Tuesday, 22 May 2018



20 Feb 2013 17:18NZX
There are forward-looking statements included in this document. As
forward-looking statements are predictive in nature, they are subject to a
number of risks and uncertainties relating to Tenon, its operations, the
markets in which it competes and other factors (some of which are beyond the
control of Tenon). As a result of the foregoing, actual results and
conditions may differ materially from those expressed or implied by such
statements. In particular Tenon''s operations and results are significantly
influenced by the level of activity in the various sectors of the economies
in which it competes. Fluctuations in industrial output, commercial and
residential construction activity, changes in availability of capital,
declining housing turnover and pricing, declining levels of repairs,
remodelling and additions to existing homes in North America, relative
exchange rates, interest rates in each market, and profitability of
customers, can have a substantial impact on Tenon''s results of operations and
financial condition. Other risks include competitor product development and
demand and pricing and customer concentration risk.

All references in this document to $ or "dollars" are references to United
States dollars unless otherwise stated.

Interim Report - December 2012

This document is an interim report covering the first six months of operation
for Tenon''s 2013 fiscal year (i.e. for the six months ended 31 December
2012). It addresses in summary form the operational and financial highlights
for the period.


The US housing market - Tenon''s largest market exposure - is now in the early
stages of a full recovery. This is an extremely positive development for
Tenon, although it is really only in very recent months that this improvement
has occurred in any meaningful way. To date, this recovery has been centred
on new house construction, but the forward looking data now indicates that
the rebound should also spread into a higher level of renovation and
remodelling activity later in this calendar year. Given Tenon is exposed to
both segments of the market (but more particularly to the latter segment), we
should see the benefit of this broader market recovery reflected in our
earnings as the calendar year advances.

These next charts give an idea of the extent of the recovery that has
occurred in the new home construction segment. Although still well off its
previous peak of 2.3 million homes, you can see that new housing starts have
almost doubled now - up from a cyclical and historical low of only 478,000
homes per annum to 954,000 per annum (December 2012).

[ chart ]

Importantly, this new housing recovery has been quite sudden relative to the
depth and length of the down-turn. This next chart shows this clearly, with
December 2012 housing starts being up 37% on the same month a year prior, and
up 27% on the number recorded just six months earlier.

[ chart ]

This noticeable lift in new housing starts indicates that this segment of the
market has now turned for the positive. Other supportive (January 2013)
indicators include -

- New home sales - up 9% in year-over-year;
- New home prices - up 14% year-over-year; and
- New home inventory - which at 4.9 months of supply, is now well below its
peak level of over 12 months of supply.

This segment is also being supported by record low mortgage rates in the US.
30-year (tax deductible) mortgage rates are now at 3.4%, which compares with
over 4% a year ago - so it is certainly an affordable time to buy a home.

Indicators are now also turning positive in the renovation and remodelling
segment of the market. The two key drivers of this segment are existing home
sales (as home buyers tend to renovate nine months or so after purchasing
their home) and existing home prices (as home-owners need to be confident
that they will recover the value of their remodelling investment, and in some
cases increased home equity provides the finance for the remodelling
activity). Both of these drivers now appear to be moving in the right

The chart below shows the Case-Shiller index which tracks the path of
existing single-family homes sales prices. You can see that this
seasonally-adjusted index has moved up every month for each reported month in
calendar 2012, and prices are up 6% on the recent low recorded a year ago.

[ chart ]

This next chart shows the months-of-supply of existing home inventory - a
measure which factors in both the rate of home sales and the inventory pool
available for sale. You can see that this measure has noticeably and
positively trended down, from 6.5 months in June 2012 to only 4.4 months in
December, where historically 6-months'' supply has been considered to
represent a balanced market.

[ chart ]

On top of all this, pending home sales in December were up 6.9% year-on-year,
and the inventory of existing homes available for sale is now at its lowest
point for 12 years. So most reported data is now very favourable to an
ongoing cyclical recovery.

Because of the natural lag that exists between these drivers and the
resulting remodelling and renovation activity that usually follows in the
future, we haven''t yet seen demand pick up in this segment in our product
categories, beyond the small localised regional lift in activity that
resulted from Hurricane Sandy. It should do so however, and in this respect
this chart from Harvard''s recent Housing Study shows the strong uplift that
is expected to occur in this segment later in calendar 2013, once this timing
lag has cleared.

[ chart ]

When all of the charts above are considered, along with their supporting
market data, you can see that the "big picture" environment for Tenon is now
changing, and that the US housing cycle is at last turning in our favour.
Although there are some notable hurdles to a full US housing market recovery
- unemployment, access to mortgage credit, home foreclosures, and resolution
of the US "fiscal cliff," being the main concerns - and moving forward the
month-to-month data is likely to be a little bumpy, it appears clear now that
we are heading out of the deep cycle-trough that has plagued the industry for
too many years now.

Six Months Activity and Financial Results

As noted above, it has only been in the relatively recent months that the US
housing market recovery has taken hold, and to date it has really only been
in one (i.e. new home construction) of the two segments comprising the total
market. Accordingly, the six-month financial period under review largely
reflects a "pre-recovery" US market for Tenon and its direct competitors. It
is important to understand that for that reason it is the forward earnings
profile that is now providing positive momentum for listed stocks in our
sector, rather than the historic results we discuss in this Report. Having
said that, our earnings result for the six months to 31 December 2012 was in
line with market expectations for this "pre-recovery" period. In summary -

? At $174 million, consolidated Revenue was up 7.4% on the $162 million
recorded for the corresponding six-month period last year. This top line
growth came from increased sales in our pro-dealer activities - up more than
20% on the previous period - as this market segment began to recover, and
also from the impact of new product introductions launched last year, such as
the Creative Stair Parts program which saw stair sales increase by 35%. The
price of our highest grade of lumber, moulding and better (M&B), also lifted
5% in the period, reflecting a tightening supply chain and rising demand.

Sales volumes also benefited from both geographic and product
diversification. For example, our Taupo manufacturing operation increased its
high-value lumber sales into both China and Europe, rebalanced its product
portfolio across lumber, clear board and solid lineal mouldings products to
optimise customer sales and margin opportunities, and expanded its activities
into Australia.

- The "thinness" of the industry supply chain in a now recovering US housing
market saw manufacturers (including our own Taupo operation) place customers
(i.e. distributors into the US, such as Empire) on product supply allocation
restrictions during the period. Accordingly, our Cost of Sales increased in
the period, as our third-party suppliers pushed through product price
increases in this very tight supply environment, and also as our absolute
volume of purchases increased to match market demand.

While our gross profit margin did compress slightly in the period by just
over 1% (normalised for non-recurring costs), to a large degree this was a
direct result of the path of the NZ dollar - particularly the NZD:USD cross
rate, which strengthened from 79 cents at 30 June 2012, to 82 cents at
balance date, and which as at the timing of writing had increased even
further to almost 85 cents.

Unfortunately, this factor is likely to remain with us for the balance of the
year, and we will need to continue to deal with it. Internally, we think of
this adverse currency movement as representing a 5% gross profit margin
decline in the profitability of our NZ manufacturing activities, which we
must make up with further cost-out initiatives across the Group -
particularly given that the gains from the $5 million Taupo profit
improvement programme put in place only last year have effectively now been
"stolen" by the strengthening NZD currency to date. During the period under
review, examples of such further cost-out initiatives that were put in place
include the -

- Completion of the consolidation of Ornamental''s manufacturing activities
onto one US site in North Carolina (NC). The order files and manufacturing
lines have now been transferred, the operation has been integrated into
Tenon''s North American shared services operation, and all surplus Canadian
property has now been sold releasing $3 million to debt repayment. The
results for the six months just completed include all costs relating to
manufacturing "start-up" of the product lines now being produced at the
single NC site. Manufacturing efficiencies will be evident in the second six
months'' results;

- Relocation of Southwest''s Dallas operation to a larger, special purpose
warehousing facility. Although the floor space has been expanded to match
increased demand forecasts, efficiency gains will allow Southwest to achieve
an effective decrease in per square foot warehouse space and a lower overall
dollar cost; and

- Implementation of IT enhancements across the Group, such as to our
electronic order confirmation, delivery, and invoicing, which will not only
assist in working capital management but also in lowering back-room
administration costs.

- Operating Profit before Financing Costs was a loss of $1 million, compared
with a loss of $5 million (including $2 million of business re-engineering
costs) in the corresponding period last year. However, the earnings figure
that equity analysts tend to focus on for company comparative purposes is
EBITDA (please refer to note 7 to the Financial Statements), because that
number removes distortions caused by differences in asset age and
depreciation policies, and by different debt:equity funding structures.
EBITDA increased from a $2 million loss last year to a profit of $1 million
for the current six-month period.

- Net debt (i.e. interest bearing debt net of cash) increased from $39
million at 30 June 2012 to $44 million at balance date. This increase is a
direct result of the increased inventory we need to carry as the market
enters its recovery phase and the need to ensure we have no stock-outs with
our large delivery-sensitive customers as sales grow in our core product
lines (please also refer to LOOKING AHEAD section below).


Our ASM was held in Wellington (NZ) on December 13th, 2012. Over 80% of the
Company''s issued shares were voted at the meeting, and all resolutions were
passed - each with a majority in excess of 99%. These excellent voting
statistics are a reflection not only of the company''s consolidated share
register, but also of the confidence that our shareholders have in Tenon''s

Our ASM presentations (which are freely available on our website at
www.tenonglobal.com) outlined the future potential for the Company in a
recovering US housing market environment. As previously noted, US housing
data continues to improve as each month passes, indicating that the US market
is now clearly in a recovery-mode. All of this news has been positive for our
share price performance, which, at the time of writing, had increased by
approximately 50% over the two months since our ASM. While this is good news,
we still believe our traded share price is well below "fair value" as at this
point in the cycle, and this view is supported by an equity analyst report
released by the Edison Group which valued Tenon in a range of NZ$1.79 - $2.05
per share (inclusive of tax losses). We will be addressing this issue further
as the year continues.

Looking Ahead

At our ASM, we outlined what the earnings potential might look like for Tenon
under future mid-cycle conditions - conditions where we see EBITDA of $35
million being achievable (assuming a mid-cycle NZ:USD cross rate of 70 cents,
and assuming historic margin levels). Shareholders will understand that this
expanded potential is a result of the significant organic growth that we have
put in place through the down-cycle (for a discussion of the growth that has
now been embedded in the Company please refer to our 2012 Annual Report,
which is also available on our website). To date the gains from these growth
initiatives have been masked by the extent of the downturn that has taken
place, however they should become obvious as the pace of recovery gains
momentum and the market progresses towards a mid-cycle path.

In relation to the more immediate term, like most participants in our sector,
we will not be giving specific earnings guidance. Put simply, there continue
to be too many uncontrollable factors that could affect the projected outcome
for us - the frustratingly strong and strengthening NZD:USD cross rate, and
resolution to the US "fiscal cliff" issue being the two immediate factors
that could chart a significantly different course than we currently
anticipate. Those factors aside, our expectation is that the Company''s North
American financial performance in the second six months of the year will
comfortably surpass that recorded for the six months just completed. The
final NZ performance however, will largely be determined by the path of the
NZD:USD cross rate, which is currently some 8 cents above our budgeted level.

Our growth activities will continue as planned. For example (and as we have
previously reported), we will continue with our new product introductions,
with the goal of expanding the breadth of our product range into both the
retail and pro-builder channels that we have created over the past five
years. Examples of this are ''FindIt", a new internally developed proprietary
pull-out kitchen cabinet product which we have been asked by Lowe''s to
distribute into over 900 stores commencing in the first quarter of the
current calendar year, Empire''s range of "Plank Paneling" products introduced
into 600 Lowe''s stores, and Southwest''s new doors program which will focus on
the Texas pro-builder market. We will also be targeting expansion potential
in the US pro-builder channel, by way of acquisitions, as opportunities
present themselves.

[ product photos ]

We have previously indicated the importance that we see China will play in
Tenon''s future. Pleasingly, the NZ Government, through both ministerial
involvement and the activities of New Zealand Trade and Enterprise (NZTE),
has been very supportive of our China goals and we are very grateful for
their on-going assistance. We have also outlined to shareholders our
strategic template for China, with the immediate plan being to continue to
increase the sale of product out of Taupo directed into the China market, and
to take a position in the wholesale market there - a pre-requisite to
building an in-market position of size. We plan to be in a position to report
positively to shareholders on both of these initiatives in the next six

[ photo - Ravi Nagasamy (NZTE), Louise Upton (MP Taupo), Tony Johnston (Tenon
COO), and Tim Groser (Minister of Trade and Climate Change Issues, Associate
Minister of Foreign Affairs) discussing Tenon''s activities at the Company''s
large clearwood processing operation at Taupo ]

At the same time as we have been growing our business through the down-cycle
we have also been actively reducing our debt - from a peak of $90 million to
$44 million recorded at balance date. We do not now see that level materially
declining in the short term, as the market recovery that is now underway will
naturally generate a need for increased working capital as our sales lift and
as we expand our product categories further. Clearly, we do not wish to
artificially constrain Tenon''s growth in a recovering market, and we also do
want to be in a position to pursue acquisitions that will further strengthen
our business activities. Accordingly, we are now actively reviewing our
existing funding, to ensure it provides the Company with sufficient
flexibility moving forward.

Finally, we would like to thank all of our stakeholders for their continued
support. As always, it is very much appreciated.

Luke Moriarty (Chairman) Tony Johnston (Chief Operating Officer)

20 February, 2013

[ END ]
End CA:00233195 For:TEN    Type:HALFYR     Time:2013-02-20 17:18:39
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