SCT - Scott Tech

[Snoopy]

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Ah yes - and we don't know the agenda of the majority shareholder (meat processor JBS) which without doubt will guide the management team. I don't think that increased earnings would be their highest priority.

For those who came in late.....

Actually we do know the JBS agenda as it was fully disclosed at takeover time in November 2015. From p6 of the Northington report on the takeover proposal:

"We understand that JBS is attracted to Scott because of the potential to apply Scott's technology throughout its global operations., providing the potential to deliver higher efficiency, higher yields and productivity gains."

"In theory Scotts could provide its service to JBS under the existing ownership structure., without JBS taking an ownership position in the company. However Scott will be in a far stronger position to take advantage of opportunities if it is well capitalised and has the financial resources to scale operations as required."

Things have really gone south since one year ago. It would be a much cheaper buy-out today for JBS if that was the overall plan. I feel like a minnow (or a mushroom) in this game.

JBS want control so that they can consolidate SCT within their own company accounts A buy out is not on the agenda, or at least it wasn't in 2015. JBS gained control by buying 51% of the company for $1.39 per share. So even at $2 -from a JBS perspective, SCT doesn't look cheap.

I am going to say that one and one half of these 11 plants are now robotised, leaving 9.5 to go. A full robotised installation today (X-ray Primal & Grading, Middle, Forequarter and Hindquarter) will cost the customer (like JBS) $12m to $13m. Scott gives a 'payback guarantee' of 18 months. This payback is achieved via improved yield, because robotized cutting is more precise, and results in less waste that a 'human knife wielder'. Gains in productivity (because robots don't get tired) and fewer accidents (robots don't sue) are a bonus. JBS hasn't done enough trialling yet to know if the 18 month (1.5 year) payback will be achieved. But based on past experiece from other installations, I am guessing it will be.

So: 9.5 (no. installations in Oz to do) x $12.5m (average cost) = $120m that JBS will ultimately spend.

Annnual payback with everything up and running will be:

$120m /1.5 = $80m

JBS have indicated they will not be paying 'mates rates' for their installations, even if they become controlling shareholders of SCT (Do I believe that? I'll take the claim at face value for now).

So: Outlay $120m (a one off).
Savings over ten years $80m x 10= $800m

Net gain: $800m-$120m = $680m

Amount laid out to 'get to the top of the customer list' : $15.4m to $50.4m (depending whether 80% or 20% of share holders accept Scheme of Arrangement).

Worst realistic case return for JBS over 10 years (calculation slightly quick and dirty, because not all installations will be installed at year one, but then again neither will all the outlay be paid in year one- but still indicative) :

$50.4m(1+r)^10= $680m

r=29.7% compounding!

This is simply a staggering return on investment. No wonder JBS Australia are keen to seek a controlling position in SCT at what, in investment terms, is an incredible bargain basement price.

Above is my analysis from 2015. Admittedly I can now see some flaws in it. But if the idea is to save $680m in costs for JBS over ten years, then the JBS share of the Scott's profit over ten years is puny by comparison - in the vicinity of $70m perhaps. For JBS it is Scotts rolling out the robotics to their plants that matters. The actual profitability of Scott Technology on the way effectively makes no difference to JBS's overall investment objective.

SNOOPY

[Snoopy]

JBS Australia Meat Processing Plants
Location	Plant	Animals Processed	Output Capacity per day	Scott Robotics Installed?
Queensland	Dinmore	Cattle	3400	Yes (pre EOFY2015)
Queensland	Beef City (Toowoomba)	Cattle (grain fed)	1134	Yes (pre EOFY2015)
Queensland	Rockhampton	Cattle (grass fed)	1400
Queensland	Townsville	Cattle (grass fed)	1800
New South Wales	Riverina	Cattle (grain fed)	600
New South Wales	Scone	Cattle (grass fed)	650
Victoria	Brooklyn	Cattle	1400
		and 'Small Stock'	8200
Victoria	Cobram	Lambs	3200
South Australia	Bordertown	'Small Stock'	5000	Yes (pre EOFY2015)
Tasmania	Devonport	Cattle (grass and grain fed)	28
		and Pigs	85
		and Lambs	540
Tasmania	Longford	Cattle	450
		and 'Small Stock'	1600

Actually we do know the JBS agenda as it was fully disclosed at takeover time in November 2015. From p6 of the Northington report on the takeover proposal:

"We understand that JBS is attracted to Scott because of the potential to apply Scott's technology throughout its global operations., providing the potential to deliver higher efficiency, higher yields and productivity gains."

<snip>

Above is my analysis from 2015. Admittedly I can now see some flaws in it.

What is wrong with my 2015 analysis? If you expect the benefit of a fully automated beef boning room to be in place in the near future then nothing. However, as of right now, only the lamb plants can benefit from full automation. It would also appear that the Devonport plant in Tasmania is a boutique plant that probably wouldn't benefit from full automation.

With the capacity to process up to 8,000 small animals carcasses per day (equivalent to 4000 cattle), it looks like even the largest meatworks in Australia (like Dinmore) can be satisfied with one automatic boning room operation. The potential for further lamb processing operation installations would seem to be restricted to Cobram Victoria.

Breaking down the revenues involved in installing such automation could result in a bill something like this

1/ X-ray Grading ($3m)
2/ X-ray Primal Cutter ($12m)
3/ Middle Machine (prepares rack and loin) ($12m)
4/ Hindquarter leg de-boner ($8m)
5/ Forequarter Processing ($8m)
6/ Knuckle Tipper (removes knuckle top from hind leg) ($6m).

That represents a total outlay for JBS Australia of around $49m for a fully automated lamb boning room at Cobram.

For the beef processing plants, of which there are six not using meat slicing robotics yet, there are two potential machines to install at each site.

1/ the "Beef Rib Cutter / Scorcher" ($8m)
2/ the "Beef Hock Cutter" ($8m)
This represents a total outlay for JBS Australia beef processing of 6 x $16m = $96m

Installations already made for JBS show an 18 month (1.5 year) payback period is realistic. So potential incremental net savings for JBS Australia over a ten year period add up to:

10 x ( $49m + $96m) / 1.5 = $966m

Take away the installation costs and you get a net gain of: $966m - ($49m+$96m) = $821m, or over $80m per year. Not a bad incentive to keep everything on track from a JBS perspective!

SNOOPY

[BlackPeter]

...
The actual profitability of Scott Technology on the way effectively makes no difference to JBS's overall investment objective.

SNOOPY

This is exactly what I meant. Great investment for JBS, but minority shareholders have the problem that their interests (a reasonable capital return either as dividends or as capital growth) is not high on the priority list of the majority shareholder. Explains why the SP is dropping.

[BlackPeter]

EPS figures over the years I pulled from Scott Tech's annual reports:
2009:1.1
2010:8.5
2011: 16.6
2012:16.7
2013:13.6
2014: 6.2
2015:13.8
2016:13.3
2017:13.2
2018: 14.3
2019: For first half of year is 6.6, last year it was 4.2 for first half of the year

Of course, we can only speculate what this years EPS would be so instead better to look at last years figures. 14.3 is more than 13.2. It's a marginal increase hence why I said weak EPS growth.

You'll need to forgive me as I'm definitely not a financial expert. Perhaps I have this wrong, and if so, please let me know. I'm not hugely knowledgeable on EPS and other financial measures of a company which is probably why I missed certain things with Scott Tech. I guess what confuses me is how revenue growth can be so strong while EPS growth isn't.

Also, my point with my post is about how the share price has decreased so dramatically. I understand how you personally don't value Scott Tech's current share price, but I'm referring to the huge 40+% downtrend that has seemingly not been triggered by any major event within the company.

Fair enough. My spreadsheet does not go that far back - and I guess with earnings growth it is similar as with share price trends - if you want to make a point you nearly always find a time window to support it. Remove in your list the first two years - and you can clearly see that EPS is actually dropping ;

One other thing to consider with SCT is that their typical business is very "lumpy". They don't produce high numbers of comparable products which consumers buy evenly spread across the year, but their typical projects are worth millions or tens of millions of dollars, every project is different often unique and they often take more than a year to completion. This means one individual years EPS (whether it is higher or lower than the average) is quite meaningless and might just be due to them finishing (and billing) a large project at the end of one or in the beginning of the next FY. What does count is the long term average and the long term trend.

Makes it obviously a bit harder to see a trend change ...

Ah yes - and how can they have significant revenue growth without earnings growth? Possible explanations would be:
1) They buy growth (by increasing the capital and the number of shares) or
2) Their margins reduce or
3) some of their projects went pear shaped and needed additional money to secure (which is a subset of 2 - taking additional earnings to secure revenue);

I suspect in Scotts case at least 1 and 3 will apply. JBS made a capital injection - didn't they ... and there is obviously the DRP. Last AGM they talked about some projects which took longer and did cost more than planned .... Not sure about generic margins in the industry.

Obviously - they might as well invest earnings into future growth ... and I am sure management would argue that this is what they do (and it well might be true).

[kiwidollabill]

What is wrong with my 2015 analysis? If you expect the benefit of a fully automated beef boning room to be in place in the near future then nothing. However, as of right now, only the lamb plants can benefit from full automation. It would also appear that the Devonport plant in Tasmania is a boutique plant that probably wouldn't benefit from full automation.

With the capacity to process up to 8,000 small animals carcasses per day (equivalent to 4000 cattle), it looks like even the largest meatworks in Australia (like Dinmore) can be satisfied with one automatic boning room operation. The potential for further lamb processing operation installations would seem to be restricted to Cobram Victoria.

Breaking down the revenues involved in installing such automation could result in a bill something like this

1/ X-ray Grading ($3m)
2/ X-ray Primal Cutter ($12m)
3/ Middle Machine (prepares rack and loin) ($12m)
4/ Hindquarter leg de-boner ($8m)
5/ Forequarter Processing ($8m)
6/ Knuckle Tipper (removes knuckle top from hind leg) ($6m).

That represents a total outlay for JBS Australia of around $49m for a fully automated lamb boning room at Cobram.

For the beef processing plants, of which there are six not using meat slicing robotics yet, there are two potential machines to install at each site.

1/ the "Beef Rib Cutter / Scorcher" ($8m)
2/ the "Beef Hock Cutter" ($8m)
This represents a total outlay for JBS Australia beef processing of 6 x $16m = $96m

Installations already made for JBS show an 18 month (1.5 year) payback period is realistic. So potential incremental net savings for JBS Australia over a ten year period add up to:

10 x ( $49m + $96m) / 1.5 = $966m

Take away the installation costs and you get a net gain of: $966m - ($49m+$96m) = $821m, or over $80m per year. Not a bad incentive to keep everything on track from a JBS perspective!

SNOOPY

To Add...

They do have customers in the pork and chicken space - apparently the EU/USA gear has issues with the variability in carcass sizes that you get in this part of the world (particuarly free-range reared).
I've been advised all but one (I suspect AFFCO) of the majors in NZ have at least 1x install. Their backstop strategy for customers who claim higher effiencies or dont have the volume to justify the larger gear is to sell the 'bladestop' bandsaws on purely an H&S perspective.
Apparently some of their patents are already being flouted by manufacturers in the EU, patents are only there to line the pockets of IP lawyers IMHO.

[Snoopy]

Apparently some of their patents are already being flouted by manufacturers in the EU, patents are only there to line the pockets of IP lawyers IMHO.

By 'flouted' do you mean 'blatantly copied' ? Or do you mean the patent has been successfully designed around?

I have heard it said that a patent is a very expensive way to put your ideas in the public domain so that those with deeper pockets than you can copy those ideas in a way such that it becomes cost prohibitive for you to sue them. For many, putting their 'great idea' behind a new recognizable 'brand' and relying on trademark protection going forwards is a better way to go.

The above might be true for an individual. But companies can afford lawyers. So the fear of 'Scott Technology' 'breathing down a competitors neck' probably has more deterrent value than saying 'Mr A Arnold from Dunedin' half-way-around-the-world might sue you.

Of course such conflicts do not necessarily end in 'cease and desist' battles. Scott's may be amenable to licensing their technologies at a modest charge. IIRC one of the Scott joint venture companies that held one of these patents received a royalty of 10c per carcass processed. It might be well worth someone interested in exploiting one of the patents to pay that as the improvement in meat yield would no doubt be well north of 10c per carcass in value.

SNOOPY

[Snoopy]

,
The are other machine products, the most high profile being 'Bladestop', a failsafe boning saw for sale to the industry.

'The Real Pet Food Company' has bought three new Scott 'Baldestop' bandsaws in 2017 (two in NZ and one in Australia) for $NZ89,000 each. One replaced a three month old bandsaw that cost $NZ25,000.

This is a good example of a customer willing to pay top dollar to obtain a safer working environment. The replacements were the response to a staff member losing the tip of a finger while using the old equipment.

SNOOPY

[kiwidollabill]

By 'flouted' do you mean 'blatantly copied' ? Or do you mean the patent has been successfully designed around?

I have heard it said that a patent is a very expensive way to put your ideas in the public domain so that those with deeper pockets than you can copy those ideas in a way such that it becomes cost prohibitive for you to sue them. For many, putting their 'great idea' behind a new recognizable 'brand' and relying on trademark protection going forwards is a better way to go.

The above might be true for an individual. But companies can afford lawyers. So the fear of 'Scott Technology' 'breathing down a competitors neck' probably has more deterrent value than saying 'Mr A Arnold from Dunedin' half-way-around-the-world might sue you.

Of course such conflicts do not necessarily end in 'cease and desist' battles. Scott's may be amenable to licensing their technologies at a modest charge. IIRC one of the Scott joint venture companies that held one of these patents received a royalty of 10c per carcass processed. It might be well worth someone interested in exploiting one of the patents to pay that as the improvement in meat yield would no doubt be well north of 10c per carcass in value.

SNOOPY

Blatently copied....

[Snoopy]

Great summary Snoopy, it definitely gives me confidence in Scott Tech in the long term. I don't get it though. Everything seems really promising as far as potential growth for this company. They have strong revenue and profit growth, albeit slightly weaker EPS growth (so far anyway), yet the share price has dropped more than $1.5 over the past year (50c in the past 2 weeks). That is an FBU type disaster but yet there is no apparent major issues at scott tech as far as we know. Anyone have an thoughts to explain the weak share price? Is it just the weak EPS grwoth + market conditions favouring high yield, larger companies vs smaller growth companies right now?

Sanctus, you ask a very poignant question. i think part of the answer is because Scott's business is so heavily weighted into overseas markets, some of the issues affecting Scotts are not reported here. After a fair bit of internet trawling, I believe I have found at least a partial answer to your question.

1/ Delayed Roll Out of DEXA in Australia

DEXA (Dual-Energy X-ray Absorptiometry) is an X-ray system that has found a use within the meat industry to estimate the yield of an animal carcass. DEXA technology is used by Scotts as a potential first key to unlocking a full automatic boning room project. At one stage, an industry lead internal roll out to every Australian red meat abattoir site looked on the cards.

An industry time line of what has happened, as regards the DEXA roll out, is here:

https://www.beefcentral.com/processi...line-of-events

Meat and Livestock Australia (MLA) got very keen on DEXA in November 2016, recommending a fast roll out to all industry members. They made plans to borrow $150m to fast track rolling out DEXA equipment to 90 abattoirs in Australia. However after an Ernst & Young review, by May 2017 a materially smaller $10m roll out at just four plants (three lamb and one beef) was commenced. A smaller trial program was deemed prudent because DEXA is unproven in beef in a commercial setting. And beef is by far the largest meat processing market in Australia. Ernst & Young were in favour of a three year delay in initiating a wider roll out, meaning industry players are having to largely fund their own installations for now. The estimated cost of buying and installing each unit outlined in MLA’s initial funding proposal is $1.45 million per unit ($1m for smaller units for sheep and goat plants, $2m for larger units for cattle plants). Notwithstanding these costs do not include other likely, and potentially considerable, expenditure such as plant modifications that may be needed to accommodate a DEXA unit. For some plants these costs will be substantial, in particular older plants that are already cramped for space. Future industry development funding has now switched away from the $150m loan proposal to implementing an industry levy. But no coherent plan had been signed off by March 2019. As a result, all such developments are still plant owner funded, with some government R&D assistance.

The whole evaluation process seems to have been caught up in a wider Australian Senate Report on "The effect of market consolidation on the red meat processing sector". This was finally published in September 2017. The slower any trial, the further down the track benefits of Scott's being able to build on the DEXA technology are pushed. A July 2018 report highlights slow progress

https://www.beefcentral.com/processi...ield-analysis/

If alternative scanning technology, the European E+V whole carcase yield camera, ends up preferred, this does not integrate with Scott's add on robotic systems. That could deal a serious blow to Scott's being able to transfer their lamb boning knowledge into the beef industry.

As a current window on industry progress, there was a March 19 2019 announcement: Three new lamb installations will include one unit in Western Australia, a second unit in Victoria and one in NSW. Company identities have not yet been disclosed. All will be retro-fitted into existing lamb plants, and some are expected to be linked to robotic lamb carcass cutting systems (the robotic bits presumably made by Scotts).

2/ Underperformance from Alvey in Europe

We don't hear much about it, but the size of Scott's business in Europe (made up of mainly Alvey) now matches, in staff numbers at least, those working in Australasia. This means the performance of the European business has a large effect on how the Scott's group as a whole is traveling. My post 717 provides evidence that Alvey's contribution since acquisition by Scotts in FY2018, as reported in AR2018, has deteriorated. Europe is having a difficult time, what with trade wars with Trump and uncertainty caused by Brexit. This could very well be the cause of a continuing significant decline in palletising, conveying and warehouse automation solutions, specialised in by Alvey, being bought and sold within Europe. The only comment in the Scott half year report letter in March, regarding Europe, was that Alvey was being integrated with Scott's German division. There was no market comment on Europe, although in the same paragraph it was noted that Transbotics in the United States was providing a good growth platform. Reading between the lines: Europe in the doldrums; No growth to speak of?

SNOOPY

[Snoopy]

2/ Underperformance from Alvey in Europe

We don't hear much about it, but the size of Scott's business in Europe (made up of mainly Alvey) now matches, in staff numbers at least, those working in Australasia. This means the performance of the European business has a large effect on how the Scott's group as a whole is traveling.

I am finding it difficult to get a feel for the reach of Alvey. To assist with this, I have been perusing the Alvey website ( www.alvey.eu ) and have produced some 'summary information' for the brands they are palletising, conveying and warehousing.

Consumer Goods

Frozen Vegetables (Multi-line palletisation)

Ardo Dujardin, McCain, Bergia Frites, Mydibel, Clarebout, Pasfrost, Farm Frites, Pinguin, Lamb Weston Meijer

Potato Snacks (Multi-line palletisation) Gentle handling a key requirement

Lamb Weston Meijer, PepsiCo, Roger & Roger, Veurne Snack Foods

Dairy Products ('An absolutely key market segment' Work in all geographical markets with an Alvey presence. Challenge: open trays with delicate products.)

Danone, Maitres Laitiers du Cotentin, NOM UK, Yoplait, Friesland Campina, MilkLink, Olma, Fromagerie Bel, Molkerei, Alois Müller, Royal A-ware, Glanbia Müller UK, Savencia Fromage & Dairy

Ice Cream (Special expertise for low temperatures)

Haagen Dasz, Rosen Eiscream, SGS Frigicrème, Thiriet

Drinks (high capacity packing lines)

Coca Cola, Chaudfontaine, Emig, Korunní, Kuracjusz

Beer (Crates and Kegs, strong in Czech Republic)

Budweiser Budvar, Litovel,, Carlsberg, Pilsner Urquell, Heineken, Guinness

Coffee (Operate in largest coffee factory in Europe)

Douwe Egberts, Kraft Foods, La Maison du Café

Bakery & Flour Products (palletise 1kg packs, use robots for larger bags)

Brioche Pasquier, Panavi, Chateau Blanc, Penam, Délifrance, Puratos, Harrys, Vandemoortele

Poultry (client one of world's biggest poultry suppliers)

LDC, SNV

Feminine and Baby and Incontinence Paper Hygiene Products

Essity Germany, Essity Netherlands, Essity Poland, Essity Russia

Home Detergents

McBride, Procter & Gamble, Vandeputte

Cosmetics (few customers)

Clarins, Gols Mediterranée

Industrial Goods

Hospital Laundry System (France only, Sorting and picking linen for departments)

Assistance Publique Hôpitaux de Marseille, Centre hospitalier de Lagny, CHU De Reims, SIH Caudan, Assistance Publique Hôpitaux de Paris, Hôpitaux de Toulouse, Jensen, CHU Clermont FerrandColruyt

Automotive (includes 'Maestro' software for 'just in time' delivery)

Deldo, Doyen Auto, MC Syncro, Volvo

General Manufacturing

Autajon, Sagem, Eternit, SEW, Isover, Schneider, Knauf, PGB

Alcyon, Durand Production, Saunier, Altadis, EPC Newspapers, Schulman Plastics, Bio c´Bon, Monsanto, Synerlab, Daikin, Nestlé Purina, Vandeputte, De La Ballina, Philip Morris, Western Newspapers

Logistics	(including pioneered drive by collection of internet ordered retail goods)

Atlas Copco, Eandis, Geodis, SB Logistics, bpost ,Eriks, Nationale Loterij Belgium, Spicers, CL Group, Euroterminal. Oesterbank, Spie, CNH, Fournial, Paul Boyé, Velleman, Colart, Franky Vleeswaren, PGB, Vergeer Kaas

Colruyt, Morrisons, Darty, Ubaldi, Décathlon. Delhaize. Leclerc

SNOOPY