Guidance Report 2015

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GUIDANCE REPORT 2015

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With many corporates facing a changing revenue mix, and high competition continuing to put pressure on margins, many have cited the difficulties in preparing accurate forecasts.

Welcome to the 2014 McGrathNicol Earnings Guidance Report, prepared by our Advisory team. This report profiles the extent to which companies released and met earnings guidance provided to the market in 2014.

Disclosure of earnings guidance targets is a topical issue for many listed Boards, with a heightened focus in the market on governance and information flow. We have seen an increase in the number of shareholder class actions as new litigation funders enter the market. In our experience this has led to Boards being more cautious in the guidance they have been issued or deciding against providing earnings guidance.

Our analysis has included a sample of 77 Australian-listed companies across the Construction & Engineering, Retail, Building Products, Media & Leisure and Utilities sectors with a combined market capitalisation of over $130 billion. The information used is based on the most recent full-year results for 2014, compared to 2013 results.

Overall, our findings have shown a mixed approach by company Boards and management teams to releasing earnings guidance to the market, with only 56% of our sample doing so in 2014 compared to 59% in 2013. Along with the likelihood of increased investor scrutiny, companies cited a combination of sector-specific challenges as factors that influenced their decision-making around market disclosures. The following pages include our analysis for each sector, which we hope you find useful.

More information about McGrathNicol Advisory, including contact details, is provided at the end of this report.

Welcome

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Key findings from our analysis

56% of the companies profiled released earnings guidance to the market in 2014, which represented a 3% fall from 2013.

The level of disclosure was highest in the Building Products and Utilities sectors (77% and 75%, respectively), whilst it was considerably lower in the Media & Leisure and Retail sectors (31% and 44%, respectively).

The sector that showed the largest change in the percentage of companies that released earnings guidance was Construction & Engineering, where disclosure rates fell 22% from 2013 levels to 52% in 2014.

Of the sampled companies that released earnings guidance, 57% either met or exceeded it in 2014. This was consistent with 2013.

The best performing sectors against guidance were Building Products and Utilities.

Only one in five companies was able to release and achieve guidance in both 2013 and 2014, highlighting the challenges of providing consistently accurate guidance.

The following pages provide key reporting metrics by sector and highlight the more consistent performers and sector-specific issues and trends.

FY14 results - compared to guidance

Industry In-line Above Below Not yet released

Construction & Engineering 33% - 42% 25%

Retail 43% - 57% -

Media & Leisure 25% 25% 25% 25%

Building Products 60% 10% 10% 20%

Utilities 44% 44% 11% -

All companies 43% 14% 29% 14%

100

0

90

80

70

60

50

40

30

20

10

Gui

danc

e re

leas

ed (%

)

Construction& Engineering

UtilitiesBuilding Products

Retail Media & Leisure

Group Average

FY14

FY13

83%

75%77% 77%74%

52%

44%

31% 31% 31%

59%56%

Guidance released per industry sector

46%

28%

26%

FY13 - Actual to Guidance FY14 - Actual to Guidance

43%

14%

29%

14%

BelowAboveIn-line Results not yet released

All companies: FY14 - Actuals vs Guidance

2-5%

0-2%

5-10

%

>10%

0-2%

2-5%

5-10

%

>10%

14% 7%

3% 5%

2%

7%

5%

43%

Inlin

e AboveBelow

14%

Not

rele

ased

Summary

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Building Products10

%

60%

10%

20%

2-5%

0-2%

5-10

%

>10%

0-2%

2-5%

5-10

%

>10%

Inlin

e AboveBelow

Not

rele

ased

In 2014, building dwelling approvals surpassed previous records set in the early 1990’s, with a 21% uplift from 2013 levels. However, this has not yet translated into top-line growth for our sample of building products suppliers, which reported a 3.6% fall in revenue – suggesting a lag on approval activity and the focus on high-density housing that typically pulls through about one-third of the building products volume of a detached house.

Notwithstanding the above, our analysis showed that the majority of companies in our sample (77%) released earnings guidance to the market in 2014. Of these, 70% delivered actual results within or above the range disclosed, which was comparable with 2013. Of particular note, 50% of the companies that met earnings guidance targets in 2013 were able to do so again in 2014. These companies included Fletcher Building, Coventry Group and Hills Limited.

Of the sampled companies that issued earnings guidance, only 30% revised their initial guidance during the year. This was also consistent with 2013.

For those companies in our sample that did not provide any guidance to the market in 2014, a number cited that difficulties in forecasting were due to a change in underlying business models, sensitivities to price fluctuations and foreign exchange movements. This suggests that, whilst there has been some consistency in the earnings profile (as well as the underlying forecasting and governance processes) of the larger companies in the sector, changing organisational structures and earnings variability has impacted the level of disclosure for other participants.

“The FY14 underlying result is in line with guidance provided to the market recently and further reflects our success in delivering on Hills new strategy.

We continue to drive new initiatives and programs to improve our operations.”

Ted PrettyManaging Director and CEO Hills Limited

Guidance issued in FY13


BelowAboveIn-line

Building Products: FY14 - Actuals vs Guidance

The sector is showing signs of an uplift in activity, although this is not yet translating to revenue growth - down 3.6% from 2013

High disclosure levels - 77% of companies released earnings guidance

70% of the companies that released earnings guidance in 2014 met or exceeded it - comparable with 2013

0% 100%0% 100%

77%

10%

77%

20%

40%40%60%

10%


20%

4

Construction & Engineering

33%

33%

9%

25%

2-5%

0-2%

5-10

%

>10%

0-2%

2-5%

5-10

%

>10%

Inlin

e AboveBelow

Not

rele

ased


0% 100%


0% 100%

74%

BelowAboveIn-line

Activity in the Construction & Engineering sector continued to be variable in 2014, with a slowdown in engineering and a change in the nature of infrastructure spending as the peak in resource development passed. For the companies included in our sample, 2014 revenue was broadly in line with 2013 whilst earnings fell by 8.1%.

With a changing revenue mix and high competition continuing to put pressure on margins, many companies in the sector have cited the difficulties in preparing accurate forecasts. Added to these issues are the more traditional sector risks of working on large and long-term projects and the uncertainty attached to project variations and claims.

The impact on market disclosures has been noticeable. In 2014, 52% of the companies in our sample released earnings guidance, a significant fall from the 74% that released guidance in

2013. However, 33% of the companies that released earnings guidance in 2014 delivered actual results above or in line with that guidance in 2014, compared to only 29% in 2013. In addition, the number of sampled companies that revised initial guidance during the year also fell (42% compared to 65% in 2013). These statistics highlight the more cautious approach to guidance taken by our sampled companies in 2014.

Notwithstanding the above, there was a select group of companies in our sample that achieved results in line with initial guidance in either or both 2012 and 2013 that were also able to do so again in 2014. These included Transfield Services, Watpac and Mastermyne Group. Evident in these companies was a reported focus on project governance and controls and an understanding of how strategic and restructuring initiatives translated into revenue and earnings.

“Our FY2014 result is in line with guidance despite the challenging conditions.

The company’s pleasing performance reflects well on our increased focus on execution discipline and targeted business development.”

Graeme Hunt Managing Director and CEO Transfield Services

Construction & Engineering: FY14 - Actuals vs Guidance

Challenging environment with margin pressure across the sector - revenue stable but earnings down 8.1%

Impact on disclosures - 52% of companies released earnings guidance, down 22% from 2013

Only 33% of the companies that released earnings guidance in 2014 met or exceeded it

25% 33%

42%


0%

23%

71% 6%

52%

5

2-5%

0-2%

5-10

%

>10%

0-2%

2-5%

5-10

%

>10%

14%

43%

10%29

%

Inlin

e AboveBelow

14%

Not

rele

ased

0% 100%0% 100%

31%

BelowAboveIn-line BelowAboveIn-line

0%

It has been widely reported that Australian retailers have experienced subdued market conditions over the last three years, with consumers remaining cautious about the overall economic climate.

Some retailers have responded with aggressive discounting – as evidenced by our sample companies, which reported a 6.4% increase in revenue but a 6.2% decrease in earnings relative to 2013 – and there has been a strategic shift by others from traditional ‘bricks and mortar’ to ‘omni-channel’ business models, combining online and mobile technology to better manage costs and increase market share. This has driven store rationalisation and broader restructuring programs that, for many retailers, are ongoing.

In terms of market disclosure, there has been an ongoing reluctance from retailers to issue earnings guidance with only 44% of companies in our sample doing so in 2014 – the third year in a row where disclosure levels were 50% or lower. For those companies that did release guidance, 43% revised their guidance during the year (at least once) compared with 80% in 2013. However, the percentage of sampled companies that met or exceeded guidance fell significantly – from 80% in 2013 to 43% in 2014.

There were only two companies in our sample that met or exceeded guidance in both 2013 and 2014 – JB Hi-Fi and Nick Scali – highlighting the difficulties experienced by retailers in both setting and achieving earnings targets.

“To deliver double-digit earnings growth would be fantastic, we have in the past, but it’s more challenging in recent years.”

Richard MurrayCEO JB Hi-Fi

44%



0%

Retail: FY14 - Actuals vs Guidance

The sector continues to experience structure change, characterised by new online and mobile technology and heavy discounting - 6.4% increase in revenue but a 6.2% fall in earnings

Reluctance of retailers to issue guidance - below 50% for past three years

Fall in companies that met or exceeded guidance - from 80% in 2013 to 43% in 2014

Food & Beverage

80%

20%

43%57%

6

Media & Leisure

25%

25%

25%

25%

2-5%

0-2%

5-10

%

>10%

0-2%

2-5%

5-10

%

>10%

Inlin

e AboveBelow

Not

rele

ased

0% 100%0% 100%

31%

There was increased pressure on traditional print media and free-to-air television advertising revenue during 2014 as large consumer-orientated advertisers cut back on traditional marketing spend. Within our sample, combined revenue fell 1.1% from 2013 levels, whilst earnings were 0.6% higher.

The pressure on traditional sources of revenue, coupled with softer consumer confidence, led companies operating in the sector to increase focus on managing costs in order to maintain earnings. In addition, the sector saw increased innovation in identifying income streams and growth in digital offerings (both mobile and web platforms) during 2014. According to recent Commercial Economic Advisory Service of Australia

(CEASA) statistics, digital advertising accounted for 34% of all advertising expenditure in 2014, up from 30% in 2013.

It appears that this change in underlying business model has made media organisations less willing to issue earnings guidance, with our analysis showing that only 31% of sampled companies released earnings guidance to the market in 2014 (consistent with 2013). Of these companies, 50% delivered actual results within or above their target range, including Sky Network Television and Southern Cross Media Group.

Of the small sample of companies that provided guidance, half revised guidance at least once throughout the year, compared with one in four companies in 2013.

“The FY14 results continue to show the resilience of our business. In what has been a challenging trading environment, and a challenging year for the group overall, I am pleased with the results and the direction in which the group is heading.”

Rhys HolleranCEOSouthern Cross Media Group Ltd

BelowAboveIn-line

31%



Media & Leisure: FY14 - Actuals vs Guidance

The sector continues to experience pressure on traditional revenue sources, whilst Board and management focus on managing costs to maintain earnings - both revenue and earnings marginally up from 2013

Like Retail, reluctance of companies to issue guidance - only 31% in 2014

50% of the companies that released earnings guidance in 2014 met or exceeded it

25%

50%

25% 25%

25%


25%

25%

7

2-5%

0-2%

5-10

%

>10%

0-2%

2-5%

5-10

%

>10%

14%

43%

10%29

%

Inlin

e AboveBelow

14%

Not

rele

ased

0% 100%0% 100%

31%


0%







44%



0%





80%

20%

43%57%

Retail

8

2-5%

0-2%

5-10

%

>10%

0-2%

2-5%

5-10

%

>10%

14%

43%

10%29

%

Inlin

e AboveBelow

14%

Not

rele

ased

0% 100%0% 100%

31%


0%







44%



0%





80%

20%

43%57%

Transport & Distribution

9

Utilities

0% 100%0% 100%

83%

BelowAboveIn-line

30%

40%

BelowAboveIn-line

30%

Market conditions remained challenging for Utilities companies in 2014, particularly in the energy sector. Regulatory changes, including the introduction of the (now repealed) carbon tax, impacted wholesale power prices.

In addition, the sector experienced falling demand for energy amongst households, and high levels of competition in the retail energy market leading to increased customer “churn” rates (particularly across the Eastern and Southern States).

Across our sample, revenue fell by 1.1% in 2014 whilst (notwithstanding the above) earnings increased by 7.5% relative to 2013.

Despite the uncertainty and changes occurring in the sector, 75% of sampled companies issued earnings guidance in 2014 (compared to 83% in 2013) and, of those that did, there appeared to be an inherent caution in the guidance provided to ensure that market expectations were met. As a result, 89% of companies that released guidance delivered results in line or above targets, a 19% improvement from 2013. Further to this point, only 50% of the sampled companies that released guidance in 2014 revised their initial guidance (broadly in line with 2013).

We note that AGL Energy, Duet Group and Envestra Limited achieved or exceeded their earnings guidance targets in 2012 and 2013, and were able to do so again in 2014.

“We continued to actively manage our cost base [in FY14], including a major reduction in our head office costs. We are seeing the benefits of internalising our management structure in December 2012 and restructuring of our operating arrangements.”

David BartholomewCEODuet Group

75%



Utilities: FY14 - Actuals vs Guidance

11%

2-5%

0-2%

5-10

%

>10%

0-2%

2-5%

5-10

%

>10%

44%

11%

45%

11%

11%

22%

Inlin

e AboveBelow

Not

rele

ased

The sector experienced falling demand for energy amongst households and high competition in the retail energy market - revenue down by 1.1%

High disclosure levels - 75% of companies issued earnings guidance

Significant jump in companies that met or exceeded guidance - from 70% in 2013 to 89% in 2014

45%44%

Guidance Report 2015

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