v2 Report - Additional Information Supplement
SGL Speirs Group Limited
Press releases
| Speirs Group Limited SGL
19 Sep, 2007, 14:57 SPEIRS GROUP POSITION UNCHANGED |
|---|
| SPEIRS GROUP POSITION UNCHANGED Given recent concern regarding the status of finance company operations in New Zealand, Speirs Group Limited wishes to assure NZX and the market that its circumstances have not changed in any material sense since the company filed its last report to NZX. The Company is issuing this assurance because of the appearance of an article in this week's Independent Financial Review which contains a number of serious factual errors. The Company is addressing these errors directly with the newspaper. Speirs Group Limited 19 September 2007 ENDS |
Securities Commission Letter
29 August 2007
Kathryn Rogers
Director - Primary Markets
Securities Commission
P O Box 1179
Wellington
Email: kathryn.rogers@seccom.govt.nz
Dear Madam
Reference: Disclosure Obligations under Securities Act 1978
Your letter dated 24 August 2007
Introduction
It is clear that during the past weeks the global financial debt markets and, to a lesser extent, the global share markets, have been in disarray. It is probable that this disarray has materially and adversely impacted upon the vast majority of the participants, both large and small, in banking and finance both around the globe and in New Zealand. Along with the whole finance industry in New Zealand, Speirs Group Limited is caught up in the impact.
In New Zealand we have the added effect of the failure of several significant finance companies, accompanied by severe, adverse and often ill-informed (as to the finance industry) media commentary. This commentary, still on-going, has placed an emphasis on all finance companies in New Zealand being at risk and has failed, so far, in any significant way, to be sector selective. The media coverage has been of the finance industry as a whole, and has generally condemned the vast bulk of the participants.
The opinions of the Directors of Speirs Group Limited as to the effect upon our company of this general disarray must be taken in the broader context of the current financial climate in which we all unexpectedly find ourselves: both the impact of current global financial debt markets and the adverse public opinion currently being freely expressed in New Zealand.
Prior to the global debt market impasse and the most recent failure of three finance companies, and completely unrelated to those events, the Speirs Board had reassessed, and will continue to assess, the company s likely forward position.
Speirs Finance business
Since 2005, Speirs has changed the emphasis of its lending to commercial clientele and away from consumer clientele. This transition is almost complete. Commercial and Industrial clients now represent more than 90% by value of our new lending business.
In a competitive market, the value propositions offered by our company, coupled with personalised service from our national agent network, continue to allow our book to grow in both quality and volume. The total book currently stands at a little over $250M.
Overdues and the value of impaired accounts continue to drop in number and value on a monthly basis. Overdues are within industry benchmarks. The Speirs book profile has:
o A reasonably even geographic spread throughout NZ
o No offshore loans
o No loans to any single customer group that exceeds 1.4% of the total Speirs book
o No loans to any groupings in any way associated with Speirs - other than to one long-standing client (limited to $2.1M) and to the Omega-3 venture with Massey University interests and disclosed below (limited to $3M)
o No loans supporting property development of any kind.
o With minor exceptions, all loans are supported by first ranking securities over vehicles, plant and equipment that we have funded for our clientele, very often with supporting personal guarantees and/or General Security Agreements.
o All loans provide a positive and monthly inwards cash flow to the group, ranging from $10m to $12m each month.
Speirs Foods business
Speirs is not a stand-alone finance business. Of equal importance to the company is the industrial/commercial/distribution arm of the company Speirs Foods. Speirs Foods primarily provides fresh salads and processed vegetables to the supermarket industry, nationwide. This is a summer business. We have wintered through during this first half of our financial year. All profits from Speirs Foods are earned in the second half. In the first half of this financial year to date, volumes are on a par with last year.
Speirs Nutritionals business
This new venture (60% owned by Speirs) is in partnership with Massey University interests. It is well advanced. The plant was opened on 31 July 2007 by the Minister for Research, Science & Technology, Hon Steve Maharey. The immediate purpose of the venture is to produce and market micro-encapsulated omega-3 oil for supply to food manufacturers around the world, using leading edge technology developed and patented by Massey s Riddet Centre.
The product is drawing interest from significant food industry participants in New Zealand, Australia, North America, Europe and Asia. While start-up costs must be absorbed in this early development phase, we expect modest revenue in the second half of this financial year, and profitability in the 2009 financial year.
Profit Expectations
As previously reported to NZX and to the public at large, Speirs will likely be impacted this year by a loss of value on tax credits available to the company due to the up-coming reduction in company tax rates commencing 1 April 2008. The company has significant tax credits available that may not be realised until a period subsequent to the introduction of the reduced tax rates. As a result the tax credits currently available to the company will lose some 9.1% of their future value.
While the finance business is returning profits, seasonal issues associated with the foods business, Nutritional s omega-3 commencement costs and the loss of value to tax credits will likely result in a modest company-wide loss for the first half of this financial year.
External Events
In July and August 2007, two significant events have clearly impacted upon both the banking and finance industries: The failure of several finance companies in NZ. The disarray of the debt and share markets worldwide impacting upon the NZ financial scene. Apart from its own share price, Speirs is not directly impacted by movements in the share market.
Speirs has two major funding lines:
Secured Stock issued to the investing public; and a portfolio of securitised assets (rated A-1+ by Standard & Poor s) funded by a Speirs in-substance subsidiary issuing commercial paper to the NZ wholesale money markets. This arrangement has provided Speirs, and continues to provide Speirs, with funding that is perfectly matched to the inwards cash flow profiles of our securitised loan book. The programme is capped at $130m. Certainty for the funding is provided by a standby facility from a major New Zealand bank, a support facility that has never yet been called upon during the ten year life of the programme. The standby facility is available to the in-substance subsidiary.
Each of these major funding lines supplies Speirs with its funding needs, in very nearly equal proportions. As part of its risk management process, the Speirs Directors some years ago established a Committed Cash Advance Facility ( CCAF ) from a major bank. The CCAF is capped at $13m and may be accessed, subject to adherence to terms and conditions agreed with the bank and trustee, when unforeseen circumstances arise, similar to those that have currently arisen in the financial marketplace. This CCAF is stable and secure. It is available until 31 March 2008, when we have no reason to believe that it will not be renewed for a further twelve month term. We use it from time to time, with fluctuations on a daily basis. Drawings under this facility at 29 August 2007 amount to $8m.
While there was a minor hesitation by secured stock investors following the first recent finance company failure, consequent withdrawals quickly abated. During that period, maturity re-investments dropped from the usual average of 78% to 71%. The second finance company failure again caused a hesitation from some secured stockholders, resulting in only a small number of withdrawal requests. At the time of writing this letter there appears to be no reaction to another company s failure that was announced this morning. While it is not possible at the time of writing this letter to predict with precision the immediate future re-investment rate of maturing secured stock, it is the view of Directors, based on current information and assessment of the market, that there will be no significant deterioration in the re-investment rate.
Attached is a more detailed fact sheet covering some critical business data. This data has been posted on our website at www.speirs.co.nz.
Current Prospectus and Investment Statement
Both the current Prospectus and the current Investment Statement for Speirs debt securities state, inter alia:
Business Risks Facing Speirs Group Limited
The principal business risks facing the Company as they exist at the date of this Prospectus are:
Funding Risks
The Company relies heavily upon funding from the New Zealand public. As
the Company obtains a large part
of its funding through the issue of debt securities a risk arises
in that the Company could experience difficulties in raising funds at
short notice to meet its lending
and debt repayment commitments, particularly as a result of
any adverse market perception. The Company manages this risk by
maintaining sufficient liquid funds and committed cash lines with a
Registered Bank to meet its commitments
based on cash flow forecasts and historical cash flow requirements.
Directors Opinion
Other than discussed above, and having again reviewed the Company s forward cash flow projections, it is the opinion of the Directors that: the Company is in compliance with Section 37A(1)(b) of the Securities Act 1978 and that the directors remain of the opinion, after due enquiry, that there are no circumstances which have arisen which would materially adversely affect the trading or profitability of the Company, or the value of the Company s assets, or the ability of the Company to pay its liabilities within the next twelve months; the financial position of the Company has not materially and adversely changed during the period from the date of the most recent financial statements contained or referred to in the registered prospectus; and there has been no material adverse change in respect of both the Company s liquidity position and the asset quality analysis set out in the most recent registered prospectus.
Yours sincerely
Speirs Group Limited
Nelson Speirs
Executive Chairman
Chairman's report
Review of Operations
FINANCIAL PERFORMANCE
Speirs Group Limited recorded a loss after tax, attributable to the Company’s shareholders, of $1,919,000 for the year ended 31 March 2007. The result is disappointing in terms of Speirs Directors’ expectations at the start of the 2007 financial year, when they believed that the Company would improve on the profit of $842,000 achieved the previous year.
By the end of the first half, it was clear that this would not be the case. Shareholders were advised accordingly. Speirs Finance Division’s margins were being squeezed by the combination of an environment of slower growth and intensifying competition and by the Company’s deliberate move to lower-risk, higher-value lending transactions that reduced the prospect of any repetition of the bad debt surge that flowed from more liberal lending practices followed by its Finance Division in the financial years 2001 to 2005.
In March, Directors confirmed that the tail of bad debt flowing from the 2001 – 2005 period would be larger than expected at the beginning of the year and that realisations from the recovered assets would be lower than expected.
Speirs Shareholders were advised to expect a loss. Speirs Group was informed on 20 June 2007 by a client company, Xpress Vehicle Rentals Limited (“Xpress”), that Xpress was unable to honour funding arrangements it had previously agreed with Speirs Group due to the impact of alleged improper activities by an individual in another aspect of Xpress’ business.
Speirs Group is concerned that this development will materially and adversely impact upon Xpress’ on-going viability and place at risk the funding that Speirs Group had, in good faith, made available to Xpress.
Speirs Group was not advised of this issue until 20 June 2007. However, it is clear that the alleged improper business activities affecting Xpress occurred prior to 31 March 2007. Consequently, Speirs Group Directors consider that, in terms of Financial Reporting Standard 5, paragraphs 4.1(a) and 5.1, Speirs Group is required to adjust the amounts recognised in its financial report for the year ended 31 March 2007 to reflect this ‘adjusting event’ that has come to the knowledge of Speirs Directors well after the balance date.
Accordingly, the directors of Speirs Group Limited decided that an additional expense of $1.6m (entitled “Diminution in Operating Lease Assets held for Re-Lease”) be provided for. This expense allows for the diminution in value of certain assets held at 31 March 2007 by Speirs Group Limited for the benefit of Xpress.
Speirs Group is taking every possible step to eliminate or mitigate the potential loss due to the unexpected developments at Xpress. The Company’s total revenue in 2007 declined by 2.0% to $43,835,000. Advances by its Finance Division rose 5.3% to $173,800,000 and Finance Division revenue increased 1.5% to $31,651,000. Speirs Foods Division sales revenue declined, in very competitive conditions, to $12,184,000.
The Company’s costs in 2007 were increased by two nonrecurring items: substantial compliance costs to prepare the Company for the adoption of the New Zealand equivalent International Financial Reporting Standards on 1 April 2007, and start-up costs from the establishment of Speirs Nutritionals Limited, a new venture between Speirs Foods Division and Massey University interests.
The effect of an increase in bad debts and doubtful debt provisioning and the Xpress issue (referred to above) are the principle drivers of the result in the 2007 financial year. Bad debts and doubtful debt provisioning in 2007 amounted to $3,318,000, compared to $1,726,000 the previous year.
Some $2,300,000 – or 66% - of the 2007 bad debt and provisioning arose from loans made prior to 31 March 2005 under lending practices that have since been changed. The Directors consider that high quality management and new processes – including significantly tightened lending policies, and upgraded asset valuation and recovered asset disposal practices – introduced in its Finance Division during the last 12 to 18 months are both proving effective, and that, after an exhaustive review of the receivables portfolio in the past year and further heavy provisioning, the significant residual bad debt problem has been properly addressed.
Speirs Group Limited paid a fully imputed dividend of 3 cents per share on 26 June 2006. No further dividend will be paid for the 2007 year.
FINANCIAL POSITION
Total assets rose to $297 million (last year $280 million), largely due to increases in Finance Division receivables, assets leased to others, and cash holdings. There was also a $540,000 injection of equity resulting from the decision by Directors Donald Speirs and David Speirs to exercise their options to acquire a total of 540,000 additional shares in the Company. These options were exercised on 27 September 2006.
Public support of Speirs Group’s on-going Secured Stock offerings remains solid and Speirs Securities Limited’s commercial paper, issued through the securitisation programme, continues to be rated A-1+ (extremely strong) by Standard & Poor’s. The Company achieved an average rate of retention among Secured Stockholders whose stocks matured during the last year of 78%.
The balance sheet now reflects permanent capital resources, including Perpetual Speirs Bonds, amounting to $24.050 million, and a permanent capital percentage of 7.82%.
SPEIRS FINANCE
Key features of Speirs Finance performance in 2007 have already been covered in this report. However, there were other significant developments during the year. A comprehensive review of the Company’s credit policy was completed The Division now places heavy emphasis on quality, asset-backed lending, primarily to fund the vehicle and equipment needs of small to medium businesses nationwide. The Company no longer lends to customers seeking finance for transactions in the higher risk sectors of the second-hand vehicle market and does not lend for property development.
New lending processes have been introduced. The Division’s quality assurance programme has been further intensified. Its collections and asset management capabilities have been strengthened. Systems and controls throughout the Division are now subject to closer monitoring and continuous review and enhancement.
Staff and agents have been involved in the review of policies, practices, products and services, as part of the update of business strategies for the five years 2006 - 2010. A number of new product and service offerings have been developed during 2007 as a result of this process.
SPEIRS FOODS
Speirs Foods remains a leader in the supply of fresh salads and fresh-cut vegetables to the nations’ supermarkets and food service providers. The Division supplies fresh product New Zealand-wide, six days a week. While encountering a competitive marketing environment in 2007, operational efficiencies were implemented to maintain a satisfactory profit position for the year.
The Division continued to apply its “operational excellence” programme to upgrade produce procurement and standards, its customer response system, more sophisticated quality control and internal audit processes, increased management and staff training, and the application of performance measures and recognition.
Throughout the past year, Speirs Foods was also heavily involved in the formation of Speirs Nutritionals Limited, an initiative originated by the Division.
SPEIRS NUTRITIONALS
Speirs Nutritionals Limited is a 60% owned subsidiary company formed in the latter part of the financial year. The minority 40% shareholding is held by Massey University and others closely associated with Massey University. The purpose of establishing Speirs Nutritionals Limited is to commercialise Omega-3 intellectual property developed by scientists at Massey University. Speirs Nutritionals will manufacture, market and license Omega-3 technologies which allow various food products to be enriched with high dosages of Omega-3.
The technology developed at Massey enable the Omega-3 emulsion to be merged into dairy products, bread, beverages and other food lines while avoiding the wellknown Omega-3 ‘fishy’ taste. There is worldwide interest in this development.
A new facility is currently under construction at our Speirs Foods’ Marton premises. Construction is proceeding on budget and on time and we expect to commence production of the Omega-3 emulsion in the second half of 2007.
STAFF AND AGENTS
The Directors continue to be impressed by and grateful for the way in which our people respond to challenge and change. They go the extra mile. Every year throws up a new set of demands. This past year has certainly been no exception. Ever changing markets, products, laws and regulations – and opportunities – continually present themselves. Our staff and agents are routinely involved in both the development and refinement of the Company’s business growth strategy and are strongly committed to its vision, values and implementing its business development plans.
This commitment helps to assure Directors that, though the Company has experienced difficulties in recent years, it is well on the way to returning to the successful track that it has followed for most of its history.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
As required by law, the Company will adopt the new New Zealand equivalent International Financial Reporting Standards (“IFRS”), effective from 1 April 2007. The adoption of the new standards will mean significant changes in the manner of our Company reporting. Work on the introduction of IFRS is largely complete, but at a very substantial compliance cost in both direct and indirect expenditure.
Many issues arise. They include, but are by no means limited to, issues arising from the adoption of IFRS that have the potential to affect our securitisation programme and our public borrowing programme, together with the joint understandings between the Company and the Trustee for our Debt Obligation-holders.
The Company is in the process of addressing these issues with its stockholders and the Trustee to enable it to continue to operate its borrowing programme as it has been under Generally Accepted Accounting Practices until now, and in conformity with the requirements of the Trust Deed
SPEIRS PERPETUAL BONDS
In October 2006, a meeting of Speirs Perpetual Bondholders agreed to a change in the terms of issue of the Bonds to the effect that interest would be payable on the Bonds conditional upon a Directors’ formal resolution authorising each interest payment. This change allows the Company to classify the Bonds as Equity, as was originally intended.
OUTLOOK
Looking ahead, the Directors expect:
a) Government’s announced intentions with regard to infrastructure spending will create larger market opportunities for our Finance division clientele.
b) further start up costs will be incurred by partly owned Speirs Nutritionals Limited. While this partly owned subsidiary should move into monthly profitability in the latter part of the 2008 financial year, these costs will impact adversely upon the overall Group financial performance for the financial year. Beyond this new 2008 financial year we expect Speirs Nutritionals Limited to provide a positive return to the Group.
c) the significant changes made over the past twelve to eighteen months in both the management and processes of the finance division will see that division return to acceptable underlying profitability in this new financial year.
d) economic, legislative, and regulatory changes – including new tax laws and employees’ savings subsidy requirements – could affect the Group’s results.
At the conclusion of the 2007 financial year, Speirs Group Limited remains in a sound position to cope with adverse trends that might result from on-going speculation about the stability of some elements of the finance sector. The company derives advantage from the demonstrated loyalty of its investor base and the strength of its wholesale money market securitisation programme.
In the longer term, with the progressive implementation of the business growth strategy now in place, we are looking ahead to better results.
Nelson Speirs Donald Speirs
Executive Chairman Deputy Chairman
Director's Report
