The Dawn Group is a manufacturer and distributor of local and international quality branded hardware, sanitaryware, plumbing, kitchen, engineering and civil products through a branch network in South Africa and selected African countries.
Dawn experienced the worst conditions since inception, with the three main impacts being:
• 35% impact:
o Volume decline due to weak building sector and infrastructure project delays
Earnings down in most businesses
(During the period, 59% of Group revenue came from the building sector and 41% from infrastructure)
• 50% impact:
o Largest operating profit decline from DPI and Incledon
Exacerbated by decreasing PVC prices and infrastructure delays
(Excluding the impact from DPI & Incledon, operating profit would have been down 33% instead of 48%)
• 15% impact:
o Currency changes reversed forex profit to loss
• The negative impact of foreign currency conversions in cross-border operations resulted in a foreign exchange loss of R1,2-million compared to a gain of R13,5-million in H1 F2009
Commenting on the results, Dawn CEO Derek Tod, said: "Even though this period was already a strong improvement from the results posted for the second half of last year, this has been the worst period we have ever experienced in our business. Volumes remained depressed due to a weak building sector and infrastructure project delays.
"However, in line with our business model, the earnings decline was somewhat mitigated by the demand for Dawn brands, as people go for quality, tested brands when the going gets tough. Our integrated business model also enabled Dawn to fill trucks more efficiently than single-product competitors where trucks often had to be sent out half empty. As has happened over the years, refurbishments and additions - often urgent spend people cannot postpone even in poor economic conditions - and non-residential volumes - such as shopping centres hospitals and schools - somewhat buffered delays in infrastructure-related revenue.
"So, although we are certainly not happy with these levels, group operating margin of 6,5% was already an improvement from the low of 2,6% during the second half of the 2009 financial year. Since the second half of F2009 Manufacturing margin improved from 3,6% to 8,7%, with Trading's margin improving from 1,7% to 4,0%, showing some turnaround starting to flow through in our business."
Looking forward, Tod said: "Dawn's business model remains robust. We are now right-sized for the market, without having compromised our capacity for any upturn. Furthermore, new product lines continued to be introduced across our group, which will benefit Dawn's earnings going forward. Through our focus on operating cost and interest expense management, a R180-million annualised saving will be realised from the second half of the year, with the full impact of interest savings to come through as well through lower gearing and better borrowing rates.
"DPI's factory loading levels have already improved significantly, which will result in a better performance in the second half. Improved margins and government's priority spend in water and sanitation, which has now become critical spend, should benefit us across the board, with a particularly positive impact on DPI and Incledon. Libra is also set on a turnaround path, with factory optimisation and an expected return to profit in the second half of the year.
"All other businesses should improve due to a return of an inflationary environment on input prices, although this is still dependent on volumes not declining further. Inventory pipelines are significantly depleted and any recovery in demand will be preceded by increased stocking and restocking of the pipeline, which will benefit all Dawn companies.
"Therefore, in line with all the actions taken by management, we believe there will be an improvement in the second half, with better prospects anticipated from F2011 if the infrastructure and building sectors recover as expected."
FINANCIAL SUMMARY
• Revenue down by 16% to R1,872-billion (2009: R2,219 billion)
o Price deflation of 9% and a 7% decrease in volumes
• Operating profit declined by 48% to R121 million (2009: R235-million)
• Earnings per share was down 63% to 32,6 cents (2009: 87,1 cents per share) and headline earnings per share was also down 63% to 31,9 cents (2009: 87,1 cents)
• Balance sheet management remained a priority.
o A R400-million debt reduction programme was completed near the end of H1 2010, which mainly consisted of a R300-million rights issue and the R70-million from the sale of Lasher
o A debt restructuring, with a new multi-bank platform introduced, improved borrowing rates and a correction between short and long term funding, also took place
o Gearing is now at its lowest level in the past 10 years at 25%
o Bad debt levels were maintained below 0,1% of revenue
• Net asset value was 2,4% higher at 525,7 cents (2009: 513,5 cents) per share
OPERATIONAL SUMMARY
Trading (contributed 64% to group revenue)
When comparing to the six months to December 2008, revenue was down 12% and operating profit down 50%. This was caused by:
• A 6% decrease in volumes due to infrastructure delays and a 6% decrease in price due to the raw material price decreases. Margin therefore declined from 7% to 4%
When comparing to the second half of F2009, it shows that there was already an improvement during his period, with the revenue up 10% and operating profit up 164%. Margin improved from 1,7% to 4,0%.
Manufacturing (contributed 32% to group revenue)
When comparing to the six months to December 2008, revenue was down 22% and operating profit was down 46%. This was caused by:
• A R145-million (38%) decline in revenue from DPI - DPI caused Manufacturing's s margin decline from 12,6% to 8,7%.
When comparing to the second half of 2009, it shows that there was already an improvement during his period, with the revenue decrease down to 8% and operating profit up 120%. Margin improved from 3,6% to 8,7%.
Services (contributed 4% to group revenue)
The strategy for creating Support Services paid off in the period, as it presented a unique opportunity to contain or drive costs down.
When comparing to the six months to December 2008, revenue was down 5% and operating profit down 41%. This was caused by:
• Below inflation charges to group clients to hold costs down and the knock on effect in DDC and Cargo correlated to lower volumes across the group
When comparing to the second half of 2009, it shows that there was already an improvement during this period, with revenue up 6% and a return to profitability.
