Hudaco Industries Limited · JSE:HDC

Hudaco Industries — FY2012 Earnings Presentation

48 slides from Hudaco Industries's earnings presentation, February 2013

1. Slide 1: Audited Group Results

   Audited Group Results For the year ended 30 November 2012

2. Slide 2: Agenda

   Agenda Introduction to Hudaco Results summary Business model Operating segments and acquisitions update Financial review and tax status of BEE structure Outlook

3. Slide 3: The 2012 financial year

   The 2012 financial year  Trading conditions were good in H1 but slowed in H2  Mining strikes had a significant impact  Volatile exchange rates made pricing difficult  Global political and economic landscape keeps prospects uncertain but increasingly there are positive signs  SARS is challenging

4. Slide 4: Introduction to Hudaco

   Introduction to Hudaco

5. Slide 5: Results summary

   Results summary Turnover 10% to R 3.5bn Operating profit 3% to R 437m Headline earnings 5% to R 339m HEPS 5% to 1071 cps Dividends per share 6% to 465 cps Net cash borrowings R17m

6. Slide 6: Market information

   Market information Market capitalisation R 3.6bn @ R116 Free Float 100%, no control P:E ratio @ R116 10.8x Dividend yield @ R116 4.0% Annual Trade (to Nov) 2009 R 791m 2010 R 822m 2011 R 757m 2012 R 1 062m

7. Slide 7: Value added for shareholders

   Value added for shareholders  2012 Sunday Times Top Heps 5-yr CAGR: 12.0% 100 1200 No. 38 over 10 years 1000 No. 58 over 5 years 800  2012 IAS reporting award – General Industry 600  2012 Chartered 400 Secretaries merit award 200  Cash generative and attractive dividend yield 0 2007 2008 2009 20

8. Slide 8: Major shareholders/fund managers

   Major shareholders/fund managers At 30 November 2012  Old Mutual 21%  Foord 15%  Govt Employees Pension Fund 8%  Investec 6%  Nedgroup Investments 5%  Abax 4%  Sanlam 4% 63% Possibly some double counting

9. Slide 9: The Hudaco business model

   The Hudaco business model

10. Slide 10: The Hudaco business model

    The Hudaco business model  Hudaco’s business is the importation and distribution of branded industrial consumable products generally used in the repair and maintenance of machines  The concept of “value added distribution” is core to our business model  Agency agreements generally restricted our

11. Slide 11: Features of value added distribution

    Features of value added distribution Value add is:  Instant availability Inventory R919m in 24 warehouses:  Application advice  4 to 6 month supplier lead times  Technical specification  600 international suppliers  Training  225 000 line items  Credit provision Receivables R684m: Technicall

12. Slide 12: Operating segments and acquisitions update

    Operating segments and acquisitions update

13. Slide 13: Operating segments

    Operating segments  Largest segment imports and distributes branded engineering consumables generally used in the repair and maintenance of machines  About one third of our business is distribution of consumer related products generally sold to installers

14. Slide 14: Operating segments

    Operating segments  Engineering consumables  Bearings  Power transmission products  Diesel engines and spares  Consumer related products  Power tools  Security equipment  Professional communication equipment  Automotive aftermarket products

15. Slide 15: 2012 segment sales by market sector

    2012 segment sales by market sector Engineering consumables Consumer related products (%) Manufacturing 33 13 Mining 34 5 Security 0 67 27 Wholesale/retail 9 19 Automotive 5 11 Exports 6 10 Construction 6 5 Agriculture 4 1 Public sector 1 8 Other 2 1

16. Slide 16: Segment contributions

    Segment contributions Contribution to 2012 operating profit (before shared services and head office) 62% 38% Engineering consumables Consumer related products

17. Slide 17: Engineering consumables

    Engineering consumables Principal Businesses Principal Brands Competitors: Used for:  Repairs  BMG  Maintenance  SKF  Expansion  Altron  Resale  Siemens  New capex  Hytec  Underground  Zest equipment  Caterpillar  Gen sets  Cummins Big customers:  Sandvik Main markets:  Toyota  Sas

18. Slide 18: Engineering consumables

    Engineering consumables 15 50 45  Impact of mining strike, 12 40 especially at DDP 35 MARGIN RONTA  Performance restored at 9 30 Bearings International but 25 Bosworth disappointed 6 20 15  FHS performed well 3 10 5  Sales to neighbouring 0 0 countries strong 2011 2012 Operating margin RONTA(%)

19. Slide 19: Consumer related products

    Consumer related products Used for: Competitors: Principal Businesses Principal Brands  Woodworking  Bosch  Grinding  Hitachi  Renovations  Metabo  Boating  Yamaha  Intruder detection  ADI  Access control  Inhep  Video monitoring  Texacom  Communication  Luk  Motor vehicles  Motoro

20. Slide 20: Consumer related products

    Consumer related products 20 100  Industrial power tool 18 90 sales up but growth is 16 80 slowing 14 70 MARGIN 12 60 RONTA  Analogue to digital 10 50 migration drives profits 8 40 at Global 6 30 4 20  Sales of security 2 10 products still muted 0 0 2011 2012  Automotive aftermarket steady Opera

21. Slide 21: 2012 acquisitions

    2012 acquisitions Deltec  Distributor of maintenance free batteries  Brands: Varta, US Battery Keymak  Manufacturer of PVC hose  Brand: Keymak Proof Engineering  Manufacturer of flameproof connectors and lighting  Brands: Proof, Azolite

22. Slide 22: Segment results – Engineering consumables

    Segment results – Engineering consumables Turnover Op Margin Operating Profit 2012 % ch 2011 2012 2011 2012 % ch 2011 Rm Ongoing 2 157 2 2 112 12.3% 12.6% 266 267 operations New businesses 123 75 11.4% 9% 14 7 Segment total 2 280 4 2 187 12.3% 12.5% 280 2 274

23. Slide 23: Segment results – Consumer related products

    Segment results – Consumer related products Turnover Op Margin Operating Profit 2012 % ch 2011 2012 2011 2012 % ch 2011 Rm Ongoing 835 10 759 14.3% 15.9% 119 -2 121 operations New businesses 388 247 12.9% 17% 50 42 Segment total 1 223 22 1 006 13.8% 16.2% 169 4 163

24. Slide 24: Segment results 2012

    Segment results 2012 Turnover Op Margin Operating Profit 2012 % ch 2011 2012 2011 2012 % ch 2011 Rm Engineering 2 280 4 2 187 12.3% 12.5% 280 2 274 consumables Consumer 1 223 22 1 006 13.8% 16.2% 169 4 163 related products Head office, shared services -11 -11 -12 -11 & eliminations Total Group 3 492

25. Slide 25: Financial review

    Financial review 25

26. Slide 26: Profit for the year

    Profit for the year Rm 2012 % Ch 2011 Turnover 3 492 10 3 182 - Ongoing operations 2 981 4 2 860 - New businesses 511 322 Gross profit 1 355 7 1 272 Operating expenses 918 9 846 Operating profit 437 3 426 - Ongoing operations 373 377 - New businesses 64 49 Margin (%) Turnover 100.0 100.0 Gross profi

27. Slide 27: Profit for the year

    Profit for the year Rm 2012 % Ch 2011 Operating profit 437 3 426 Fair value adj to amounts due to 9 vendors and reversal of impairment Net interest on working capital (5) 4 Interest paid to vendors (imputed) (11) (14) Interest paid on sub. debentures (234) (233) Preference dividend received 202 201

28. Slide 28: Earnings per share and dividends

    Earnings per share and dividends 2012 % Ch 2011 Earnings per share Basic eps 1 074c 5 1 026c Headline earnings per share 1 071c 5 1 024c Dividends per share Interim 155c 130c Final 310c 310c Total 465c 6 440c Dividend policy: annual dividends = approximately 40% of HEPS

29. Slide 29: Statement of financial position

    Statement of financial position Rm Nov 12 Oper Div Acq Nov 11 Working capital 1 011 124 46 841 Property plant equipment 205 15 8 182 Goodwill and intangibles 643 -15 93 565 Tax 5 8 -6 3 Net operating assets 1864 132 141 1 591 Net borrowings (17) 81 -163 -104 169 Investment in pref shares 2 181 2 181

30. Slide 30: Working capital – a little high

    Working capital – a little high 4.5 4.0 In months of sales 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 H1 08 H2 08 H1 09 H2 09 H1 10 H2 10 H1 11 H2 11 H1 12 H2 12 One month of sales: H2 2012 = R 316m; H2 2011 = R 296m  Working capital traditionally peaks end of H1 to cope with anticipated increased seasonal de

31. Slide 31: Working capital – elements in months sales

    Working capital – elements in months sales 4 3 2 1 0 H2 08 H2 09 H2 10 H2 11 H2 12 -1 -2 -3 Inventory Payables Receivables Net W Cap. One month of sales in H2 ’12= R316m H2 ’11= R296m

32. Slide 32: Exchange rate environment

    Exchange rate environment  We import directly 60% of US Dollar Euro Index group cost of sales (as do our 150 competitors) 140  On average these cost 11% 130 more in 2012 than 2011 120 Index 110  We do not take a house view 100 on exchange rates 90  We hedge all liabilities and 80 20% - 30% of or

33. Slide 33: 10 year operating margin performance

    10 year operating margin performance 20.0 15.4 14.3 15.0 13.4 12.7 12.7 12.5 11.8 12.2 11.0 11.2 10.0 5.0 0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Operating margin (%)

34. Slide 34: BEE structure

    BEE structure  In response to the BEE imperative, Hudaco restructured in 2007  Through a fully geared structure, introduced BEE shareholders at negligible cost to the BEE partners  Hudaco Trading (held 15% by BEE partners) borrowed R2.2bn from Morgan Stanley – pay debenture interest of R234m pa 

35. Slide 35: BEE structure (continued)

    BEE structure (continued)  Ownership score key in achieving level 4 BEE scorecard rating  Ownership is main criterion in mining industry BEE charter  BEE credentials have been instrumental in:  retaining business  drawing new customers  Attracting acquisitions that needed better BEE credential

36. Slide 36: S8E and S8EA: Cadiz preference dividend becomes taxable

    S8E and S8EA: Cadiz preference dividend becomes taxable On a “tax event”:  Hudaco can:  Do nothing  Ask Cadiz to gross up dividend  Then Cadiz can:  Gross up as requested (ideal but probably out of reach)  Redeem the preference share  If Cadiz redeem, Morgan Stanley lose security so can:  Do

37. Slide 37: BEE structure and taxation

    BEE structure and taxation  SARS have issued a notice under S80J indicating that they believe the purpose was a scheme to avoid tax  They intend assessing BRI on the interest paid by Hudaco Trading to Morgan Stanley and disallowing STC credits on the preference dividends  Potential exposure 2007-

38. Slide 38: BEE structure and taxation (continued)

    BEE structure and taxation (continued)  The notice was issued over the holiday season which gave us no time to consult counsel and respond adequately by deadline and an adequate extension of time to do so was not granted  Last week, counsel reviewed all the documentation and reconfirmed that we ha

39. Slide 39: Summary

    Summary  Earnings are solid  Working capital (inventories) a little high  Healthy financial position  Cash continues to be deployed successfully into new businesses  Capacity remains for more acquisitions  Rand weakness positive for Hudaco in 2013  inventory to increase  Gross profit to incr

40. Slide 40: 40

    40

41. Slide 41: 2012 sales by market sector

    2012 sales by market sector % Manufacturing 26 Mining 24 Wholesale & retail 12 Security 9 Automotive 7 Exports 7 Construction 6 Public Sector 4 Agriculture 3 Other 2

42. Slide 42: Outlook - reminders

    Outlook - reminders  Hudaco sales are predominantly driven by GDP activity  GDFI adds capacity for future GDP activity  Rand exchange rate has a big impact on pricing  Hudaco has balance sheet investment capacity of about R500m

43. Slide 43: Outlook by segment

    Outlook by segment Engineering consumables  South African mining industry has troubles  Commodity prices  Labour  Regulatory  Infrastructure  Mining in neighbouring countries growing but problems emerging in Mozambique  Manufacturing activity follows mining activity, particularly in the space

44. Slide 44: Outlook by segment

    Outlook by segment Consumer related products  Industrial power tool market slowing  Analogue to digital migration continues  Automotive parts aftermarket steady  Security equipment market may pick up later this year

45. Slide 45: General outlook for 2013

    General outlook for 2013  Exports to neighboring countries up 25% in 2012 and up 85% over two years  Growth in open cast mining good for FHS  Sales of digital communication equipment to continue to grow  Pricing depends largely on the Rand exchange rate  Promising signs in global economy - prob

46. Slide 46: Disclaimer

    Disclaimer The preceding presentation contains forward looking statements about the Hudaco Group’s operations and financial position. They are prepared in good faith and are based on Hudaco’s best estimates and information at the time of preparing the presentation. They are nonetheless subject to si

47. Slide 47: Contact details

    Contact details Stephen Connelly Clifford Amoils Chief executive Financial director Tel +27 (11) 657 5001 Tel +27 (11) 657 5002 Fax +27 (86) 532 9524 Fax +27 (86) 681 7862 sjc@hudaco.co.za camoils@hudaco.co.za www.hudaco.co.za

48. Slide 48: Hudaco

    Hudaco

Hudaco Industries — FY2012 Earnings Presentation on 6ix