CEO'S ADDRESS - S&T ANNUAL MEETING NOVEMBER 2016

17 Nov 2016

Address by Dave Taylor, CEO

[Slide: CEO Dave Taylor]

Thank you Sir John and good afternoon ladies and gentlemen.

Reflecting on last year’s performance, I think it is important to understand the environment in which S&T has been, and still is operating within.

Global steel prices had been declining since late 2011 / early 2012, and these declines accelerated through-out the 2015 calendar year, to 13 years lows in December 2015.

This led to margin squeeze which was further compounded by some competitors chasing volume, which in turn leads to further margin erosion as others protect market share.

With the One Company strategy however, S&T had delivered year–on-year earnings’ improvements, until the last financial year, when we simply could not keep pace with the acceleration in declining global steel prices.

The One Company strategy, however, has seen S&T modernise many of its capabilities in terms of facilities, equipment, systems, and these activities are ongoing, ensuring we continue to deliver products most cost effectively & efficiently. It has also seen a united approach to customers and this continues.

We have also been extending our stable of best-in-class companies, with acquisitions, that along with the strong foundations already within the business continue to position S&T for ongoing growth in our key markets. The majority of the acquisition’s KPIs have been met and are improving.

And so we had been on target to deliver underlying earnings for financial year 2016 consistent with the prior financial period, as we signalled at the last Annual Meeting.

Had we not had the product quality issues in the second half, which I will talk about a little later, we would have achieved that expectation.

[Slide: Building on Stronger Foundations]

We have refreshed our strategy to reflect what we believe will be the environment over the next few years.

The refreshed strategy builds on the strong foundations put in place under One Company and many of the key One Company themes continue. These are being supplemented with strategies that reflect the low priced raw material and finished steel environment, increasing commoditisation of some products, and increasing customer expectations requiring further capabilities and technologies within S&T.

[Slide: Quality Assurance]

Moving to the quality issues.

As Sir John eluded to, we had two key product quality matters in the second half. The first related to seismic mesh, of which there were two concerns:

  • The first was the use of the Holmes Solution logo on the test certificates. This was an inadvertent oversight and as soon as we became aware, we publicly acknowledged the mistake and removed the logo.
  • The second concern is one of compliance to the Standard and S&T are one of five other companies involved

When this was raised, we had similar product tested with several different testing houses and the results showed significant variation. It became obvious the Standard (and there are several documents) was ambiguous and people had interpreted the testing requirements differently, resulting in different testing outcomes.

S&T proactively called for a Government/industry review of the testing Standard, and since then the Government has worked with the industry on an updated Verification Standard and Acceptable Solution to give clarity and consistency to the testing requirements.

Both the logo and possible compliance issue are subject to Commerce Commission investigations which as you expect, we have cooperated with fully. Given the significant interpretational issues, it may be that the Commerce Commission forms a view that may be inconsistent with S&T’s interpretation of the testing standards.

The second matter was the supply of steel pile cases to the Huntly By-pass section of the Waikato expressway.

Unlike much of what we supply, the steel requirements were specified by the project. Coupled with tight delivery timeframes, we utilised a supplier that had provided similar material into NZ but not for S&T. To ensure compliance, we engaged third party testing to be performed by accredited laboratories. Given that this is the subject of further action in the country of the steel’s origin, I’m unable to go into more detail.

We have worked with the expressway project team to find an engineering solution that maintains the integrity of the design with no impact to the NZTA.

All said, we were bitterly disappointed by both these issues and it is by no means a reflection of S&T, and in an attempt to put things into perspective, it is worth noting:

[Slide: High Quality Procurement]

  • S&T purchases approximately $400 million of steel products per year across approx. 50,000 products from all over the world but predominately NZ, Australia, and Asia.
  • We deliver the products into 56 different facilities throughout NZ before final despatch to over 20,000 customers.
  • The long term conformance runs at 99.75% which is consistent with the New Zealand industry average.
  • S&T’s imports from China are approximately 8 per cent of all our steel procurement, compared to an industry average of 18 per cent.

Clearly however, we are aware that these issues have negatively impacted S&T’s reputation, and not least the share price, and although this appears to me to be more within the general community than our customers, there is some work to rebuild our reputation.

To help with this, we are in the final stages of a perceptions survey that will provide valuable insight into the views of our different stakeholders. Naturally, we will develop plans to address any gaps identified in that survey.

[Slide: NZ’s largest Hospital Building Project]

Setting that aside, it’s important to recognise and celebrate some great projects and some notable milestones S&T has been involved with.

A few examples include:

  • We continued to supply products into the Burwood hospital redevelopment, part of New Zealand’s largest public hospital building project. We had been involved in that project from the outset and for our staff involved, it was a chance for them to have a role in the rebuild of a city. You may recall the Burwood Hospital story formed part of a 60th anniversary celebration video. The new facilities at Burwood were opened to admit patients in June this year, three years after breaking ground on site.

[Slide: Sustainable School Campus]

  • Country’s largest new school campus built over three decades, constructed entirely from sustainable products in the burgeoning northern Hamilton suburb of Rototuna. 

​[Slide: World Class Innovation Hub]

  • And providing value add products to a world-class learning facility for the University of Canterbury’s new Regional Science and Innovation Centre.
  • Similarly, the Len Lye centre continues to receive international acclaim, and S&T was instrumental in much of the steel supply to that building.

​[Slide: Acquisitions update]

The acquisition of Manufacturing Suppliers Ltd (MSL), whose iconic brand is Fortress, continues to perform very well. When coupled with S&T’s existing business, MSL has created the leading fastenings business in NZ, and continues to grow.

Aquaduct along with its sister company Bosch Irrigation, acquired in September 2015, and since rebranded to S&T Plastics, has strengthened S&T’s existing piping system’s capability as well as opening new markets and opportunities for S&T.

Since then we have acquired Composite Floor Decks Ltd, a market leader in the installation of steel floor decking systems. This latest acquisition vertically integrates S&T’s steel floor decking manufacturing capability with a distribution and installation capability, and should benefit from the ongoing strength in the multi-level building activity.

[Slide: Reinvesting for the Future]

As I mentioned earlier, we continue to invest in the future of the business by upgrading facilities and equipment. In December 2015, we opened a small-format store in Blenheim, and 2017 will see two new facilities come on stream in Christchurch and Dunedin, with the latter having a new Stainless capability.

Our people and the communities we live and work in continue to receive much focus. We have a greater focus on people and their development and succession planning. We launched the second cohort for Lead2Succeed, a three-year programme aimed at S&T’s future senior leaders, which includes participants from some of the newly acquired businesses.

[Slide: Charities and Sponsorships]

Our sponsorship of the First Foundation continues. We are now in our fourth year with five teenagers from employees’ families benefiting from a financial help toward tertiary education, with the scholarship providing financial assistance, paid work experience and coaching provided by the foundation.

Our focus on supporting the communities in which we operate continues with multiple donations made to a myriad of worthy causes including Koru Care Charitable Trust, Ronald McDonald House, the Westpac Rescue helicopter and Burns Support to name a few.

[Slide: Health & Safety across the Business]

As always, Health and safety remains a key priority for S&T. We have made excellent progress against all of the leading indicators and there were some great initiatives that we celebrated at the Health & Safety awards night. However, we did have too many medical treatment incidents with a significant number involving hands. As a consequence, we have run a ‘hands-off campaign’ targeted at methods to avoid hands on product. All managers and supervisors have participated in either a Leading Legends or Be a Legend H&SE programme targeted at empowering front line staff to make the right calls.

[Slide: Global Outlook]

Looking ahead now and to the Outlook.

Starting with the global steel scene, given that this always provides both the backdrop and direction for all steel companies:

Following 13-year steel price lows at the end of 2015 as I mentioned earlier, the first quarter of 2016 saw prices rise rapidly in China and other parts of Asia. While there was some easing approaching the year’s mid-point, prices were still significantly higher than those 13- year lows at the end of 2015. Although partially off-set by the elevated New Zealand dollar, this helped a domestic price increase at the start of the new financial year.

While there has been some price improvements across many product categories, it remains disappointing to see some domestic players chasing volume, particularly in some of the more commoditised products. This continues to impact the Distribution business to the greatest extent.

[Slide: Coking Coal]

Looking forward however, there has been a dramatic upswing in coking coal raw material costs that we believe will have a significant impact on finished steel prices in the short to medium term. Prices have more than trebled from US$90 per tonne to US$270 per tonne, primarily driven by changes to Chinese output, coinciding with operational issues in several key Australian mines.

The effect of this increase in price of raw material translates to a cost increase of approximately US$140 (NZ$200) per tonne of steel. Already steel prices have shown an upward trend, with steel mills no longer able to absorb this cost increase.

Iron ore futures have also increased and are currently at $70 per tonne. This equates to another NZ$40 increase per tonne of steel.

These key cost contributors all point to a substantial price increase across all steel products that we expect will impact domestic steel prices in New Zealand very early in calendar year 2017.

[Slide: NZ Trading Environment]

Moving to the domestic market:

The NZ economy continues to ‘shine’ relative to others, and the outlook for those sectors important to S&T appears a little more optimistic than previously.

Construction activity remains strong and underpins much of the steel activity within NZ. All consents data remains solid, although variations and movement at a regional level are evident, notably the transfer of activity away from Christchurch towards Auckland.

We remain pleased by the resilience of the manufacturing sector despite the elevated NZ dollar. Another key sector for the steel industry, manufacturing, has progressively improved from the GFC lows, although we did note the latest confidence index has reduced considerably.

Finally, it is pleasing to see the improvement to commodity prices within the dairy sector. We expect this will ultimately result in reinvestment by the sector into new projects and capacity, and ‘green shoots’ are already evident. This will be a welcome addition beyond viticulture which has underpinned much of the stainless steel tank manufacturing investment in the last couple of years.

From a business perspective, we have made many improvements under the One Company banner and these will continue as part of the refreshed strategy, including the next phase of building and equipment upgrades that the Chairman mentioned.

The improvements in systems are enabling some cost synergies to be realised, which is part of the refreshed strategy to reflect the current operating environment. We have re-structured in excess of 30 roles which will have an EBIT benefit of $1.4 million this year, mostly in the second half, and an ongoing annualised benefit of $2.6 million. However the first half earnings will be impacted due to the cost of implementation.

Our focus continues very much on delivering the improvements to the business. This remains somewhat of a moving target as we continue to add businesses to the S&T stable. However, the building blocks that are establishing stronger foundations are coming together well.

While we may have some work to address reputational issues, the Company is in good shape. As a result, we anticipate the first half results will be consistent with last years. However we do expect the second half will be much stronger reflecting the pricing opportunity, a full half benefit from the cost reductions, a full half of CFDL and improved earnings from S&T plastics.

We look forward to what the rest of the year holds.

[ENDS]


Note this speech was made in conjunction with the AGM PPT presentation. You can open a PDF of the presentation here.

 

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