SCT - Scott Tech

[Snoopy]

FY2016: $8.929m / 74.681m = 12.0cps

Notes NPAT normalisation calculations

FY2016: These adjustments may be found on p33 of AR2016. I have:

a/ Added back a loss on sale of property plant and equipment, $0.215m; and an impairment of net assets at QMT Machinery Technology Co. Ltd in China, $0.449m.
b/ Added back fair value losses on firm commitments, $1.051m.
c/ Added back foreign exchange losses, $0.027m; and unrealised fair value losses on fair value losses on foreign exchange derivatives, $0.155m; and subtracted fair value gains on derivatives held as fair value hedges, $1.051m.

$8.134m+($0.215m+$0.449m)+ 0.72($1.051m+$0.027m+$0.155m-$1.051m)= $8.929m

FY2017: $8.959m / 74.681m = 12.0cps
FY2018: $10.205m / 75.903m = 13.4cps
FY2019: $9.464m / 77.545m = 12.2cps
FY2020: -$0.259m / 78.311m = -0.0033cps
FY2021: $11.146m / 78.636m = 14.2cps
FY2022: $13.510m / 79.852m = 16.9cps


Notes NPAT normalisation calculations

FY2017: These adjustments may be found on p30,31 of AR2017. I have:

a/ Subtracted a gain on sale of property plant and equipment ($0.073m)
b/ Added back fair value losses on firm commitments, $0.001m.
c/ Subtracted foreign exchange gains ($0.269m) and unrealised fair value gains on fair value gains on foreign exchange derivatives ($0.143m) and fair value gains held as fair value hedges ($0.001m).
d/ Subtracted a fair value gain on purchase of business "DC Ross" ($0.936m).

$10.265m-($0.073m+$0.936m)+ 0.72($0.001-$0.269m-$0.143m-$0.001m)= $8.959m

FY2018: Most of these adjustments may be found on p33 of AR2018. I have
a/ Added back the $0.021m loss on disposal of property plant and equipment.
b/ Added back in the unrealised loss on foreign exchange derivatives, $0.271m; and losses on derivatives used as fair value hedges, $1.579m; and the unrealised fair value losses on interest rate swap contracts, $0.043m.
c/ Subtracted foreign exchange gains ($1.627m) and fair value gains on firm commitments ($1.579m).
d/ Added back $0.496m being due diligence and acquisition costs (including the $0.271m of due diligence services from the auditors)

$10.772m+($0.021m)+ 0.72($0.271m+$1.579m+$0.043m-$1.627m-$1.579m+$0.496m)= $10.205m

FY2019: Most of these adjustments may be found on p39 of AR2019. I have
a/ Subtracted the gain on sale of property plant and equipment of $0.106m and $0.237m (assumed non taxable)
b/ Added back in the unrealised loss on foreign exchange derivatives, $1.334m; and fair value losses on derivatives used as hedges, $1.216m; and the unrealised fair value losses on interest rate swap contracts, $0.346m.
c/ Subtracted foreign exchange gains ($0.008m) and fair value gains on firm commitments ($1.216m) .

$8.604m-($0.106+$0.237m)+ 0.72($1.334m+$1.216m+$0.346m-$0.008m-$1.216m) = $9.464m

FY2020: This is the year in which the Covid-19 crisis struck! Most of these adjustments may be found on p5 and p36 of AR2020.

I have
a/ Subtracted the gain on sale of property plant and equipment of $0.328m (assumed non taxable)
b/ Added back $7.600m from the impairment of assets (ceased development of projects Scott dairy and automated pork processing).
c/ Added back $4.257m of restructuring impairment related to the closure of subsidiaries DC Ross Toolmakers in Dunedin and Scott Automation GmbH, the machine tools workshop arm in Germany. Since these represent complete and final closure of these businesses I am assuming no tax is recoverable
d/ Added back $6.295m of project impairments, closing out several challenging Australasian legacy projects (assumed no tax recoverable).
e/ Added back in the unrealised loss on foreign exchange derivatives, $0.082m and fair value losses on derivatives used as hedges, $0.890m.
f/ Subtracted foreign exchange gains, ($0.450m); fair value gains on firm commitments, ($1.036m); unrealised fair value gains on foreign exchange derivatives, ($0.146m) and unrealised fair value gains on interest rates swaps ($0.146m).

-$17.503m-($0.328m)+$7.600m+$4.257m+$6.295m +0.72($0.082m+$0.890m-$0.450m-$1.036m-$0.146m-$0.146m)= -$0.259m

FY2021: Most of these adjustments may be found on p39 and p40 of AR2021.

I have
a/ Subtracted the gain on sale of property plant and equipment of $0.068m (assumed non taxable)
b/ Added back an actual foreign exchange loss of $1.706m and an unrealised fair value losses on derivatives used as hedges of $0.521m.
c/ Subtracted unrealised fair value gains on foreign exchange derivatives, ($0.132m) and unrealised fair value gains on interest rates swaps ($0.155m).
d/ Added back the amortisation of HTS 110 goodwill, now a legacy asset that has been sold, of $0.403m.

$9.527m-($0.068m) +0.72($1.706m+$0.521m-$0.132m-$0.155m) + 0.72x$0.403m= $11.146m


FY2022: Most of these adjustments may be found on p45 and p46 of AR2022.

I have
a/ Subtracted the gain on sale of property plant and equipment of $0.049m (assumed non taxable)
b/ Added back an actual foreign exchange loss of $1.529m and an unrealised fair value losses on derivatives used as hedges of $0.639m.
c/ Subtracted unrealised fair value gains on foreign exchange derivatives, ($0.339m) and unrealised fair value gains on interest rates swaps ($0.576m).
d/ Writing off of Robotworx goodwilll, now Robotworx is a discontinued operation, was done as a separate accounting entry, outside of the continuing operations accounts as presented. Thus no adjustment to the accounts as presented is required as a result of discontinuing Robotworx operations.

$12.657m-($0.049m) +0.72($1.529m+$0.639m-$0.339m-$0.576m) = $13.510m

--------------------

Discussion: You will notice that I calculated six years of results, whereas I am meant to be considering only five. I have done this because for Scotts, I believe the FY2020 result was so unusual (Covid-19 effects related), that it would be misleading to to think of it as any part of a 'normal business cycle'. Thus I am going to 'look through' FY2020 as though it didn't happen. The one sense where I will consider FY2020 is that on normalised profit metrics the business was close to break even. So with the benefit of hindsight government support, and no doubt lots of prudent management behind the scenes, we can see that the SCT business was not put at risk of closing by Covid-19. Consequently I do not think that SCT will be forced to close down should Covid-19 restrictions again come to the fore. With FY2020 excluded, and only one blip on the 'eps' growth scoreboard, the result of the second Buffett test is clear.

Conclusion: Pass Test

SNOOPY

[Snoopy]

FY2016: $8.929m / $94.600m = 9.4%
FY2017: $8.959m / $97.156m = 9.2%
FY2018: $10.205m / $102.947m = 9.9%
FY2019: $9.464m / $111.817m = 8.5%
FY2020: -$0.259m / $92.947m = -0.29%
FY2021: $11.146m / $98.195m = 11.4%

Is FY2021 a portent to a much improved utilisation of shareholder funds in the future? It could be, but Scott's have a lot of catching up to do in the return on shareholder equity space.

Conclusion: Fail Test

FY2017: $8.959m / $97.156m = 9.2%
FY2018: $10.205m / $102.947m = 9.9%
FY2019: $9.464m / $111.817m = 8.5%
FY2020: -$0.259m / $92.947m = -0.29%
FY2021: $11.146m / $98.195m = 11.4%
FY2022: $13.510m / $100.406m = 13.5%

Good improvement over FY2022, even if we haven't yet reached the Buffett hurdle standard. It is pleasing the see the increased 'return on equity' (ROE) is happening on an increasing equity base. This shows the capital that has been invested back into the company is being wisely invested along a growth path. But our test 'hurdle height' is set for a reason so....

Conclusion: Fail Test

SNOOPY

[Snoopy]

Here are the net profit margins for the last six years.

FY2016: $8.929m / $112.044m = 8.0%
FY2017: $8.959m / $132.631m = 6.8%
FY2018: $10.205m / $181.779m = 5.6%
FY2019: $9.464m / $225.093m = 4.2%
FY2020: -$0.259m / $186.073m = -0.14%
FY2021: $11.146m / $216.234m = 5.2%

We have had a blip up from the lows of FY2019 (ignoring the one off FY2020 Covid-19 genesis year). Is this a result of the new 'product lead' and 'standardised unit' policy? I think it is too early to tell if this uptick in net profit margin will form part of a trend. One thing that is clear is that the net profit margin trend was all down before FY2021

Conclusion: Fail Test

Here are the net profit margins for the last six years.

FY2017: $8.959m / $132.631m = 6.8%
FY2018: $10.205m / $181.779m = 5.6%
FY2019: $9.464m / $225.093m = 4.2%
FY2020: -$0.259m / $186.073m = -0.14%
FY2021: $11.146m / $216.234m = 5.2%
FY2022: $13.510m / $221.757m = 6.1%

Margins have been increasing since new CEO John Kippenberger started the 'Scott 2025' strategy. In short this is using standardised products and processes to remove contracting risk. Ignoring the unrepresentative Covid-19 year FY2020, profit margins look to be on a steady, albeit slow, recovery path, notwithstanding that margins are still below where they were six years ago. Over FY2022 margin growth of 6.1%/5.2% = +17% is greater than inflation.

Conclusion: Pass Test

SNOOPY

[Snoopy]

I don't think SCT management see themselves as a 'no growth' company. But as investors I think it is reasonable to assess the company as a 'dividend payer only' to get some idea of value.

The calculation to work out the equivalent gross figure for the FY2020s partially imputed dividend, is as follows:

FY2020 Dividend P.I.: 4.0c (18.41% imputed, 18.41%/28%= 0.6575)
= 2.63c (FI) + 1.37c (NI)
= 2.63c/0.72 + 1.37c = 3.65c + 1.37c = 5.02c (gross dividend)

Year	Dividends as Declared	Gross Dividends	Gross Dividend Total
FY2017	5.5c+4.0c	7.64c + 5.56c	5.56c
FY2018	6.0c+4.0c	8.33c + 5.56c	13.89c
FY2019	6.0c+4.0c	8.33c + 5.56c	13.89c
FY2020	4.0c (18.41% I) + 0c	5.02c + 0c	5.02c
FY2021	0c + 2c (NI)	0c + 2.00c	2.00c
FY2022	4c (NI)+ ?c	4.00c + ?c	4.00c
Total			44.3c

Averaged over 5 years of dividend payments, the dividend works out at 44.3/5 = 8.86c (gross dividend).

I have given some thought as to whether I should revise my sought for "gross yield" in this new environment of very low interest rates. Scott's seem to have been remarkably adept at solving the logistical transport problems created by Covid-19. They have even completed factory acceptance testing by virtual technology. I am now of the opinion that my previously selected sought after 7.5% gross yield over an historic five year business cycle window, should be reduced to 7.0%. This means that 'fair value' for SCT, based on the, 5 yearly historic dividend record is:

8.86c / (0.07) = $1.27

Now using my plus and minus 20% rule of thumb range to get a feel how the SCT share price might behave at the top and bottom of its business cycle.

Top of Business Cycle Valuation: $1.27 x 1.2 = $1.52
Bottom of Business Cycle Valuation: $1.27 x 0.8 = $1.02

SCT shares were trading at $3.25 on Wednesday 10th December as I write this (more than double the upper end of my expected range) and are now ($3.25-$1.27=$1.98) 155% overvalued (from a business cycle projected dividend income perspective). Another way of interpreting the same information is to say that SCT shares currently contain a 155% growth premium (because a capitalised dividend valuation assumes no growth).

It is clear the market is pricing SCT well above what we might expect from the dividend payer that I am modelling. And this is assuming SCT will increase the current annual dividend rate of 2c +4c = 6cps, to more than 8cps. This means the market clearly believes the growth story. But a capitalised dividend valuation relies on 'runs on the board', not future hope.

I don't think SCT management see themselves as a 'no growth' company. But as investors I think it is reasonable to assess the company as a 'dividend payer only' to get some idea of value.

Year	Dividends as Declared	Gross Dividends	Gross Dividend Total
FY2018	6.0c + 4.0c	8.33c + 5.56c	5.56c
FY2019	6.0c+4.0c	8.33c + 5.56c	13.89c
FY2020 (1)	4.0c (18.41% I) + 0c	5.02c + 0c	5.02c
FY2021	0c + 2c (NI)	0c + 2.00c	2.00c
FY2022	4c (NI)+ 4c (NI)	4.00c + 4.00c	8.00c
FY2023	4c (NI)+ ?c	4.00c + ?c	4.00c
Total			38.5c

Notes

1/ A sample calculation to work out the equivalent gross figure for the FY2020s partially imputed dividend, is as follows:

FY2020 Dividend P.I.: 4.0c (18.41% imputed, 18.41%/28%= 0.6575)
= 2.63c (FI) + 1.37c (NI)
= 2.63c/0.72 + 1.37c = 3.65c + 1.37c = 5.02c (gross dividend)

Discussion

Averaged over 5 years of dividend payments, the dividend works out at 38.5/5 = 7.70c (gross dividend).

I consider that under a more focussed industrial standard product model, an appropriate gross yield return on investment is 7.0%. This means that a 'fair value' for SCT shares, based on the 5 yearly historic dividend record, is:

7.70c / (0.07) = $1.10

Now, using my plus and minus 20% rule of thumb range to get a feel how the SCT share price might behave at the top and bottom of its business cycle.

Top of Business Cycle Valuation: $1.10 x 1.2 = $1.32
Bottom of Business Cycle Valuation: $1.10 x 0.8 = 88c

SCT shares were trading at $2.75 on Tuesday 15th November as I write this (more than double the upper end of my expected range). By this measure are now ($2.75-$1.10=) $1.65, or 150% overvalued (from a business cycle projected dividend income perspective). Another way of interpreting the same information is to say that SCT shares currently contain a 150% 'growth premium' (because a capitalised dividend valuation assumes no growth).

This current gross annual dividend rate being modelled of 7.7cps cps, is very close to the current twelve month dividend rate of 8cps. So it may not be reasonable to expect increasing dividends going forwards.

It is clear the market is pricing SCT well above what we might expect from 'a dividend payer'. This means the market clearly believes the growth story. So capitalising the dividend is not a good sole tool to measure the worth of this company.

SNOOPY

[Snoopy]

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.

Scott's 'have a plan' (see post 1010) and are 'executing the plan'. The flaw in the plan execution is the mediocre (to a Buffett eye at least) return on equity capital. This isn't a surprise for an asset rich manufacturing business, particularly so when war is on the doorstep of the company's largest revenue earner, the Material Handling Automation unit in financially strained Europe. Yet all the of those Buffett tests are by their nature historical. Let's look to the future. What is the contracted 'workload on the books', signed up to at years end?

	Forward Work (1)	Revenue in Following Year
FY2020	$102m	$216,234m
FY2021	$119m	$221.757m
FY2022	$172m	?

Note

1/ Forward Workload is 'contracted activity' taken from slide 4 of FY2022 results presentation (PR2022).

By this indicator, FY2023 is looking to be better than FY2022. Much of this forward work must be in 'Materials Handling', because there is $190m of such equipment on the order book (slide 6 PR2022).

I like to use a 30th September reference date, In the case of SCT, it covers the run up period to when the annual result is released. So there is a good incentive for institutional investors to align their expectations (by buying or selling shares) to bring the share price into line with what is a generally well signalled result. On 30-09-2022, the SCT share price was $2.80. That means the company was trading on a normalised historical PE ratio of: $2.80/$0.169= 16.6. This is a big drop from the equivalent historical PE ratio of last year (20.9) and is the lowest PE ratio Scott's have traded on since 2015. Nevertheless a PE ratio of 16.6 is not cheap, and implies significant future growth.

An alternative way to price growth is to create a 'no growth' valuation. The difference between the share price and the 'no growth' valuation is therefore the market priced 'growth premium'. The 30-09-2022 actual Capitalised Gross Yield for SCT (post 1014) is 7.7c / $2.80 = 2.75%.

	Share Price equals	Capitalised Dividend Value plus	Implied Growth Premium
30-09-2021	$2.85	$1.27	$1.58 (+124%)
30.09-2022	$2.80	$1.10	$1.70 (+155%)

By this measure, despite the share price being lower than last year, the market growth premium has increased.

What do I make of all this? Buffett is looking for a good return on equity. CEO John Kippenberger is working towards that goal, but is not there yet. So Buffett is off elsewhere seeking out suitable investment gems. What about we shareholders on the register already? We are waiting for growth while being paid just under 3% on our invested capital while we wait. Last year, with interest rates still near their record lows, that would have sounded OK. This year, if you pick the right bank, you can earn 5% on your term deposit money. So a 3% gross dividend yield doesn't cut it. It only makes sense to hold SCT today if you believe in the growth story. Finally if you do believe in that growth story, you have to decide what is a fair price to pay for that growth story.

If I look at the compound 'eps' growth rate 'g' over the last 5 years:

12.0cps(1+g)^5= 16.9cps => (1+g)^5 = 1.40 => g= 7.1%

To me paying a PE of more than 15 is a high price to pay for that level of growth. Granted the level of eps growth was higher last year: 16.9cps/14.2cps= 119% (or +19%). But 19% is the highest normal operating eps growth for the company on record. I am expecting growth going forwards to moderate. So I think that an SCT share price of $2.80 with an implied PE of 16.6 looks about right. SCT is a 'hold' for me at $2.80.

SNOOPY

[HITMAN]

Your posts are excellent Snoopy, Thanks

[Snoopy]

	Australasia Manufacturing	Americas Manufacturing	Europe Manufacturing	China Manufacturing	Overall
Revenue (a)	$112.060m	$37.248m	$53.981m	$12.945m	$216.234m
Revenue %ge	51.82%	17.23%	24.96%	5.986%	100%
Segment NPBT (a)	$16.291m	$3.322m	$1.895m	$2.534m	$24.042m (b)
subtract Admin NPBT Adjustment	($6.242m)	($2.075m)	($3.006m)	($0.721m)	($12.044m)
equals NPBT Adjusted	$10.049m	$1.247m	($1.111m)	$1.813m	$11.998m
less Taxation (a)	($1.112m)	($0.737m)	($0.501m)	($0.121m)	($2.471m)
equals NPAT adj	$8.937m	$0.510m	($1.612m)	$1.692m	$9.527m
Notional Tax rate (T / NPBTadj)	11.1%	59.1%	-45.1%	6.7%	20.6%
NPAT profit margin (NPATadj / R)	8.0%	1.4%	(3.0%)	13.1%	4.4%
Divisional Interest Income (a)	$0m	$0m	$0.003m	$0.099m	$0.102m
less Divisional Interest Costs (a)	($0.160m)	($0.194m)	($0.392m)	($0m)	($0.746m)
less Admin Interest Costs	($0.329m)	($0.109m)	($0.158m)	($0.038m)	($0.634m)
equals Divisional Net Interest Expense (I)	($0.489m)	($0.303m)	($0.547m)	$0.061m	($1.278m)
EBIT Adjusted (NPBTadj+I)	$10.538m	$1.550m	($0.564m)	$1.752m	$13.276m

Notes

a/ Information marked (a) in the above table is straight from Section A3 in the annual report. Other rows of information are derived.
b/ But an individual entry marked (b) is derived.

Observations from the Above

1/ Australasia is from where most of the 'product' output (Bladestop and Rocklabs Output) is sourced. Perhaps then, it is unsurprising that this geographical region is the most profitable?
2/ The very low tax bill from Australasia may be a reflection of tax being offset by government grants of $0.625m (AR2021 p39).
3/ The 'standard product line' based in the Americas - Robotworx - looks to have had a poor year, given the other substantive US based business, Transbotics Automated Guided Vehicles, seems to have had a good year with the tyre manufacturers (AR2021 p10). Although maybe the closing remark on Transbotics "we see a positive future'" means that the present is not yet so positive?

Assuming Transbotics revenue of $20.3m (my post 798, Note B, assume no growth over FY2020) and an EBITDA margin of 20%, this translates to a Transbotics EBITDA of 0.2x$20.3m=$4.06m. Total depreciable capital assets acquired when the business was purchased in FY2018 were valued at just $0.144m (AR2018 p61). So I am estimating the annual depreciation charge on these assets to be close to zero. Much more significant is the goodwill acquired on acquisition of $7.100m. This goodwill is revalued annually because the value of overseas goodwill, even if constant in its home currency, varies with exchange rates. (It would also vary if the goodwill was amortised, but this has not happened). I intend to ignore the annual exchange rate related amortisation fluctuations.

For interest charges, and to be conservative, I will apportion all of this years US funding cost of $0.194m to Transbotics. I can therefore estimate EBT for Transbotics to be:

NPBT(Transbotics) = EBT(Transbotics) = EBITDA - I - D - A = $4.06m - $0.194m - $0m - $0m = $3.866m = $3.9m

If my estimates are anywhere near correct, this would suggest that 'Robotworx', -the second hand robot refurbishment and resale company-, operated at an EBT loss over FY2021 of around $0.300m. (Ref AR2021 p43, Total 'America's NPBT' was $3.332m. $3.3m-$3.9m = -$0.300m.)

Standard Product' (I believe largely 'Robotworx') revenue slumped from $22.860m in FY2019 down to $15.198m (FY2020) before recovering $17.153m (FY2021).

4/ The Alvey acquisition (automated conveying systems) in Europe (c.f. my post 649 estimated EBT = $11.764m) looks like it has turned to disaster (EBT now is -$1.111m). O.K. that actual figure for FY2021 includes a Scott machine shop workshop and assembly area in the Czech republic, and 'Normaclass' in France. Nevertheless I don't believe EBT for Europe reflects well on what was principally the old Alvey automated conveyor business.

5/ China manufacturing, which designs and installs production lines for appliance manufacturers, had the highest net profit margin. But they are very dependent on workload. During the outbreak of the Covid-19 crisis over FY2020 work dried up, and so did profits. Scott's China, over 2HY2021, moved to a new facility almost three times the size of the old location "to maintain their growth trajectory" (Ref: Cover letter from AR2021 announcement). Meanwhile new appliance manufacturing lines in the US (as opposed to US manufacturers with their appliance production lines based in China) continue to be serviced from the 'appliance line centre of excellence' in Christchurch N.Z..

A bit of a change this year as 'Australasia' separates out into Australia and New Zealand

	New Zealand Manufacturing	Australia Manufacturing	Americas Manufacturing	Europe Manufacturing	China Manufacturing	Overall
Revenue (a)	$50.948m	$56.670m	$52.464m	$57.885m	$3.790m	$221.757m
Revenue %ge	22.97%	25.55%	23.66%	26.10%	1.709%	100%
Segment NPBT (a)	$21.967m	$0.005m	($2.073m)	$4.732m	$0.245m	$24.876m (b)
subtract Admin NPBT Adjustment	($2.288m)	($2.545m)	($2.356m)	($2.600m)	($0.170m)	($9.959m)
equals NPBT Adjusted	$19.679m	($2.540m)	($4.429m)	$2.132m	$0.075m	$14.917m
less Taxation (a)	($3.282m)	$0.667m	$1.068m	($0.736m)	$0.023m	($2.260m)
equals NPAT adj	$16.397m	($1.873m)	($3.361m)	$1.396m	$0.098m	$12.657m
Notional Tax rate (T / NPBTadj)	16.7%	-26.3%	-24.1%	34.5%	-30.7%	15.2%
NPAT profit margin (NPATadj / R)	32.2%	-3.3%	-6.4%	2.4%	2.6%	5.7%
Divisional Interest Income (a)	$0m	$0.486m	$0m	$0.001m	$0.073m	$0.560m
less Divisional Interest Costs (a)	($0.153m)	($0.107m)	($0.164m)	($0.321m)	($0m)	($0.745m)
less Admin Interest Costs	($0.175m)	($0.195m)	($0.181m)	($0.199m)	($0.013m)	($0.763m)
equals Divisional Net Interest Gain/(Expense) (I)	($0.328m)	$0.184m	($0.345m)	($0.519m)	$0.060m	($0.948m)
EBIT Adjusted (NPBTadj+I)	$20.007m	($2.724m)	($4.084m)	$2.651m	$0.015m	$15.865m

Notes

a/ Information marked (a) in the above table is straight from Sections A1 and A3 in the annual report. Other rows of information are derived.
b/ But an individual row entry marked (b) is derived.
c/ I use the word 'Adjusted' here in the sense that I have distributed the unallocated costs across the trading business units in proportion to the revenue of those trading units.

Observations from the Above

Sometimes 'scratching below the surface' we can find insights into a business that are not apparent when looking at 'the big picture'. The big picture tells of Scotts as a listed second tier manufacturer with a pot of 'takeover capital' that came on board as a result of JBS taking a controlling stake. Consequently, Scotts continued a push to acquire global technology leading automation businesses around the world. Subsequently some acquisitions have proved more successful than others.

Scott's comes across as an outfit doing clever stuff, but with an array of un-co-ordinated divisions prone to extended development times and project cost overruns that have failed to lift the company's financial sharemarket performance above the mediocre. But look at the 'country by country' divisions, and a much more diverse business-scape unfolds.

1/ New Zealand has been 'by far the star' performer over FY2022. Look at that Net Profit Margin of 32% (consistent with Slide 32 of PR2022 on Meat Industry products). The NPM is even higher at Rocklabs (over 40%)! Wow! I presume it must have been the 'appliance line manufacturing centre' now designated as 'non-core' that brought the NZ NPM overall back to a still laudable 32% overall.

2/ The United States operation has been 'rocked' by the closure of 'Robotworx' (AR2022 p2). However, put 'www,robots.com' into your browser and 'Robotworx' comes up still trading under the new ownership of: TIE 'The Industrial Experts'. What is that all about?

The reference divisional results for the Americas from the previous year have been restated, I assume because of 'no Robotworx' any more. I was therefore surprised to see such a big EBIT loss in the Americas this year - over $4m. Since the Americas now consists of a small service centre in Dallas, and Transbotics, I assume most of this loss was from Transbotics! If we go back to 2019, the Automated Guided Vehicle market had a target growth rate of 30%+ (slide 14, Scott Presents with Moelis November 2019 Slide Show). Yet a comparison of 'standard product' sales from the Americas (with Robotworx gone, this is all Transbotics now) between FY2022 and FY2021 (AR2022 p43,44) shows no growth in sales.

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.

I wonder if the comment I made above in 'Buffett summarising' what happened over FY2021 has any bearing on what happened at Transbotics over FY2022?

3/ The Bladestop band-saw, made in Australia as I understand it, saw a 20% growth in installations over FY2020 (PR2022 s13). I make that to be 25 more installations supplied over FY2022, although I am not sure exactly how many bandsaws end up in each installation. Given Bladestop is one of Scott's 'hero' products, I was very surprised to see Scott's Australia in EBIT loss of $2,704m for the year. Management are conservatively estimating that this EBIT result will improve by $3.8m (AR2022 p57). That means an EBIT profit in Australia of $1.1m for 2023

4/ China is showing minimal profit. But look at the turnover. Down two thirds on the previous year. IMV the Chinese result is the result of the ebb and flow of big appliance line manufacturing projects. Last year China was the division with the highest net profit margin of all, and I expect it to bounce back over FY2023.

So what conclusions can I draw from all this information?

SNOOPY

[Snoopy]

So what conclusions can I draw from all this information?

Summing Up

I am surprised the 'appliance line manufacturing arm' has now become 'non-core'. This 'rest of the business' margin (mostly appliance line manufacturing) is 10% (PR2022 s9). However if we look at the other part of the business that supplies big project turnkey solutions, the Alvey Packaging System Arm, that has an 11% margin on sales (PR2022 s15). Not much different, and a lower margin than what the 'appliance line manufacturing arm' did in the previous year (FY2021). My impression is that some of the creative juice that drives Scotts, has come from creative people solving one off production line problems. If this kind of work is downgraded, (in management's eyes), as we transition to 'modular solutions', then where will the 'future creative culture' that has driven Scotts to where it is today come from?

I was hoping China might bounce back in FY2023. However 'Foreign Currency Risk Management', set up to cover future projects, in Chinese yuan (AR2022 p71) of both assets and liabilities, is more than halved from the previous year. The previous year's hedging would have related to mostly FY2022 activity, which was itself well down on FY2021. So early indications are that overall workloads in China are not going to improve soon. I wonder if 'non-core' is code for 'we want to unload this business'?

The same 'Foreign Currency Risk Management' indicator is predicting a bright business uptick for European located Alvey over FY2023. Furthermore, in the world capital of meat processing, Kaikouri Valley in Dunedin, there is a steady order book for the proven poultry trussing machines, and the automated lamb boning equipment - high margin engineering product lines that have no direct competition. Across the Tasman, a transition to profit has all but been promised. Meanwhile, Rocklabs in Auckland is riding the global mining boom. But I don't see any clarity on what is happening in the USA at Transbotics, with their AGVs (automated guided trolleys and tractors.)

Of the future projects not yet commercialised, the automated 'beef boning room' could be the 'smash it out of the park' home run that Scotts has always promised but never quite delivered. Yet I sense this project in particular will absorb many more millions of Scott's surplus earnings before, even if, it comes to market, meaning those hoping for an increased dividend going forwards are likely to be disappointed.

By putting together the different country ingredients, and weighting their relative importance to the group, I can come up with both positive and negative profit change scenarios for FY2023. The real value that I see in an investment in Scott Technology today is that for the price you pay, you get an option on the 'automated beef boning room' and other 'growth projects' for free. That may make some excited. But for me it, is simply enough to keep me invested.

SNOOPY

[winner69]

Scott signs agreements with Caterpillar

They acquiring Caterpillar or something

[kiora]

Collaboration for charging E vehicles with CAT
For refueling diesel. How big is this?
https://scottautomation.com/en/produ...ation/robofuel