Before commenting on the performance of each business I would firstly like to give a brief summary on the economic conditions that the Company had to contend with during the period under review.
I note that last year I made the statement that “overall, the trading conditions were amongst the most difficult encountered for some considerable time”, regretfully, the year under review was just as tough.
The Reserve Bank’s actions to slow the economy through the continual hiking of the Official Cash Rate and the rapid appreciation of the NZ Dollar substantially affected the business sectors that we service.
The Company’s three Key market segments of, Commercial Construction, Manufacturing and the Rural sector all suffered to some degree. This had the overall effect of reducing demand for our goods and services and increasing the competitive trading environment.
Despite the action taken by the Reserve Bank to slow the housing market, activity in this sector increased by 4% during the year, however, commercial construction activity which is a key driver for our business was similar to last year’s level.
Export receipts for the manufacturing and rural sectors were adversely affected by the strong NZ Dollar which reached a 23 year high against the US Dollar.
Although dairy commodity prices increased rapidly from the third quarter, the full benefit to the NZ economy will not be seen until next year. Difficult trading conditions however, remain for Sheep and Beef farmers.
Distribution business
The distribution group comprises the following businesses.
- Steel Distribution
- Stainless Steel
- Fastening Systems
- Piping Systems
- Industrial Products.
These businesses are heavily reliant on robust demand from the construction and manufacturing sector for its goods and services.
Demand from the construction sector has continued to soften. It is worth noting that there has been no growth in commercial construction activity for the last three years.
In real terms, the volume of building products consumed by this sector has reduced year on year once the effects of price increases and inflation are taken into consideration.
Demand from the manufacturing sector was also slightly lower than last year.
A substantial part of our inventory is purchased domestically from Pacific Steel and New Zealand Steel, in NZ Dollars. The prices paid for these products however, follow the global price trends for imported product as if they were purchased in US Dollars.
This effectively means that, provided the price of steel remains constant in US dollar terms, then any appreciation of the New Zealand Dollar will cause a reduction in the landed cost of steel into New Zealand. A weaker currency will have the opposite affect and increase the price of steel.
The NZ Dollar depreciated substantially in the first half of calendar 2006 causing a rise in the replacement cost for the majority of our steel products at the commencement of our financial year.
Inventory values then progressively decreased in value as the dollar strengthened to a 23 year high against the US Dollar by year end.
This had the effect of putting downward pressure on selling prices and margins at a time of soft domestic demand.
Combined, the Distribution Group produced higher earnings than the previous year due to the addition of the Stainless Steel business acquired in April 2006 and an increased focus on Industrial Products which allowed the Company to increase its overall market offer to our expanded customer base.
To put the success of the Stainless Steel acquisition into perspective, it is worth noting that when this business was acquired it was not profitable.
This business is now contributing a return of about 25% on the money invested in its first full year as part of the Steel & Tube Group.
Manufacturing business
These businesses are reliant on robust demand from the domestic housing sector, commercial and infrastructure construction and the rural sector for its goods and services.
The manufacturing group comprises the following businesses
- Roofing Products,
- Reinforcing Fabrication,
- Hurricane Wire Products.
The Roofing Products operation continued its strong financial performance of recent years against the backdrop of strong demand for rain water and cladding products from both the light commercial construction and new residential property sectors.
The Reinforcing Operation also performed well in a more competitive environment, although its returns were substantially down from the previous year’s result. Strong demand from the infrastructure sector partially offset the weaker demand from commercial construction.
The Hurricane Wire business had to contend with lower demand from the rural and commercial construction sectors.
Competing against imported product become more difficult as the cost of these imports reduced progressively throughout the year as the New Zealand currency strengthened.
The resulting volume reduction coupled with a squeeze on margins combined to produce an unsatisfactory result.
To counter the import threat, management took steps during the year to import some product from China that otherwise would have been manufactured in our factories.
As we obtain comfort from our suppliers that they can meet our quality standards and deliver on time, it is our intention to accelerate the import program to other products.
Steps were also taken earlier in the year to reduce the operating costs of this business.
A major review is also now underway that will examine all our options to reduce our operating costs further so that we can compete in the new trading environment.
In aggregate the manufacturing group did not perform as well as the previous year.
Inventory
Group inventory volumes and values were increased during the year to cover the extra working requirements of the Stainless and Industrial Products business.
We believe however that we can reduce the inventory on hand by around $6 million during this financial year without affecting our customer service requirements.
Health and Safety
The continuing strong focus to make the work place safer and to reduce the number of work related injuries has enabled the Company to achieve and maintain excellent results these past few years.
This year we improved our medical treatment injury frequency rate by 30% compared with last year, achieving a frequency rate of 5.6, per 1 million hours worked which is a great outcome by world standards.
The Company was once again recognised externally for its excellent safety record when it was awarded the Wellington Region Gold Safety Award for 2007.
Environment
Steel & Tube shares the concern of its staff, customers and the community at large in respect to environmental sustainability.
Although the Company has compliant processes in place at sites that generate industrial waste, we are beginning the process to formally identify areas of the business that we can improve on in a practical way to enable us to reduce our carbon footprint.
Senior Management
A significant change was made to the senior management structure during as we created two separate operating structures.
Steve Davies and Mark Winnard were appointed to the new Executive General Manager positions for the Distribution and Manufacturing businesses respectively.
This new structure reduces the number of direct reports to myself and will allow me more time to focus on the strategic growth of the Company.
Building Relocation Program
You will have read in the annual report that we relocated a number of our businesses during the year into new purpose built leased premises.
The businesses in question are;
The Roofing businesses in Hamilton and Wellington.
Steel Distribution businesses in Hamilton and Mount Maunganui.
These businesses were relocated for a number of reasons. In most cases they have been in the same premises for around 40 years. Over this period truck access ways have altered as the urban sprawl has spread to our sites and beyond.
The dimensions of steel product have also increased considerably during this period requiring wider storage bays and higher crane lifts.
Consideration of Health and Safety is also a major consideration today.
This requires well lit areas, walkways and good working space around the stored product or machinery.
The new facilities incorporate all these requirements and will allow future growth and improved efficiency to take place.
Management and Staff
I would like at this point to publicly acknowledge and thank our staff who focused hard throughout the year to provide excellent customer service and to overcome the myriad of business challenges that were thrown at us by a slowing economy and a volatile international steel market.
Outlook
The New Zealand economy is expected to stay soft in the near term as business activity copes with increased costs of doing business, high fuel and interest charges and a volatile currency.
Dairy farmers will benefit next year from the rapid rise in world commodity prices for dairy products. This is expected to add an extra $2 billion into the economy.
Beef and Lamb farmers however, are unlikely to improve their incomes in the short term.
Commercial construction activity and infrastructure projects relating to the 2011 Rugby World Cup will have to commence early in 2008 if they are to be completed on time. This will eventually provide a welcome boost to this sector.
The construction of residential housing however is expected to suffer as the lower levels of net migration and the impact of servicing higher interest costs begin to take effect.
The recent depreciation of the New Zealand dollar against the Australian dollar will give some welcome relief and assistance to our manufacturing sector as around half of our manufactured exports go to Australia.
International steel prices and supply volatility have been key issues that have impacted on the Company’s financial results these past few years.
World demand for raw materials led by the industrialization of China is expected to remain strong for some time yet causing a long term upward trend on pricing but with continued price volatility in the short to medium term primarily due to the unstable NZ currency.
Although the volume of steel sold in the first quarter is similar to the same period last year, margins are substantially down due to the continued volatility in the NZ dollar.
Based on current trading trends, it is my expectation that after tax profit for the six months ending December 2007 is likely to be down by around $4 million compared with the previous corresponding period.
I do however feel that the worst is behind us and that our position will improve in the second half and that the performance for the second half will be in line with the same period last year .
If however the NZ dollar was to weaken, we could expect some upside.
In summary, trading conditions are expected to remain tough in the short term with some upside prospect late in calendar year 2008.