Okay, good morning everyone. It's my pleasure to present the year forward 2024, sorry, half-year 2024 results for Skellerup. I'll introduce the people in the room, so on my left, we have the privilege of having our Chair John Strowger, sitting in with us, giving us full moral support. Opposite me we have Graham Leaming, who obviously we'll be talking about later, but has been appointed CEO. Congratulations, Graham. And we have Tim Runnalls, diagonally from me, who is being appointed CFO, so congratulations to them. So we'll follow the same format as normal. I'll talk through the slides, and we'll try to keep up on the screen to make sure we're talking about the right slide. There'll be an opportunity for questions at the end.
We have everyone on mute, so if you have a question, please remember to use the chat button to highlight it, and we'll select people in turn. So anyway, without further ado, let's get started. So if we go to the first slide, slide two, Graham, please.
I'm giving it down to you. Here we go, David.
Here we go. So just the key points. So as reported earlier today, the half-year NPAT of NZD 21.6 million was down 6% on the PCP. Clearly, we had strong Industrial Division returns, but the Agri Division was impacted by customer destocking and customer ordering timing. We'll go through that in a bit more detail later. The group EBIT of NZD 31.6 million was down 6% on the PCP. The Industrial Division achieved a record result. We'll go through that in detail. Fifth consecutive record result, but Agri was well down on PCP, and as I said, we'll go through the detail of that later on. Very strong operating cash flow of NZD 36.5 million, up 81% on PCP. We've tabled in the past our focus on receivables and our focus on managing our inventory.
It's not helped by the Red Sea and the Panama Canal and a few other minor things, but in the scheme of things, I believe we have very effective working capital management, and our teams are very focused on this, have been for a long time, and will continue to be. So our strong cash flow has funded our CapEx needs, dividends, IFRS 16 lease payments, meaning net debt is closed well down. So just from a balance sheet point of view, we have a very, very strong balance sheet, and it's a clean balance sheet, which I think is very important these days. I've sort of skipped over the dividends. So the directors have approved an NZD 0.085 per share dividend. That's an increase of NZD 0.005, or 6%, on PCP, and reflects our confidence on the performance of the business.
Our guidance is we're expected to come in similar to our prior year record result, which was NZD 50.9 million NPAT. And again, welcome questions on that. Really, it's a game of two halves. From my point of view, the industrial division is fitting in exactly as we expected, and there've been some issues certainly highlighted in the first half of this year for Agri, but we'll give an update on our view on January performance, February from what we can see, and also the outlook going forward later on. Please remember the graphs on the right-hand side are half-year results, year-over-year, PCP. They're not full-year, and I know many of you will be doing your half-year/full-year comparison. So in essence, the key part is there needs to be a big uplift in Agri in the second half. We have a lot of confidence we're going to do that.
Next slide, please, Graham. So just the key financials, I think, just give me a second. There's not a lot of additional highlights in this slide. Again, I just point out the operating cash flow is strong. I pointed out what it's funded, but also the net debt is down, and we have always had a strong focus on keeping our debt down. I previously have said many times that I'd like us to be in control of our banking situation, and so I'm very pleased with the level of debt. It does give us the opportunity to consider opportunities that come along, and we'll get into this in more detail later. Next slide, Graham. Just the bridge, so the NPAT key drivers. It's kind of obvious looking at that. The increase in corporate costs is minor, but it's really Agri and sport and leisure.
Both of them are suffering from overstocking by customers. In the Industrial Division, we saw the overstocking play out in the second half of last financial year and sort of flush through, whereas for various reasons, particularly our European Agri customers have had issues, and the sport and leisure is very retail-based, so very strong in the U.S. So those are the two areas of key focus for us, certainly over the next six months, but going forward. There are a couple of minor things. As I said, the corporate costs are slightly different, but as I pointed out at the start, the Industrial Division businesses, other than sport and leisure, are performing very much in line with how we expected them to perform. So, slight changes. There's been the impact of favorable exchange rates on revenue eroded by the purchase costs and hedging program.
We've had rising market interest rates, but the effective tax rate is reduced, so on balance, very little change there. Thanks, Graham. On to the Industrial Division. So as you can see, five years of very, very good performance, so fifth consecutive record half-year result. I've often said, and I'm sure someone will throw back at me, that the Industrial Division was always capable of 20% EBIT as a percentage of sales, in my view, and it's pleasing, even though it's a half-year result. It's pleasing to see us actually finally getting there. I believe it's worth, it is capable of more than that. It just seems to take a very, very long time, and some of that's the nature of the contract or the launch of new products, particularly in the uncertain time, but I'm very, very confident with our three-year plans going forward.
So I expect, and, we'll hold Graham and Tim accountable to delivering an even better EBIT result on the industrial side. So some of the highlights there, I guess, potable water and wastewater continues to grow, and we are strengthening our position in the markets, particularly Australia. The new customer in the hygiene sector we've talked about previously, they've finally launched the product. The launch seems to be going very, very well. We have an additional project that we're working on for them. We need finalization, and part of our role is to ensure they pay us so we don't have a written contract. Remember, we expect them to pay for a large part of the development, so we talk about customer-led development.
That actually means customers pay for a lot of the development to de-risk our business, and so that's a very exciting opportunity, mainly in the U.S. market. High-performance foam sales have been impacted sort of around the world, but one thing we know, our customers still say we have the best quality foam for the applications that are used, particularly marine, and there's a minor comment about the New Zealand dollar weakness, obviously, translation of offshore earnings. So very pleased with the Industrial Division in line with our expected result, and we don't foresee any issues, really, in the second half of the year. Of course, we have a particular focus on the marine foam, Agri Division.
So dairy, in particular, has been impacted by two, two factors in Europe, mainly destocking, so they were overstocked, and this is the typical pattern from, and I've explained before, the bullwhip, where they overorder, then they end up with too much inventory as shipping improves, and it has improved from the sort of the peak issues in COVID during COVID. They realize they have too much inventory. Just like us, they focus on reducing the inventory by selling it through. But the second main impact that we've seen from our European customers, and almost, almost all our European customers for Agri, has been they have a balance date of the 31st of December, so in November and December in particular, they did not place orders. So this is a time where I want to talk about our, our Wigram facility, which is a large part of the Agri Division.
Now, in January, we had an incredibly busy January, and in February, we have a lot of orders to produce. We have, with revenue recognition for Europe, we really need to focus on getting the stuff on the water by the end of March. So we actually have a very small window that affects our ability to influence the numbers out of Europe. Having said that, we have slightly longer for the U.S. market, and of course, the New Zealand market is very near normal terms, if that makes sense. So revenue recognition is effectively works for a lot of our products, not all of our products. So I think, from my point of view, if I go back one year, we're in exactly the same position. We all—I mean, it's obvious that we have an expected very large uplift in the second half.
It is bigger than it was last year. Interestingly, I do believe we have the opportunity to improve. There's one other thing, for obvious reasons we didn't shout about it, but when the volumes went down when the volumes went down, and particularly in August September, driven mainly from our European customers not ordering and even trying to cancel orders in some cases, we did do a restructure in Christchurch and took some costs out, which affected, obviously, some of our staff, a very unfortunate thing. But we're through that now, and I can tell you I was in Christchurch recently where I was really impressed with how busy people were and how excited people were there to satisfy our customers going forward.
So the quote from one of the leaders is, "This is the busiest she has ever seen, Wigram," which is a great thing because people are confident about the future in that sense. Maybe too much detail there, but from my point of view, another exciting thing about Agri, we've been spending a lot of time on developing our development team, and we have a number of exciting new products. They won't necessarily affect the next six months, but if you look forward out three years, they will have a significant impact on lifting our Agri performance.
We haven't had that technical capability probably in the time I've been involved in Skellerup, so I'm very excited about that, and I'll come back to some of the leadership changes at the end, but just from an aggregate point of view, it looks a big lift for the second half when you do the comparisons. We understand that. I still believe it's in our hands to deliver at least the same result as last year, NPAT. Thanks, Graham. So the levers for growth. I've been talking a bit about the investment in people to strengthen markets, products, and equipment, as well as our investment in the technical team, particularly at Wigram. We still have an amazing amount of productivity opportunities.
We've also been spending quite a bit of capital on tooling capabilities, so that's CNC lathes and CNC mills and things like that, so we have the new equipment that's installed. We needed to enhance our ability to chlorinate certain products, particularly for the U.S. market. So we've been investing in, certainly where it makes sense, opportunities to capitalize productivity gains, and so, and interestingly, we're seeing those gains come through quite quickly, and we will see the benefit of that in the second half. I should mention that revenue what we saw some of the benefit of our pricing changes in the first half as volume picks up, of course, that will also help us in the second half. So in-market manufacturing presence.
I've talked a lot about in-market manufacturing presence, but what's come up is that a number of customers, particularly global customers that have a presence both in Europe and the U.S., for example, GEA I've talked about in the past, they're very concerned about ongoing disruption to supply chain. So what we've been doing is carefully working on proof of concept to manufacture and market, but without a doubt, we will speed up the supply to customers and market, and that there's something we're very focused on at the moment and continue for the next, I would argue, two years. We've continued, Graham and Tim in particular and their team have focused on our information systems, so we're just getting better and better with our information systems. I'll remind you that our total capital investment in our upgrade to JDE, our ERP system, was NZD 1.18 million.
I think I'm correct, Graham, but anyway. Round figures, just over NZD 1.00 million probably total NZD 1.2 million. A lot of time for our teams, but when we went live, we've seen the benefit of that. We are still upgrading the data structures within that system, but particularly we've been rolling out another system, NetSuite, among our businesses, and our business leaders are finding that extremely helpful in reviewing both low-margin products and low-margin customers, and not just reviewing, taking action and dealing with that. I won't focus too much on the new products and new customers. I mean, the most exciting one has been our hygiene customer, GOJO, in the U.S., but there are a number of other projects, so I'm not concerned about the new projects drying up, and all of those levers for growth continue to deliver better returns for shareholders and, just as importantly, opportunities for our people.
ESG priorities and performance planning. I'd like to thank Graham and Tim in particular who've done an awful lot of work on this. This is very important to us. In essence, of course, we are complying with our disclosure requirements, but at the same time, we've always taken a pragmatic view. So for us, I mean, I've talked in the past about we—we actively move to change the boiler in China. It sounds minor, but we—we converted to natural gas early on from coal. Coal's a terrible fuel in that sense. These—these seem minor, but remember the strategy of Skellerup has been the accumulation of very small, almost imperceptible changes and advances gives a very solid foundation, and we're continuing to do that. So we are driven a lot by common sense, where it makes sense we invest and we get the benefit of that quickly.
You know, we locked in our electricity a couple of years ago, Graham, now, for Wigram in particular, and we're a very large user of electricity in Christchurch. We did not put, it's under review always, but we did not put solar panels in place and things like that. But anyway, I mean, the rest of that is ongoing. Obviously, our big focus is on Scope 3 emissions. That's a more challenging one to get our flows right, but we have a great team, and we've actually strengthened the head office team to help Tim and Graham. So we can come back to detail on that if you like, but let's talk about the leadership changes because that's the one that I'm most interested in, for personal reasons. So from my point of view, it's been a fantastic time.
I joined the board in 2006 working with, originally Liz Coutts and then Sir Selwyn Cushing who really provided a great opportunity to survive the earthquakes and invest in Wigram, and we're still getting the benefits, as you heard, from that. So I've been CEO for 14 years, acting for 12 months. Our annual earnings have been up over 400% in that time. I'll let John make a few comments if he wants to later on. One of the things is I am continuing on the board, so I am a director. I'll be continuing on the board as a director. I love this business. I'm very confident about the next three years, not any six months in particular. I'll go through some of the other people that we've developed, and then, I'll talk a little bit about Graham and Tim. So I'm very pleased with our board.
I should start with our board. So John took over from Liz. How many years? John? one and a half [crosstalk] one and a half . And I think we have a very focused board. It can be challenging at times, which is a good thing. They understand, but in particular, when they agree with what we're doing, they enable Graham and me to get on with things. And I think Graham and I have worked very, very well together. I think we've been a fantastic team, a constant to the people that report to us. Paul Shearer and I, as directors, are going to provide a little bit more focus on in-market initiatives and things like that, but without getting in the way of Graham and Tim and the younger team.
We have three key leaders that have come through, and Graham is organizing for them maybe in May, but we haven't set a date yet, but they'll provide a very short brief presentation to help people understand. We often get asked, "Okay, so we know Graham and we know you, David, and they've got to see Tim at the shareholders' meeting," but in reality, we have a strong bench. Of course, we're trying to make sure people don't get pinched, but, we've done our best to lock them in with purpose and they feel they're contributing and all those good things, and of course, we—we reward them well. But there are three in particular, just without going through it in detail now, but the oldest is 39 years old, Pat Crotty. He's doing a fantastic job. He has taken over Ultralon.
That's been a challenging business, but if anyone has the skill set to drive change and improve that business, he does. Some of you have heard me talk about Guy Meuli. He's 38, happily married with two lovely young daughters, but he is also in charge of the U.S. market and has very strong plans to grow to, to grow the business there, but grow it profitably, of course. And we also have Dino Kudrass. He's relatively new. He took over the Agri Division from Hayley, and he's one of the one of the best engineers I've ever met, but more than that, he's commercial. So I've enjoyed working with Dino closely over the last period of time. Okay, just about Graham. He has my full support. This has been part of the plan. Graham's been very patient for a long period of time.
We did send him to Stanford. I've warned him not to use the word pivot. It annoys me, but anyway, other than that. That was five years ago almost. Yeah, a long time ago. So you had patient [crosstalk] pivoting on pivoting a while. Pivot was new then. Well, it was actually earlier than that, but anyway. No, look, the point is this, and I'll remind everyone, Graham has been a fantastic CFO, but I didn't hire him just to be the CFO. He has other skills that are worth considering. First of all, he had a strong operational view. He was COO at Rayonier. That was one of the key things, and we worked together.
We have a very similar view of how to improve the lever of productivity, and Graham is very good at making sure we get the accounting right for that because I'm often in a hurry and I need to remind myself that we need to not so much the accounting, but the thought about getting the information flows correct. More than that, a lot of companies have legal counsels and things like that. Graham's done a fantastic job of not only framing how we use our legal counsel, and funny enough, we use Chapman Tripp, but also, all of our other service providers, so Deloitte and, you know, for tax and things like that. One thing I learned from Graham, frame it, frame what you want to do, and then ask them what the risk is. Don't ask them what to do.
So there's a hint for a few other people. Anyway, as I said, I have full confidence in Graham and also Tim. I've got to know Tim. I think he's a very clever guy. It'll be interesting to see how much of the broader role that I've been explaining about Graham that he can take on, but again, you know, he's been here barely three years, saw the light, changed companies, and came to a better company, and I'm sure that they will continue to improve the head office. Round figures, our head office costs are about NZD 6.5 million annually. That includes all of the board, the annual report, the head office. I think Graham's intended to spend maybe a little bit of money on improving the office here, but it's a very tight, small team. We have two part-timers.
We have eight people in total. So, so what am I?
Lean and mean.
Yeah, lean and mean, exactly. Thanks, John. The last thing I'd say, the thing I'm proudest of, I think, is that we—we've all worked hard. The board has fully supported paying the, the lower-paid people in the company. Excuse me. Not just Wigram. I've focused on Wigram because people can understand it and they can put it in context with the New Zealand market, but the lowest-paid people at Wigram are paid NZD 60,000. There aren't that many of them. Most people are paid more. I'm sure you know the minimum wage is much lower than that. The so-called living wage is much lower than that. Go back three years, that wasn't the case, but it's not, it's not just Wigram. We've done the same in the U.K. It's been a bit more challenging there.
We've done the same in all of our businesses around the world because we see ourselves as a family. We have a strong purpose, and from my point of view, that's what I'm proud about. Thank you.
He, he, really just to record the board's, you know, gratitude and respect for David's contribution, stellar contribution over a sustained period of time. You know, the numbers you can see on the screen speak for themselves. I don't know whether it'd be many chief executives that can boast. He won't, but he should. Now, a 400% improvement in performance over his tenure. Just David brings, as most of you a number of you know David will know that he brings a passion and energy to the role. That's, you know, quite outstanding, quite remarkable. He's a 24/7 CEO, no doubt about it.
He'll be missed, of course, but we're not losing him. He will stay on the board, as he's mentioned, and from our perspective, we're delighted that Graham can step up into this role. Graham is a very known quantity, to put it mildly. He's been with us for 11 years. He is already a lot more than a CFO, and the board's extremely confident that this will be a very seamless transition. It's a credit to David that he leaves the company, you know, in great hands going forward. We've got every confidence in the future, and we look forward to continuing to work with you, Graham, and with Tim. Congratulations on your appointment. I should really ask you who you're supporting in the test match today.
That's probably it after this call and nothing to do with Skellerup, but, we're delighted to have you on board too, Tim. So congratulations. Thank you. So we'll open it up for.
Yeah, open it up for questions. Questions. And I think, Josh, you might be the first one, with a question, so if you'd just like to unmute yourself and, and fire away.
Brilliant. You can hear me okay, Graham? Yes, we can. Excellent. First of all, just want to say well done on a fantastic run, David, and, best of luck to you, Graham, and also Tim as you, step up. Thank you. Thanks. Just, most of my questions really center on the Agri Division, which was probably the most interesting part of the result. As you mentioned, it feels like a bit of déjà vu this year, you know, given we saw a similar situation last year. I guess I'd be interested to know why is the same thing happening two years in a row? It feels like seasonality's being reintroduced back into the division, and is there a point at which you think things will start to normalize and we get, you know, similar performance in both halves rather than a big divergence?
I'll start, and then I'm sure Graham's got a view. Thanks for the question. I highlighted that most of the volatile in aggregate has been from European customers.
So just to be clear, we used to get quite a bit of volatility out of the U.S., and we've worked hard there, and we had more visibility, as I've explained previously, about what happens with stock levels at customers. I'm not sure. I think, certainly the energy shock in Europe, we know that it's affecting a lot of German production and things like that at the moment. So I'd love to say, oh, you know, in a year's time, the first half will be easily explainable, but this, we were expecting. I've explained probably another way of saying it. I explained the bullwhip which COVID created. So customers had orders, then they got worried. Shipping slowed down, became more expensive. So customers overordered, and after a typical bullwhip, you always get a secondary one about half the size.
It's like a dead cat bounce kind of thing in markets, and we saw that in the Industrial Division in the latter half of last year, and that has washed through. So we don't see that issue in the Agri and sorry, the Industrial Division. In the Agri Division, we thought we saw it in the second half, but the second half was, as you know, strong. It was stronger than we were expecting, and I think they overcooked it. They overdid it. And then certainly in the first six months of this financial year, we saw the European customers for a number of reasons, and certainly in November, December, the order pattern said they were not ordering, but then in January, we've had orders that we can't make, bigger than we can make. So just to emphasize, one reason I'm confident about the second half for Agri is January.
January was bigger than we were expecting in some ways, but February definitely's going to be bigger, and we can see March, and that's kind of the European customers in that sense. Of course, we still rely on the European, sorry, the U.S. customers staying strong, but all the signs at the moment are they will. So our key customer, GEA, in January had the biggest sales that I can recall. Now, I talk volume there because volume is the most important thing for our factory, particularly in Wigram. Our other dairy businesses are going well. The only other part of dairy that we always have to think about is actually the footwear part, and, you know, despite having a very good run over the last three years, we've had issues with inventory.
We actually have inventory on hand in New Zealand now, and our Chinese, Martin Li and our Chinese team have done a fantastic job of making sure we have the product. I, I have very little insight into how our footwear will finish through May, June, but a lot of that depends on the weather, and I don't want to, I don't want to cause an issue with weather in New Zealand at the moment. We've had enough, but anyway, from my point of view, I'm very confident about where we are. I haven't seen as many outstanding orders. We just need that to carry on. I'll let Graham talk a little bit about that as well.
You're not much to add, really. I think certainly it's been exacerbated in this first half, Josh. That's pretty obvious in the numbers.
I think traditionally there has always been a bit of seasonality in the aggregate results, and probably during that COVID period, that changed a little bit because of the fact that customers were building up inventory levels, in response to, you know, mitigating and managing that risk. So, I think we're likely to continue to see seasonality in the aggregate results in particular, but I think the year that we're currently in has been exacerbated by that inventory correction. And as David says, our concern is always customers run it down and then overreact and maybe order a little bit more, and so then there's a little bit of a ripple effect, and hopefully that ripple effect's getting a little bit smaller, and we'll see a little bit more of a normalization.
But I think you can anticipate that there'll be some seasonality in the Agri Division results whereby the second half will typically be stronger than the first half. I should add one thing that may help. So one other reason I'm positive. We have won some new customers in Europe. We've done technical development, and we've solved some technical issues, and these customers, we've taken off Avon Milkrite, who, of course, have been relocating to Poland and their new plant. So if there's one customer in particular, it could easily become our fourth-largest European Agri customer. But the issue there, we have to work very, very quickly because, of course, if something happens and we can't supply, then they'll go back to Avon Milkrite. So the point I'm trying to make here is we do not believe we've lost markets here in Europe. It's really important.
So, anyway, enough on that, but we'll have some other questions. Thank you.
Brilliant. Thank you. That was really helpful.
At the update you provided in October, you mentioned aggregate sales were lower because your customers were, you know, in addition to the inventory movements, also experiencing challenging market conditions, but there was no real mention of this in today's material. Have the market conditions for those customers changed or improved since your October update?
Well, I think if you looked at—I mean, I don't—I do it, so I shouldn't, but I mean, giving economic views, but, you know, dairy international not dairy international, but the international dairy world has been suffering for a while because of China for, for, you know of course, that's mainly New Zealand for powder and things like that, but if you look at it, around the world, feed costs, like in the U.S., there have been issues which pretty much have been resolved. So dairy worldwide is starting to look stronger, and I mean, there's a whole lot of disruption for, for various reasons, but we, we actually think the backwinds, if you like, are back to at least normal, if not slightly better.
And certainly the wash-through of China, you know, the worry about the lower birth rate, then it's a dragon year, so they're going to have two babies if they can, you know, all those kinds of. I mean, look, there's always change. I guess the thing is, I always say, it's in our hands to change that. We have some exciting new products that we think, in some cases, for Agri. I'm talking Agri specifically, and especially for Europe. We have some interesting ideas. Dino, the person who's taken over, grew up in Germany, worked for a mixing company in Switzerland. He understands the dairy industry very, very well, and geez, clever, and his team are producing new products at a fantastic rate. Now, of course, you can produce a product and no one wants to buy it, so we're working with customers.
I've always talked about customer-led, so will we get there by June? I don't know, but give it two years. The Agri Division is going to be significantly stronger than it is now, no doubt.
Brilliant. I'll, I'll leave it there, and let someone else jump in. Thanks, guys.
Thanks, Josh. Hey, Christian, you're up if you'd like to go ahead.
Thanks, Graham. Just checking, can you hear me okay?
Yes. Yep.
Cool. Just firstly, obviously, congratulations to both, you know, David on moving into the board and, Graham on your move into CEO. And then just so I'll, I'll, I'll start my question. I've got a few questions, but I'll start with a couple and then, maybe jump back in the queue. Just on the on the Agri line, yeah, you've obviously indicated, you need and are expecting a stronger second half for dairy, underpinned by early trading. So at this point, based on current trading, should we be thinking about second half EBIT similar to second half last year, or if anything, it sounds like early trading is actually ahead of PCP, so are you actually expecting second half 2024 to be ahead of second half 2023?
Yeah, we would anticipate it'd be slightly ahead of the second half of 2023.
Okay. And then so I guess on the other side of that is that, I guess that kind of implies a lower growth rate in industrial, so, which, like, sort of quickly, like, sort of looking at it, it looks like low growth in industrial into the second half. So are you able to sort of just call out the sort of key drivers in industrial, sort of key growth drivers, or maybe there's some offsets from some headwinds in construction or something like that?
Yeah, construction's interesting, both. I mean, in Australia, it's not very helpful at the moment, but look, from my point of view, other than the marine foam, I'm not concerned about our growth plans. I mean, it would be great if we could speed them up and things like that, but again, we have exciting products. There's, I'll save it for Guy Meuli, but we're launching a new product for our vacuum systems. Now, I know that's a very small part of our business, but the value of this is incredible. So we're solving for all the pumper trucks.
The number one reason is they, they stop. And when I say solving, it's a it's again, hopefully in May, Guy can give an update. That's one of a number of initiatives there, so, so that's that side. But the bigger opportunity is, is Gulf, and Gulf now comes under Guy Meuli, and he will bring his laser-like focus onto continuous improvement that he's shown running both DEKS North America, which is doing very well, and vacuum systems. He also runs DEKS Europe. But so without a doubt, I believe the Gulf part of the industrial group has the biggest opportunity, and we have a number I mentioned earlier there's a second product, for our hygiene customer. There are other opportunities that we're realizing through the Whitewater facility in Northern Wisconsin.
So from my point of view, the only reason we're being cautious about the industrial number, really, is uncertainty around our foam, right?
Yeah, maybe to add to that, if we think about the applications we sell into, potable water and wastewater's pretty solid, and we expect that to continue to grow, not only in the U.S., but we've also got growth opportunities in Australia, as well. As David said, the roofing construction, which is the second-largest application we sell into, the North American market is going pretty well for us, but not as strongly in Europe, and certainly it's probably the best way you could describe Australia is flat. That's a pretty tough market at the moment, and that is our biggest market for roofing and construction.
So that's not going to provide a big tailwind in the second half of the year. And then in the mining area, which is a relatively small application that we sell into, we had a pretty strong first half. That demand tends to be pretty lumpy, so we won't see that repeat in the second half. So growth for industrial in the second half will come through potable and wastewater for sure, and through hygiene applications, as we've talked about, but it's going to be a bit more of a grind into the roofing and construction area.
Okay. Yeah, so you're not kind of getting the same boost that you were getting in the first half from the likes of oil and gas and then roofing and construction. Is that kind of the right set of tackle?
Yeah, certainly not the front.
We didn't get a boost from roofing and construction in the first half. We got a little bit of a boost from mining. That won't repeat. But we'll continue to gather momentum in particularly that main application area of potable and wastewater, which, as you know, is our largest piece and our priority, and I think we'll continue to grow into hygiene as well as that customer continues with the launch of that product.
So on balance, a bit of a slowdown in second half growth, but I guess the key kind of growth areas are the ones that are actually going quite well, and then offset by some sort of, some, yeah, like the I guess the more sort of discretionary areas are a bit slow.
Yeah, yeah, year on year, we're expecting the Industrial Division result to be up again.
Yeah. Cool.
I think it's really important on the industrial side, the nature of the products we develop and the customer relationship, like, you know, I mean, hygiene's one example, but even some of the other projects, they don't get done within a financial year. So, I mean, to me, I always think of the three years. Sometimes we're a bit lucky. It happens a bit faster. COVID didn't help, so it slowed things down. Despite that, we've delivered good growth. So why I'm so confident about the next three years is not a particular project or a particular customer. It's more how our team are learning to do things faster, more effectively, and make more money. So we're just getting better and better at doing that.
It is a combination of a series of small things and one or two big ones. One or two of those big ones—I mean, the hygiene thing is one of the big ones, and that could be really big over the next three years. I try not to be—I mean, our job, certainly as a board and as a senior management team, is not to get too micro, accepting that we have to report every six months.
Okay. Great.
Carry on. Thank you.
Oh, yeah, sorry. I'll just squeeze in one more, and then I'll jump back in the queue. Just on aggregate again, sorry. There was obviously quite a large margin decline, compared to the PCP, which was actually also kind of a weak PCP. So, could you just explain if that was all operating efficiency from lower volumes, and if you sort of expect that margin to return to normal in the second half?
Yeah, it was. We didn't suffer. You don't get line of sight on the gross margins, but despite the lower volumes and therefore lower revenues, we maintained and actually slightly improved our gross margins for the Agri Division. So it's all that operating leverage basis. When your revenue drops to the extent it did, the indirect costs were actually pretty flat for the Agri Division, so therefore you see the fall-through when you look at EBIT as a percentage of revenue.
Awesome. Thank you for answering my questions.
Okay. Rowan, you're up.
Oh, thanks, guys, and thanks, David, for your time as CEO.
You've done a fantastic job, as, as John pointed out, but, yeah, and it's sad to see you moving on, but, welcome, Graham, to the big seat. I just had a couple of questions, and I know you're not CEO yet, Graham, but, you know, David talked about, costs and, and efficiencies, and he kind of sees a baseline for 5% underlying growth over the next three years. Has he shared his thoughts with you on this, and, you know, is, is that still kind of the target that you that you kind of have in your head as well?
Yeah, absolutely. I mean, David and I have worked together for, for 11 years, so, you know, we, we've worked closely together, so, obviously, I share, share the same perspective on our opportunities that David does.
And just to be clear, I don't necessarily do it.
I do get hands-on, but that's, you know, that's why I do judo, but anyway, that's a joke. The reality is our teams do it, so like I keep getting surprised at Wigram because I remember way back when we first opened Wigram, and people were expecting the gains to be had within a year and that. I'm always amazed at how many more opportunities there are, but remember, a lot of these opportunities come from the teams themselves. So one reason I'm so focused on some of these young leaders coming through, like Guy Meuli, Dino, and Pat Crotty, but there are others. They drive those changes, so it's about us making sure that they're clear.
Graham, I know has a similar view about how we can expect these kind of changes from them, so I don't see that slowing down at all from my point of view. And of course, I remain on the board, so I'll be there to hold people accountable.
Thanks. And just around, I guess, strategy, Graham, is there anything that you were thinking of tweaking? You know, I appreciate that you're still not yet CEO, and David's in the room, but you know, do you have any thoughts about things that you'd any different direction you may take?
No, again, I think we've worked together for a long time.
I think the opportunity we have, or what we certainly plan to do or what I plan to do, is David's highlighted some people in the organization that have been developing and growing very well, and I think there's an opportunity to engage them in a slightly more broader sense to help develop the strategy that we have.
But the basics that we talk about in terms of the critical competencies of Skellerup are the things we still have to capitalize on, and David and I have consistently talked about what they are in terms of a deep material knowledge of how to use the various materials we use, our ability and capability to tool and therefore mould products that you know deliver and pretty demanding applications, and then the process knowledge that we have of how to make these things and how to improve these things. So, those are the you know the deep competitive advantages that I believe we have that we continue to exploit. We're pretty focused.
You know, we've done some acquisitions over the years, and we continue to look for those, and we've been open and said we would like to find something larger that would be good to sink our teeth into. But from a point of view, the Agri business, you know, we're rightly, tightly focused on particularly the dairy market. We think we can broaden our product offering a little bit there to help that business grow. And the Industrial Division, you know, we play in a or we sell into a number of different broader applications, but we have some real priority areas where we believe what we can design and manufacture has some real value to customers, and so therefore, you know, we get to create that value, and we get to capture a fair share of it as well.
So you shouldn't expect to see any major changes in direction, that's for sure.
I'll add, I'm relaxed if Graham does change the strategy quite a lot. I think the essence of Skellerup is the deep material knowledge, all those things that we've explained, but also our purpose. So the glue that holds our alignment of people together is the purpose, which that's with customers, and I've been through that. But the point is, I don't think the purpose will change, but in some ways, that's very generic. You could argue that purpose applies to any company. What Graham will do, and I have no doubt, is he will bring his view of the world and start to focus on other areas that maybe I've overlooked, so, you know, or not focused on is probably a better way to say it.
So we take a broad view, and I'm very confident that Graham will add to our strategy. No, it would be terrible if he left the strategy exactly as mine for the next three years. That would, you know, I don't see that as the right way to think about it at all, and I'm not precious about it. So anyway, look, you know, I really think the area that we've wrestled with a bit is growth initiatives. Yeah, we've wrestled with Agri.
Sorry. That's Christian just talking in the background. Carry on.
Okay. Anyway, so we've struggled with Agri because although the numbers were getting better, they were all operational, almost all operational, but it's products and customers that drive your business forward.
So we were just fortunate that we were in a stronger position, but with the geopolitical changes and that, that's going to change. So I'm looking forward to seeing how Graham does change the strategy with, with his direct reports. That's, that's the right thing to do. Anyway, enough.
Anything else, Rowan?
No, that was it. I'll let someone else have a go.
Yeah, I think Christian's got his hand back up so far away.
Christian, you need to unmute.
Sorry, sorry. I didn't realise there's actually I was. Sorry,
we have. Yeah, I've unmuted you. Carry on.
Sorry. Sorry, guys. Yeah, just, just I just had a question on the Agri again. You sort of mentioned a, a new product that you or a new innovation in that space, that you're confident on in the next three years.
Just, I mean, obviously, you've – you probably can't provide too much detail, but can we essentially think of that as, like, in broad terms, like a new generation of milk liner or, you know, like just some sort of sense of what you're kind of talking about?
So the first thing is the ADF opportunity, their old liners weren't fit. I've seen the customer, haven't I?
Very, that's all right.
But a European, fourth largest – it could become our fourth largest European customer, but look, in some ways, it doesn't matter, but the existing product is no good, so it's an enhancement to a liner. But as Graham sort of hinted earlier, we're looking at other adjunct products to aggregate.
So there's one we don't want to discuss right now, but I'm very confident that we can, within two years, own that market completely. So it's not just not a one-shot thing on the Agri side. So look, I don't, I genuinely, we're right in the middle of that at the moment, so it'd be unfair to talk about it, but those things are why I'm so positive about not just the next six months, but going forward. But this European customer, if we can just, so here's the issue. We've kind of got the deal done. We need tools. We've got some new machines to make the tools. How fast can we make the tools? Get them in the machines. We've got capacity. Go bang, bang, bang. Get them on a boat.
Get them to that customer in, in England and still meet our revenue recognition requirements. That's the key for the next 4.5 months. But of course, take a longer-term view. I'm very confident about what we're doing.
Cool. Thank you. That's just really useful context. And then just, just in terms of health and hygiene, like just to sort of help us sort of how to how to think about the, the growth target for that particular division, like what would what would be a reasonable target? What would be a reasonable target for revenue? Like is it to sort of double, or can you give a sense of what a low, mid, high case might look like without giving numbers away, I guess, and what, what would be a reasonable target? For example, new large customers or growth with a with existing customers? You kind of mentioned a new opportunity with the sort of current large customer.
So look, you'd be able to derive the sort of contribution or the growth from that sector from the information we've been provided. So, I mean, the customer we're talking about launched their product in October, so that's delivered about NZD 2 million of revenue to us in the year to date, New Zealand dollars. When customers set out these projects, they always have pretty large numbers on what they perceive the opportunity will be, and typically, the ramp-up to that is slower than what they might project. We're certainly confident, Christian, that there's very strong growth in that well above, you know, the headline growth for the Industrial Division.
So I think we'd be disappointed if, and based on the customer projections, that if we don't sort of double that current revenue rate over the next couple of years. And then the other product developments, these are things we've known about for some time, and we did some early work on them, and it now appears that one of those projects is likely to come forward, which would sort of add to that momentum. So, that probably is as much visibility as we've got on it at the moment, in terms of what that's likely to materialise to because they've only recently launched the product in the market, so I guess the sell-through for them will dictate what our next 6, 12, 18 months looks like.
Awesome. Thank you. Oh, sorry.
We have done. We've made sure that we have the capability. If it does go zoom, we can keep up. Yeah, we have the capacity. And then just, sort of, you mentioned in the sort of commentary that pressures and leisure were abating, I guess, from, from the second half.
So are you able to sort of explain why like what's it like why, why those pressures are abating, given that it is sort of a more discretionary retail exposure?
Yeah. Yes. So, so, it's, it's not assuming a big bounce back in or a significant increase in demand in the market, but we know our customers, and we have some, some key customers in North America in particular for this product and this application, and we know they've been working through inventory levels, so we know where they have got to.
Actually, the guy that David talked about before, Patrick, who's responsible for that business, is in the US this week now, so he's visiting with customers and going to a pretty significant marine show. So part of the reason that the customers had as much inventory as they did was we really improved our lead time through the first half of last year. So previously, they had been dealing with the fact that we had a much longer lead time, and as we managed to improve that, it ended up that they got their inventory a little sooner than they otherwise would have been anticipating. So in some respects, we're architects of the slowdown we experienced in the second half of last year and the first half of this year.
The market is not as strong as it was, so we're not anticipating or reckoning on a massive bounce back, but we're expecting to see some improvement in the second half.
Yeah. Awesome. And then just sorry, just one final one for you, David. The sort of growth agenda that yourself and Paul Shearer will be working on, are you able to sort of just elaborate on that a little bit more? Like what type of things you'll be what exactly that sort of agenda will include and maybe some sort of sense of metrics that you'll be measuring yourself against?
Sales and Profit. Yeah, that's right. Sales up profit up, costs. No, I think the key is that, you know, I'll use one customer, so the German-based customer, but they have a big presence in the U.S.
If they get too much uncertainty of supply into the U.S. market from us, and currently, we manufacture most of, if not all, their product in Christchurch and ship it there, and then if there's a shipping issue or they are not really in control of their demand. So to explain, this month, we've done two air freights that they have paid for. So interestingly, some of our staff say, "Oh, that's okay because the customer pays, but it's a grudge purchase." So we don't want them to have to air freight to keep up with their customers. To be fair, we think they could manage their customer base better. But you've got to be careful how you say that to customers. I mean, that can annoy them. But the point is, it would be a lot easier if we were supplying in market.
Now, when we talk about supply in market, that doesn't automatically mean manufacture in market. We can take away the uncertainty of shipping by us carrying inventory in the market. There's a cost to doing that, I understand. But, you know, a person that I rate highly and I've had good discussions with is Paul Shearer. So this is an example where I think that Paul and I, not as distracted by the day-to-day, week-to-week stuff that's happening, we can meet maybe three or four times a year, formally frame an issue like supply and possibly manufacturing in the U.S. market and just have that as a theme, get the critical people together for one or two days.
Graham, of course, will be there and Tim, and then actually bring a stronger strategic focus and take advantage of the knowledge and experience that people like Paul Shearer has as an example. But we also see the same issue in Europe. Europe just looks messy. And when I heard one of our key staff say, "We have to wait until they get sorted out," and that's been more than 12 months, "That's not going to work for us." So one of the key things from my point of view is there is there is an opportunity to solve some of those issues. The customers can't; they're too close to it in that sense. It's without interfering in management. I mean, there's a lot for management to do anyway, but we just think that I mean, you know, again, I'm giving a view.
Globalization kind of slowed down or died more than 10 years ago. It's become regional. So if it's regional and the U.S. is a key market, we really need to think hard about manufacturing, distribution in market, not, I would argue, adjacent like Mexico, for example. And of course, that depends on who the president is and things like that. One other key person I should have mentioned, Martin Li in China has done a fantastic job. He's been promoted to the title helps him to get access to things. He's CEO China, but it's just the title. But, but he would be the best purchasing guy. We have a great opportunity on the purchasing side. It's an area that we can do a lot more. And so he, he will take a broader view for all businesses in China, accepting that so that's one side of it.
The other side of it, to de-risk, we should be doing less in China and more in the States or more in the market. So it's getting that balance right. And I just think that, cleared of other responsibilities, Paul and I can add to whatever the senior leadership team come up with.
Awesome. Thanks. Oh, sorry.
We've got time. Let's just for another couple of questions. DL, which I'm guessing could be Dougie, if you go first, and then we've got one more from Rowan, and then we'll have to wrap it up.
Thanks, Rowan.
Yeah, that's right. Graham. Hey, just, first of all, I just want to reiterate what, John said, today. Mr. Chair, I just want to express our gratitude as a shareholder. You've done a fantastic job. And shareholders have been well rewarded. And congratulations, Tim and Graham.
I think the analysts have asked most of the good questions. So just a quick one. Were there any sort of one-offs in this half result, given there was some restructuring in Wigram?
Yeah, there's a one-off cost of about NZD 600,000 in the first half result.
Given the staff numbers have dropped by about 50, how should I think about that in terms of labor costs?
So some of our staff numbers, Dougie, we manage our production activities, I guess, with a mix of permanent staff and temporary staff. So that in part accounts for the reduction in headcount.
Okay. Cool. No, thanks for that. And Dave, right on, mate.
Thanks, Dougie. Catch up later. Rowan, your hand went down, but we've got time for one more question if you'd like to ask. Otherwise, we'll close it up.
No, sorry. I accidentally left it up. I didn't know I had to lower it.
All right. Okay. Thanks here.
Well, thank you, everyone. It's been a good ride. The ride will continue, so I look forward to looking at it with a different lens. Not going anywhere. Thank you very much. Thanks, everyone. I'm not going anywhere. Thank you. Cheers.