Oldfields FY2016-17 results
New product development
CEO of Oldfields, Richard Abela, with Betty Tanddo, Hardware News Network publisher
CEO of Oldfields, Richard Abela, with Betty Tanddo, Hardware News Network publisher
 
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The company is in the early stages of marketing its paint brushes for a changing market
HNN Sources
Over the past five years a familiar pattern has emerged for smaller Australian manufacturing companies in the hardware sector. Typically, these are companies that have tried to maintain a majority Australian-manufactured product, and have found that this has not worked out. Inevitably their competitors sort out the quality and communication problems with overseas (mostly China-based) manufacturing, and are able to offer better value products, which then impacts on marketshare.

After witnessing a dip in their revenues, these companies make the move to overseas manufacturing, either completely, or on a hybrid basis, with some Australian operations maintained.

One of the more successful companies to go down this route is GWA Group, the South Australian-based manufacturer of sanitaryware and tapware. Nearly three years ago the company changed direction, divesting itself of divisions such as hot water heaters, moving most of its manufacturing overseas, and reducing its Australian manufacturing operations. It then revitalised innovation at well-known brands such as its Caroma sanitaryware, and began taking these products to market in a more effective manner.
Oldfields moves up

Oldfields is one of the latest Australian companies to travel down this same path - though in its case, as we say these days, "it's complicated". That complication comes from two areas, which both have to do with how what it terms its "consumer products" are distributed.

The company had a major contract with the now defunct Masters Home Improvement. As the company states in its annual report for FY 2016/17, that contract only provided sales for July and August of 2016, as Masters ceased resupply in September as it began a lengthy process of stock liquidation. Needless to say, this left something of a gap in Oldfields' sales forecast.

The second factor, which doesn't really apply to the reporting period, but is important for the company's future, is that it decided in late 2017 not to pursue a contract with the Independent Hardware Group (IHG) for distribution. According to the Oldfields 2017 Annual Report:
In the latter half of the year Oldfields completed negotiations with Mitre 10. These negotiations resulted in the termination of the prohibitive trading terms for sales through the Mitre 10 warehouse system. Commencing in the new financial year, Oldfields will distribute direct to Mitre 10 store owners that establish individual accounts. Whilst sales to the Mitre 10 network will initially be lower, all sales will now be profitable and should reduce the loss currently being incurred by the consumer division.
The Group is further developing its strategy to operate in multiple channels to market in order to reduce or eliminate excess costs within the value chain.

This is a fairly big step for the company to take, as it now faces the task of developing new channels to market. It is ramping up distribution to retailers in buying groups such as Hardware & Building Traders (HBT), as well as trade-oriented retailers who sell directly to professional painters. Fortunately, however, it has laid a solid groundwork for this new distribution through both better operational efficiencies and new product lines which seem a good match for the current market conditions.
Results

The results for Oldfields follow a pattern that is familiar in companies undergoing this kind of restructuring. For the current reporting period, FY2016/17, the company is showing a net profit of $0.312 million. Results for the pcp were marked by some writedowns, in particular $0.341 million for "impairment of property, plant and equipment", with the year producing a net loss of $0.722 million.

Overall sales were $26.721 million, down by 6.0% on the sales for the previous corresponding period (pcp), which was FY2015/16.

The real story, however, can be seen in numbers such as the company's administrative costs, which went from $2.735 million in the pcp, to $2.171 million in the current period, a savings of $0.564 million, or 20.6%. Marketing expenses were also reduced, coming in at $0.307 million, down by 22.1% on the pcp. These are very respectable operational efficiency gains for any company, but especially for a smaller listed company such as Oldfields.
Markets

In terms of what has been shaping the company, Chart 1 shows some of the underlying numbers. While pure sales of products, including painting equipment and sheds, have continued to decline, revenue from the installation and rental of scaffolding has continued to grow.

Comparing the company's two segments directly, consumer products sales came in at $7.722 million, a fall of 24.5% over the pcp. Earnings before interest, taxation, depreciations and amortisation (EBITDA) for this segment recorded a loss of $0.966 million, an increase in loss of over 40% on the pcp.

In contrast, scaffolding revenue was $19.13 million, up by 4.3% on the pcp. Scaffolding EBITDA also rose, by 13.5% over the pcp, coming in at $2.85 million.

Chart 1 (in the PDF magazine version of this story) shows the steady increase in revenue from scaffolding rentals, and the decline of sales. The scaffolding market in Australia is - to say the least - peculiar, with unexpected constraints in certain regional markets. Nonetheless, it is an area where Oldfields has operated for some time, and the underlying increase in construction in Australia - especially multi-storey - has boosted the overall market.

In the consumer products markets, Oldfields faces considerable competition from a range of painting tools and accessories manufacturers. As far as its Treco range of sheds, aside from the extra costs associated with having its production base in Australia, new competitors have emerged over the past two years. In particular, Globel Industries sells sheds that are produced in China and have what some regard as a marked similarity to those produced by Oldfields. The company has moved to counter these competitive forces in 2017 by starting to offer the sheds for sale directly online.
Outlook

There are three stages companies transitioning to overseas production typically go through: consolidation of operations, either through divestment of non-core activities, and/or reorganisation and reduction of administrative and other costs, as they cut staffing; development of new and innovative products to better suit a changing market, which are then manufactured overseas; and the marketing of those products, as they seek to both emphasise the long-established advantages of their brand, while also building on its new capabilities.

Oldfields is about to embark on the third part of its transformation process. With costs clearly in hand, the company has developed new ranges of products, including brushes. It is currently developing new channels to market, and further enhancing its brand image.

The key to these developments is its ongoing work in product innovation. Oldfields is, in particular, making a strong push into the painting brush market. Its approach has two parts to it.

The broader part of this approach is to present an overall simplified range of brushes. These break down into three areas: The "Classic" brush aimed at DIYers; the "Tradesman" brush aimed at tradies for whom painting is a part of their work; and the "Pro" brush for professional painters.

All three of these brushes have been improved over previous Oldfields brushes. The Classic comes in a total of 12 varieties, with six sizes of wall brush running from 25mm to 88mm, and two sized each of sash cutter, angle sash, and oval cutter. These brushes are made from 100% PET filament (polyester). Oldfields states that the pulling force on the brush has increased from 325g to 715g, paint load increased from 26g to 31g, and paint release increased from 15% to 32%.

The Tradesman brush range comes in a total of 12 varieties, including five wall brushes ranging in size from 38mm to 88mm, three sash cutters from 50mm to 75mm, two angle sash brushes, and two oval cutter brushes. The brushes are made from 70% PBT and 30% PET, providing a different brush feel from the Classic. Oldfields claims the pulling force has been increased from 518g to 546g, the paint load increased from 20g to 30g, and paint release from 30% to 37%.
The Pro brush

It is the third brush type, the Pro Series, that really reveals the second direction in which Oldfields is heading. While the other two ranges continue many of the company's past efforts, with improvements, the Pro indicates a more defined and genuinely new direction. Oldfields has spent a good deal of time and expertise coming up with what it considers to be an "ultimate" brush. It has developed its own filament material, which it calls E4 Mark II, which it claims has a number of significant advantages, including "maximum paint hold and release" and "continuous solid coverage". There are four sizes of wall brush that are square cut, but the rest of the range - three sizes of wall brush, three sizes of sash cutter and two angle cutters - are all oval shaped.

Very clearly what Oldfields is doing (in part) with this market move is supplying a range of independent stores - both hardware and paint specialists - with brushes that will at least equal if not exceed the quality of brushes supplied by Austbrush's Monarch brand (among others). This is a very clever move, as it provides a strong, non-Bunnings brand, and a point of clear difference for small suppliers.
Marketing

As part of this push into new product lines, it has become more important than ever before that Oldfields engages with marketing on two levels, both direct to the actual users of the product, and to the retailers who will be selling to those users.

Certainly the initial efforts the company has made show true promise. HNN attended an event held in Melbourne to help launch the new ranges of paint brushes (another event was held in Sydney). It was a smaller mid-sized event, which gave a select group of retailers and some end-users the chance to get to grips with the new range. There were sample packs of the brushes, and also an opportunity to try them out by using the painting station (complete with smocks) that Oldfields supplied.

It's an intelligent way to begin the marketing push, and it brings Oldfields staff into direct contact with elements of the market, and gives them a chance to get direct feedback on the brushes themselves, but also on how the audience responds to the marketing effort.

In terms of the marketing, Oldfields is faced with a familiar dilemma. On one hand with an over 100 year history in Australia, the company wants to stress the strength of its heritage. On the other side, the new paint brushes are the result of considerable modern technology being brought to bear.

Combining those two messages is difficult, and Oldfields is still experimenting with this. However, there are good signs in terms of marketing collateral such as brochures and advertisements, that the company is well on its way to developing a brand identity suited to the current market.
Analysis

In the somewhat hard cold world of stockmarkets it's to be expected that companies will be judged purely on the basis of numerical performance. However, it does seem to HNN that there should be room in the hardware industry itself to consider other elements of a company. Companies like Oldfields (and GWA Group) really did spend time, money and effort trying to retain their Australian workforces, and only gave up when it became evident this would not succeed. That they have managed to reorganise, and to build on their major strengths - product design, servicing of clients, and marketing - is something that really does deserve to be acknowledged.
HNN Sources


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