Financial Performance
The Company announced a full year after tax result of $22.5 million. This is a decrease of $5.2 million, or 18.8% when compared with the previous year’s result. Sales at $504 million were up from $466 million in the previous year.
Normalised profit after restructuring and asset sales for the year amounted to $23.3 million.
Restructuring costs for Hurricane Wire Products and the gain from the sale of a property were $1.5million and $0.7 million after tax respectively.
Although the profit result was less than last year’s, it is pleasing to note that the second half trading profit improved substantially in a rapidly slowing economy, finishing in line with the guidance given at the half year.
A final dividend of 10 cents per share was declared.
The Company’s result represents an EBIT return on year end total funds employed of 18.9% and an after tax return on average shareholders funds of 16.1%.
Market Conditions
In commenting on the Company’s operations the Chief Executive Officer Mr Nick Calavrias said,
“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 while the Construction sector was affected by escalating finance costs. In addition to slowing consumer investment in residential housing, the collapse of finance companies and by the global credit squeeze affected a number of commercial developments as interest costs and lending conditions for mezzanine finance became prohibitive.
In spite of drought conditions affecting earnings from the farming sector, global demand and prices for dairy products increased rapidly during the year resulting in record payouts to this sector. However difficult trading conditions for sheep and beef farmers continued to prevail.
Performance
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.
The value of commercial building activity and infrastructure projects was up on last year, however the volume of building products consumed by this sector was lower once the effect of price increases was taken into consideration. Volume to the manufacturing sector and to the rural communities however was steady and in line with last year.
Considerable pricing volatility for replacement inventory was encountered in the early part of the financial year putting pressure on margins. Conditions however improved late in the second half as the cost of replacement inventory increased, which contributed to improved profitability in the last quarter.
The Manufacturing business comprising Roofing products, Reinforcing fabrication and Hurricane Wire, was also affected by the same unfavorable economic conditions.
Although the Roofing and Reinforcing operations posted solid results, the Hurricane Wire business was adversely affected by a structural change to the market sector it services. The strong NZ currency relative to the US dollar made it difficult for Hurricane Wire to compete against imports from Asia for part of its manufacturing range.
Outlook
The New Zealand economy contracted by 0.3% in the March 2008 quarter. A similar environment is expected for most of calendar year 2008 as consumers struggle with the rising costs of mortgage payments, declining house prices and rapidly increasing food, energy and fuel prices.
The global economy is also facing similar difficulties as the impact of the US sub-prime mortgage problems spreads to other economies causing substantial stresses to financial markets world wide.
Although the construction of residential housing will continue to decline in the near term, there should be a gradual improvement in the construction sector in 2009 due to infrastructure projects and commercial activity relating to the 2011 Rugby World Cup.
Dairy farmers’ incomes were boosted this year by the rapid rise in world commodity prices for dairy products which added an extra $3.5 billion to the economy with the outlook for similar total incomes next year. Lamb and beef farmers however continue to struggle with limited upside expected in the near term.
The export sector can expect improved profitability provided the NZ dollar remains close to its current levels relative to the Australian and American currencies.
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 are once again pushing the price of replacement steel inventory up.
As a result of this, the domestic price of steel products is increasing substantially as new inventory arrives with the expectation of further increases to follow as the year progresses. This will assist our position provided prices and volumes do not retreat later in the year.
In summary, we expect market conditions to gradually improve in early 2009 as construction activity increases and the weaker NZ currency assists the export sector. Provided that the NZ economy is not adversely affected by global events, we expect to post an improved result in the year ahead”.