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Behind Hills' laser focus on distribution

Also announces the sale of its STEP Electronics satellite business
David Lenz

David Lenz

Hills Limited CEO and managing director David Lenz has revealed the thinking behind the company's decision to double down on distribution and health across Australia and New Zealand.

Speaking at Hills’ annual general meeting for 2019, Lenz explained that following operational and strategic reviews of the business during the second half of the 2019 financial year, it was determined that the communications and audio visual (AV) parts of the business would be divested to reduce exposure to non-performing assets and reduce complexity in the business, selling off its antenna and AV businesses as a result. 

“This will enable the company to streamline and narrow the focus of our distribution business and increase our investment in our Health business,” Lenz said. 

In addition to the sales of its antenna and AV businesses, Lenz announced Hills would be selling its STEP Electronics business, a satellite communications vendor, to Av-Comm, which would be the last of Hills’ business divestments.

“As part of these divestments it has been pleasing to be able to also ensure the transfer of over 50 staff, enabling them to continue their careers in their chosen industries,” Lenz said. 

By selling off these businesses, Lenz expects Hills will see a full-year revenue impact of about $50 million with no negative impact of earnings before interest, tax, depreciation and amortisation and a release of about $10 million in working capital to reduce net debt and to reinvest back into the business. 

On the distribution side of the business, Hills is doubling down on integrated security, IT and technical services in Australia and New Zealand, while the health side of the business is focusing on nurse call solutions, patient engagement systems and Wi-Fi networks in Australian and New Zealand hospitals and aged care facilities.

“I believe this improved focus will have a positive impact on the overall performance of our company and provide our customers, partners, shareholders and staff with an exciting future that will deliver the results many in this room have been waiting for over the past few years,” Lenz said.

The particular narrowing of the focus on the distribution side of the business is due to the expected growth forecast for access control, video management systems and closed-circuit television (CCTV) and information technology (IT).

Lenz said he expects to see the annual rate of growth for the three markets at 7 per cent, 7 per cent again and 5 per cent, respectively.

Each of these three markets, according to Lenz, have the potential to provide Hills with opportunities through leveraging relationships with other businesses; the CEO and managing director said there is an opportunity in the access control market with Carrier (formally Interlogix) attempting to break into the home automation market. Meanwhile, the video management systems market has an opportunity with Genetec and the CCTV market has multiple opportunities with Axis, IDIS, Vivotek, Dahua and Mobotix.

Further, the growth enjoyed by Ruckus and Extreme Networks, two businesses whose products and services Hills distributes, has flowed through to the distributor's IT business, seeing 6.4 per cent growth over the last year, and is also being felt in financial year 2020.

The distribution side of the business is also seeing new tools being implemented – business intelligence tools, customer relationship management tools and a phone system – and is expected to accelerate the utilisation of Hills’ e-commerce platform, which is now focused on security and IT sectors.

Overall, the distribution business saw operating expenses decline by 6.1 per cent – or $4 million – over the last year, with financial year 2020 expecting to see additional savings from $3 million to $5 million.

“With the continued focus on improving the overall distribution business and as a result of our announced business divestments, we have the confidence we are well positioned to return the distribution business to profitability in FY20 and positive cash flow generation,” Lenz said.

Overall, Lenz said Hills saw an “encouraging” start to the first half of the 2020 financial year and expects to see strong net profit after tax performance over the prior year and strong growth year on year throughout the rest of the 2020 financial year.

“I am sure, like all companies today, we will continue to face challenges over the coming 12 months, but I am very confident we have made the right decisions to ensure the longer-term success of Hills and ensure it is well placed to continue to hold a strong position in the Australian business landscape,” Lenz said.

These comments follow the restructuring of Hills’ business, which ended up costing it nearly $15 million.

Meanwhile, the reasoning behind Hill’s focus in the health sector is due to the strength of Australia’s health sector, with 9.8 per cent of Australia’s gross domestic product spent on health – $47 billion spent in the public sector and $11 billion in the private sector.

On this point, Lenz claimed Hills has a “market-leading position” in nurse call and patient engagement systems, with its nurse call business has  a backlog of $70 million worth of orders and tenders and is servicing 43 per cent of public and 30 per cent of private hospital beds in Australia, and its patient engagement system has a backlog of $10 million worth of orders and tenders and is servicing 43 per cent of public and 23 per cent of private hospital beds.

Lenz also said Hills is positioned to take on the shift towards health-related software as a service-based solutions, as they utilise subscription-based payment models rather than upfront contract payments to allow for constant revenue streams.

To find growth in the patient engagement market, Hills made an agreement with US-based company GetWell Networks in May to distribute its Inpatient and Loop products in Australia and New Zealand.

The health side of the business is forecast to see revenue growth in financial year 2020 and beyond, Lenz said, due to market share gains, increased share of wallet, leveraging replacement cycle in hospitals, maximising contract renewals, GetWell market penetration and continued investment in product development.