Future of US sales looks bleak for F&P Appliances

Just 40 days after it assured shareholders that it was on target to meet its forecasted annual revenue targets, Fisher & Paykel Appliances (NZX: FPA | ASX: FPA) is now blaming a flat US market over the past few months for a $19-$24 million sales shortfall - and things are unlikely to improve soon.

The news – which was first revealed on the ASX market after the New Zealand stock exchange closed yesterday – caught the market by surprise, with the share price immediately plummeting by 20%. They since recovered to be down 7c or 9.5% at 67c shortly after 3.15pm.

In May, the company forecasted its normalised net profit after tax for the current year would be $32.8 million, but was now forecasting a result in the $20-23 million range.

At its annual shareholder meeting last month, chief executive John Bongard – who will formally step down from the role next week – said that while it was down on its forecast year-to-date earnings due to margin pressure and increased product costs in the US, the company had met its revenue targets for the first four months.

Less than a month and a half later and acting chief executive Stuart Broadhurst said earnings would be $19-24 million below the forecasted $87.7 million, while net profit has been adjusted from $32.8 million to $20-$23 million.

The sales shortfall means the company will breach its budget performance covenant at the end of the month, but Mr Broadhurst told NBR the company was being proactive on the issue.

“As soon as realised we were not confident that we would not breach the covenant, we went to the banks with our new guidance and we expect an answer from them before end of month.”

With the company still forecasting a reduction in debt to below $200 million by March 31, it is predicting that its revised covenant terms will be accepted by its banking syndicate, but the fundamental issue of reduced sales – especially in the US – remains.

Mr Broadhurst said that while sales revenue in New Zealand and Australia were expected to exceed forecasted levels, the USA story remained bleak, especially in the higher-end products.

“The main driver behind the revised revenue and sales is the US performance over the last couple of months, where revenue is now forecasted to be down 12% on the previous assumed level.”

He said there was no sign of any recovery in the US market over the near future, but the performance may have bottomed out, with F&P now forecasting that sales should remain at current levels.

While he admitted the company had got off to a slow start for the year, Mr Broadhurst did point out some improvements.

“The Australian performance is still looking positive and while we are not seeing any lift in the New Zealand market, there has been some stabilisation.”

Increased costs in the company’s global manufacturing strategy – which are expected to be $4.5 million above previously forecasted figures – have also been blamed for the revised profit figure.

Mr Broadhurst said the higher-than-expected manufacturing costs at the company’s Reynosa plant in Mexico were a short-term issue.

“For the Mexico facility we still using supply lines that were used in Dunedin. We are still looking to localise that supply. It has taken longer than originally thought and it is a staggered process as every individual part becomes available in Mexico, but we will have most done before the end of the financial year.”

Despite the revenue and profit downgrade, Mr Broadhurst stressed that the company was still within its other banking covenants and was well on the road to reducing its massive debt burden, with debt forecast to fall beneath $200 million by March next year.

But with a US consumer recovery still to materialise, the company’s next chief executive, which Fisher & Paykel Appliances are still searching for, will have a huge task ahead of them after Mr Bongard steps down on doctor’s orders next week.