GUD : ASX 2016.10.25 Chairmans Address.pdf

GUD Holdings Limited Chairman's Address‌

59th Annual General Meeting

Tuesday 25th October 2016 RACV Club‌

501 Bourke Street, Melbourne

Ladies and gentlemen, my address to you at today's meeting will cover three key topics. The first of these is the customary overview of financial performance for the last completed financial year - that ending 30th June 2016. The Annual Report and Annual Review covering that year were recently mailed to you or, if you have chosen, their availability electronically has been advised to you.

The second item I will cover relates to our business portfolio and the changes we have made to it since we gathered here at this time last year. Finally, following a review of operations from Managing Director, Jonathan Ling, I will provide some commentary on the outlook for the current financial year.

However, prior to addressing all these issues I wanted to provide a perspective on workplace health and safety at GUD, as this remains an overarching management matter to which significant attention is directed on a daily basis.

Our recent priority in relation to safety has been to improve safety performance through the introduction of a number of new programs and initiatives. These have included increasing employee engagement, improving the safety culture at each business unit and site and developing safety campaigns encouraging staff to be more aware of their surroundings and the immediate resolution of identified safety risks.

GUD established a Safety Excellence Awards program in the 2014-15 financial year and continued with this in the 2015-16 year. The Awards are directed at promoting, encouraging, recognising and rewarding businesses, teams and individuals who have placed a high emphasis on accident prevention and have promoted a safety culture in the workplace.

While significant progress has been made it has recently been recognised that the GUD group's primary safety risks now reside in remote sites and with employees whose role requires a significant time spent on the road. It is fair to state that while the culture and safety performance has improved at all major sites within GUD this hasn't translated fully to our more distant operations, such as interstate offices and warehouses. This is being actively addressed in the current financial year.

In relation to mobile worker safety we are actively managing driver performance through the installation of telematics systems in all tool of trade vehicles supplied to mobile staff to enable them to do their jobs. This allows poor driving behaviour, which elevates the safety risk, to be identified and rectified and effectively places the same safety culture into the mobile office as it does the traditional office.

While GUD operates across industries that are not as inherently risky as, for example mining or construction, we recognise that providing a safe workplace for our employees and contractors is essential and our safety programs are structured around improving safety performance year-on- year.

Pleasingly, this unyielding focus on workplace safety is reflected in the high ratings achieved on the safety questions included in the group's annual employee engagement survey. More importantly, our safety performance improved in the 2015-16 year as evidenced by the group's total injury frequency rate, as measured by the total number of recordable injuries per million hours worked, more than halving over the last two years to 7.1 injuries.

I will now turn to outlining the primary factors underpinning the financial results we reported in late July for the year ending 30th June 2016.

Whilst the headline result was a loss of $43 million, this clouds the underlying operating result which was boosted by the full year inclusion of Brown & Watson, further outstanding returns from the established Ryco and Wesfil automotive businesses and a substantial uplift in profitability at Davey.

Underlying net profit after tax from the continuing businesses in GUD's stable, increased by 36% to

$44.4 million. It is important to note that with the impending sale of GUD's remaining interests in the Sunbeam joint ventures, the financial results for Sunbeam have been removed from comparisons of performance with the prior year.

It is important that you have an appreciation for the decision to write down the value of GUD's investment in the Dexion business by a total $75.7 million pre-tax. This impairment was taken following a review of Dexion's trading performance, particularly in the second half, and its then near term outlook. Some of this was recognised at the time of our first half results announcement but as conditions for Dexion didn't materially improve in the second half further impairments were necessary.

Included in this non-cash write down was just over $59 million of goodwill, $10 million in brand name values, $4 million in inventory and $2 million in capitalised product development costs. I will comment shortly on Dexion's trading performance in the year and the factors behind these write- downs.

In addition to the Dexion impairment two other one-off items affected financial performance after the operating line. The first of these was related to the payment of the maximum earn-out for the previous shareholders of Brown &Watson, following its exceptional financial performance in the year. $10.6 million, representing half of the earn out, was taken as a one-off expense

The last item included in the one-off costs for the year was an impairment of Davey's inventory, valued at $1 million, which was included with the first half's results.

However, underlying earnings before interest and tax for the continuing businesses improved by 52% to just under $79 million, with growth in Automotive and Davey offsetting declines in Oates, Dexion and Lock Focus.

By business the major points to note around FY16's trading performance were as follows.

Profit growth in the established Ryco and Wesfil automotive businesses was impressive and was generated by strong sales growth. This came from a combination of introducing new product categories, range extension in existing categories, growth in the user base and the activation of a number of innovative marketing programs to support the new product activities.

Additionally, financial performance in the Automotive segment of GUD was boosted by the inclusion of Brown & Watson's trading for the full year. Sales and profit from Brown & Watson exceeded all expectations and resulted in the maximum earn out being paid, as already noted.

Davey's 27% improvement in earnings before interest and tax came from a combination of sales growth and internal efficiency improvements. These improvements included substantial savings

being generated on domestic freight and further contributions from Davey's leading sales force effectiveness program, centred on improving share of wallet with established customers and on reducing the cost to serve across the customer base.

Disappointingly, Dexion reported a loss of nearly $4 million following a $5 million profit in the prior year. This result came from a combination of lower sales especially in the Australian warehouse racking market. This lower demand led to reduced throughout at the Dexion's Malaysian factory, causing the factory to operate at below break-even volumes. Whilst it was expected that factory volumes would improve in the second half this didn't occur, as demand remained relatively soft and Dexion implemented an inventory reduction program to release cash, further affecting factory performance.

Despite this sub-par operating performance, the one positive to come from Dexion was its improvement in cash generation, coming from a combination of the inventory reduction and from increased collections from customers, especially in the second half.

While reporting a growth in revenue, profitability at Oates declined 11% on the prior year. The main reason for this decline was the difficulty in obtaining price increases in the retail channel, including supermarket and hardware customers, to offset the higher cost of product stemming from the devaluation of the Australian dollar. Both the grocery and hardware sectors remain extremely competitive and under significant pressure, as the demise of Masters reflects. These pressures fall back on suppliers in many instances, as the primary focus of retailers is on price to gain and retain retail customers.

To wrap up my commentary on the year I want to focus on cash generation. A significant improvement in cash generation was recorded in the year following a structured program, that was directed at working capital reduction, being deployed across all businesses. Operating cash generated improved to $70 million from $30 million previously with higher receipts from customers and lower inventories being the primary drivers of this improvement. Much of the gain occurred in the second half and the focus on cash generation remains strong into the current financial year.

All of these factors allowed us to increase the total dividend paid for the year to 43 cents per share from 42 cents previously.

In addition, the actions we have taken to reposition GUD, through both portfolio changes, which I will address shortly, and business improvement, have been well accepted by the market, as reflected by the share price moving from below $10 at the time of the annual results announcement to around $11 per share recently.

Prior to inviting Jonathan Ling to provide you with a review of operations I wanted to talk about GUD's portfolio.

As you are aware we have made significant changes to the portfolio in recent times with the acquisition of Brown & Watson on 1st July 2015 followed by the sale of our remaining interests in the Sunbeam joint ventures, a year later.