Raw material prices push down F&P Appliances earnings

Fisher & Paykel Appliances is warning that earnings this year will be at the lower end of expectations and has cut jobs.

Chief executive John Bongard told the annual meeting in Auckland yesterday raw material prices were "stubbornly high" with recent increases in some categories - copper had virtually doubled since March.

"All of these factors have continued to put pressure on margins and profitability. Pricing uncertainty for these commodities remains."

F&P Appliances' shares fell 21c on the news to finish the day at $3.90. However, the forecast of lower earnings did not faze brokers, who still rate the company highly.

"Generally speaking, we're positive towards the stock but recognise that with the subdued outlook the price is going to be under some pressure," said Stephen Wright, head of advisory at ASB Securities.

He looked on the result as being part of the business cycle. Positives for the company included strong management, a commitment to R&D, and strong progress in the United States.

Higher import prices also would not have helped, he said.

Forsyth Barr analyst Greg Main said it could be difficult for F&P Appliances to pass on costs. "If the markets are slowing ... you have less ability to do that in the short term.

"At the end of the day, they're a good manufacturer and operator, and they're just being caught in this cost pressure squeeze once again and that impacts short-term earning.

"They will deal with it but they can't just automatically adjust."

Bongard said the company was raising prices in its three main appliances markets: New Zealand, Australia and the US.

While softening demand in the US had hit sales, there had been good progress with the DCS brand and with a new factory in Ohio.

The company expected to hold its recently expanded New Zealand market share even though the overall local market would decline.

A lower New Zealand dollar had offset some anxieties about high raw material costs and a procurement office will be set up in China this year to help reduce costs further.

Bongard said earnings from the finance operation would remain under pressure due to "intense competition and lower net yields".

Overall, company earnings guidance for the year "is now biased to the lower end of the previously announced earnings range of $75 million to $80 million" before restructuring costs and the sale of surplus land.

First half net profit was expected to be lower than the previous period last year, when a $26.2 million after tax profit was recorded, but ebit was expected to be slightly up.

The full year after tax profit in 2005-06 was $63.9 million compared with $68.6 million the previous year.

Bongard said opportunities for savings through design and "labour efficiencies" had been identified. "Unfortunately, the inevitable consequence of this is job losses." So far this year 41 people had been retrenched. "This structural review is ongoing."

In the year to date, revenue is about 10 per cent ahead after eliminating currency effects.