DuluxGroup (ASX:DLX)

Patrick Houlihan
CEO & MD
Market Cap (AUD): 3.64B
Sector: Materials
Last Trade (AUD): 9.35 +0 (+0%)
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1. About

DuluxGroup Limited is a leading marketer and manufacturer of premium branded decorative paints, texture coatings, protective coatings, industrial coatings, powder coatings and woodcare coatings for the existing home, new housing, commercial construction, infrastructure, and industrial markets. DuluxGroup employs approximately 4,000 people in Australia, New Zealand, Papua New Guinea, South-East Asia, China, and the United Kingdom. Dulux has been manufacturing in Australia since 1918 and in New Zealand since 1935.

Dulux also plays a critical role in protecting and improving the spaces and infrastructure,including providing the protective coatings for Australia's landmark Sydney Harbour Bridge since 1932. Its portfolio of iconic, premium brands includes Dulux, Cabot's, Berger, British Paints, and Porter's Paints.

The Company’s key points are

  • 24 Manufacturing facilities
  • 24 Distribution centres
  • Approximately 120 company owned trade outlets

2. Business model

    

The Group operates the following divisions:[1]

 

Divisions

Revenue ($’000)

% of Total Revenue

% of Profit (before Int, Tax, Dep & Amort)

Profit drivers[2]

Dulux ANZ

$982,238

53.3%

74.4%

Sales Revenue Up $44.9m (+4.8%)

  • Revenue grew 5.3% in the Australian business (~90% of segment) and grew 2.6% in New Zealand (flat in Australian dollars)
  • The Australian decorative paint market grew at 3.3%, with the first half growing ~5% and the second half reverting to ~1.5%

EBIT Growth of $7.8m (+4.7%)

  • A strong result, with EBIT margin maintained, notwithstanding a higher raw material price environment (titanium dioxide and latex increased well above inflation) and higher Merrifield depreciation

Selleys & Parchem ANZ

$269,222

14.6%

14.2%

Selleys (~65% Of Divisional Revenue)

  • Selleys grew revenue 3.5% and EBIT grew marginally
  • The core Selleys retail business (95% of revenue) grew both revenue and EBIT at ~5%, driven by a strong performance with key retail customers in positive markets
  • Revenue and EBIT declined in the small Selleys trade business

Parchem (~35% Of Divisional Revenue)

  • Parchem grew revenue 2.5% and EBIT was flat
  • The Australian business (94% of revenue) grew revenue by ~4% and EBIT by ~6%, reflecting good progress in growing the Fosroc construction chemicals business and reshaping the Avista decorative concrete and Flextool equipment businesses
  • Revenue and EBIT declined in Parchem New Zealand

B&D Group

$188,657

10.2%

10.2%

Sales Revenue Up $6.2m (+3.4%)

  • Overall market growth, led by the Australian existing home market and commercial
  • Positive price outcomes reflected improved mix with a shift towards premium products

EBIT Growth Of $1.5m (+8.2%)

  • EBIT increase was driven by revenue growth and margin improvement, while increasing investment in marketing and growth projects (e.g. ‘B&D to You’ vans)

Lincoln Sentry

$203,503

11.0%

6.6%

Sales Revenue Up $8.3m (+4.3%)

  • Revenue growth was led by the cabinet hardware business, in generally positive markets (biased to renovations) with modest share growth and positive price outcomes

EBIT Growth Of $1.3m (+9.0%)

  • EBIT growth was driven by revenue, good fixed cost control and lower amortisation, partly offset by margin pressures in competitive markets

Other Businesses

$214,300

11.6%

5.2%

  • Yates ANZ grew revenue and EBIT complemented by the Organic Crop Protectants (OCP) acquisition (in June 2018)
  • The Dulux PNG business increased revenue and EBIT in continued weak economic conditions
  • The PT Avian-Selleys Indonesia joint venture (formed in August 2017) made a small EBIT loss ($0.5M) due to establishment costs. The joint venture is expected to commence trading by the end of the calendar year
  • The DGL UK business increased revenue due to channel distribution expansion of paint sales into Homebase, own stores and online

Corporate & Unallocated

($14,206)

(0.8%)

(10.6%)

N/A

3. Strategy

      

Key strategies include:[3]

 

Company’s strategy is to put its consumers and its customers at the centre of everything the Group does. With this foundation, Dulux Group aims to build on its market leadership positions in Australia and New Zealand to deliver consistent and sustainable year-on-year growth as it progresses developing a material offshore business in a measured way.

 

The Company aims to do this by:

  • Leveraging and continuing to invest in its core capabilities across its portfolio of businesses including brands, consumer engagement and marketing, innovation and technology, retail and trade customer service and experience, architectural and engineering specification, and supply chain excellence
  • Focussing on markets and market segments that deliver consistent growth and strong returns, with an emphasis on the relatively stable existing home renovation and maintenance markets, typically 65% of Group revenue – as context, Australia has about 10 million existing residential dwellings and approximately 70% are more than 20 years old
  • Focussing on categories that are premium, branded and that leverage innovation, technology, and supply chain excellence
  • Continuing to foster its strong culture, underpinned by its values and behaviours and its focus on encouraging diversity and developing its talented workforce.

 

Within this over-arching strategy there are three specific components:

  • Defend and extend its market-leading Dulux, Selleys, and Parchem businesses in Australia, New Zealand and Papua New Guinea
  • Grow its Other Home Improvement businesses (Yates, B&D Group and Lincoln Sentry) so they realise their potential
  • Continue to explore and develop pathways to build a meaningful offshore business in a measured way through extending its coatings and Selleys capabilities into new markets

 

DuluxGroup aims to deliver growth through a combination of organic strategies (e.g. continuing to increase market share whilst maintaining margins) as well as joint ventures and acquisitions where they make strategic sense.

4. Markets

   

The Group operates in markets including:[4]

 

Industry (Australia)

Industry Revenue

Growth Rate (annual 13-18)

 

Paint and Coatings Manufacturing   

$3 billion (2018)

 (1.0%)

Furniture and Floor Covering Wholesaling

$5 billion (2017)

 1.6%

Adhesive Manufacturing

$708 million (2018)

 (1.9%)

5. Competition

 

Major competitors include:[5]

 

  • Nufarm Limited (ASX:NUF)
  • Imdex Limited (ASX: IMD)
  • Orica Ltd (ASX: ORI)

6. History

 

1918[6]   

Founded British Australia Lead Manufacturers (BALM) in Sydney, Australia. Acquired The Australasia United Paint Company

 

1933   

Acquired Australian ownership of the registered Dulux Trade Mark and gained access to the newly developed paint technology from E.I Du Pont de Nemours

 

1939   

BALM commenced manufacturing paint in Wellington, New Zealand

 

1946   

Acquired 57% of BALM by ICI Australia

 

1948  

Terminated the association with Du Pont, although ownership of the Dulux registered trademark was retained

 

1955   

Increased  ICI plc holding in BALM to 70%

 

1964   

Changed BALM status to a public company and name changed to BALM Paints Ltd

 

1969   

Acquired Walpumur Co. Ltd.

 

1971   

Changed BALM Paints name to Dulux Australia Ltd

 

1986   

Acquired 100% ownership of Dulux Australia Ltd. by ICI Australia

 

1987   

Acquired Acratex Materials Pty. Ltd

 

1988   

Acquired Berger Group’s operations in Australia, New Zealand, PNG, and Fiji, adding Berger Paints, British Paint and Selley to the Company

 

1993   

Acquired assets of Kenbrook Group Pty Ltd including Cabot’s woodcare license

 

1996   

Combined the Dulux business (Dulux, British paints, Berger, Walpamur and Cabots) and Selleys to form the Consumer Products Division of ICI Australia

 

1997   

Sold shareholding in ICI Australia by ICI plc

 

1998   

Changed name of ICI Australia to Orica Limited and established the Orica Consumer Product Group. Sold Consumer Product Technical Markets division to PPG Industries

 

1999   

Acquired RotaCota

 

2004   

Acquired Yates Garden Care Business

 

2006   

Commissioned Woodcare manufacturing facility in Dandenong, Melbourne

 

2008   

Commissioned Powder Coatings manufacturing facility in Dandenong, Melbourne, Acquired Sopel, Shanghai, China

 

2010   

Demerged Consumer Products from Orica

 

2012   

Acquired Alesco Corporation Limited including Parchem construction products & equipment, B&D roller doors, ATA electronics openers, and Lincoln Sentry cabinets and windows product

 

2015   

DuluxGroup acquired the Sydney based Porter’s Paints business

 

2016   

Acquisition of Craig & Rose Paints Company in Edinburgh, United Kingdom

 

2017   

Launch of Avian Selleys joint venture in Indonesia

 

2018   

Acquisition of Organic Crop Protectants

DGL Camel International (DuluxGroup's 51% owned joint venture company) has entered into an agreement to sell most of its coatings portfolio in Hong Kong and Mainland China to Yip's Chemical Holdings Limited

7. Team

 

Board of Directors[7]

 

Graeme Liebelt – Chairman

Patrick Houlihan – Managing Director and Chief Executive Officer

Stuart Boxer – Chief Financial Officer and Executive Director

Joanne Crewes – Non-Executive Director

Jane Harvey – Non-Executive Director

Andrew Larke – Non-Executive Director

Judith Swales – Non-Executive Director

Simon Black – Company Secretary and General Counsel

 

Management Team

 

Patrick Houlihan – Managing Director and Chief Executive Officer, DuluxGroup

Stuart Boxer – Executive Director and Chief Financial Officer, DuluxGroup

Patrick Jones – Chief Operating Officer- Dulux Paints and Coatings

Richard Stuckes – Chief Operating Officer, DGL International

Brad Hordern – Executive General Manager, DuluxGroup Supply Chain

Martin Ward – Executive General Manager, Selleys Global, and Parchem

Jennifer Tucker – Executive General Manager, Yates

Murray Allen – Executive General Manager, B&D Group

Siobhan McHale – Executive General Manager, DuluxGroup Human Resources


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8. Financials

 

2018 Full Year Results Presentation

 

Financial Year 2017/18 (ended 30 September):[8]

 

Division

Revenue ($’000)

% Change

Profit (bef Int, Tax, Dep & Amort) ($’000)

% Change

Dulux ANZ

$982,238

4.8%

$191,729

6.7%

Selleys & Parchem ANZ

$269,222

3.3%

$36,702

0.6%

B&D Group

$188,657

3.4%

$26,238

5.5%

Lincoln Sentry

$203,503

4.3%

$16,896

1.7%

Other Businesses

$214,300

(3.6%)

$13,447

(6.2%)

Corporate & Unallocated

($14,206)

(5.5%)

($27,351)

(3.3%)

Total

$1,843,714

3.3%

$257,661

5.0%

9. Risk

 

Major risks include:[9]

 

Material Business Risks

Strategic Risk

Growth

An inability to identify and execute sustainable growth opportunities in local and offshore markets, and/or the risks associated with pursuing further growth, could impact the Company’s long-term profitability

 

Key customer relationships

DuluxGroup’s largest retail customers represent a significant portion of total revenue. Loss of revenue from key customers could impact the Company’s profitability.

 

Competitive threats/ market disruption

DuluxGroup’s multinational competitors or new disruptive entrants could bring product innovations or lower cost to the Australian market, threatening DuluxGroup’s market share and/or operating margins.

 

Manufacturing and Supply Risks

Business continuity including catastrophic event or hazard in manufacturing and distribution operations and/or IT systems

DuluxGroup’s operations could be impacted by accidents, natural disasters, failure of critical IT systems, cyber or other catastrophic events that have potential to materially disrupt its operations.

 

Key input volatility

Supply disruption and declines in the availability of key input materials, price volatility (including the effect of foreign exchange fluctuations) could negatively impact revenue and/or operating margins.

 

Industrial relations

DuluxGroup product supply could be materially impacted by prolonged industrial disputes related to the renegotiation of collective agreements.

 

Brand And Product Risks

Erosion of brand equity

DuluxGroup has a portfolio of strong, premium brands with products which are trusted and relied upon for their quality and premium performance. A significant loss of brand equity could have a material adverse effect on revenue and profit.

 

Product liability

Litigation relating to product liability or product recall could result in reputational damage or a materially adverse financial impact.

 

Safety and Regulatory Risks

Safety incident

A death or major injury in the workplace would be devastating for employees and families and could jeopardise the Company’s reputation as a first-choice employer.

 

Regulatory requirements and appropriate business culture and conduct

DuluxGroup’s reputation and license to operate is dependent upon consistently demonstrating its stated Values and Behaviours and its ability to comply with regulatory requirements including safety and environmental practices, competition and consumer law, and anti-corruption legislation.

 

Loss or exposure of sensitive data

Sensitive data relating to DuluxGroup, its employees, suppliers, customers or consumers may be lost or exposed resulting in adverse financial, reputational or regulatory impacts

 

Market Risk

Interest rate risk

Interest rate risk refers to the risk that the value of a financial instrument or the associated cash flows will fluctuate due to changes in market interest rates. The Group is primarily exposed to interest rate risk on outstanding long-term interest-bearing liabilities. Interest rate risk on long-term interest-bearing liabilities is managed by adjusting the ratio of fixed interest debt to variable interest debt. Under the Treasury Policy, a maximum of 90% of debt with a maturity of less than five years can be fixed and a maximum 50% of debt with a maturity of five years or greater can be fixed. The Group operated within this range during the financial year ended 30 September 2018. As at 30 September 2018, the Group had no fixed interest rate hedging in place.

 

Foreign exchange risk

Foreign exchange risk - Transactional

Transactional foreign exchange risk refers to the risk that the value of a financial commitment, recognised asset or liability or cash flow will fluctuate due to changes in foreign currency rates. The Group’s foreign currency exposures are USD, NZD, RMB, HKD, EUR, GBP, and PGK. The Group’s policy allows hedging to be undertaken to protect against unfavourable foreign currency movements on purchases, however, there is flexibility as to when hedging is initiated and the instrument used to hedge the risk (typically forward exchange options or forward exchange contracts). In determining which instrument to use, consideration is given to the ability of the Group to participate in favourable movements in exchange rates. The Group is exposed to foreign exchange risk primarily due to purchases and sales being denominated, either directly or indirectly in currencies other than the functional currencies of the Group’s subsidiaries.

Foreign exchange risk – translational

Translational foreign exchange risk refers to the risk that the value of foreign earnings (primarily NZD, PGK, GBP, and RMB) translated to AUD will fluctuate due to foreign currency rates. The Group’s policy allows for economic hedging to be undertaken to reduce the volatility of full year earnings. At 30 September 2018, the Group did not have any outstanding derivative instruments pertaining to foreign currency earnings (2017: NIL).

 

Commodity price risk

Commodity price risk The Group is exposed to commodity price risk from a number of commodities, including titanium dioxide, tin plate, hot rolled coil steel, and some petroleum based inputs, for example latex and resin. The cost of these inputs is impacted by changes in commodity prices, foreign currency movements, and industry specific factors. To the extent that any increases in these costs cannot be passed through to customers in a timely manner, the Group’s profit after income tax and shareholder’s equity could be adversely impacted. For major suppliers, this impact is managed through a range of contractual mechanisms which reduce the impact or provide sufficient visibility over when these impacts will affect the Group’s profit.

 

Liquidity Risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as and when they fall due. The Group manages liquidity risk by:

  • Maintaining adequate levels of undrawn committed facilities in various currencies that can be drawn upon at short notice
  • Retaining appropriate levels of cash and cash equivalents
  • Spreading the maturity dates of long-term debt facilities (to the extent practicable)
  • Monitoring liquidity requirements taking account of forecast business performance and critical assumptions (e.g. input costs, sales price and volumes, exchange rates)

 

Credit Risk

Credit risk is the risk that a customer or counterparty to a financial asset fails to meet its contractual obligations. Credit risk arises principally from the Group’s cash and receivables from customers and derivative financial instruments. The maximum exposure to credit risk is the carrying value of receivables. No material collateral is held as security over any of the receivables. The Group has policies in place to ensure customers who wish to trade on credit terms are subject to credit verification procedures, including an assessment of their independent credit rating, financial position, past experience, and industry reputation. The Group has some major customers who represent a significant proportion of its revenue (refer note 2). In these instances the customer’s size, credit rating and long-term history of full debt recovery are indicators of lower credit risk. Credit risk from derivative financial instruments and cash arises from balances held with counterparty financial institutions. To manage this risk, the Group restricts dealings to highly rated counterparties approved within its credit limit policy. The allowable exposure to the counterparty is directly proportional to their credit rating. The Group does not hold any credit derivatives or collateral to offset its credit exposures. Given the high credit ratings of the Group’s counterparties at 30 September 2018, it is not expected that any counterparty will fail to meet its obligations.