Hellaby Holdings Annual Meeting - Chief Executive's Address

HELLABY HOLDINGS LIMITED

ANNUAL MEETING

25 OCTOBER 2012

CHIEF EXECUTIVE’S ADDRESS

Thank you, John, and good afternoon everyone.

We said last year that we are keen to create a new future for Hellaby. We have not yet made acquisitions, but we have made considerable progress over the past 12 months in our three priority areas - being operational growth, portfolio growth and strengthening our bench.

We were pleased to report yet another strong operational performance for the year to 30 June 2012, which made it our third successive year of significant profit improvement. Our leadership development programme is now well established and we are confident we’ll start seeing the benefits from this initiative from 2013.

And despite an apparent lack of progress on the portfolio growth front, we have achieved a tremendous amount in developing our due diligence capabilities, decision-making disciplines and building a strong pipeline of prospects.

Today I will outline our performance and direction through three broad themes:

1. last year’s financial performance was excellent

2. the flat economy and diminishing returns will limit further profit growth

3. reshaping our portfolio is critical; and we will generate profit growth through acquisitions

I will start by outlining our achievements of the past year.

Last financial years performance was excellent

Let’s not be too modest for a moment. Hellaby’s financial performance in the past year has been outstanding. We have achieved and in some cases exceeded by a significant margin all of our key performance benchmarks

Arguably our biggest achievement was a return on funds employed (ROFE) of 30%. All four Hellaby divisions exceeded the company’s ROFE target of 20% for the first time.

The group generated $29 million free cash flow for the year.

Our group net profit after tax (NPAT) improved by 26% to $19 million.

Trading EBITDA improved 10% to $37 million on revenue growth of 6%, resulting in an EBITDA margin (EBITDA to sales) of 7.5%, ahead of our target of a margin greater than 7% 2

We further cut net debt by 59% to $10 million, with this debt reduction primarily driven by higher operating profits. Our gearing, measured as debt to debt and equity, was 6% at 30 June 2012, down from a high of 65% five years ago and well below our gearing ceiling of 45%

Hellaby continues to benefit from its most conservative capital structure in a decade.

This year’s result clearly demonstrates the benefit to shareholders of Hellaby’s diverse portfolio. The strong group result was delivered through outstanding performances from our Equipment and Footwear divisions, a steady performance from our Automotive division, and despite a disappointing result from our Packaging business.

The most striking operational achievement, from my perspective, was in Footwear, where Number One Shoes and Hannahs together achieved EBITDA improvement of 21% on zero same store sales growth.

Dealing with a flat economy

We will continue to focus on earnings growth across our businesses, regardless of economic conditions.

Nonetheless, the New Zealand economy remains stubbornly flat in most of the market sectors in which we operate. We are possibly only four years into what may be a six to seven year period of anaemic economic growth. We believe a flat economy has unfortunately become the ‘new normal’, and our businesses are adjusting to that reality.

So what does that mean for our existing portfolio? Having already substantially turned around the performance and culture of a number of our businesses, the law of diminishing returns implies that meaningful profit growth will now not occur for these businesses without higher GDP growth and/or acquisitions.

We are justifiably proud of achieving 66% operating profit growth over the past three years on revenue growth of only 4%. However we will not be able to repeat this achievement in future without a more fundamental change to our portfolio of businesses.

The first quarter of this financial year has again been tougher than expected, particularly in those of our businesses which are impacted by consumer and discretionary spending, with our first quarter group operating profits behind target and last year.

Fortunately in terms of 12 month seasonality, Hellaby’s first quarter is traditionally by far our smallest quarter, representing less than 15 percent of Hellaby’s annual operating profits. But trading conditions remain very sluggish.

We are naturally continuing to target organic growth opportunities across all our businesses, with the simple goal of growing faster than the markets we participate in. Organic growth is significantly more difficult in an economic downturn, particularly when the business is already number one or two in its sector.

Having said this however, we are continuing to drive any growth or improvement opportunities hard. I’ll now give you some examples of operational improvement and organic growth initiatives currently happening across our divisions: 3

1. At last year’s Annual Meeting we signalled a review of the shape and composition of our Equipment division. As a result of this review Hellaby has very recently amalgamated its two heavy equipment businesses, AB Equipment and Eurolift, into one larger equipment distribution and servicing entity. We believe that this will improve the service offering to our customers, and over time, improve efficiency and reduce duplication of costs.

2. Hannahs has this year launched an online sales site, which is Hellaby’s first material foray into e-commerce. Initial online sales activity has been very promising for Hannahs.

3. We have appointed new leadership at Elldex Packaging with the clear expectation that this added capability, combined with the recent optimization of the manufacturing footprint, will strengthen the company’s performance in New Zealand and Australia. I would like to signal however, that we do not expect to see an improved performance from Packaging until the second half of this financial year. Packaging remains a work-in-progress.

4. Our specialist tyre business, TRS Tyre & Wheel, has entered the truck tyre market as a wholesale distributor over recent months. TRS has successfully launched the Roadlux tyre brand, and secured the New Zealand distributorship of the well-known premium Continental truck tyre brand. Five years ago, TRS was solely a distributor of agricultural and tractor tyres. Since then, it has created additional revenue streams in the forklift, mining and off-road sectors, and now also in truck tyres.

In addition to our operational initiatives, we’re continuing to make a long-term investment in Hellaby’s future by way of our leadership development programme which we started last year to develop and grow Hellaby’s talent pool. We call this project ‘Raising the Bar’. Soon we will have evaluated our top 65 managers, with feedback and a personal development plan provided to each manager.

We also recently commenced a group HR review, which will enable Hellaby to get a clear understanding of how well our subsidiaries are performing in respect of HR management compared to where they need to be, and importantly, to leverage HR capability from a group perspective. This has received enthusiastic buy-in from our subsidiaries and, as an indicator, around 250 employees with supervisory responsibility voluntarily took part in a comprehensive information-gathering survey during October.

Both of these processes are driven by the belief of our board and management that a key differentiator for Hellaby should be the quality of its leaders and people processes. You might ask why we didn’t start this a lot earlier? In reality, our priority was dealing to our unproductive debt mountain two to five years ago. During that period we were more concerned about the group’s survival and less concerned – rightly or wrongly – about whether Hellaby’s HR systems were best practice. However it is now time for us to look in the mirror and raise the bar.

Future growth through a reshaped portfolio

As we no longer expect any real GDP growth in the next couple of years, we will seek to lift our profitability through acquisitions. This fits with our stated aim of creating a new future for Hellaby by reshaping our portfolio. The group’s stronger balance sheet certainly positions us to take advantage of suitable acquisition opportunities. 4

While no acquisitions have yet been completed, we remain patient and confident that the rigour we apply to due diligence will pay off. As a shareholder recently said to me, “better a good balance sheet than a bad buy”. Following a year of hard work establishing a pipeline of potential businesses, we expect that portfolio growth will begin in this financial year.

I’ll now give you a very brief summary of our investment strategy:

1. We are looking to diversify our earnings across geographies and across different sectors. This will create a more balanced portfolio and ensure a more reliable earnings stream through the economic cycle.

2. In addition to bolt-on acquisitions in those current sectors with long-term investment appeal for Hellaby, we plan to invest in one or two new sectors over time. We will explain clearly to our stakeholders our rationale for selecting a new sector at the time we invest.

3. Our medium-term focus has now turned offshore, to achieve greater scale, growth and market diversification. We expect that up to one third of our revenues and assets may be in Australia and beyond by 2015. Today only five percent of our revenues are offshore.

4. Although today Hellaby owns 100 percent of all it subsidiaries, we will in future also look to co-invest with partners who share our strategic ambitions.

Conclusion

So where to from this point?

I believe that we will be tested as a management team this year. The economy has tightened again for us, and the market is expecting Hellaby to make acquisitions.

We are equally keen to do so, but we will only act if acquisitions meet the board and management’s stringent criteria. We, and you our shareholders, need to be patient. The reshaping of our portfolio will take some time and we are ‘playing the long game’.

We are signalling today that we expect earnings to be relatively flat until we acquire, and in the meantime we will continue to invest in Hellaby’s future through continued operational excellence, investment in our people projects and disciplined M&A due diligence.

We thank our shareholders for your continued support. Our performance has translated into stronger returns for you. Total shareholder returns (dividends plus share price appreciation) for the year to 30 June 2012 were 29%, well ahead of the NZX50 Gross Index which fell by 1% over the same period. We believe that Hellaby is in good shape to continue to deliver on our investors’ high expectations.

Thank you again. I will now pass you back to the Chairman.

ENDS

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