SCT - Scott Tech

[BlackPeter]

Historical long term PE on my 30th September 2023 reference date was: $3.23/$0.193=16.7

Comparable historical PEs for FY2022, FY2021, FY2019 and FY2018, again on my 30th September reference date, were 16.6, 20.1, 20.5 and 22.8. Including FY2023 gives a five year average historical PE of 19.3. (notice I have omitted FY2020 from this analysis, as I believe this Covid year is not a credible forecasting data point).

Based on yesterday's closing price of $3.67, the historical PE was $3.67/$0.193 = 19.0, or very close to the five year average. This is an indicator to me that Mr Market has got the share price 'about right'.

Six reference year reference date compounding 'eps' growth (note I am including the FY2020 Covid year in this compounding time frame) rate is:

13.4(1+g)^5=19.3 => g = 7.6%

No 'improvement' necessary?

SNOOPY

discl: holding

Cheers - so, it looks like my memory was right (I didn't follow them the last couple of years) - and it looks as well that the PE improvement came basically with a reduction of the P - and to be honest, 16.6 looks still pretty dear unless it comes with reliable future growth.

I guess I wish them all the best, they are a cool South Island engineering based company after all and provide plenty of fun (and learning opportunities) for generations of engineering students.

From an investor perspective however I am still wondering what would make one invest into this company? I guess I can understand the rational for the majority shareholder (they might be happy to have paid a premium for priority access to an engineering workshop when they need it), but what's in it for a retail investor at a PE of nearly 17, unless one assumes they keep growing their earnings from now on year after year with a CAGR of at least 5. Not sure I would assume that the last 5 years (with a gap) would provide in a cyclical industry a reliable measure for average future growth? Do you?

Why do you think the growth coming out of the Covid valley will provide a guide for consistent and sutainable growth in the future?

And sure, they might be the largest production automation company in NZ, but internationally they are just a minnow. Where do you see their moat allowing them to keep growing on the international stage compared to automation giants in Japan, Korea, the US and Germany (next to some other countries all larger and with more high tech industry than our small (though beautiful) islands in the South Pacific ;?

[Snoopy]

Cheers - so, it looks like my memory was right (I didn't follow them the last couple of years) - and it looks as well that the PE improvement came basically with a reduction of the P - and to be honest, 16.6 looks still pretty dear unless it comes with reliable future growth.

Actually the share price is flirting with all time highs. So the reduction in PE (from a five year average of 20 to 19 today) has definitely come from an increase in earnings, not a decrease in price. But I agree at that PE ratio of 19, there is a lot of growth priced in. A run up in share price wouldn't be unusual for a growth company running up to its AGM though, in this case in a couple of weeks. It happened last year, then the share price then cooled off over the summer, which if it happens again should provide a more attractive entry point than today. Last year I topped up my holding by picking up a small parcel at $2.50. I can't complain about a 50% return on that parcel in less than twelve months!

From an investor perspective I am still wondering what would make one invest into this company? I guess I can understand the rational for the majority shareholder (they might be happy to have paid a premium for priority access to an engineering workshop when they need it),

'Paid a premium'.!?! I have to pull you up there. JBS paid just $1.39 a share for their controlling stake in 2015. after Northington Partners issued a rather miserable valuation of $1.08 - $1.26 per share. So JBS paid a premium compared to that, but the market share price never got that low. I remember being wild at the time that JBS got their controlling stake so cheaply. No need to feel sorry for JBS. They are well in the money with this one.
.

but what's in it for a retail investor at a PE of nearly 17, unless one assumes they keep growing their earnings from now on year after year with a CAGR of at least 5. Not sure I would assume that the last 5 years (with a gap) would provide in a cyclical industry a reliable measure for average future growth? Do you?

Why do you think the growth coming out of the Covid valley will provide a guide for consistent and sustainable growth in the future?

You need to look at my figures again. The five year eps growth rate of 7.6% compounding per year was from a base date of EOFY2018 (31-08-2018), So well before Covid. That 7.6% compounding growth rate happened despite the Covid problems. There was no 'gap' in that particular calculation. And 7.6% is a compound annual eps growth rate well exceeding your 5% target. What is more, I didn't cherry pick my start point either. eps actually fell in FY2019. So if I had calculated a four year compounding growth rate, then I would have got an even greater number.

In case you hadn't caught up, Scott's are trying to move away from the cyclical contracting, into more on demand standardised products with less engineering execution risk.

And sure, they might be the largest production automation company in NZ, but internationally they are just a minnow. Where do you see their moat allowing them to keep growing on the international stage compared to automation giants in Japan, Korea, the US and Germany (next to some other countries all larger and with more high tech industry than our small (though beautiful) islands in the South Pacific ;?

Scott's aren't trying to compete with the big guys who make the robots. They are more about niche applications using other peoples robots, (although they do make their own AGVs via Transbotics, their US manufacturing subsidiary.)

SNOOPY

[Snoopy]

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

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%
FY2023: $15.702m / $113,899m = 13.8%

Return on Equity is still going in the right direction, 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 a further rise in the 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

[percy]

I am having a good laugh.
SCT are "FAIL TEST" for you while they are starting to "PASS TEST" on my radar..
Operating cash flow of $26m was higher than pcp due to the strong underlying performance of the
business but also the timing of significant cash deposits relating to large projects won, which in turn
boosted the Group’s net cash position to $12.8m.

[Snoopy]

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

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

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%
FY2023: $15.702m / $267.526m = 5.9%

Ignoring the unrepresentative Covid-19 year FY2020, profit margins look to be on a steady, albeit slow, recovery path. A fall in margin, albeit small, from from last year is disappointing, notwithstanding that margins are still above where they were six years ago. But 6.9% is still a good jump from where the company was in FY2019

Conclusion: PASS TEST

SNOOPY

[Snoopy]

I am having a good laugh.
SCT are "FAIL TEST" for you while they are starting to "PASS TEST" on my radar..
"Operating cash flow of $26m was higher than pcp due to the strong underlying performance of the business but also the timing of significant cash deposits relating to large projects won, which in turn boosted the Group’s net cash position to $12.8m." (AR2023 p3)

Percy, don't take a fail on the 'Return on Equity' test for a manufacturer like Scott's too hard. It is very rare for a capital intensive manufacturing business to meet that target (although I believe Skellerup does). The only real effect of this 'failure' is that I can't put my Buffett inspired compounding retained earnings spreadsheet model into use for predicting future returns. It doesn't mean that I exclude SCT as a worthwhile investment going forwards under other criteria.

Since the 2015 recapitalisation, access to cash has never been a problem for Scotts. But large projects have necessitated going into debt to provide the working capital to finish them. It is always good to see operational cashflow taking a favourable turn. Although as Scott's stated themselves in your quote, much of that was owing to ,
"the timing of significant cash deposits relating to large projects won" (AR2023 p3)

So rather than this being a new trend, it wouldn't surprise me at all if the cashflow picture turned around again over FY2024. That is just how a business like Scott's works, and would not be cause for alarm. Just letting you know in case you are considering climbing on board. The other problem with being an SCT shareholder is liquidity which is not often great. But of course that works 'both ways'. If new significant shareholders want in, that means they usually have to 'pay up' which provides a good opportunity for 'overweight shareholders' to exit. Share price up another 5c today as I write this to $3.72. By my calculation that is a PE of $3.72 /$0.193 = 19.3. Bang on the five year average for this share. So at $3.72, not expensive, but not cheap either (by my measure).

SNOOPY

discl: holding, not selling

[Snoopy]

3M, the NYSE listed multinational corporate is known as a 'clever tech innovator' in the business space. Now New Zealand has their own 3M in the form of listed company 'Scott Technology'. The eMs in this case refer to Material handling, the Meat Processing Industry and Mining Adjunct Equipment. These are the three 'standard product' industries where Scott's have 20 years or more of specialist industry expertise.

1/ Material Handling

This is the old Alvey group business, purchased as a going concern by Scott's in FY2018 and headquartered in the Belgium and the Czech Republic in Europe. Much of the Alvey division's work is with palletising and packaging food for international brands such as McCain, Danone and Friesland Campina (a Dutch dairy multinational). Acquisition by Scott's has allowed branching out into new geographic markets with materials handling installations in Canada and New Zealand. In terms of revenue, this is the largest part of the Scott business (about one third).

Added to Alvey is the US based Transbotics business unit, which specialises in self guided automated trackless transportation trolleys for industrial use.

2/ Meat Processing

Meat processing's flagship project, the now successfully integrated 'automatic boning room', is built around processing of lamb carcasses. Globally lamb is a 'minority meat'. But 18 wholly or partly automated lamb boning rooms have been sold across Australasia, representing $180m in cumulative sales (PV = $10->15m per installation today). Scott's estimates that the 60% of our regional lamb processing market that remains unautomated is 'ripe for the picking'.

The second string to Scott's meat automation bow is the automated poultry trusser. 'Trussing' is the term used when a plucked and de-headed chicken is packaged up ready for sale with string, tying the wings and legs of the bird carcass tightly to the body. This keeps the processed chicken 'compact' for packaging and rotisserie cooking purposes. A Scott robotic trussing system ($1.7m for a 24 birds per minute system) is capable of processing a single chicken in five seconds. The opportunity within the US market alone is estimated at 150 machines.

The third product, 'Bladestop' is an industrial band-saw with a twin safety mechanism that makes it almost impossible for an operator to injure themselves. This product is applicable to more manual meat processing, such as occurs in the beef industry. 'Bladestop' (around $70k per unit) currently has a 9% market share in the US, and shows further promise of being a sales prospect for non-protein based applications.

The above three 'standard products' all have patent protection in the markets in which they are sold.

3/ Mining Adjunct Equipment

Rocklabs, based in Auckland, does not supply mining equipment for pulling minerals out of the ground. What it does do is provide automated equipment to crush down and analyse drilling samples. That means those companies mining certain mineral veins know exactly the composition of material is that is being dug out. This is important information in assessing the ultimate yield of the raw material a company is mining. Rocklabs have a globally wide and loyal client base.

Normally, to do this testing, some form of comparative assay material is required. Rocklabs can supply such material.

A further 'mining aid' is Scott's robotic fuel filling system. An on site mining truck can be a very large beast, not suitable for driving on a public road. Typically the wheel height might be the height of a person. So reaching up to refuel such a thing, in hot weather, can be a demanding physical task. Scott's Australian business has developed a robotic arm automated refueling system to solve this problem.

4/ And 'oh yes' Scott's has a 'non-core business' arm too, and it makes up just under 25% of company revenue! Very curiously it wasn't even mentioned in the annual report text by name (although it was in a couple of photographs). This is the 'Appliance line manufacturing business', where the competition has been either from co-operative European consortiums in Spain and/or Italy, or the Appliance manufacturer doing the project 'in house' themselves.

As the producer of patent protected technology for niche applications, Scott's certainly ticks the 'top three in their chosen market' box. Even in the more contested Appliance line manufacturing business, Scott's seem to end up in the top three for customer choice.

Conclusion: Pass Test

Scott Automation, as they like to promote themselves, is a world leading niche provider of automated robotic solutions to global manufacturing and processing industries. These are industries as highly varied as highly varied as: Appliances, Automotive, Cosmetics and Healthcare, Distribution and Retail , Food and Beverage, General Manufacturing, Meat Processing and Mining.

Scott's have engineering centres across the globe organized into global 'centres of excellence', where specific product lines are made to service the industries described above:

1/ Dunedin New Zealand (Meat Processing),
2/ Christchurch New Zealand (Appliance Production Line manufacturing),
3/ Auckland New Zealand (Automated mineral sample assessment, using the so called AMS (Automated Modular Solution) system, and the supply of CRMs (Certified Reference Materials) to use in these machines.
4/ Sydney and Melbourne Australia (Complementary to NZ in automated mining and meat processing equipment) supplying more complex automation to the mining industry and the award winning 'Bladestop' safety bandsaws to the meat industry.
5/ Belgium and the Czech Republic Europe (Materials Handling and Palletisation Equipment)
6/ Charlotte, North Carolina, United States (Materials handling, Automated Guided Vehicles)
7/ Qingdao, China (Appliance Production Line manufacturing)

Despite Scott's global reach, in worldwide terms they are still a minnow company planning on conquering the industrial world from headquarters in Dunedin. That means having good people to develop a technical edge and having good people to market and implement that technical edge are critical to the company's success. Being able to implement such a strategy has long been a foundation of the company. But under CEO John Kippenberger's leadership, which is encapsulated in the Scott 2025 strategy, added to that technical discipline is a financial one. Put simply the 'Scott 2025 Strategy' means 'doing what Scott does best where the technical lessons have been learned' and not taking on engineering vanity projects that satisfy company engineers but leave little or no profits for shareholders.

O.K. it all sounds good so far. Does Scott really have a 'tech edge' that stacks up globally? Scott's commissioned a valuation study on the company from Forsyth Barr published on 20th January 2023. Appendix 1 in that report is a 'competitor analysis', and the three examples I have chosen to expand on below, I have referenced from there.

Materials Handling and Palletisation
Scott's Europe, with their PAL4.0 packer, offer a dispatch solution for customers who want to combine different sized 'output units' into single efficiently packed pallet packages, at the producer level PAL4.0 has a noticeably small footprint for its output capability. Competitors in a similar market space include:
a/ 'Mecalux' which offers automated selection of goods and sorting as part of a wider automated warehousing solution.
b/ 'Tavil' which offers a similar ability to PAL4.0 to sort different sized packages onto pallets. However the installed footprint looks to be all single level, i.e. it is physically larger than PAL4.0 for the same output.
c/ CSi offers a lower cost solution compared to PAL4.0 called 'Stack-Mate'. But 'Stack-Mate' doesn't offer two or more variable input feeds and looks to have a lower processing capacity per hour. CSi also offers the C5000 (which can handle 140 'cases' (input cartons) per minute) and which does look similar to PAL4.0 (which handles 40-100 cases per minute). It could be that the C5000 is aimed at the higher throughput end of the market. CSi also offers the lower capacity Taros unit that processes up to 60 cases per minute. So it looks like Scott's have found a slot in the market between those two CSi products.
d/ John Bean Technology (JBT) do not appear to offer conveyor belt type packaging systems at all (they do AGVs).

Despite not being 'unique in the market', Scott's PAL4.0 looks to be a competitive offering in a carefully targeted processing capacity niche.

Bandsaws
Kando, (a variation on 'Can do'?) is a New Zealand based company offering specialised equipment to different protein processing industries. Their 'Guardian' bandsaw brand looks like a serious competitor to Scott's 'Bladestop'. Kando have a North American sales and service office based in Omaha Nebraska. Guardian have a bandsaw safety protection feature with four cameras watching for the presence of any special blue coloured glove near the saw blade. The 'shut down time' is measured in milliseconds. As well as the meat processing industry, Guardian is already active in the supermarket and industrial sectors, where Bladestop is only just getting started. In addition to a camera, which cannot see your hands if they are obscured, Bladestop, in addirion, features a 'body sensing system' where skin contact can be sensed via its capacitive electrical potential because the operator is earthed to the machine via a plug in cable attachment.

This means Bladestop can offer that patented extra security feature that others in the market cannot match.

Mineral Sample Preparation
Rocklabs, are the Scott division that has previously works on bespoke end to end sample preparation equipment for mining companies. Cost, complexity and repairability of such an installation must all be balanced around value and potential down-time. Mining sample preparation generally involves three steps:
i/ A sample is dried in an oven at 100degC
ii/ The sample is crushed using a rock crusher
iii/ A portion of the crushed sample is pulversied into powder, like talcum powder, and a sample of that is taken for analysis.
Although the sample was prepared by Rocklabs, the actual analysis was undertaken by using products from much larger corporates with bigger budgets.

Rocklabs has developed a new AMS (Automated Modular Solution) that is a world first in linking three individual modules (crushing, pulverising and dispensing) in a single sequential unit, But such a full scale end to end sampling system can still be operated as single units if desired. This modular nature of the product guards against entire system failure, so reducing downtime. The new design also offers the benefit of a significantly smaller installation footprint.

Herzog, based in Germany, markets itself as "your partner for automatic sample preparation." Herzog offer a range of sample preparation equipment, through to the computerised spectroscopy equipment for chemical analysis (not supplied by Rocklabs). Herzog also serve a wider range of customers including foundries, recyclers and cement producers (three markets not targeted by Rocklabs). Options start with the automated benchtop sized TP20E, and top out with the shipping container sized 'Herzog Metal lab' (Within the MetalLab, an industrial robot takes care for handling of production, re-calibration and control samples.) The Herzog metal lab is a size up on anything from the standard Rocklabs product range.

It looks to me as though Rocklabs do not necessarily offer 'global technical superiority' in the equipment they sell (although the new AMS product may change that). Rather, Rocklabs edge has been built on service. That means having replacement parts and equipment 'in stock' rather than the approach of other companies where sample preparation is only one cog in a much larger business wheel. In the case of those other companies, equipment can be out of action for months, while waiting for a batch order of replacement parts to be made. When a multi-million dollar mining operation can be brought to a halt for want of a simple part, service really matters and Rocklabs delivers.

I cannot cover all products and all competitors in all markets in which Rocklabs operates. But the three examples I have chosen show that without being 'the biggest', Scotts are very adept at identifying a market niche and by design and desire are able to put together a compelling package in that market space.

Conclusion: PASS TEST

SNOOPY

[Snoopy]

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 13 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.



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.

Updating the table for FY2023

	New Zealand Manufacturing	Australia Manufacturing	Americas Manufacturing	Europe Manufacturing	China Manufacturing	Overall
Revenue (a)	$49.864m	$41.533m	$82.256m	$88.997m	$4.876m	$267.526m
Revenue %ge	18.64%	15.52%	30.75%	33.27%	1.823%	100%
Segment NPBT (a)	$21.634m	$2.321m	$3.197m	$4.981m	$1.901m	$34.034m (b)
subtract Admin NPBT Adjustment	($2.765m)	($2.302m)	($4.562m)	($4.936m)	($0.270m)	($14.835m)
equals NPBT Adjusted	$18.869m	$0.019m	($1.365m)	$0.045m	$1.631m	$19.199m
less Taxation (a)	($1.360m)	($0.409m)	($0.856m)	($1.116m)	($0.022m)	($3.763m)
equals NPAT adj	$17.509m	($0.390m)	($2.221m)	($1.071m)	$1.609m	$15.436m
Notional Tax rate (T / NPBTadj)	7.21%	2053%	-62.7%	2480%	1.37%	19.6%
NPAT profit margin (NPATadj / R)	35.1%	-0.94%	-2.70%	-1.20%	34.6%	5.77%
Divisional Interest Income (a)	$0.176m	$0.280m	$0m	$0.042m	$0.038m	$0.536m
add Interest Income Reallocated (a)	$0.004m	$0.003m	$0.007m	$0.008m	$0.000m	$0.022m
less Divisional Interest Costs (a)	($0.708m)	($0.060m)	($0.228m)	($0.354m)	($0m)	($1.350m)
less Interest Costs Reallocated	($0.166m)	($0.138m)	($0.274m)	($0.296m)	($0.017m)	($0.891m)
equals Divisional Net Interest Gain/(Expense) (I)	($0.694m)	$0.085m	($0.495m)	($0.600m)	$0.021m	($1.683m)
EBIT Adjusted (NPBTadj+I)	$19.563m	($0.066m)	($0.870m)	$0.645m	$1.610m	$20.882m

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 share price has risen sharply over the last year, ironically on the possibility of corporate activity with majority shareholder JBS considering an exit from the share register. However, if we consider Scott purely on operational performance, then the rise in share price is supported by the jump in underlying earnings and the accompanying 'growth premium' that a company growing at this rate (eps has been growing at 7.6% compounding over five years) deserves.

The 'country by country' divisions, tell of a diverse 'business-scape'.

1/ New Zealand has once again been 'a star' performer over FY2023. Look at that meat industry Net Profit Margin of 33% (Slide 12 of PR2023 on Protein). The NPM is even higher at Rocklabs (Slide 13 of PR2023, 40%)! The NZ NPM I calculated in the table above to be 35.1% overall.

2/ The United States operations see a much reduced EBIT loss in the Americas this year, down 79% from over $4m to $0.87m (still a loss though). The USA footprint remains an appliance line service centre in Dallas, and the Transbotics AGV manufacturing site at Charlotte in North Carolina. Scott's have changed the reporting categories between FY2022 and FY2023 for all of their manufacturing base business units. For the 'American manufacturing' business unit, readers may compare the reporting changes in the table below.

The comparative product categories in section A1 of the respective annual reports have changed from 'Systems', 'Products' and 'Services' (AR2022) to 'Protein', 'Minerals', 'Materials Handling' and 'Rest of Business' (AR2023)
The 'standard product' sales from the Americas (all Transbotics) showed sales of $9.378m in AR2022. Yet the retrospective comparison of the same sales period from AR2023 showed sales of $11.314m of 'materials handling equipment' (an apt description of Transbotics). I cannot explain the near $2m difference.

Americas Manufacturing Revenue	Systems	Products	Services	Protein	Minerals	Materials Handling	Rest of Business	Total
FY2022 (AR2022)	$31.005m	$9.378m	$12.081m					$52.464m
FY2022 (AR2023)				$12.579m	$0.998m	$18.324m	$20.563m	$52.464m
FY2023 (AR2023)				$34.925m	$1.913m	$28.387m	$17.031m	$82.256m

A couple of years ago I read an article about Transbotics migrating from laser guided navigation to GPS guided navigation. However true GPS guided navigation has a positioning accuracy of 5-10m at best. Frankly I can't see how that is useful when transporting goods from storage area to a manufacturing point in a factory (as an example). Perhaps it might be useful outdoors when a Transbotic train is moving goods from one building in a multi building manufacturing site to another? I had considered going from laser to GPS navigation a major generational change in AGV technology. I could be wrong. But today it reads more like an 'add on' with limited applications. Why did I bring this topic up? I was wondering if this was a explanation for a sudden jump in Transbotics sales (+55% YOY). But as I have explained, I doubt new GPS technology vehicles is the explanation.

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). Perhaps after a year of slow growth last year, that 55% lift is going towards restoring AGV growth to some kind of medium term forecast trend average?

3/ In Australia, management 'conservatively' estimated that this EBIT result would improve by $3.8m in FY2023 (AR2022 p57). That $1.1m EBIT 'profit target' turned into a $0.066m EBIT loss for FY2023. Not good, although this failure must be seen in the context of $41.553m in revenue (i.e. it was only a 2.9% forecasting error). The reason for this loss is hinted at on s15 of PR2023:
"Strategic focus away from one off complex projects sees loss-making mining systems revenue and associated low margin taper off,"

By contrast, Bladestop band-saws, made in Australia as I understand it, saw a 36-51% growth (depending on the market) in installations compared to FY2022 (PR2023 s13). Things look very promising in this space for FY2024, with the new smaller T300 designed for smaller businesses, like retail butcheries and supermarkets coming to market early in CY2024.

4/ Europe had a good year with revenue bouncing to $88.997m, 54% up on the $57.885m from the previous year. But in this context it was disappointing to see the 'divisional net profit' rise by only 25% (AR2023 p47,p48). In the past in NZ, such discrepancies have been explained by more overtime being paid and excess work being farmed out at 'contract rates'. I do not know if that is what happened in Europe.

5/ By my table above, China looks to have made a strong rebound into profit. Turnover has bounced back at $4.876m, albeit this is still down 67% on the FY2021 figure ($12.045m). With an allowance for corporate overheads taken into account, my table numbers are saying China, exclusively an appliance production line manufacturing centre, is the second most profitable arm of the company, behind only New Zealand. That being so it is curious to read in s15 of PR2023 that the:
"Appliance business remains challenging with the overall contribution to group profitability still being marginal."

A possible explanation for this discontinuity is that my 'cost apportioning assumptions according to revenue' are wrong and that the rebuild of the Chinese operation worksite into entirely new and larger premises has raised local costs in a way that shareholders do not fully appreciate. Nevertheless the appliance line business is destined to be forever lumpy as a result of the ebb and flow of big appliance line manufacturing projects.

So what conclusions can I draw from all this information?

SNOOPY

[BlackPeter]

Interesting analysis - cheers.

Looks just like another clever NZ company finding it difficult to gainfully compete in the rest of the world ... which makes sense.

Scotts main business (setting up customised automation solutions) requires close contact with the Gemba (in this case the place where the customers operates und uses their solutions). Scott is not the first and won't be the last company finding this difficult and expensive across the oceans. Can be done, but requires much more expense compared to local competitors, explaining Scotts small or negative margins overseas.

[Snoopy]

I had Scott for some years and it seemed a good bet with new technology for automating assembly lines in manufacturing and agricultural uses. It gave divs and increased in value until a large (Brazilian?) outfit bought a controlling interest. Divs reduced and share price went down and heeding Percy's wise words about getting out when private equity gets in, I sold out. Not been sorry.

I don't think it is accurate to describe JBS, one of the largest food companies in the world as 'private equity', even if the actual shareholding company that JBS used to get their controlling interest (JBS Australia) was not listed. However, I was not without concerns either Jerry. Looking back it was with some trepidation that I saw the 'new shares for control' JBS deal go through. However, over the 8 years since this happened I think it has been a good partnership.

Management of Scott has remained independent with the company free to consider growth options outside of the meat industry. What is more the 'shortage of capital' problem that brought JBS to the shareholding table in 2015 has largely disappeared. Debt is largely a working capital item these days. However, there was always the question on what would happen if JBS wanted to sell its stake. In AR2023 on p1 we get this:

"In mid June 2023 Scott announced its intention to undertake a strategic review and that the review would take several months. The strategic review is ongoing. There is no certainty that a transaction will result , and no decisions will be made regarding any potential outcome until the completion of the process."

From the June press release
"Scott Technology Limited (NZX: SCT) advises that after discussions with majority shareholder JBS (which owns 53.05% of the Scott shares), it intends...."

It is clear this 'process' was initiated by controlling shareholder JBS.

Then from 'Street Talk' on July 4th in the Australian Financial Review we get this:
https://www.afr.com/street-talk/pep-...0230704-p5dlnm

I am aware that JBS will be looking to maxmise the price of their stake. But if private equity, in the form of Pacific Equity Partners, gets control of Scotts, I think it will be a disaster. Stripping the company of cash and cranking up the debt is exactly what Scotts does not need. It was this exact fiscal position that brought them into the arms of JBS in the first place back in 2015. And of course if such a deal does go through, it is 'lights out' for another respected NZX listing, to go with the probable departure of MHM in the scheme of arrangement deal for that company announced to the NZX this morning.

SNOOPY