COVENTRY GROUP LIMITED — Management Reports 2014

Jun 19, 2014

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Operational Update June 2014 FASTENER AND HARDWARE BUSINESSES

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1

Fastener Industry Structure: Past & Present

Asian manufacturing has facilitated a fracturing of industry structure

1980s

Manufacturers (Australian) Distributors End Users

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1990s
Manufacturers
(Asia)
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Importers (Former manufacturers) Distributors End Users

Present

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Manufacturers
(Asia esp. China)
Importers
Rare
Importers
Distributors
Distributors
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End Users

2

Fastener Industry Structure: Future

Large distributors & importers best placed to drive a more rational industry structure

Possible Future Outcomes

Manufacturers (Asia esp. China) Importers Distributors

End Users

• Distributors continue to expand house brands for most common commodity lines

• Scale important

• MOQs limit direct imports

• Current Konnect imports a significant minority.

• Importers reposition themselves as aggregators of the “tail” to meet MOQ requirements.

• Some importers already closed: Fewer importers in the future doing more volume individually than today.

• Branded products will still be important and drive different manufacturing and distribution outcomes.

3

Restoring a great business

Fastener Recovery Underway

• Fastener recovery centred around four themes

• Strategy

• Operational Efficiency

• Prices

• People

4

Fasteners Strategy

Leverage scale to deliver low cost service

• Working hard to differentiate…

– Branch Network

• People

• Range/Availability

• To compete, must be low cost/ competitive value

• More imports

• Better local sourcing

5

Progress on key objectives

Progress Evident

• Fasteners

• Re-branded ANZ to Konnect to reduce operating expenses and simplify import logistics

– Invested in training to upskill and slow turnover

– Increased import program

• Expanded Branch footprint

• Get control of pricing

• Artia

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• Exited Furniture producing $4m in cash

• Relaunched hardware product line up

• First Artia locations opened in Konnect stores

6

Improving Service

Good Service is Cheap Service

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Fasteners DIFOT 250 Face to Face Sales Calls Per Day
Baseline 100 = Oct 2012
85
200
84
83 150
82
100
81
80 50
79
78 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 - Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14
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Call Centre Dropped Call Rate

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30%
25%
20%
15%
10%
5%
0%
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7

Cost Reduction Update

Cost will continue to fall

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Head Count Index
Baseline 100 = July 2012
100
95
90
85
80
75
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Fasteners Total Monthly Expenses
Baseline 100 = Jul 2012
105
100
95
90
85
80
75 Jul-12 Sep-12 Nov-… Mar-… May-… Jul-13 Nov-… Jan-14 Mar-…
May-…
Jan-13 Sep-13
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Import Receipts
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Baseline 100 = Cal 2012
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800
700
600
500
400
300
200
100
0
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8

Every Regional Market is Different

Konnect is a multi-local business

KONNECT Segmental Exposure by End User Type

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100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
SA Qld NSW WA NZ VIC Aust/NZ
Geographic Territory
type
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Construction Mining Manuf Fabrication Other

9

Currency Implications

Softer AUD better in the long term, but some short term pain expected

• Impossible to predict with any certainty

• Expected to go down which is likely to be a positive to any industry that is “cost plus” focussed

• Timing issues will create low margin work

• Short term turbulence as lower value stock gives some players a temporary advantage

10

Price controls

Margin gains hard won but will hold

• Price control objectives

• Important in times of currency volatility

• Increase margins

• Margins went up but volume dropped

• Emphasis on optimal local pricing

• Market share returning

• Ultimately expect to make small margin gains and return to previous volumes

11

Artia Strategy

Clear and simple strategy

Differentiation

• Brands are strong

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• Product innovation is common

• Price is important, but far from the most important

• Product management and selling are key skills

12

Creating a great business

Clear & Simple plan to Deliver the Strategy

Artia improvement centred around four themes

• Exit furniture

• Fix product offering of hardware

• Leverage distribution footprint of fasteners

• Focus on selling

13

Exiting Furniture

First of four steps has been delivered

Decision to exit announced 2 May 13

• Difficult business to operate which complicated warehousing arrangements

• All but one Distribution Centre closed by 30 June 14

• Stock was $4.5m on 2 May 13, $0.25m on 31 May 14

• Taken 6 months longer than expected

14

Fix Hardware

Hardware line-up improved

Create a predictable & comprehendible product offering

• Previous product offering was unfocussed and broad offering 3,400 SKUs from 6 major suppliers

• New product offer focuses on complete sets

• New hardware launched Nov 13 and May 14

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Grass- Concealed Hinges
(Jul 2013 = 100)
300
200
100
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Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14

• SKUs significantly reduced to 2,000

15

Focus on Brands

Branded Space is defendable

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16

Focus on Brands cont .

Greater Depth in Smaller number of Brands

PREVIOUSLY

NOW

GOOD BETTER 1 BETTER 2 BEST

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GOOD BEST

17

Leverage Fasteners Distribution

High Growth Potential from Low Market Share Base

Reduce cost and increase reach via fasteners

• Global hardware players have scale

• 2 sales forces, 1distribution/admin system

• Fasteners will take over the distribution of hardware (30% cheaper)

• Reduce Distribution centres by 6 (5 already closed)

• Regional fastener branches to be targeted to sell Artia with 1 pilot underway and 4 more planned

18

Focus on selling

Nimble, Focussed Sales Team

• Single purpose of selling combined with good product offer and selling tools

• Artia is a single purpose sales force

• Provide basic selling tools

• Catalogue

• Working Models & Samples

• Product Training

• New product cycle driven by product managers

19

Summary

Some progress, but lots of work to do

• Clear focus to strengthen each business

• Cost out

• Combined distribution and administration

• Separate sales efforts

• Focus on availability & branch network for fasteners

• Focus on product portfolio and availability for hardware

20

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