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Dawn posts decline in profit

Johannesburg - Distribution and Warehousing Network [JSE:DAW] on Monday reported a 40% decline in diluted headline earnings per share to 45.6 cents for the year ended June 2010 from 76.1 cents a year ago.

The board said it considers it prudent to conserve cash until market visibility becomes clearer and it therefore does not propose a dividend in respect of the 2010 financial year. 

The group manufactures and distributes quality branded hardware, sanitaryware, plumbing, kitchen, engineering and civil products through a national, strategically positioned branch network in South Africa, as well as in selected countries in the rest of Africa and Mauritius.

Revenue decreased by 8.6% to R3.6bn and operating profit declined by 15.5% to R208m. The group experienced a 9% decrease in volumes while prices on average remained flat. Excluding the impact of DPI and Incledon, the two divisions worst impacted by infrastructure delays, operating profit would have been up 16%, it said.

Although it was a very disappointing performance, the group's operating margin of 5.7% (2009: 6.2%) was an improvement from the low of 2.6% during the second half of the 2009 financial year, it added.

The group's financial gearing is now at its lowest level in the past eight years at 21.1% and total net debt at June 30 2010 amounted to R282m.

Continued close management of collections and strict credit policies, together with the group's policy of credit insurance, assisted management in maintaining bad debt levels below 0.1% of revenue.

During the first half of this financial year, the group started to show a significant improvement from the second half of F2009 when Dawn experienced its worst trading conditions since inception. However, although the second half of this year was much stronger than the second half of last year, the impact of the recession continued to sharpen its bite during the second six months of F2010.

Although the majority of the group's businesses contained within the building segment (representing 63% of revenue) posted a strong performance, with operating profit in this segment increasing by 8%, the severe slowdown in infrastructure spend in South Africa had a significant impact on the rest of Dawn's businesses.

Worst hit in the infrastructure segment was DPI Plastics, Incledon and Sangio Pipe, due to their particular focus on water and sanitation infrastructure spend, where government spending was significantly reduced.

Cross-border currencies also depreciated, which resulted in a net foreign exchange loss of R5.3m after a loss of R6m in 2009.

Looking ahead, Dawn said the benefits from the actions taken during the past financial year will flow through in the new financial year. These include a stringent focus on cost management and the full impact of interest savings through reduced debt and better borrowing rates.

As a result of the rightsizing of the businesses, the group's operating expense base will be maintained on this lower platform. This is expected to result in the annualisation of the R57m costs saved to date in this calendar year through a further R50m saving to December 2010.

On an operational level, an improvement is expected at DPI Plastics and Incledon through internal action taken. Although the short-term outlook for government infrastructure projects remains bleak after the 2010 World Cup-related spend, the infrastructure segment focuses on priority spend in critical areas, such as water infrastructure projects, which are likely to turn up first. However, the timing of the awarding of contracts and tenders remains uncertain.

On the building side, the group anticipates some volume improvements as the market slowly starts to recover, particularly in the second half of the new financial year. The Consumer Protection Act should assist in containing sub-standard imports, with Dawn's leading brands and comprehensive after-sales service and warranties, set to capitalise on this.

Key management focus areas will remain sales growth, margin maintenance, productivity improvement and cash and working capital management. The benefits of the optimal utilisation of assets are anticipated to contribute to the results for the year ahead. Provided that market demand does not deteriorate further, the board anticipates better prospects mainly from the second half of the 2011 financial year, it concluded.
 

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