The year under review was certainly one of two halves.
The first six months was categorised by a continuation of steel price volatility and competitive pressure evident at the tail end of the previous year leading to margin erosion.
In addition, the need to restructure the Hurricane Wire business because of its inability to compete with cheap imported product for part of its manufacturing range had a negative impact on first half earnings.
This resulted in a net trading decrease of $4.6 million when compared with the previous corresponding half year period and $6.18 million after allowing for the restructuring cost of $1.57 million.
The second half trading profit improved substantially in a rapidly slowing economy, finishing in line with the guidance given at the half year.
In total, the full year after tax result of $22.5 million was a decrease of $5.2 million, or, 18.8% when compared with the previous year’s result.
Normalised profit after restructuring and asset sales for the year amounted to $23.3 million.
Sales at $504 million were up from $466 million in the previous year.
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.
It has been well documented that discretionary spending slowed during the year as the rising costs of mortgage payments, declining house prices and rises in food, energy and fuel prices affected consumers and businesses during the year under review.
These conditions contributed to a contraction in the New Zealand economy in the March and June 2008 quarters and officially put the country into a recession.
The global economy was also facing difficulties as the impact of the US sub-prime mortgage problem spread to other economies causing substantial stress to financial markets world wide.
The Company’s three Key market segments of construction, manufacturing and the rural sector, all suffered to a varying degree as the combination of exchange rate volatility, high interest rates and reduced growth in consumer spending slowed the economy.
These conditions prevented businesses in general from recovering the increased cost of doing business resulting in a margin squeeze.
The Manufacturing sector had to contend with a strong and at times volatile currency which adversely affected our customers.
Those who exported their products to Australia were able to benefit to a degree from the depreciation of the New Zealand dollar against the Australian currency. However those who exported to other markets in US dollars were adversely affected as our dollar strengthened against this currency.
The effect of the strong NZ currency also made it difficult for many domestic focused manufacturers to compete against product sourced from Asia.
The Construction sector was initially affected by escalating finance costs and then as the year progressed, funding for projects dried up as a large number of finance companies closed their doors.
The number of new housing and apartment starts authorised during the year reduced by 10% and 26% respectively resulting in lost revenue of $460 million when compared with the previous year and at numbers last seen in 2002.
Commercial construction activity however, improved by $381million or 8% over the same period.
Although drought affected earnings from the farming sector, global demand and rising prices for dairy products during the year resulted in record payouts to this sector. Incomes for sheep and beef farmers however continued to under perform.
Turning now to the individual businesses.
Although the Distribution business comprising Steel Distribution, Stainless Steel, Fastening Systems, Piping Systems and Industrial Products on aggregate increased sales revenue by about 8% compared with last year, the earnings of this division were lower.
Sales to the manufacturing sector and to the rural communities were steady and in line with last year however the volume of steel supplied to the construction sector was down.
Considerable downward pressure for replacement inventory was encountered in the early part of the financial year as the NZ currency strengthened putting pressure on margins.
Increased global demand for steel and a weakening NZ currency combined to lift the replacement cost of inventory in the second half of our year. The recovery of steel prices together with an increase in sales volume contributed to the improvement in our profitability in the last quarter.
The Manufacturing business comprising Roofing Products, Reinforcing Fabrication and Hurricane Wire, was also affected by the same unfavourable economic conditions.
Although the Roofing and Reinforcing operations posted solid results, the Hurricane Wire business was adversely affected by the strong NZ currency relative to the US dollar which made it difficult to compete against imports from Asia for part of its manufacturing range.
Debtors & Inventory
Higher than normal sales, in the last quarter resulted in a $14 million increase in debtors compared with the previous year.
We did however manage to decrease the inventory values on hand by $3.6 million during the same period.
Moving forward however there will be a substantial increase in both debtor and inventory values as the effect of the higher steel prices take effect.
Although appropriate action has been taken by management to reduce the volume of inventory on order to match current and expected sales against volume of product on hand, we expect that this will peak sometime in December before the required balance is achieved.
Health and Safety
You will be well aware from past comments of the importance placed on Health and Safety by our organisation. Given the nature of our industry this is a key priority for all staff, contractors and visitors to our sites.
The 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.
Our medical injury treatments that generally consist of minor cuts and physio treatment increased by 7 compared with last year to 17.
We are obviously concerned with this trend and have taken further steps to increase employee awareness of the potential danger in the work place and to insist that personal protective equipment is worn at all times where appropriate.
In respect to the more serious injuries that requires time off work we have reduced this from 2 to 1. This gives us a world class lost time injury frequency rate of 0.6 per 1 million hours worked.
We have since gone one year without a lost time injury which gives us a Zero Lost time injury frequency rate.
This is an excellent result and one that all our employees can be proud of.
Outlook
Most economists believe that the New Zealand economy is likely to remain in recession for the nine months ending September 2008 with some increased activity expected in the December quarter on the back of tax cuts, lower fuel costs and a reduction in interest rates.
Over the last 12 months, the US sub-prime mortgage problem has developed into a global financial credit crisis. Unprecedented action was forced on governments around the world to restore confidence to the banking system by guaranteeing deposits and to ensure that lending within the banking industry and its customers continued.
American consumer spending which accounts for 70% of the country’s GDP fell for the first time in 17 years in the September Quarter contributing to a slowing world economy and the collapse of investor confidence on stock markets world wide.
The slowdown in world trade has been swiftly reflected in lower commodity prices for items such as dairy products, crude oil and petrol, iron ore and steel.
Trading conditions are expected to be tough with the New Zealand export sector expected to suffer to a degree however the weaker NZ currency is likely to soften the impact of any volume loss.
It is also our expectation that the construction of residential housing will continue to decline in the near term however we expect a gradual improvement from the construction sector early to mid 2009 due to lower interest rates and an increase in infrastructure projects and commercial activity relating to the 2011 Rugby World Cup.
International steel prices and exchange rate volatility have had significant impact on the Company’s financial results over recent years.
Substantial price increases for input costs to make steel, such as iron ore, coal and scrap metal coupled with an increased global demand for steel products increased the price of replacement steel inventory peaking in October.
World demand for steel however is now softening with substantial price reductions taking place in parts of the world for some products.
Steel producers have already taken steps to reduce capacity with global demand expected to pick up in the second quarter of 2009 as the combination of reduced manufacturing capacity and decreased inventory levels find a better balance.
In summary, we expect market conditions to gradually improve in early to mid 2009 as the weaker NZ currency assists the export sector and lower interest rates and tax cuts flow through the domestic economy although this is still very dependent on external factors.
Construction activity is also expected to recover as infrastructure projects and construction activity relating to the Rugby World Cup increase, followed by a gradual increase in residential housing towards the end of the year.
As we have had an excellent start to the New Year, trading results for the first half will be substantially ahead of the same period last year.
Trading conditions however for the second half of our financial year have the potential to be one of the most difficult faced and the impact on our business is therefore too difficult to predict at this time.
We do however expect to post an improved result for the 2008 / 09 financial year.