SCHOOLBLAZER LIMITED — Call Transcript 2009

Feb 3, 2009

Attention ASX Company Announcements Platform Lodgement of Open Briefing[®]

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HGL Limited Level 5, 34 Hunter Street, SYDNEY, NSW, 2000

Date of lodgement: 04-Feb-2009

Title: Open Briefing[®] . HGL. CEO on Q1 Update

Record of interview:

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HGL Limited said at its AGM yesterday that for the first quarter ended December 2008, EBIT from its operating businesses was down 46 percent to $2.9 million. You’ve said it’s unlikely your operating businesses will achieve last year’s EBIT of $17.7 million in the current year ending September 2009. What earnings visibility do you have and how does this compare with visibility at this time in a “normal” year?

CEO Kevin Eley

We have very little visibility for the full year. Usually our first quarter results give us some comfort on the outlook for the year, however in the current environment there are too many uncertainties for us to form any view on the likely full-year result.

However, we’ve provided some guidance on core profitability for the six months to March 2009, which we believe will be between $1.5 million and $2.0 million, significantly down from last year’s interim core profit of $5 million. That’s based on our actual first quarter result and what we believe is immediately ahead of us.

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You’ve attributed the fall in operating business earnings to reduced gross margin resulting from the drop in the Australian dollar. What ability do you

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have in the current environment to pass on exchange-rate related price increases?

CEO Kevin Eley

To date we’ve had a fair amount of success in achieving price increases in our businesses and we’ve found that most of our competitors are doing the same; we’re all in the same boat. But the task of raising prices isn’t over yet given the precipitous fall in the Australian dollar since October 2008; it takes some time for these issues to work their way through.

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In your specific markets, what is the sensitivity of demand to pricing and what has been the trend in selling volumes year to date?

CEO Kevin Eley

Our sales for the first quarter were ahead of last year by 7 percent which is encouraging, but not sufficient to maintain earnings growth. In normal economic times we’d expect larger growth than that just to stand still given the impact of inflation and additional costs we take on.

Although there’s some sensitivity to pricing in our businesses, in general they operate in niche markets, and in some cases supply industries that tend to be defensive in a weaker economic environment. For example, some of our businesses have supply and service contracts with major corporations and government bodies, or supply essential products to schools such as hats and uniforms, or provide promotional materials to the large grocery sector. However, we believe that at best demand in our businesses will be flat in the current environment.

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You’ve said you’re taking action to minimise overheads and product costs, and reduce working capital. How effective can such action be in light of deteriorating demand conditions?

CEO Kevin Eley

It’s difficult in this environment to reduce product costs and overheads effectively, but its part of doing business in a changed environment. Our suppliers are based in Europe, the US and Asia, and are very much aware of the effect of the fall in the Australian dollar on the cost of our goods, and the potential effect on sales, which will in turn affect them. Most are being supportive by providing some price reductions for their products and those products comprise the major component of our costs. We’ve also had small reductions in head count throughout the group, including head office, and management within the operating business is looking at saving costs wherever possible.

At the same time we’re starting to see more competitive freight rates due to the fall in oil prices, and there hasn’t been a huge increase in wages. We also think that when leases come up for renewal on the offices we rent there will be potential to negotiate more attractive terms. All of this should help offset to some degree the impact of softening demand.

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In regards to working capital, we monitor cash flow weekly throughout the group, and for the first quarter our cash flow was in line with expectations. Our inventory and debtor levels have remained flat since the end of last financial year. However, we’ve paid a lot of our creditors early to take advantage of favourable currency movements, so our trade payables have fallen.

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You’ve indicated that net debt fell to $20 million as at the end of January, down from $34 million at the end of September, partly reflecting funds received from the sale of HGL’s stake in MMC Contrarian. Gearing fell to 18 percent from 30 percent. Can you comment on the recent trend in interest cover?

CEO Kevin Eley

We expect interest cover for the six months to March to be close to 8 times, so we remain very comfortable.

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You’ve highlighted HGL’s financial strength as one of the reasons your operating businesses are well placed to emerge stronger from the current downturn. Where do you expect opportunities to arise over the short to medium term?

CEO Kevin Eley

We’re already seeing opportunities that include acquiring additional agencies as a result of suppliers wishing to strengthen their distribution by using more robust distributors, and gaining business mandates at the expense of competitors with weaker balance sheets, given big suppliers tend to go with financially stronger customers. We’re also seeing opportunities to employ better sales staff and believe there will be opportunities to consummate small bolt-on acquisitions.

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HGL paid a fully franked dividend of 12.1 cents per share for 2008, down from 14.4 cents in the previous year. Your aim is to continue paying 70 to 80 percent of core profits as dividends. To what extent might your ability to pay dividends at this level be constrained by further impairment losses on your listed investments?

CEO Kevin Eley

In relation to our dividend policy, the board’s definition of core profits excludes impairment losses, and therefore they don’t impact our dividend level. Also, as at 30 September 2008, we had substantial reserves from which to pay dividends as we had retained earnings of close to $30 million, and a corresponding amount of franking credits.

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What will be the key factors that might push the payout into the upper or lower end of the 70 to 80 percent payout range?

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CEO Kevin Eley

The difference between 70 and 80 percent isn’t huge, but in deciding the payout, our board will take into account the outlook for our businesses, our level of borrowings, the capital required for funding growth opportunities such as those I mentioned earlier, and the overall economic environment.

We’ve had a strong record of continuing dividend growth up to 2007, so we were very disappointed in 2008 to have to reduce our dividend. It looks like this year we’ll again see a reduction in dividend, but that’s a reflection of the current environment. We believe we can maintain a relatively high payout without in any way eroding the future prospects of the operating businesses.

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Thank you Kevin.

For more information about HGL, visit www.hgl.com.au or call Kevin Eley on (+61 2) 9221 7155

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