SMITHS CITY GROUP LIMITED; ANNUAL MEETING
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Smiths City Group Limited (SCY) | 3:33 pm, Wednesday 3 September 2008 | SCY | 0.310 |
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RESULTS OF RESOLUTIONS AT ANNUAL MEETING
The following resolutions were passed at the annual meeting of Smiths City
Group Limited held on 3 September 2007.
To re-elect Ms Sheldon as a director.
To confirm the appointment of KPMG as Auditors and authorise Directors to fix
their remuneration.
PRESENTATIONS
The presentations made by the Chairman and by the Managing Director are
attached.
INDEPENDENCE OF DIRECTORS
The company has determined that JA Dobson and SJ Sheldon are independent
directors.
GH Willis
Company Secretary
CHAIRMAN'S ADDRESS TO SHAREHOLDERS OF
SMITHS CITY
3 SEPTEMBER 2008
INTRODUCTION
Before moving to the formalities of the meeting I would to talk to you as
shareholders and investors about the company.
Firstly however a couple of acknowledgments
John Holdsworth - John joined the board of Smiths City in
October 1988 as a director and has remained through "thick and
thin" taking over as Chairman during the late 1990's and has been a
director and major shareholder for 20 years. His support and wise counsel
has been so important to Smiths City
Barry Cotton - 1939/2008. Barry was a manufacturer and Smiths
City supplier over many years of the Barda brand of lounge furniture and
the famous BIG SOFFEE brand of recliner .
A big man with a big voice and never backward in using it - which he did on
many occasions in support of Smiths City during our
difficult times in the early 1990's. He was a wonderful person in
many walks of life but to us at Smiths City we owe him and
acknowledge him for his leadership and confidence in the
Company at that time.
THE ECONOMY
In the Chairmans review section of the yellow annual report I said that
"Everyone knows these are tough times in the retailing of home appliances and
furniture products but that Smiths City had been there before in 1996,1998,
and 2000 and that the recession this time may be a long one particularly if
the Reserve Bank monetary policy doesn't ease up quickly"
Since writing that in early July we have seen the bold move of a
.25% interest rate reduction by the Reserve Bank. The economy
has limped through winter and finally the bureaucrats in
Wellington have had to admit that they have managed the country
into a recession something that they have been aiming to achieve
for a couple of years. We will have to wait until 26th of September to get
the official negative GDP figure for June quarter and then Christmas to see
if we have had a third negative quarter ending September - my guess is it
will be and that for the year to end march 2009 we will achieve about 1%
growth the worst for 10 years.
When I addressed you this time last year in September I said that
retailing conditions were " flat and expected to remain so through 2008 and
that commentators including Business NZ expected GDP growth to average 2-3%
through to the end of 2009 - but at Smiths City we didn't expect trading
conditions to pick up from the downturn which really started back at
Christmas 2005".
What we did expect to happen however was an earlier move by the
Reserve bank to cut interest rates to below 6 %- only time will tell how much
real damage has been done to the economy and the
productive and export sectors with the official rate still at 8%
compared with Australia 7% and USA 2%. The following graph
shows the key NZ economic indicators with GDP declining as
indicated .
Interest rates have a huge effect on Smiths city results - firstly in on the
cost of borrowing of our $25m of secured bank funding and $90m into
Smithcorp finance our customer financing Company - as you can see from the
cash flow statement interest paid is $10.4m compared with $9.1m the previous
year. Interest rates also have a big effect on leasing costs both property
and vehicles - rents in our retail and wharehouse premises have in the last 5
years doubled to about $12m but sales growth has been only about 25% - some
of this reflects price deflation in the products we sell but the majority of
this major cost is due to interest costs to landlords and inflated rental
valuations - management has targeted significant reductions in rental space
over the next year.
SMITHS CITY RESULTS
Traditionally the SI leads NZ out of a downturn and as I have
shown to this AGM in the past Smiths City results tend to
improve ahead of the increase in NZ GDP growth.
It is clear from the information available that the major centres (and
Auckland in particular) are worst affected by the downturn
and that the provincial areas are recovering in the back of good
farming results. Certainly in our business we see great results from centres
such as Nelson, Kaikoura, Ashburton,Timaru,Oamaru,West Coast,and
Southland,and in the North Island Gisbourne and at Tauranga a very strong
opening this month.
SMITHS CITY RESULTS
SCY OPERATING PROFIT COMPARED WITH FOLLOWING YEAR REAL GDP GROWTH
This graph shows the Smiths City operating profits over the last
fourteen years chartered against the next years national GDP
growth rate. In the past "big ticket retail sales growth and profits" have
tended to reflect the GDP growth of the year ahead. In our view this is due
to improved consumer confidence and access to credit which drives purchasing
behaviour and that customers act well ahead of the official statistics of a
downturn or an upturn.
BOARD AND MANAGEMENT RESPONSE
So what has Smiths City's management response and what has the
board been thinking about over the last year. Management has been -
Maintaining market share by strong promotions particularly
targeting our loyal customer base and using credit
promotions through Smithcorp finance.
- Continuing the focus on cost reduction with reduced staffing
and deployment of IT systems.
- Turn around of poor performing parts of the business as well
as consolidating premises to eliminate surplus space.
- Working closely and collaboratively with our suppliers.
Board has been
- Focussed on ensuring a clear business plan both for the
existing businesses and the NI growth strategy.
- Maintence of good cash flow and relationships with those
providing our funding lines.
- Encouragement to management in their business improvement program and
maintaining the strength of our market position and brands.
OUTLOOK
In the Chairmans review in the annual report I covered a number
of issues which have lead to structural or non reversible change
particularly in home appliances and whiteware retailing over the
last 5 years.
The entry of Australian retailers including Harvey Norman (and
their second brand Norman Ross),JB HIFI,Good Guys, and Noel
Leeming (now owned from Australia) has occurred and made it
an essential part of our strategy that increase in "scale or size" occur to
lower costs and ensure we are relevant to suppliers.
Further new entrants are expected but it is clear that they will find the
going very tough and make significant losses if they attempt a greenfield
start - JB HIFI for example have just announced a $A4.6m EBIT loss for the
year in NZ.
Its easy for us to forget the huge benefits we have from 90 years
of retailing and brand recognition and having over 100,000 active
customer accounts as a base for promotions. It is also easy to
forget the inherent strength of the Smiths City offering through the
complementary products of the high foot traffic/high innovation product range
in appliances and the low foot traffic/more traditional furniture and bedding
product range.
In summary I reiterate what I said in the annual report - "The
coming year will be bumpy with many factors affecting our results
but our focus will be on what we can control and ensuring we get
the best out of the market that is available."
Before I pass over to Rick Hellings I would just like to comment
on the Company's shareprice.
At 40 cents it is half the shareholders net asset backing, has a PE of 6 and
dividend yield of 11.25% based on a gross dividend of 4.5 cents per share -
like many shares on the NZX - a terrific buy.
The share price has fallen in the last year by 30% from the mid
50's but on very low turnover - clearly sales have been made by
those really needing to sell. The 30% decline is similar to other
retailers including Briscoes, Hallensteins, Kirks, Wharehouse,
and much less that Postie+ and Pumkin Patch.
I guess the shareprice is only an issue if you are wanting to sell but it
still hurts when we know that the Company is worth its nett asset backing
and we feel confident about its future.
I would like to pass over to Rick Hellings to talk more about the
Business.
AFTER RICK
There are real uncertainties ahead especially between now and
Christmas with the election, interest and exchange rates, inevitable product
price increases and the effect of tax cuts.
We will be in a better position at Christmas when we make our
half year announcement to talk about how the year is progressing.
All I can say is that we remain confident of the Companies position and
believe that we are coping with the downturn and conditions as well as anyone
in the sector.
MANAGING DIRECTOR'S ADDRESS - 3.9.08
SUPPORTING NOTES TO POWERPOINT PRESENTATION
THANK YOU CRAIG.
GOOD MORNING LADIES AND GENTLEMEN AND THANK YOU FOR THIS
OPPORTUNITY TO SPEAK TO YOU THIS MORNING. AS YOU WILL BE AWARE
SMITHS CITY IS A FULLY INTEGRATED RETAIL, FINANCE AND PROPERTY
COMPANY BUT RETAIL UNDERPINS EVERYTHING WE DO. WITHOUT
RETAIL THERE IS NO FINANCE COMPANY AND WITHOUT RETAIL THERE
ARE NO OPPORTUNITIES THAT ARISE THROUGH PROPERTY DEVELOPMENT
OR PROPERTY OWNERSHIP.
AS CRAIG HAS SAID RETAIL TRADING CONDITIONS OVER THE LAST TWO
YEARS HAVE, TO PUT IT MILDLY, BEEN CHALLENGING AND TO BE HONEST
THE 2008 CALENDAR YEAR HAS BEEN PARTICULARLY DIFFICULT.
HOUSEHOLD BUDGETS HAVE BEEN UNDER SEVERE PRESSURE FOR A
VARIETY OF REASONS ALL OF WHICH HAVE BEEN DOCUMENTED
EXTENSIVELY IN THE MEDIA. THE REALITY, WHETHER WE LIKE IT OR
NOT, IS THAT WHEN AN ECONOMY GOES THROUGH THE SORT OF
DOWNTURN THAT NEW ZEALAND IS EXPERIENCING AT PRESENT, IT IS THE
BIG TICKET DISCRETIONARY PRODUCTS THAT ARE THE FIRST TO BE CUT
FROM THE BUDGET. HOWEVER, AS CRAIG HAS SAID, WE HAVE BEEN
THROUGH IT BEFORE - AFTER ALL WE ARE NOW 90 YEARS OLD.
THESE CONDITIONS ARE NOT UNIQUE TO NEW ZEALAND AS JUST ABOUT
EVERY MAJOR WESTERN ECONOMY HAS SUFFERED IN THE SAME WAY. OF
PARTICULAR SIGNIFICANCE TO OURSELVES IS THE FACT THAT
AUSTRALIA HAS ALSO HAD A DOWNTURN AND MANY OF THE
AUSTRALIAN COMPANIES ARE LOOKING TO NEW ZEALAND FOR THE
EXPANSION THEY REQUIRE TO ENSURE THAT THEY MAINTAIN THEIR
PROFITABILITY. FOR EXAMPLE WE HAVE SEEN HARVEY NORMAN
EMBARK ON A DUAL BRANDING STRATEGY INCORPORATING NORMAN
ROSS AND HARVEY NORMAN ELECTRICAL (BEING STAND ALONE
APPLIANCE ONLY STORES) OPERATING ALONGSIDE THE HARVEY
NORMAN BRANDED OPERATIONS. WE HAVE SEEN GOOD GUYS ENTER
INTO THE AUCKLAND MARKET AND WE HAVE SEEN BOTH J B HI FI AND
THE WOOLWORTHS OWNED DICK SMITH CHAINS EXPAND BEYOND THE
AUCKLAND REGION INTO THE PROVINCES. THIS STYLE OF EXPANSION IS
NOT GOING TO CHANGE AND IT IS JUST SOMETHING THAT WE HAVE TO
LEARN TO LIVE ALONGSIDE.
IN ADDITION WE HAVE SEEN PRICE POINTS CONTINUE TO DECLINE AND
WE HAVE SEEN COSTS CONTINUE TO INCREASE. AS CRAIG HAS
MENTIONED THE PROPERTY COSTS HAVE BEEN PARTICULARLY SEVERE
FOR US THIS YEAR. TO GIVE YOU AN INDICATION OF HOW THE INCREASE
IN OCCUPANCY COSTS HAVE EFFECTED US IF YOU LOOK AT THIS SLIDE IT
WILL SHOW YOU THE POSITION FROM 2004 TO 2008.
WHEN RETAILING CONDITIONS ARE TOUGH LIKE THIS IT DOES HOWEVER
GIVE AN OPPORTUNITY FOR MANAGEMENT TO LOOK INWARDS AND TO
HAVE A REAL FOCUS ON THEIR EXISTING BUSINESS. AS CRAIG HAS
STATED THERE WERE THREE KEY AREAS FOR THIS FOCUS. FIRSTLY - TO
MAINTAIN MARKET SHARE IN OUR EXISTING SOUTH ISLAND BUSINESS.
SECONDLY - TO CONTINUE THE GROUP'S GROWTH STRATEGY INTO THE
NORTH ISLAND, AND THIRDLY - TO ENSURE THAT WE REDUCE OUR COST
BASE AS MUCH AS POSSIBLE TO PUT US IN A STRONG POSITION TO TAKE
ADVANTAGE OF STRONGER DEMAND ONCE THIS COMES BACK.
TO MAINTAIN MARKET SHARE WE HAVE MATCHED, AND IN SOME CASES
BEATEN, THE VERY COMPETITIVE OFFERS THAT ARE IN THE MARKET
PLACE. IT IS AS TOUGH AS OUT THERE AND WE JUST NEED TO BE
TOUGHING IT OUT WITH THE BIGGEST OF THEM. WE WILL CONTINUE TO
DO THIS BECAUSE OF OUR UTMOST BELIEF THAT THE STRONGER YOU ARE
AT THE TIME THE MARKET STARTS TO PICK UP, THE BETTER POSITION
YOU ARE IN TO BE ABLE TO TAKE ADVANTAGE OF THAT UPTURN.
ALONGSIDE BEING AGGRESSIVE IN THE MARKET PLACE WE MUST ENSURE
THAT OUR CUSTOMER OFFERING CONTINUES TO BE OF A STANDARD OF
WHICH WE CAN BE PROUD. TO THIS END DURING THE YEAR WE HAVE
MOVED THE POWERSTORE INVERCARGILL OPERATION INTO NEW
PREMISES IN LEVEN STREET; WE HAVE AMALGAMATED THE GORE
POWERSTORE AND SMITHS CITY OPERATIONS INTO ONE LARGE SMITHS
CITY STORE AND MOVED THE SMITHS CITY BLENHEIM STORE TO A NEW
SITE IN BLENHEIM. WE HAVE ALSO CLOSED THE OLD SMITHS CITY
FILLEUL STREET STORE IN DUNEDIN TO ENABLE US TO CONCENTRATE ON
THE NEW SITE IN ANDERSONS BAY ROAD. ALL THESE MOVES ARE
DESIGNED TO IMPROVE THE CUSTOMER'S IN STORE EXPERIENCE.
WE HAVE ALSO RECOGNISED, HOWEVER, THAT SIMPLY DOING THINGS
THE SAME WAY GOING FORWARD DOES NOT REFLECT WHAT IS
HAPPENING IN AN EVER CHANGING WORLD. TO THIS END WE HAVE
RECOGNISED THAT AS PRICES OF APPLIANCES HAVE FALLEN THE VALUE
OF TRADE-INS FALLS ALONGSIDE THEM AND IT IS NOT ECONOMIC TO
CONTINUE TO OFFER TRADE-IN OPTIONS TO THE CUSTOMER OR TO TRY
AND SELL TRADE-INS AT A PROFIT.
IN THE SAME WAY WE ALSO RECOGNISED THAT WE WERE NOT LARGE
ENOUGH TO COMPETE IN THE WHOLESALE BUILDING SUPPLIES MARKET,
PARTICULARLY WHEN WE COULD FORESEE THE FALL IN MARKET SIZE
THAT WAS LIKELY TO HAPPEN TOWARDS THE END OF 2007 AND INTO 2008
AND WE DECIDED TO EXIT THE CANTERBURY BASED WHOLESALE
BUILDING SUPPLIES BUSINESS BY SELLING IT TO CARTER HOLT HARVEY.
LOOKING AT THE NORTH ISLAND OUR EXPANSION IS CONTINUING
SLOWLY, STEP BY STEP, AND IT MAY SURPRISE SOME OF YOU TO KNOW
THAT THE NORTH ISLAND NOW ACCOUNTS FOR 21% OF OUR TOTAL SALES.
THE NORTH ISLAND BUSINESS IS BUILT AROUND THE WELLINGTON BASED
L V MARTIN BUSINESS PLUS THE SMITHS CITY STORES THAT YOU WILL
HAVE SEEN IN THE PRESENTATION AT THE COMMENCEMENT OF THIS
MEETING. AS PART OF THIS EXPANSION WE PURCHASED THE 20%
SHAREHOLDING WE DID NOT OWN IN L V MARTIN.
AND FINALLY, WE HAVE DONE A HUGE AMOUNT TO TRY AND CONTROL
OUR COST BASE. JUST CUTTING COSTS IS NEVER AN ANSWER IN ITSELF IT HAS TO BE
BUILT AROUND ENSURING THAT YOU CAN MAINTAIN THE
SAME LEVELS OF PRODUCTIVITY. THE ROLL OUT OF THE NEW POINT OF
SALE TECHNOLOGY HAS ENABLED US TO ACHIEVE THIS.
LOOKING AHEAD, THE PERIOD TO CHRISTMAS IS VERY DIFFICULT TO
PREDICT WITH CERTAINTY AS THERE ARE SO MANY FACTORS BEYOND
OUR CONTROL. ONE THING IS FOR SURE TRADING - AND HENCE PROFIT -
IS GOING TO CONTINUE TO BE DIFFICULT AND WE MUST SIMPLY RIDE THIS
TOUGH TIME OUT. WHAT IS OF IMPORTANCE IS OUR CONTINUED ABILITY
TO GROW A SUSTAINABLE BUSINESS AND TO IMPROVE SHAREHOLDER
VALUE OVER THE LONG TERM. WITH THIS IN MIND MANAGEMENT WILL
CONTINUE THE STRATEGIC INVESTMENT IN OUR EXISTING SOUTH ISLAND
BUSINESSES (WE ARE CURRENTLY MOVING OUR POWERSTORE RICHMOND
STORE TO LARGER PREMISES AND UNDERTAKING A MAJOR
REFURBISHMENT OF THE POWERSTORE MAX SITE IN MOORHOUSE
AVENUE, CHRISTCHURCH); WE WILL CONTINUE TO MAINTAIN MARKET
SHARE THROUGH AGGRESSIVE PROMOTIONAL CAMPAIGNS WITH AN
ABSOLUTE FOCUS ON PROVIDING THE BEST CUSTOMER SERVICE IN OUR
INDUSTRY; WE WILL BE VERY CLOSELY CONTROLLING INVENTORY
LEVELS, WORKING CAPITAL AND COSTS; AND, WHERE POSSIBLE, WE WILL
TAKE ADVANTAGE OF EXPANDING THE FINANCE COMPANY AND ANY
PROPERTY OPPORTUNITIES THAT DO COME ALONG.
THIS SHOULD NOT SOUND PESSIMISTIC - RATHER IT IS REALISTIC. SMITHS CITY IS A
GREAT COMPANY WITH GREAT PEOPLE AND TREMENDOUSLY
LOYAL SHAREHOLDERS AND CUSTOMERS. ON THIS BASE THE COMPANY
HAS A SECURE AND SUCCESSFUL LONG TERM OUTLOOK.
A copy of the Smiths City Group meeting presentation can be requested by
emailing lcr@nzx.com
