Kathmandu IPO: Prospectus Analysis

I was right about this one, took about 2 years longer to come unstuck but come unstuck it did.

Will it work with a new person? Well out of all the retailers in this part of the world id give Rod Duke 50/50.

Hes getting the company for what its worth by the way.


Right from the get go the Kathmandu IPO Prospectus (Requires free registration at Share Investor Forum to download ) is all about the flash, the sheen, the image and impact of the Kathmandu brand - at first glance the document looks more like a catalogue for their product rather than a prospectus - and to be sure the brand is part of what the present owners are selling and it is a great loyally followed brand but what of the bones, the inside, the guts of the company, how are they selling prospective investors that?

Well in short the present sellers are not telling investors the full story. Pro Forma figures - figures based on an "as if" scenario rather than reality - are used throughout the document.

Pro-forma figures do not show investors the true state of a companies books and this alone should have prospective investors running for the hills (without a Kathmandu backpack).

I will go on however.

For example pro forma sales figures from 2007 and 2009 indicate that in 2007 Kathmandu sales were $A151.4 million and in 2009 A$215 million and respective store numbers were 58 and 82. That works out roughly the same level of sales per store for each of these years. Very hard to get this sort of consistency in any sector of the economy, least the retail industry. These particular figures have clearly been manipulated or "smoothed" to make things look good and we can safely assume this for other comparisons made. This makes the figures misleading to say the very least.

It is pointless to make any further comment about the prospectus' other figures or comparisons used except to say they cannot be trusted.

Some more key points but they rank in far less import for potential investors than do the inclusion of pro forma figures to make comparisons year to year to sell the company.

1. management are more than halving their stake - not alot of faith there in the company and they are insiders!

2. $85 million in debt to be paid off - not a high figure considering indications that debt in July 2008 was more than double that.

3. IPO costs of more than $15 million, far too high.

4. Investors will not know how much their application for shares will cost them until after the IPO has closed. At NZ$2.01 - $2.32 per share a large range in price exists.

5. A major emphasis throughout the prospectus on growth through increases in store numbers - an expensive way to grow and to be fueled by more company debt or perhaps additional capital raising from shareholders.

6. Omitting financing costs and essential financial data like historical NPAT.

I was skeptical of the Kathmandu IPO before perusing the prospectus but after reading it I have come to the conclusion that this IPO is a complete and utter stinker.

Too much emphasis is on the media grabbing sexy Kathmandu brand and not enough on what is important when an investor needs to make a wise decision - full, frank and accurate financial statements and not pro forma monopoly style accounts that are only fit to wipe your bum with.

I am appalled at the gall of the present owners, the accounting firm signing off on pro-forma accounts and the NZX for allowing this kind of bullshit and calling it sufficient disclosure pre-IPO.

I could be wrong and this IPO could be the best listing since Coca Cola but investors cannot tell that from reading disclosures in the prospectus with accuracy what sort of condition Kathmandu the company is in - why are the present owners playing shell games with investors one would have to ask?

If you sink your money into this one you deserve to lose it.


Related Share Investor Reading

What is Jan Cameron up to?

Kathmandu @ Share Investor

Kathmandu IPO: Jan Cameron lands a blow to IPO
Kathmandu IPO: What is it worth?
Kathmandu IPO: Retail Interest HighKathmandu IPO: A tough mountain to climb
Kathmandu No.1 but IPO should get the Bullet
Download the detailed Kathmandu Value Cruncher Report - Requires free registration at Share Investor Forum to download
Download Kathmandu IPO Prospectus

Discuss Kathmandu at Share Investor Forum

Related Amazon Reading


Initial Public Offerings by Richard F. Kleeburg
Buy new: $26.70 / Used from: $27.70
Usually ships in 24 hours

Pro Forma Becoming the Norm on Earnings Statements.(Applied Micro Circuits Corp, Qualcomm earnings reports): An article from: San Diego Business Journal by Mike Allen
Buy new: $5.95
Available for download now


c Share Investor 2009

Share Investor Q & A: Briscoe Group CEO Rod Duke

Briscoe Group Ltd [BGR.NZX] hasn't been immune from the current recession and its impact on the overall retail sector but it has fared better than most. The group consists of three major brands; Bricoes, Rebel Sport and Living and Giving, with Urban Loft a small chain present in the Auckland market only.

The company listed on the NZX in 2001 but has been a patchy investment in during its 9 year run on the stockmarket.

However with no debt and healthy cash reserves in the bank, the company, while not setting the stockmarket on fire has been around for decades and CEO Rod Duke has managed it well since he joined the company in 1988.

Rod, when he does make public statements, is always forthright with his opinions but he rarely talks about himself or his business preferring company results to speak for themselves.

All the more reason to stick Rod under the spotlight and find out more about him and his company.

The Q & A was conducted by email.




The Q & A

Share Investor - Your 2010 half year result of $6.64 million after adjustments for accounting, depreciation changes and company tax rate was up on the 2009 half year result. What contributed to these profit levels and in comparison to last year how do you feel the company has performed considering the overall economy and the performance of your competitors?

Rod Duke - The major items this year were sales growth and the on-going efficiencies in our cost of doing business. We were very pleased with our profit performance this year and our improvements compared across the retail market.

SI - How much has a focus on cutting day to day business costs contributed to profit and is there more fat to cut in 2011?

RD - The focus on our costs was a significant contributor and in the years to follow we intend to challenge ourselves to deliver an improvement in productivity and profitability.

SI - Do you expect higher sales levels for 2011 and will that be at the expense of margins or not?

RD - Our internal budgets have provided for an improvement in sales but not at the expense of margin.

SI - Looking towards 2011 do you think you will be able to beat the 2010 result and if not why not?

RD - We remain cautiously optimistic but much will depend on issues beyond our control.

SI - Is this the worst recession you have experienced in terms of retail and/or personally?

RD - Yes, Yes

SI - What are some of your business and management principles and what strategic planning method do you adhere to?
  

RD - Our core management principle is to do the basics really well. In retail you need to ensure you’re on top of cash, GP, wages and inventory. Having clear expectations around how we manage these is essential.

SI - What are your medium to long-term growth plans (5-10 years) in terms of company size and revenue growth?

RD - Five years ago those growth plans were much more aggressive than to-day. Next year we may be looking at some very different economic projections so our mid term estimates are very much a moving target.

SI - How is the Briscoe Group performing against competitors like The Warehouse Group Ltd [WHS.NZX] Kmart and Farmers?

RD - Like you I can only look at the information widely available. That question is perhaps better answered by a share-holder of both companies, and that’s not me.

SI - How are the all important margins tracking and how much emphasis are you placing on them given that retailers like Hallenstein Glasson Holdings Ltd [HLG.NZX] look to be doing better this year after a focus on margins rather than sales at any cost?

RD - Firstly our margins are pretty much in line with where we forecast them to be and we regard margin as the life-blood of a healthy enterprise. Secondly, I don’t know of any retailer that has adopted a strategy of sales at any cost. On the question of HLG, I’m not in any position to comment on their strategy or performance, I’m simply not in possession of the detail required to do so. What I can comment on is my knowledge of that industry and the generation of gross margin. I have an associate that operates within the apparel industry in NZ and I believe his recent experiences are most likely to be identical to many retail and wholesale participants.

Final gross margin is not just a bi-product of how much you discount product it is often an indicator of how cheap you purchase product. The NZ apparel market is dominated by product originating from China or at least the far east. Therefore, the raw material (fabric) is purchased in China, its manufactured in China and its shipped to its final destination from a Chinese port, all these transactions are denominated in US$. When you look at the Kiwi $ - US $cross last year versus this year you would have noticed a vast difference. By my calculations 2009 Jan – Aug average cross was .59, the 2010 Jan – Aug average cross is .70. As you can see, and as my associates demonstrated to me it has been particularly easy for him to generate significantly higher margin this year, even if he were to discount his product at a higher rate than last year, because he has purchased product very much cheaper than last year almost entirely due to the move in currency.

SI - What kind of profit margins are you achieving and can the company do better?

RD - For first half this year our EBIT margin was 6.8%, last year 4.9% and the year prior 2%. We believe we can build on the solid 6.8% of this year and over time move that beyond 8%.

SI - How many more outlets can you add to the group in terms of all 4 of your brands before saturation point?

RD - Overall we think we can add about 10% more stores into the network. The real issue will be the re-location and or re-sizing of many of our stores to maximise the opportunity in each of the catchments.

SI - Any intentions of expanding the Briscoe brand across the Tasman in the near or distant future?

RD - Not at this point but I’m not saying never.

SI - Living and Giving & Urban Loft, they haven't been great success stories thus far, do you see them doing well in the long-term and at what point do you walk away if they don't perform?

RD - In a period of recession the highly discretionary products do suffer the hardest. Both our offerings have found the going tough but in the scheme of Briscoe Group the effect is minimal and our intention is to battle on.

SI - With retail in general in the doldrums and many retailers struggling to survive some might expect you would want to use some of the 60 odd million that BGR has in cash on the balance sheet for some good retailing bargains of your own. Have you seen any attractive propositions?

RD - Not attractive enough to purchase.
 

SI - I am often disappointed by the levels of service offered to myself, my friends and associates and think sometimes it is so low because New Zealand consumers have low expectations and don't complain. How well do you think your staff represent the company in terms of service levels to customers so customers remain loyal and keep coming back for more over the long term?

RD - We have never pretended that we offer personalised one-on-one service, perhaps assisted self service would best describe our offering. I believe customers appreciate that no promise has been broken and expectations have largely been met.

SI - Does the company have a mystery shopper program and if it does what has it revealed about service levels to the customer?

RD - Yes we do and whilst we will always strive to do better our customers’ expectations have largely been met.

SI -Tammy Wells, otherwise known as the Briscoes Lady, how much do you think she brings to that brand and whose idea was it to identify her with that brand?

RD - Tammy brings a lot to the value of our brand, she identifies with middle NZ and I believe our customers see her as being a lot like themselves. Many of us had a hand in her selection some 20 years ago.

SI - Is the overall retail sector saturated in terms of retail offerings or is the recession the main reason for the large number of retail failures and the slowdown over the last 2 or 3 years?

RD - A recession of this severity and of this length will always sort out those businesses living on the edge of bankruptcy. As Warren Buffet is famous for “You only know who’s swimming naked when the tide goes out”.
 

SI - In my investing experience I have found the level of business leadership in New Zealand wanting - with a few very notable exceptions - when it comes to making good long-term decisions based on sound business skills, the basic understanding of running a business and accountability when it comes to making mistakes and this is often reflected in businesses hiring from an overseas talent pool. What are your views on how we can get good shareholder representation in the boardroom?

RD - My experience does not extend beyond my own company so perhaps I can talk a little about us. For us its always been about balancing the individual skills within a board and these days there needs to be much more importance placed on Governance and experiences from outside of BGR.

Many of the issues confronting retailers (particularly those listed) require a very detailed knowledge of the Governance requirements which incidentally are ever changing.

Additionally, recent trading difficulties brought about by the effects of recession has meant that both management and board members have needed to look for answers in a wide variety of places. Our board has a wide level of experience and thankfully not exclusively retail, because many of the most complex recent issues we’ve faced have not been solved in typical retail manner.

SI - What company or companies do you admire the most (apart from BGR) that you don't have a financial interest in and why?

RD - Harvey Norman Holdings Ltd [HVN.ASX] Very experienced and long serving management and a strong and wide distribution of stores. Plus a compelling format that has good acceptance and buy-in from customers.

SI - Your 9.41% holding of Pumpkin Patch Ltd [PPL.NZX] is that just an investment in what you see as a good company or do you have any other intentions you would like to share with Share Investor readers?

RD - Personal investment only.

SI - Are there any particular books, periodicals or websites that you have read that you would recommend to Share Investor readers in terms of business and investing?

RD - None.
 

SI - I have read Benjamin Graham's Security Analysis and find it crucial to long-term investing not just in the stockmarket but for investing in general. Have you read it and if you have what have you taken from it as its main points?

RD - Not read.
 

SI - Who are some of your business mentors/heroes and why?

RD - No current mentors.
 

SI - What was your first job ?

RD - Footwear salesman, 16 years old, Adelaide South Australia.
  

SI - What excites you about retailing in general and the Briscoe Group specifically?

RD - The constant change generates the most excitement and I guess the need for constant change inside Briscoe Group is both a challenge and a “Rush”.
   

SI - MBA or practical experience, what kind of experience is most suited to retail management in the Warehouse boardroom?

RD - I wouldn’t like to say, you had better put that to my friend Stephen.
 

SI - What do you see as the strongest and weakest quality of your leadership style?

RD - I put great importance on loyalty and I’d like to think I give it as well, but I do from time to time get a little frustrated at the speed at which things get done, Impatience!

SI - What has been your main achievement or achievements at Briscoe Group over your term as CEO ?

RD - The building of a loss making company 20 years ago to an organisation now supporting 1500 NZ families with interesting employment through the profit generated by 90 stores.
 

SI - Where do you see yourself and the business you help manage over the next five years?

RD - I’m not expecting the business or myself to be in a very much different place. We will have made stores generate higher sales and larger profit but I expect we will not look vastly different in 5 years.

About Rod - From Briscoe Group Website

Rod Duke has spent all his working life in the retail sector. After leaving school in Adelaide, he commenced work with retailers in South Australia before moving to Waltons Ltd in Sydney in 1980. From 1981 to 1988 he held the positions of New South Wales Manager of Homecraft/Eric Anderson Stores, a Senior Merchandise Executive for Grace Brothers then Managing Director of Norman Ross Ltd. In September 1988, Rod accepted the position of Managing Director of Briscoes (New Zealand) Limited, at that time a subsidiary of Hagemeyer of the Netherlands, with a mandate of returning the company to profitability and preparing it for sale. In January 1990, Rod reached agreement for the RA Duke Trust to purchase 100% of the shares of Briscoes and he has continued to be the Group’s Managing Director. In 1996 Rod established, and in subsequent years expanded, the Rebel Sport chain of sporting goods stores in New Zealand as a business within the Briscoe Group.


About Briscoe Group - From Briscoe Group Website

Rebel Sport employs approximately 615 permanent full time and permanent part time staff, 17 of which are employed at their Head Office in Auckland.

In peak periods the company employ staff on a fixed term basis and this number can increase to around 704.

Rebel Sport stores employ generally between 25 and 35 permanent staff each.

Briscoes Homeware (includes Urban Loft & Living & Giving) employs approximately 1074 permanent full time and permanent part time staff, 25 of which are employed at their Head Office in Auckland.

In peak periods the company employ staff on a fixed term basis and this number can increase to around 1298.

Briscoes Homeware stores employ generally between 15 and 25 at the smaller branches and between 25 and 40 at the larger branches.

Briscoe Group has 72 employees, providing management, finance and administration, information technology and other support functions.


History Timeline

2008

Briscoe Group retailing interests total 57 Homeware Stores and 32 Sporting Goods Stores. Raised $1.35 million dollars for Cure Kids since becoming a key partner in 2000.

2006

Acquired the business, assets, and certain liabilities of Living & Giving (9 stores) and opened Urban Loft. Briscoe Group retailing interests total 48 Homeware Stores and 27 Sporting Goods Stores.

2004

Briscoe Group retailing interests total 33 Homeware Stores and 19 Sporting Goods Stores. Became a key partner of the charity Cure Kids and committed to raising funds to further medical research for children with life-threatening illnesses.

2003

Briscoe Group retailing interests total 30 Homeware Stores and 17 Sporting Goods Stores.

2001

Briscoe Group retailing interests total 28 Homeware Stores and 11 Sporting Goods Stores.

1999

Agreement reached with Rebel Sport Australia for the franchise agreement to be terminated with effect from April 2005, beyond which date the Briscoe Group will continue to have the exclusive right to the Rebel Sport name in New Zealand.

1997

First Rebel Sport store opened outside of Auckland.

1996

First Rebel Sport store opened in Panmure, Auckland.

1995

Briscoes negotiated a limited franchise agreement with Rebel Sport Australia. This franchise agreement gave Briscoe Group the exclusive right to use the Rebel Sport name in New Zealand and access to Rebel Sport Australia's product supply arrangements and intellectual property.

1990

Briscoes purchased by the RA Duke Trust, a trust established by Rod Duke.

1988

Following several years of losses, Hagemeyer recruited Rod Duke, the then Managing Director of Australian retailer Norman Ross Ltd, as Managing Director of Briscoes. Rod Duke's mandate was to prepare Briscoes for sale. Over the next two years Rod Duke returned Briscoes to profitability by rationalising the number of stores and product lines, improving inventory management and re-orienting the business towards branded homewares.

1977

Following extensive rationalisation of the Briscoes store chain by Merbank, Hagemeyer (a Netherlands-based international company) purchased Briscoes New Zealand.

Over the next nine years, during which period import licensing was phased out in New Zealand, Hagemeyer transformed Briscoes from (primarily) a wholesaler of imported goods to a general merchandise retailer.

1973

Australian and New Zealand operations of Briscoes purchased by Merbank Corporation of Australia.

1862

First Briscoes warehouse and store established on the corner of Princes and Jetty streets in Dunedin by William Briscoe and Son.

1781

Original Briscoes business established in Wolverhampton, England and steadily expanded into the British Colonies, including Australia and New Zealand.


Share Investor Q & As

Warehouse Group CEO Ian Morrice
Ryman CFO Gordon Macleod
Ecoya's Geoff Ross
Xero's Rod Drury
Mainfreight MD Don Braid
Burger Fuel Director Josef Roberts
Sky City CEO, Nigel Morrison



Briscoe Group @ Share Investor

Share Investor Q & A: Put Questions to Briscoe Group CEO Rod Duke
Long Term View: Briscoe Group Ltd
Briscoe's Cash worth looking at
Whats on Rod Duke's shopping list?
Why did you buy that stock? [Briscoe Group]
Rod Duke's Pumpkin Patch gets bigger

Discuss BGR @ Share Investor Forum - Register free




c Share Investor 2010

Thanks Dennis Barnes

I just want to say a quick hello and thank you to Contact Energy's Dennis Barnes.

I have been critical in the past.

Your background is back up the front and you are to be congratulated.

A 50c dividend is generous.

This Blog Share Investor thanks you.

Share Investor Q & A: Ryman Healthcare's CFO Gordon MacLeod

Please forward to near the end of the review. Gordon talks of Australian expansion just before they actually started. VERY illuminating.

Ryman Healthcare Ltd [RYM.NZ], the retirement village and aged care provider, is one of the NZX's best performing companies and historically it has increased earnings by at least 10% for each of the last 10 years.

Its full year result to March 31 2010 was up 16% on last years 2009 full year and indications are that these sorts of results are likely to continue for the foreseeable future considering the increasing age demographics for the New Zealand population and the seemingly unparalleled popularity of their offering to their prospective customers.

It seems a well managed business with unlimited prospects. In fact you would find it hard to find anything negative written about the company and the way that it is run.

Little is known about who the company is run by and how -they just get in and run the business and get good results - and I would like to know what is behind the hype of promised increased returns forever. Is this company going to achieve the lofty results of the past into the future?

With these things at the centre of my mind I flicked off an email to Ryman in Christchurch and got back a response from the Chief Financial Officer, Gordon MacLeod who kindly agreed to a Share Investor Q & A.

The Q & A was conducted via email .



The Q & A

Share Investor - Congratulations on a great full year result to 31 March 2010. Was this expected by management or a surprise given the state of the economy?

Gordon Macleod - Our growth in realised profits of 16% to $61m was mainly driven by strong growth in earnings from completed villages. This growth reflects our portfolio doubling in size over past 5 years – feeding through into earnings – and higher occupancy. So, we experienced higher care fees, management fees and resale gains in addition to the initial earnings from the three new villages opened in 2010. Most importantly, this increase in profitability was also reflected in even stronger growth in operating cashflows, up 31% to $149m.

The growth in earnings was therefore not a surprise to management, and reflects the robust nature of our business model along with the very real need we are serving to the elderly.

SI - Ryman Healthcare has had significant growth in the size of the business, its revenue and long-term returns to shareholders since listing in 1999. Are you able to continue with this sort of growth for say the next 10 or 11 years or do you see a tail-off, for whatever reason, of these sorts of spectacular results?

GM - We believe that Ryman will grow strongly for many years to come for a number of reasons. There remain many locations throughout New Zealand which are ideally suited for a Ryman village, and we are continuing to see a strong number of land opportunities from which we will continue to pick the best.

Most importantly, we are now entering a prolonged period where the elderly population will increase at a significantly faster rate than ever before. In fact, the number of people aged 75 years and over is set to increase on average by 12,000 per annum for the next 20 years.

Add to this the harsh reality that although we are living longer we are also somewhat frailer. Recent medical research estimates that men spend the last 6.8 years, and women the last 9.1 years, of their lives with the limiting diseases of old age. In addition, it is also expected that the incidence of dementia is set to rise by 50% and osteoporosis and osteoarthritis by 40% by 2025.

Our confidence in Ryman’s future prospects is therefore not just the result of the quality of what we do – our purpose designed villages meet a very real, and growing, need in the community.

So, our medium term earnings target is to grow realised profits 15% per annum, or put in more simple terms - to double the size of the business every five years.

SI - Do you anticipate continued growth of the aged care sector in general or do you see a plateau sometime in the future?

GM - Given the growth in our elderly population expected over the long term (as outlined above) it is hard to see a plateau – the demand will just get stronger over the next 20 years. Capacity in the sector generally is getting tighter, and there is very little in the way of new build going on (except for Ryman), so we expect very strong demand.

SI - Is your growth rate above that of the rate of growth of the elderly population?

GM - Since listing in 1999 our growth has significantly exceeded the rate of growth in the 75 plus population – our realised profits are up ten fold from $6m to $61m, whereas the 75 plus population has increased by 30% over that same time frame to 256,000. So our growth in realised profits has far exceeded the demographics growth rate. Market share wise we are only just over 12% of the retirement village market (ie independent and serviced units) and 5% of the aged care market (ie rest home, hospital and dementia beds).

Reader Question - What is your projected yearly growth rate in net profit for the next five years? Also, what would a 10% decrease in residential property prices have on net profit, say over a 1 year period?

GM - Approximately half of our realised profits are retained for our organic growth strategy, as the business model provides returns well in excess of our cost of capital. We aim to grow our dividends in line with our realised profits, so shareholders should expect growing dividends in addition to our capital growth.

SI - What kind of profit margins are you achieving and have they been maintained as the company has grown?

GM – Our overall realised profit margins have averaged just over 20% for many years and we have maintained this rate.

SI - Interest free loans for senior staff of up to $2 million to buy shares as pointed out in the 2010 Annual Report. Shouldn't senior employees use their own money to buy shares and wouldn't that be a better incentive for them to achieve positive results?

GM – Our Board views it as important that management’s long term interests are aligned to those of long term shareholders, with the on market share scheme representing an important part of the senior management remuneration package. The Board (and shareholders for that matter) prefers the on market purchase mechanism ahead of share options. This is because they are non dilutive, as existing shares are bought on market – rather than share options which constantly impact the issued share capital for existing shareholders.

SI - How hard is it to purchase suitable sites for a reasonable price for your villages and has the recession provided some added opportunity in this area?

GM - We have seen a number of good opportunities over the last two years, our landbank is very healthy, and we continue to explore potential new sites. It has been a good time to buy, as there are very few competing bidders with too much cheap debt. Prices are therefore more sensible than before. We now have 4 to 5 years’ worth of stock in the landbank which is a strong position to be in.

SI - Could you envisage another style of aged care in your business, say a move away from the "village" type layout of your properties to a more self contained, self sufficient sort of living?

GM - Our residents tell us that our lay out works very well, and this has been the case for many years. A Ryman village is tailor designed by us to meet the needs of the elderly, and includes a range of care options to ensure we can meet our residents needs as their health needs change. It is hard to see a time when the elderly will not want this peace of mind and security. In addition, our retirement village environments are very difficult to replicate in the broader community when you consider the village facilities, companionship, beautiful gardens, secure environment and so on that we offer, all on one site.

SI - Do you offer "hotel" style living, that is, rent a unit in one of your villages, rather than own, therefore allowing individuals to free up capital in the latter years of their lives or generally do your customers have enough free cashflow on top of what they might put into buying a unit to allow them to live how they want?

GM - Residents actually often free up capital when they come into a Ryman village, as we offer an affordable product due to our cost advantages. In addition, our weekly fees are very affordable, and in over 20 years we have never increased the weekly fees to an existing retirement village resident. This has given residents real certainty over their weekly outgoings, which is very important for the elderly. We therefore do not offer a rental type model for our independent and serviced units.

SI - As we all live longer and are generally healthier, we are living longer in our own homes. How much of an impact do you think that will have on your business in the long-term as the age when we might want to consider moving to a retirement village moves out?

GM - Our average age of entry is 78+ for independent units, 83+ for serviced units and 85+ for rest home / hospital, so we are catering for the older end of the spectrum rather than the 65’s as some independent retirement villages do. As noted above, people may be living longer, but often frailer due to the health issues of old age. So we see demand increasing, especially with the 75+ population doubling over the next 20 years. Over the long term we may see the average ages of entry noted above increasing, but this will depend on people’s health needs.

SI - Is New Zealand in its infancy in terms of retirement living, in the sorts of complexes you build and run, and if we are how much more advanced are say things in Australia and the United States?

GM - Based on what we have seen overseas, and feedback from overseas investors, our Ryman offering is unique and world class. Self constructing our own villages, with a full range of care options integrated on one site, is uncommon around the world. Most often, nursing or care services are run by different operators to the providers of independent living villages and in different locations. This is not what the older resident wants, as they want the peace of mind and security that they can age in place with the same friends and staff, and stay in the same location as their partner.

SI - How much impact will the recent Government tax changes on building depreciation affect Ryman and will the lower corporate tax rate ameliorate the situation if the company has been impacted?

GM - At this early stage we estimate that we will lose tax depreciation on buildings of $9m to $10m. Shareholders currently pay tax at 33% on our dividends, so they will start to receive the benefit of imputation credits once tax losses accumulated during our investment / growth phase have been utilised over the next 2 to 3 years.

Reader Question - Do you have a maximum debt to equity figure that directors aim to keep below?

GM - Our strategy is to only incur bank debt to fund the construction of new villages, which ultimately fund themselves by the time of full occupancy. We have never incurred debt to fund acquisitions, or share buy backs and the like. In this way, there is no debt on a substantial existing portfolio and we aim to keep this conservative position. Our strong operating cash flows mean that we have been able to invest $730m in new villages since listing in 1999, and we haven’t needed to raise any fresh equity from shareholders to do so. Our current bank debt to equity ratio is only 31%.

SI - What are your biggest challenges as the company expands?

GM - Executing well is our most important focus.

SI - You have a sizable workforce of over 2000. Is there much of a union movement in that workforce or are your employment contracts mostly on an individual basis?

GM - We are a good employer and there is very little union involvement. Staff are on individual employment contracts.

SI - How have you managed the business in relation to your competitors, do they have or will they have an impact on your business in the future?

GM - We don’t manage our business relative to competitors. The demographics mean that if we offer a first class product to our residents at an affordable price then we will do well.

SI - Why have you done better results wise than your listed competition, Metlifecare Ltd [MET.NZ] for such a sustained period?

GM - We only focus on why we do well and don’t really want to compare and contrast ourselves to MET.

Reader Question - It has been suggested to me that Ryman’s success is built on its being a property company, rather than a healthcare one. If there is a significant element of truth in that assertion there would be implications?

GM - First and foremost our core business is looking after the elderly. We are therefore a healthcare company, which meets a very real need from the growing elderly population. Our rest home and hospital beds are purely needs driven, as are our serviced apartments – collectively these account for two thirds of our units / beds. We have shown that we can trade well in a difficult property market, as was evidenced in 2009 when the market fell 10% yet our realised profits increased 5%. Without the absolute healthcare focus we have, our business could well be considered as more a property company.

SI - In my investing experience I have found the level of business leadership in New Zealand wanting – with a few very notable exceptions - when it comes to making good long-term decisions based on sound business skills, the basic understanding of running a business and accountability when it comes to making mistakes and this is often reflected in businesses hiring from an overseas talent pool. What are your views on how we can get good shareholder representation in the boardroom?

GM - I think Boards should always be looking for the right mix of skills, experience and commercial acumen – and not just ticking governance boxes. Real business experience is critical. Of particular importance is that a good balance of directors on the Board understands the perspective of shareholders - by having a reasonable amount of skin in the game through share ownership. This is the best way to get shareholder representation in the Boardroom (along with having the usual respectful dialogue with all forms of shareholders). This contrasts with some theories out there that ‘pure’ independence on Boards (ie no financial interest at all) improves governance – what is important is a good balance.

SI - What company or companies do you admire the most (apart from RYM) that you don't have a financial interest in and why?

GM - I think that Fulton Hogan in Christchurch have done a great job of growing their business in NZ and Australia. They seem to take a good long term approach and look after their staff well. Also I have really respected the way Foodstuffs have successfully responded to the Australian challenge through their Pak N Save and New World stores. Neither businesses try and grab the headlines, they just focus on offering a good product to customers.

SI- Are there any particular books , periodicals or websites that you have read that you would recommend to Share Investor readers in terms of business and investing?

GM - I think that people in business should read Jim Collin’s books – Good to Great, Built to Last, and How the Mighty Fall. All good stuff, practical and not full of MBA jargon. I try not to read too much from economists anymore, the last three years has been proof enough to me that you can’t predict the future – just focus on running your own business extremely well, and mind the farm.

SI - I have read Benjamin Graham's Security Analysis and find it crucial to long-term investing not just in the stockmarket but for investing in general. Have you read it and if you have what have you taken from it as its main points?

GM - I haven’t read it. I think investing is about finding a very good quality company that you would be happy to be the owner of, and then taking a long term perspective.

SI - What does a Chief Financial Officer do and responsible for in a listed company?

GM - A good broad range of stuff! Providing advice to the Board, strategy and planning, forecasting, cash management, banking relationships, financial reporting, maintaining controls, IT, and investor relations. Dealing with the financial and investment community is a very important part of the job.

SI - Who are some of your business mentors/heroes and why?

GM - He will hate me for mentioning his name, but I greatly admire Kevin Hickman (Ryman co-founder). Ryman has been built from the ground up (literally) over 25 years, and the business principles installed in the team many years ago are still just as strongly recognised today. In my experience it is highly unusual for founding principals to be so respected and still part of a large company’s (family) culture.

SI - What do you see as the strongest and weakest quality of your leadership style?

GM - I will have to think about that! Basically I have just worked very hard for many years and tried to get on with people, not matter what their job title.

SI - Where do you see yourself and the business you help manage over the next five years?

GM - Ryman – Double the size, from well managed growth in NZ and Australia and with lots of happy residents and shareholders. Me – I have never really thought more than one year ahead, the ‘to do list’ is too daunting! If I do a good job then there will be lots of good opportunities for me at Ryman.


On Ryman's Australian Expansion

I asked Gordon a question about Ryman moving their business model across the ditch before the announcement last week that they were looking at expanding there, so asked some additional questions about that move.

SI- How long will the first village be assessed before expanding further?

GM – We will carefully assess the entire Australian experience, from land acquisition to consenting to constructing, sell down and operations. During the initial sell down phase of the first stages we will get a good feel for how we are going. We have strict business case criteria for capital pay back of a village and we will set the same criteria as we do in NZ for whether the opportunity stacks up.

SI - Just how much research was done before the move?

GM – We have undertaken substantial research over a number of years. Australia has always been an opportunity for Ryman, and we felt the time was right now to take the next step up.

SI - Is your business model different to how such villages operate in Australia?

GM – We are quite different to many, in that we plan to continue to building and operating our own unique villages (many others simply undertake acquisition activity). Most importantly, what we offer will be different in that we plan to offer the same sort of integrated village with a full range of care as we do in NZ. This means that residents will have the security of having their changing health needs met within one village.

SI - Why Melbourne, Victoria first?

GM – We have a number of contacts in that area and it is easy to get to from Christchurch. That said, other states on the East Coast remain a possibility too.

SI - Will business conditions, employments laws, tax structures etc allow you to operate the way you do in New Zealand or do you have to tweak the model for Australia?

GM – As always we will have adapt to local conditions to a certain extent. However, on the whole the overall industry attractiveness and dynamics are very similar which is good. Encouragingly, build costs are actually lower in Australia and on the care side of things providers can obtain an accommodation bond on top of the weekly fees (in NZ rest home / hospital care offers weekly fees only), which we see as an advantage.

SI - If successful in Melbourne what are 5 year growth plans for that State and other Australian States?

GM – We actually just plan to focus on this first village for now. We will develop our strategy once we have a better idea as to the long term opportunity.

SI - Will you concentrate on growth in Victoria first before other States are considered?

GM – Victoria is our initial front runner, as you need to focus your energies somewhere to get traction, but a site could equally pop up in Queensland or NSW first. Once the first site is underway our plan is just to focus on that before anything else is planned. Thereafter it would make sense to focus our energies in one State for a while.

SI - How will expansion in OZ be funded?

GM – Traditional debt funding from our bankers – ANZ and CBA, and through our strong operating cash flows.

SI - Will RYM consider listing on the ASX sometime in the future?

GM – Yes, this is a real option for us once we have a site established. An ASX listing could be a way to achieve better liquidity for investors and to broaden the base of Australian fund managers in the Ryman shareholder list. That said, we have no plans at this stage and the Board will assess this option when the time is right.

Q & A End.


Disclosure: I own RYM shares in the Share Investor Portfolio


Gordon MacLeod Bio - Supplied by Ryman

Gordon MacLeod is the Chief Financial Officer and Company Secretary of Ryman Healthcare Ltd. Gordon is responsible for investor relations, treasury management, planning and budgeting, financial and management reporting, IT and systems development, taxation compliance, aged care billing and insurances. Previously, Gordon was a Corporate Finance Partner of PricewaterhouseCoopers, and was also the Finance Director of a London listed hi-tech engineering company based in Cambridge, England.


About Ryman Healthcare - Various sources including RYM website

Established in Christchurch in 1984, Ryman draws on over 20 years of experience to provide the best possible retirement living options for its residents.

Ryman Healthcare Limited develops, owns and operates integrated retirement villages, resthomes and hospitals for the elderly within New Zealand. Its villages provide a range of retirement living and care options, including independent townhouses and apartments, serviced apartments, and a care centre providing resthome, hospital and dementia level care. As of March 31, 2010, the Company operated 22 operational retirement villages from Auckland to Invercargill and plans to open two new villages every year. The villages are all designed, built and operated by Ryman. Since listing in 1999 the company has increased profits and dividends ten-fold without seeking any fresh capital from shareholders. The company is a six times winner of Best Retirement Village in New Zealand, serves over 4500 elderly New Zealanders, and employs over 2000 staff.

The Company's subsidiaries operate in the aged care sector in New Zealand. Its subsidiaries include Anthony Wilding Retirement Village Limited, Beckenham Courts Retirement Village Limited, Edmund Hillary Retirement Village Limited, Ernest Rutherford Retirement Village Limited, Evelyn Page Retirement Village Limited, Frances Hodgkins Retirement Village Limited, Grace Joel Retirement Village Limited, Jane Mander Retirement Village Limited and Jane Winstone Retirement Village Limited.


Share Investor Q & As

Ecoya's Geoff Ross
Xero's Rod Drury
Mainfreight MD Don Braid
Burger Fuel Director Josef Roberts
Sky City CEO, Nigel Morrison
Sky City Entertainment: CEO Nigel Morrison discusses 2010 HY
Convention Centre proposal interview with Sky City CEO Nigel Morrison


Ryman Healthcare @ Share Investor

Ryman Healthcare: Interview sneak peak
Ryman Healthcare Ltd: Australian Expansion Needs Care
Share Investor Q & A: Reader Questions to Ryman CFO Gordon Macleod
Long Term View: Ryman Healthcare Ltd
Stock of the Week: Ryman Healthcare Ltd
Why did you buy that stock? [Ryman Healthcare]
Long VS Short: Ryman Healthcare Ltd
Time for retirement?

Discuss RYM @ Share Investor Forum

Download RYM Company Reports



c Share Investor 2010