Shares in the region’s largest printing company fell by more than 31% in one day after PMP warned that higher volumes of short run work had contributed to a $20m downgrade in profit forecasts.
As the integration of PMP and IPMG has progressed, it has now become clear that the guidance previously announced for fiscal 2018-2019 will not be met, the company told the ASX on Monday.
Within hours of the announcement, PMP’s share price had plummeted from 77c to 47c, before recovering to 51c on Tuesday afternoon.
An industry analyst said the company’s employment of casual workers following its merger with IPMG in March indicated “a miscalculation of labour capacity for commercial short run work.”
According to The Australian Financial Review, the profit downgrade and share price collapse hit major shareholders and former IPMG owners the Hannan family especially hard: The 37 per cent stake owned by Lindsay Hannan, Adrian O'Connor, Richard O'Connor, Michael Hannan, James Hannan and family vehicle Sayman lost almost 31 per cent of its value, or $45 million, in a day.
The company said its Print Australia business had been adversely affected by:
Synergy shortfall $12m:
We originally expected to deliver $55m of cost synergies as a result of the merger. $43m of savings have been delivered. The higher volumes of short run work have been a major factor in preventing PMP from delivering the final $12m of expected labour savings.
Pricing assumptions and contract renewals $16m
The majority of this relates to assumptions made around pricing. We assumed average higher prices for some of the work in the post-merger volumes.
Labour & operational costs $14m:
The volumes of the short run work, which is labour intensive and required additional equipment to produce therefore resulted in a cost base greater than anticipated. This has resulted in increased manufacturing costs being incurred.
PMP downgraded its EBITDA forecast for FY 2018 from between $70m to $75m to between $50m and $55m, a fall of about 28%. 2019’s forecasts have been cut from $90m-$100m to $70m-$80m.
“Given the large amount of short run complex work that was transferred into the merged group we have had to maintain an increased operational cost structure to deliver on customer expectations,” said PMP CEO Peter George. “This extra short run work required a higher cost base affecting our ability to deliver the full anticipated synergy benefits, and also required additional labour costs including casual employees and overtime payments. We also had to re-set price on some key contracts to reflect market conditions.
“The company has responded quickly and has identified a number of new cost out projects, described as Phase 2 cost initiatives. These will be undertaken over the ensuing 18 months. We have started to implement several of these, including: changes in shift patterns at the larger sites to significantly reduce overtime, commissioning of additional bindery equipment, further headcount reductions and repricing work on smaller format presses. These savings are expected to improve FY19 profitability to $70m to $80m.”
Meanwhile, the company announced that George would step down at the end of this month following ‘a tragic family bereavement’ and be replaced by former IPMG CEO Kevin Slaven, who will start as Interim CEO on 1 December.
“It has been a privilege to work with Peter,” said PMP chairman Matthew Bickford-Smith. “His disciplined focus on efficiency and cash generation have secured PMP’s future. The merger with IPMG could not have been achieved without Peter’s vision and leadership. We offer our deepest condolences to him and his family at this difficult time. Given Peter’s original intention to retire next year, we had already begun the succession planning process, which will now be accelerated.”
In August, George told Print21’s Patrick Howard of his determination to transform the billion dollar-plus company into a debt-free powerhouse.
Slaven, who joined PMP with the merger in March 2017, will start as Interim CEO on 1 December.
“Kevin is a well-respected and highly effective leader in the industry with a strong track record of managing integrated print and distribution,” said Bickford-Smith.
Slaven said he was looking forward to “building on the strong foundations that Peter George and the board have put together following the merger. Much of the integration has been done. The next step is to complete the integration, the phase 2 initiatives, and leverage PMP’s position as the pre-eminent print media and marketing services company in Australasia.”