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Provenco Group Ltd: David Ritchie

Monday 12th December 2005

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Provenco Group reported a doubling in net profit to $8.6 million for the year ended June 30, which included a $2.5 million tax credit. At the pre-tax level, the $7.6 million profit was up 50% on the previous year which the company attributed to strong growth in its international retail payments business and the strengthening of its Eftpos-based businesses in New Zealand and Australia. The company is forecasting a pre-tax profit exceeding $9 million for the current year. The company twice raised its pre-tax forecast last year and the actual result was well above the most recent forecast.

Sharechat: Who is the Kuwait contract with?

Provenco chief executive David Ritchie: It's with a local Kuwaiti company called Al-Oula which is a local retail oil company. They bought 40 sites of the network in Kuwait that was until then owned by the Kuwaiti government. The expectation is that the other 80 or 90 sites will be privatised within the next 12 to 18 months. We're putting in our site automation and advanced payment systems to all those sites. The important thing is it's our first contract or market presence in the Middle East. We see it not only as good business in itself, but a good local reference point for other Middle Eastern companies who we know are looking for similar solutions.


SC: The company has commented in the past that its international activities tend to deliver large but lumpy contracts. Are you currently discussing new contracts?

DR: We are. We're actively involved in discussions right now with a number of companies in the oil industry from independent individual service station operators to regional and national oil companies to major global players. It will at some stage lead to contracts. Whether we get them or not is another thing. The discussions we're having at the moment include a number of countries where we have a strong presence right now: Australia, New Zealand, Malaysia, South Africa and Hong Kong would be examples of some of those. At our annual meeting in October, I stated that we were well positioned to prepare for potential moves into other, larger markets. We have been focused on the Southern Hemisphere and Asia in the past. We're now looking at a number of new market opportunities which include India. We and our local Indian partner are in detailed discussions with one of the local oil companies. In China, we continue to develop relationships with the national oil companies - there are three of them, but they're big. I was in China about a month ago. We have signed a small contract with Sinotech which is the largest of the oil companies in China. We signed a contract for their Hong Kong business which is small but it provides potential opportunities beyond that. We see the Kuwait contract as a potential launching point to other countries throughout the Middle East. In both the USA and Europe, we're doing a lot of research on the market potential and exploring whether we want to fast-track an entry into those regions. We're working on a number of fronts.


SC: Has Provenco lost any tenders to competitors?

DR: We're always competing with some substantial international competitors. Secondly, the customer requirements are different in many markets. It's not one solution they're after. We don't win every business we target and chase. The market's so big and the requirements so different that we don't win everything. I've been in Provenco for 16 or 17 months and I can't recall any major tenders we've lost. The business opportunities and my expectations of those international business opportunities are as positive now or more so than they've ever been.


SC:What are the chances of getting further Shell contracts?

DR: I think we're as well placed for further Shell business as we could be. We're discussing potential business on a number of fronts and in a number of markets with them. Further contracts need to be won through what will be a competitive process. Business is never a given when you're dealing with companies like that, but I think we're very well positioned.


SC: How important are your own contacts in Shell?

DR: I spent 20-odd years with Shell. I don't think my past has been detrimental to our business. Where potentially I have broad value is in having an ingrained understanding of the oil industry and knowing how they think and make decisions. Also, they will listen. The thing we focus on is making sure we understand them and other oil companies, what their business drivers are and where it is we can add value. That's where I certainly have and will continue to help the organisation.


SC: What is Provenco's competitive advantage in this area?

DR: From my perspective, it starts with our intellectual property, our people, our processes, our product solutions. On top of that, it's all very well to have that intellectual property, but we have a proven reputation now of actually delivering against expectations and commitments. That's something which in technology companies often doesn't occur. We deliver a complete solution. EMV (Europay, Mastercard and Visa smartcard certification standards) is new and it's difficult. A lot of companies have had trouble getting there and a lot of the oil companies have had trouble. We delivered the first and the largest EMV compliant pump to Petronas (in Malaysia), 5,500 of them on time and below cost. It's that delivering a solution, the products we have and we have a very clear understanding of the cost of ownership. We're not just out there selling a thing and walking away and leaving it. We have a whole-of-life perspective. We're a market leader in Australasia and the Pacific.


SC: How much of what the company sells is its own hardware/software and how much is sales of other companies' products?

DR: Provenco as a company overall, firstly, for the international oil industry, we design, develop and manufacture and sell 100% our own products. That's our intellectual property, that's both hardware and software. For the rest of Provenco portfolio, most of that we actually import, global leading brands - Hypercom Eftpos terminals, Symbol scanners are two examples. We import global leading brands for New Zealand and Australia and, in many instances, do quite a lot of integration software development. They may want to interface them with their inventory management systems. They might want hand-held computers people can walk around with in their shop. In those businesses, it's a mixture of importing leading brand hardware and then customising it.


SC: Is Provenco's intellectual property likely to attract a takeover offer?

DR: There's no doubt we have valuable and commercially marketable intellectual property. That covers our products, our solutions, our technology and probably also our customer and partner relationships we have in many countries around the world. That's where the value of the intellectual property is. Will it attract a takeover? I have no idea.


SC: Explain why rental customers are better than one-off sales?

DR: What they do is they smooth out our revenue and cash flow. What we will do is we will move to gaining a regular monthly income and profit, rather than one-off and nothing for three or five years. We're moving in that direction. Another thing it does is provide you with a long-term relationship with a customer. Every month, there's something going on between the customer and us. The other thing I would say is to turn it around and look at it from a customer's point of view. It gives them much more flexibility to upgrade or change their hardware and software solutions. On the payments side, they may change their Eftpos terminal.


SC: Your recent acquisitions suggest you place great store on distribution capability. Is that a fair interpretation and why?

DR: Yes, that's correct. The growth in the distribution business by acquisition over the last couple of years has been significant for the group. We're able, as an organisation, to add quite a lot of significant existing distribution business that we had in Provenco already. We're really cleaning up the business model we have. We had a mixture of being both a reseller and a distributor. We've recognised both are quite different so we've split them. We've recognised we have a core competency and an ability to scale that up. We've rebranded the business Vantex. We're now the largest in point of sale and mobile and wireless technologies across Australasia. It gives us a constant and reliable stream of revenues. It really has de-risked our business to some extent. The distribution really isn't lumpy at all. That's important to us.


SC: Are the Vantex and Javelin acquisitions living up to expectations?

DR: Yes, they are. They have enabled us to form a significant business in this area. We're very pleased with the performance of both Vantex and Javelin.


SC: How has Provenco been able to convince vendors of the businesses it has acquired that they should accept part payment in Provenco shares?

DR: The vendors in all of those acquisitions did undertake detailed reviews of Provenco as a group. They understood what they were buying shares in. As well as that, they all bought into the vision and prospects of the company. It was a two-way sell. It's worked well for all parties. There has been significant incremental growth for both new and existing shareholders. That's a key part of it.


SC: Are you still looking for further acquisitions? If so, in what areas?

DR: It's fair to say we are always thinking about and looking for business opportunities, some of which may come through acquisition. The important thing I feel is that we have the capability within the organisation, both from the financial as well as the people and processes perspective, to undertake further acquisitions. But if we do, it would be to build the core of the business. It would be required to be earnings per share positive. That's a given. I really can't advise on any specific acquisitions we're targeting at this stage, but yes, we are looking.


SC: Is your forecast that operating profit will exceed $9 million in 2006 as conservative as your 2005 forecasts?

DR: The question does lead us into an area which is market sensitive. All I can do is confirm that under the continuous disclosure requirements that if there are any changes, we will inform the market.


SC: How vulnerable is Provenco to an economic slowdown in New Zealand?

DR: EMV is certainly proving a strong growth driver for us. The other thing that's important is greater than 50% of our revenue is now derived offshore, either through Vantex in Australia or through the oil industry in many countries. Between the two, the economic slowdown hasn't impacted on us. It's starting to come through, I hear from different people. All of our businesses in New Zealand are showing solid growth.


SC: What's been happening to Provenco's market share in New Zealand?

DR: Reporting market share is difficult. Obviously, we don't all exchange numbers. We're confident we're still gaining over 60% of the Eftpos sales business in New Zealand. It has to be remembered that not only is market share a difficult number to assess, but there's also quite a lot of over-lapping. A lot of the terminals we sell, we actually sell to our competitors. Our competitors are our customers. We sell a large number of terminals every month to ANZ Eftpos and Cadmus. It may be that a large number of those terminals are actually double-counted.


SC: What does the company mean by its intention to return "a reasonable portion of the after-tax profits" to shareholders?

DR: A little bit of background: we have obviously only just started paying dividends after eight years. We're flagging we will pay them on a six monthly basis with maximum imputation credits. Because we're in a growth phase, we want to work our way through in the first year as to what's appropriate. We don't want to lock ourselves down to a number. It's early days in the payment of dividends and we do intend to continue paying them, but we have so much growth in front of us, we just want to assess it as we go through.


SC: Dividends are very important to New Zealand investors

DR: They're income hungry.


SC: Why has your share price been so volatile this year, and why so weak since October?

DR: I'm sure you get this from most executives, it's inappropriate for me to comment on the share price. At a general level, we've seen strong growth over the last year in the business. That reflects a number of things: a strong earnings performance, a further diversification and de-risking of the business with the acquisitions. We have market leadership in Eftpos in New Zealand and also retail technology. Our international retail oil business has produced good results and is well positioned. There are a number of significant opportunities in front of us. It's been pretty positive. The recent fall, I can only assume it's part of a recent downgrade of medium-sized stocks. It's not something I can explain any more than that.


SC: Why have Provenco shares under-performed Cadmus?

DR: They came off a low base, I would assume. I haven't actually watched them too closely. We have a very different business to Cadmus. Only a small, but important, part of our business, being our Eftpos business, competes or can be compared to Cadmus. Our performance has been strong. Over the last year as an organisation we've seen that growth come through in both revenue and profitability.


SC: What will happen to the capital notes in April 2006?

DR: There's a formal process we have to engage in with noteholders before April -- whether they're rolled over or converted or whether there are other options. One of the issues we're aware of is the issue around dilution. We will certainly take that into account when we go through the process. We haven't yet finalised it, but dilution is something most shareholders don't seem keen on.


SC: When will Provenco adopt international accounting standards and how will they impact reported results?

DR: We've got a process in place with PricewaterhouseCoopers. They've given us a preliminary report on the impact and recommended timing. The board and management right now are working through that report. We will notify the market when we've decided on the adoption date which I think is the key thing. There's a different interpretation on things like revenue recognition, which we don't think will have a major impact, and goodwill in that you don't amortise goodwill over a fixed period but you basically assess it on an annual basis. There are a number of things which change.


SC: Is goodwill the biggest issue?

DR: That's probably the thing that will be most transparent or will be most noticeable, but there are other things we have to work through. Goodwill is certainly one that every company that has goodwill on its balance sheet has to deal with.


SC: What's likely to happen to your Eftpos equipment sales beyond January 2008?

DR: There's a continual development of security standards and other value-added applications, although the terminals at that stage will all be EMV compliant. It may be terminals that can actually write money onto cards so you have gift cards. We're also seeing technological improvements coming through. You're seeing things converging like the X-Box and Play Station. It's a continual moving feast and we will have plenty of opportunities. The majority of Eftpos terminals in the market are rented, not necessarily from us, but from finance companies. Most of them are medium-term rentals so there are plenty of opportunities beyond 2008. It's certainly not a falling off the cliff. There will be plenty of opportunity beyond that.


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