Hills Industries Ltd is expecting to increase its annual profit despite absorbing a higher interest bill, with more costs to come in the current half.
The outlook from the maker of the iconic Hills hoist clothes line comes after it reported a modest 0.7% rise in first half net profit to $24.12 million.
The market pondered the modest result for a while and then gave it the thumbs down, leaving the shares off 20c on the day at $4.90.
Revenue was up 8.9% to $555.74 million in the half.
An interim dividend of 13.5c a share will be paid, unchanged on a year ago.
The company's financing costs jumped by almost 50% to $6.541 million from $4.78 million in the December half of 2006 as the company was forced to pay more than $12.2 million for a shipment of pipe for a Queensland contract that turned out to be defective.
Hills had to pay higher financing charges to pay for that delivery which disrupted cash flow and working capital.
But with rates going up last November and yesterday, plus increases from banks outside those rises on business and other forms of finance, the impact is starting to be felt.
That amount has been provided for in the half
In fact Chairwoman Jennifer Hill-Ling warned interest rates were starting to hit Australian businesses.
"Interest rates are starting to impact businesses in Australia so we will continue our major focus on inventory reduction and working capital management.
"Although Hills is a complex set of businesses, we expect we will achieve an improved profit compared to 2007 notwithstanding a significant increase in our interest bill and consumer uncertainty in the face of volatile share markets and rising interest rates."
The company said it "will continue to pay around 100% of it's after tax profit to shareholders in interim and final dividends. This policy is subject to the same conditions as previously advised and obviously relies on the support of shareholders in relation to the Dividend Reinvestment schemes.
The 13.5c a share dividend can be taken as cash, reinvested in Hills shares at a 10% discount or reinvested as bonus shares at a 10% discount, or any combination paid on 31st March 2008.
As predicted at the AGM the results for the Group for the first six months were flat compared to the previous corresponding period, primarily due to the below budget performance of the Orrcon business.
"A restructuring of the Orrcon and Home and Hardware businesses is underway. We will deliver on a number of major pipeline projects in the Orrcon business in the six months and we expect strong results from the changes towards the third and fourth quarters," the company said.
"The results for the Orrcon Pipe & Tube business were disappointing. A combination of a high Australian dollar, significant over stocking by importers and aggressive market positioning by the combined Smorgon/OneSteel business all contributed to a significant compression in margins.
"When we released our 2007 results in August last year we expressed some concern about the competitive pressures in the Pipe & Tube industry following the acquisition of Smorgon Steel by OneSteel.
"At that time we expected to be successful in supplying large diameter pipe into a number of major infrastructure projects. Unfortunately the timing of these projects was delayed and although the majority of the expected projects have now been secured they will not be delivered until the third and fourth quarter of this financial year.
The company said the electronic security and entertainment business was the best performer in the half.
"The increase in sales and profit for the six months was very pleasing and returned this segment to be the best performer across the Hills Group," the company said.
Total revenues rose 8% to $151.849 million, with operating profit before interest and tax rising 25.4% to $20.956 million.
The company said that as announced to the market in December we advised that the results for the six months would include two individually significant items which would largely offset each other. Last year we announced that we had reached agreement to sell the Hills Edwardstown manufacturing site and that a profit above book value would be achieved. (a profit of more than $7 million after tax)
"We had previously advised the market that a contract we had secured to supply water pipe to a major customer in Queensland had been cancelled due to the quality of pipe received from our overseas supplier. Legal action has been commenced in relation to this matter; however the Directors consider it prudent to write down the value of the pipe (which is in storage at Wollongong) to expected recoverable value. We will aggressively chase a satisfactory resolution to this matter; however in line with our conservative approach we believe the above action is appropriate.
"Due to the vagaries of international trading laws we were forced to pay for the stock shipped by the overseas supplier notwithstanding the fact it was obviously not fit for purpose. This impacted on our cash flows for the period.
"Prior to Christmas we announced that we had made a conditional bid to acquire 50.1% of publicly listed BSA Limited (ASX code BSA). BSA is a leading provider of technical field installation resources to major entertainment and telecommunication providers as well as providing innovative engineered Air Conditioning and Fire Protection solutions to the building and construction industry. Due diligence is proceeding according to the agreed timetable and further announcements are expected towards the end of February.
"Funds raised under a proposed Share Purchase Plan (details of which will be released in coming months) will assist in the funding of this acquisition.
