S&T Annual Meeting 16 November 2017 Interim CEO’s Address

16 Nov 2017

Thank you Susan.

Good afternoon. Firstly, I’d like to say as someone who’s observed Steel & Tube from a number of perspectives that it’s been a real privilege leading the business over the last 6 weeks.

There is no question in my mind that this is a great business that has significant intrinsic value. This afternoon, I will explain why the new management team and I have complete conviction that this business can be quickly improved.

I’m going to cover the following topics

  • 2017 financial summary
  • Market positions and sector exposure
  • Resetting the business; and
  • Licence to operate

[Slide: FY17 Financial Summary]

The company has already provided a lot of detail and comment on the FY17 financial results in our results announcement and presentation as well as the annual report, all of which you can find on our website.

In brief, Steel & Tube delivered a reasonable result with a $20 million NPAT, benefitting from acquisitions made over the past four years.

As reported, at the close of the year, we were impacted by external project delays, outside of our control, which increased both inventory and working capital, and reduced operating cash-flow.

We also had issues with the manufacturing processes in S&T Plastics which resulted in higher scrap rates than expected. This has now been resolved and our extruders are operating at capacity and scrap rates have significantly improved.

In the Reinforcing business, two contracts proved to be more complicated and costly than originally anticipated. We made a provision for these in FY17 and we have largely resolved these issues. Importantly the management team in that business has been strengthened, and improvements have been made to tendering, business processes and account management. This sector has also been particularly impacted by competition, margin compression and risk transfer. That said, I am confident the reinforcing business has turned the corner and is now positioned for growth.

Several businesses delivered record or near record revenue and EBIT performances in FY17 and, apart from the two issues I’ve mentioned in S&T Plastics and Reinforcing, the company performed better than in the previous year.

Our overhead, cost structure and working capital management continues to be a focus and I will discuss shortly the action we have underway to quickly improve these areas.

Our $32 million capital reinvigoration programme will come to an end next year with the completion of our new Christchurch facility. The program has resulted in fit for purpose facilities, enhancing health and safety for our employees and where possible bringing together our operations under one roof. Importantly, not only does this support a better customer value proposition but it also sets us up to deliver improvements in supply chain scale and operational excellence. We continue to look for opportunities to optimise our network and production capacity where there are short-medium term paybacks.

Susan mentioned our new technology platform. As you can imagine, replacing a 22 year old ERP system with a new fit for the future platform, across every part of our business, has been a major undertaking. We went live with the new AX Microsoft ERP system early last month. This is a major milestone and the result of significant efforts by our people and external parties. Whilst there have been some ‘teething problems’, these are now largely addressed and AX will allow us to better manage and monitor our business and financial performance. It will also enable us to standardise practices, improved traceability and simplify the business.

As with our acquisitions, these investments have been funded by operating cash-flows and debt.

[Slide: Our Role in the Supply Chain]

As you all know, it’s very easy to overcomplicate businesses and as I step through my presentation I’d like you to keep this chart and Steel & Tube’s role in the supply chain in mind.

Simply put, our main role is to add value to our customers. We source steel and steel products in bulk from the steel mills and we provide a broad range of products and services to our end customers as and when they need them.

Our role in the supply chain is to:

  • Have the scale to access the steel mills’ minimum order quantities
  • Hold a wide range of stock for our customers
  • Hold and break down bulk products into smaller quantities for our customers
  • Provide competitive pricing and reasonable credit terms to our customers
  • Processing and light manufacture for our customers e.g. slitting, REO detailing and placing

Obviously, our ability to source steel at competitive prices and having a strong national footprint provides us with a competitive advantage.

[Slide: Sourcing Steel]

We source the majority of our steel supplies from either New Zealand or Asia – it’s a fairly balanced mix and varies according to product type.

The demand for steel is a dictator of price – the more global demand there is for steel, the higher the price that can be set by the steel mills.

As you can see here, pricing can be quite volatile and after dropping during 2014 to 2016, it is now trending back up.

Demand for steel in New Zealand remains high, correlating with global demand trends as countries such as China invest into large infrastructure projects.

I’ll come back to our specific sector exposures shortly.

[Slide: New Zealand Steel Market Landscape]

This chart provides an overview of the total steel market by product and distributor.

The New Zealand steel market is roughly 900 thousand tonnes and ~$2.3 billion in value.

To provide the whole picture, we have estimated the market broken down into long products [350 Kt], flat products [375 Kt], specials [80Kt] and non-distributed products [100 Kt]. We’ve also estimated market shares.

Susan mentioned our aspiration to be a supply chain participant of scale. Aligned with that vision, Steel & Tube have made excellent progress in extending our reach through the distribution channels - we are now either number 1 or number 2 in every segment in the steel market.

We haven’t shown competitor names in each channel for obvious reasons but, as you can see, not one competitor has the breadth of positions we have.

This is a key point and supports our conviction regarding Steel & Tube’s intrinsic value. [Slide: Sector Exposure]

We operate in 3 main sectors: construction, manufacturing and dairy, all of which show the promise of continued growth.

Construction is expected to continue to grow with new initiatives such as the proposed KiwiBuild programme and the light rail projects in Auckland. This should drive demand for reinforcing, piping and structural steel.

Equipment and machinery manufacturing is also expected to rise, which will drive demand for plates, coils, sections and fasteners.

The dairy sector is also expected to perform well on the back of demand from consumers in Asia, with capital investment in the sector traditionally leading to greater demand for stainless steel.

[Slide: Resetting the Business]

To recap, we are either number 1 or 2 in all of the key steel distribution segments in which we operate, we have a well invested footprint, and our acquisitions provide access to higher value segments.

This is a fantastic platform, the problem is we have not captured the earnings growth that should be flowing to the bottom line. Your board and management team believe there is a clear opportunity to significantly grow earnings over the next year or two.

We have just started a change programme that will reset the business. The scope is company-wide and focused on simplifying the business, leveraging our procurement scale and better servicing our customers.

  • We need to better manage our supply chain and utilise our group procurement scale. I see significant opportunities to optimise our supply chain and leverage our steel procurement scale both within New Zealand and further afield with high quality approved Asian steel mills.
  • Our brand new ERP system enables both better visibility through our whole supply chain and also the opportunity to significantly simplify the business which will lead to a significant improvement in our overhead cost structure.
  • We have many deep customer relationships, however we have lost some of our specialist expertise and we can see an opportunity to use our improved suite of businesses to provide better service to both existing and new customers.

Both change and program management have not been a strength for Steel & Tube. To ensure we digest change and capture earnings benefits I have appointed Chris Birkinshaw to manage the programme and he will report directly to me. Chris is a highly regarded Commercial Business Manager and has demonstrated ability to work with the businesses to deliver improvements.

We are quickly working through the size of the opportunity for the 3 areas I mentioned and will then address the changes required to the business.

[Slide: Aligning People and Structure with Strategy]

We are a new but experienced team. I’ve been in the interim role 6 weeks, starting on the left of the chart Marc Hainen has had 2 weeks in the business, Ross Pickworth 11 months and Greg Smith 3 weeks.  I’ll talk about each of them shortly.

A key component to quickly delivering the earnings improvements I mentioned earlier is getting the organisational wiring right.

Over the last couple of weeks I have made changes to our organisation structure to:

  • Organise the business around our customers
  • Simplify and create a clear line of sight for improved accountability
  • Unlock integration benefits from our acquired businesses

Effectively we have organised our businesses into two streams: Distribution and Infrastructure.

The Distribution stream is led by Marc Hainen. As well as carbon steel distribution and our merchant business, fasteners and stainless have also been included in this stream. These businesses all have common trading activities and having them all under one roof is important to capture the trading disciplines I mentioned.

Marc is no stranger to steel distribution. He and I led the turnaround of the Fletcher Easysteel and Reo businesses 4-5 years ago. He is highly commercial and a strong people leader.

As part of the Distribution changes we are also quickly getting on with integrating the acquired businesses under the Distribution stream.

  • Heritage S&T fasteners is being combined with MSL fasteners creating a Fastenings business. This will be led by Steve Williams, an existing and very experienced Manager who came to us with the MSL acquisition
  • Heritage S&T stainless is being combined with the acquired Tata stainless creating a Stainless and Specialty Steels business. This will be led by Keith Wearing, another existing and very experienced Manager

The second and equally important part of the business is Infrastructure. The Infrastructure Group was created earlier in the year and is ably led by Ross Pickworth. These businesses are typically servicing contracting and project type markets.

Ross is an experienced and highly capable leader who joined the business 11 months ago.

  • Ross has been actively involved in turning around our Reinforcing business with our National Reinforcing Manager, Andrew Roche
  • The Plastics business has also made excellent progress under Darryn Ross who has now got this business back into profitability
  • Also within the Infrastructure business is our roll forming business which has been going from strength to strength and led by Steve Kubala
  • In addition, Composite Floor Decks Limited just celebrated its first year under Steel & Tubes ownership and is ably run by Mohammed Afroz.

We now have the right people in place and I’m very confident this combination of businesses and new talent will lead to significant improvements in our performance.

[Slide: Our Licence to Operate]

How we achieve our results is just as important as the results themselves. Core to this is our focus on Health & Safety, the Environment and Quality.

Health, Safety and Environm​ent

We continue to strengthen our Health, Safety and Environmental management systems, and have a robust operating framework focused on engagement within our workforce and creating a healthy, safe, fair and just culture.

Every year, we identify new initiatives such as:

  • The recently completed “Legend” programme for managers and supervisors, to help them engage more effectively with front line workers
  • The Hands Clear initiative, which was developed for the reinforcing business and resulted in a clever engineering innovation for table bends that was simple to implement and ensures hands are kept safe during the production process.

Quality Management ​System

Last year the Board initiated a comprehensive review of quality processes, procedures and organisation.

A new Quality function has been established with the objective to implement a ‘world-class’ Quality Management System that will set the industry standard and provide customers with the certainty of a world-class compliance system.

We appointed a new Quality Manager, Damian Miller, about 18 months ago who has significant international experience in quality and safety leadership. Damian reports directly to me. We have also engaged with expert independent consultants with experience in QMS in the steel industry.

The team have made significant progress:

  • All Steel & Tube’s seismic mesh is now externally tested by independent, IANZ accredited laboratories;
  • We have implemented quality audits for our international suppliers and mills within Asia;
  • And the progressive business-wide roll-out to ISO 9001:2015 is underway. Pleasingly, S&T Plastics has already achieved this, as well as Watermark certification, another highly recognised quality standard.

[Slide: Strengthening the Capital Structure]

As Susan mentioned, we have been working on our capital structure.

Our focus is now on strengthening the balance sheet, including capturing working capital benefits from our significant scale and technology investments.

Since year end, we have reduced surplus inventory by $14m and further reductions are planned.

We have also been assessing our property portfolio and use of funds. One example is our intention to divest our Stonedon Drive property in Auckland.

We are also reviewing other owned properties for similar opportunities. We are a distribution and contracting company, not a commercial property company.  The funds from a sale and

lease back will generate a better return for shareholders by being used to further grow and develop our business.

[Slide: Outlook and Guidance]

We are focussed on resetting the performance of the business but none of this will happen overnight. In 12 to 24 months, the company will be significantly stronger.

In the short term we are expecting Half Year earnings before interest and tax (“EBIT”) for the 2018 Financial Year will be lower than the prior half year by $9 -10 million.

The Half year EBIT will be impacted by working capital review, reorganisation and restructuring activities, increased depreciation costs for new ERP system and the slow response by the industry to margin pressures arising from increased costs of supply.

The recent implementation of a new ERP system is a key enabler now available to the business and has helped assist Management with a review of slow moving inventory. Approximately half of the expected decrease in half year EBIT is due to a write-down of inventory.

Reorganisation and restructuring activities will have an unavoidable impact on short term EBIT, however the benefits from this are expected to offset these costs over the remainder of the financial year. In the first half of the 2018 Financial Year the company has seen margin pressures from higher steel purchase prices, which the market took some time to pass onto customers. The Company has increased selling prices across its portfolio of steel products from mid- November 2017. Margins are expected to improve in the second half of the 2018 Financial Year from improved pricing.

Excluding any one-off inventory valuation adjustment, full year EBIT for the 2018 financial year is expected to be materially the same as the 2017 financial year, as the impacts from recent price changes and the benefits of change actions are realised.

Whilst the short term impacts on the current half year EBIT result are regrettable, the Company is well positioned to deliver improved earnings and operational performance going forward. We have commenced a change programme, with a number of initiatives being implemented to improve the operational and financial performance of Steel & Tube.

Our new Board and leadership team are focused on delivering these initiatives to deliver superior value to our customers, grow earnings, improve efficiency and strengthen the Company’s capital structure.

Thank you for your time, I will now pass you back to the Chair.

 

[ENDS]

Note this speech was made in conjunction with the AGM PPT presentation. You can view the presentation by clinking on this link

 

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