It seems like CEO John Kippenberger looked at the business upon taking the CEO reins two years ago, then had some of the same doubts that I did. The 'adaptable teams' way of doing business at Scotts has been replaced by 'centres of excellence': Specialists doing what they do best at one site. Potential geographical constraints on trade have been (mostly) worked around - kudos for that! The Covid-19 pandemic means that it is difficult to judge the effectiveness of what looks like a radical rethinking of the way Scott's works 'by the numbers'. But what I can say is that 'earnings per share' of 14.2c (adjusted) is the best it has been since 2004 (when eps was 14.9cps, and Scott's was a very different and much smaller 'appliance production line manufacturer' only).
The one truth that has remained from those earlier days is that when appliance manufacturing line sales go well, then Scotts does well. That stands to reason. When you employ a lot of highly skilled tradespeople, you don't want them hanging around the workshops underutilised. It is difficult to get a good 'return on assets' (and in the case of Scotts, their best assets are not on the balance sheet, they are people) when the type of projects you are geared up to run are not firing. Adjusted ROE over FY2021, at 11.4%, was the best it has been since FY2013 (12.3%). But the more diversified Scotts becomes, the harder it becomes to get the whole internationally spread and diveresly experienced 'project teams' operating 'near peak' at the same time.
Right now 'Europe manufacturing' (see post 971) is effectively 'on the bench' as the rest of the Scott team plays on. I have looked at some of the Scott youtube videos on palletising and packing systems, showcasing the largely Belgian headquartered 'Scott Europe'.
https://www.youtube.com/c/ScottAutomationRobotics
It does look like very clever stuff. There has been cost cutting in Europe with the closure of the German workshop base, and with some work moving the Czech republic premises. 'In theory' Covid-19 should be a tailwind for 'Scott Europe'. Automated packaging systems reduce the human 'touch', and should combat disease spread (also through having less workers in a confined space). Yet capital commitments by manufacturing customers at a time when a business is under pressure is never a straightforward sell. Nevertheless I do think a real key to lifting the performance of the Scott group as a whole is a resurgence of 'Scott Europe'. By 'lift' I mean the potential to lift profits 50% above today's levels. That kind of profit lift is a juicy carrot worth staying invested for! But by when could that happen? I note as an aside that, as it stands today, profit margins for the group as a whole, at 5.2% for FY2021, are well below the pre-Covid-19 norms of 7 to 8%.
There are other headwinds too. Transbotics has moved on from its first generation AGVs that just followed painted lines, to 2G AGVs that navigate via lasers, to now looking at moving to a 3G system, where GPS guides a driverless vehicle's movements. I am not sure how much R&D is needed to make the transition to 3G AGVs. But I can't imagine the move is cheap. Elsewhere in the USA, Ohio, 'Robotworx', the reseller of refurbished robots, looks to be 'just plugging along' under a wave of Covid-19 uncertainty..
The biggest disappointment for me, from two years ago, has been the closing down of the automated pork processing project in Australia and the seeming end (although it hasn't been formally announced) of the fully automated beef processing project as well. Could it be that:
a/ The larger nature of these animals (as compared to a lamb),
b/ The more varied size of the carcass, and
c/ The consequent necessity to process these animals by halves (IOW you can't just take the way lambs are processed and 'scale it up'.)
are technical hurdles that are too difficult to clear? Ironically the great success of Scott's 'Bladestop' product in the beef industry, the safety bandsaw that nevertheless requires a human hand to operate, suggests that the prospects of a more comprehensive automation of the beef and pork processing lines may have indeed receded over the horizon.
Sometimes in 'cutting edge' technology it is necessary to 'wield the axe'. JK has ended a couple of my dreams with a final meltdown of the Milktech project, and the selling off of HTS-110. But I guess it had to be done?
To summarise, the Warren Buffett snapshot view: Well chosen operating niche, increasing profits, rather average return on capital (not unusual for a capital intensive industry I might add) with shrinking profit margins. There is as a bonus, no net company debt, which is always helpful when navigating uncertain times.
The 'glass half full' interpretation is that the company has been reset. And once the USA, and particularly Europe, gets back on line, sales and profits should accelerate. The 'glass half empty' interpretation is that the favourable confluence of cyclical factors in the Asia Pacific rim will turn south, capital expenditure on new projects will become more difficult to justify, and sales will settle at a level a little below what we see today.
I continue to have the 'glass half full' outlook. But I see the 'no net debt' position as a kind of 'safety net', that should allow the company to regroup again, should I be proven to be wrong. There is a significant growth premium (see my post 969) built into the share price today ($3.25 -$1.52=) $1.73. I think such a premium could be justified, if the full 'JK vision' for Scotts pans out. But I won't be adding any more shares to my holding at today's prices ($3.25, an adjusted PER of 23). And I think it is fair to say that I wouldn't expect Warren Buffett to be joining me on the share register any time soon.