Hills’ distribution business struggles as COVID-19 bites

Hills’ distribution business struggles as COVID-19 bites

The publicly listed distributor reported an overall revenue decline of 26.5 per cent, year-on-year, to A$93.16 million.

David Lenz (Hills)

David Lenz (Hills)

Credit: Hills

Hills Limited has flagged substantial revenue and earnings declines for its technology distribution business segment in the six months ending 31 December 2020, with the company citing adverse impacts from COVID-19 and delayed projects.

The publicly listed distributor reported an overall revenue decline of 26.5 per cent, year-on-year, to A$93.16 million, and a whopping 379 per cent tumble in net profit after tax (NPAT) during the period, to -A$6.45 million. Overall segment EBITDA, meanwhile, was A$6.40 million, a year-on-year decline of 29.3 per cent.  

The company’s health solutions segment did reasonably well during the first half, with sales revenue declining by 7.6 per cent, to A$16.9 million, and earnings before interest, tax, depreciation and amortisation (EBITDA) rising, year-on-year, by 12.4 per cent, to A$6.2 million.  

The same could not be said for Hills’ distribution business which, by the company's own admission, was hit by challenging trading conditions. Revenue for the business segment declined, year-on-year, by 29.6 per cent, to A$76.3 million, while segment EBITDA plummeted by 67.1 per cent, to A$1.8 million.  

The distribution division was adversely affected by COVID-19-related lockdowns, delayed projects, reduced competitiveness from foreign exchange losses and non-operating items, Hills told shareholders.

“The distribution division has recorded a decline in profitability reflecting the challenging trading conditions, particularly in Victoria and in the IT business,” Hills said in a statement lodged with the Australian Securities Exchange (ASX).  

At the same time, the segment’s EBITDA as a percentage of sales declined to 2.3 per cent, reflecting the adverse impacts on competitiveness caused by foreign exchange losses, an increasingly competitive marketplace and losses generated by the company’s New Zealand business.  

The New Zealand distribution business delivered a loss of A$800,000 million in the first half, reflecting a highly competitive trading environment and poor economic conditions in the country, according to Hills.

However, operating expenses in the distribution business declined by A$4.4 million, including the benefit of three months of the Australian government’s JobKeeper COVID-19 subsidy, with the division on track to deliver cost savings of up to A$5 million in FY21.  

Across the group, Hills said that its overall NPAT factored in A$2.95 million from Australia’s JobKeeper subsidy, along with non-operating items of A$5.7 million, including foreign exchange losses and legal costs, a A$1.1 million reversal of timing differences and New Zealand tax losses in deferred tax assets and a A$1.4 million write-off of aged, slow-moving and demonstration stock. 

Moreover, during the preparation of the half-yearly consolidated financial statements, the company identified an overstatement of the carrying value of trade and other receivables and inventory and an understatement of trade and other payables as of 30 June 2020 of A$1.55 million.

Net loss for the full year ended 30 June 2020 was understated by A$0.37 million (net profit for the half year ended 31 December 2019 was overstated by A$0.33 million), and retained losses as at 30 June 2020 were understated by A$1.18 million.

“The impacts of COVID, non-operating items and foreign exchange losses have resulted in disappointing first-half results,” Hills CEO and managing director David Lenz said. “We are pleased to report that our health division has returned to revenue growth in the second quarter as COVID restrictions have been lifted and we remain excited by the profit opportunities identified in our recent strategic review of this business.  

“We continue to streamline the distribution division to remove costs and improve margins,” said Lenz, who, in early February, revealed he would be retiring from his CEO role

Despite the challenges, however, Hills said it remained focused on its strategic priorities of building and maintaining a market-leading product portfolio, tight cost control and capital management – working capital declined by A$5.3 million as of 31 December 2020, while capital employed reduced by A$3.8 million.

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