sheeting. It's great for the long term, but you do end up with more costs. It has a lumpiness about it. With a hospital, they're queuing up. A couple a months ago, it (occupancy) was 120%. Admittedly, the price is cheaper. That's the reason we've amalgamated those plants. Tourism gets very busy in the summer and hospitals go down. It will flatten out that peak.
SC: It looks like the second half of the latest year was particularly tough - by my calculations, sales were up 10.8% but NPAT was down 12.7%. Can you explain why it was so much worse than the first half?
MN: The second half was disappointing, to be honest. The first (half) was over-stated - we took profits that shouldn't have been taken, they should have been spread over the whole year. It was disappointing, no argument about that. The sales in the second half grew from Kleencare but the profitability wasn't great at Kleencare.
SC: Have the problems in the second half been fixed?
MN: It's fixed. The first half should be as good as last year's first half.
SC: Even with the over-stating last year?
MN: We expect it to be in line with last year.
SC: The rising New Zealand dollar benefits the company, doesn't it?
MN: It should do - as long as the tourism numbers stay up. The sheeting and towels come cheaper so a high dollar should help.
SC: The last time the company had a dip in profits seems to be back in 1997/1998. Are there any similarities between then and now?
MN: No. It was the acquisition we bought in Wellington. I was only a director then. I took over in 1998. (My predecessor) bought a laundry in Wellington and didn't sign off the customers. (The vendor) opened up in competition and the customers went with him.
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