Before moving on I would like to add my own thanks to Tony Candy for his contribution as acting CEO in helping to steer the company through a difficult and turbulent 6 months.
As Dean has highlighted, the year under review was one of two halves.
The first half, in line with the global steel industry was buoyant with strong demand and pricing. Customers looking to increase their stock holdings to mitigate future price increases, along with increasing underlying demand, led to global steel shortages. Suppliers implemented stock allocations and prices rose further.
Notwithstanding the shortages, market volume was initially high across most sectors, with the rural sector being particularly strong.
But then as the impact of the Global Financial Crisis took hold, all sectors started to deteriorate. The manufacturing and rural sectors were under increasing pressure with a volatile currency, softening demand and reductions in commodity prices as the year progressed.
In the second half, a substantial drop off in global steel demand led to the removal of supplier allocations whilst lower demand in the domestic market led to a contraction in margins. Profitability of the Company’s businesses declined sharply, inventory levels rose and bad debt write-offs increased as the slowdown in the construction sector took hold.
The international price of steel reduced in line with decreases in global demand, however an initial drop in the value of the New Zealand currency meant this price effect was not so apparent in the local market.
Thus, the six months to 31 December 2008 had sales revenue of $274 million and net profit after tax of $20.8 million. The second half of the financial year had sales revenue of $210 million and net profit after tax of $5.3 million.
In total, the full year after tax result of $26.1 million was an increase of $3.6 million, or 16.0% when compared with the previous year’s result.
Sales at $484 million were $20 million lower than the previous year.
Health and Safety
Before commenting on each business I would like to acknowledge the ongoing improvement to health and safety.
During the course of the year, there were no lost time incidents and the number of medical treatment injuries reduced by seven to a total of ten. This is an outstanding performance and I congratulate all employees. Safety is a personal passion and this performance is particularly pleasing for me coming into Company.
This performance has continued into the new-year and the Company has now completed two full years with zero lost time injuries and the number of incidents requiring medical treatment also continue to show improvement.
Market Commentary
The New Zealand economy was either in or close to recession for the whole of the Company’s financial year and the Global Financial Crisis impacted the ability of businesses to finance or refinance projects either planned or under way.
Considerable volatility was experienced in most of the sectors that impact our business: Residential building, as an example saw the number of consents issued fall to the lowest annual number since records began in 1965. Commercial construction activity as measured by the value of consents issued rose by 7.6% however this was not enough to offset the decline in the residential sector. The overall reduction in value of building consents issued was $1.9 billion or 16%.
The Distribution business comprising Steel Distribution, Stainless Steel, Fastening Systems, Piping Systems and Industrial Products in aggregate, had a reduction in sales revenue of around 4% over the full year.
The higher demand and pricing volatility during the supplier allocations saw an increase in margins in the early part of the year, but then a subsequent reduction when demand and prices declined and replacement inventory became abundant later in the year.
The Manufacturing business comprising Roofing Products, Reinforcing and Fabrication and Hurricane Wire Products was generally also affected by the same conditions with a reduction in sales revenue of 4%. The Reinforcing operation posted improved results due to a favourable mix of commercial contracts and strong demand from infrastructure projects.
Hurricane also had an improved result overall despite suffering from the slow down in the rural sector in the latter part of the year. Roofing operations were able to replace some lost revenue from the residential housing sector with higher sales to the light commercial sector and farm shed market. Its result however was lower than the previous year.
With the deteriorating business environment, a no staff replacement policy was introduced, and in combination with redundancies saw the work force reduced by fifty between January and June. The work force has reduced further in the first 4 months of the new financial year.
Inventory values increased significantly in the first half of the year when prices increased considerably.
When demand stalled, a concerted effort to reduce inventory holdings across all businesses saw a reduction in inventory value of $43 million in the second six months, and at a time when sales volumes fell below expected levels. This reduction when combined with lower accounts receivable contributed to a reduction in borrowings of $36 million in the year. Inventory holdings have decreased further in the period since the end of June.
Outlook
Most economists have been forecasting that the New Zealand economy will record positive growth for the year ending March 2010. We are encouraged by Dr Alan Bollard’s latest comments indicating that economic activity is growing again. However, indicators to date have been mixed, unemployment continues to rise, inflation has reduced, and interest rates are near to historic lows. House prices appear to have stabilised however commodity prices remain volatile.
The volatility and recent strength of the New Zealand dollar, especially against the US Dollar continues to impact business in New Zealand.
Exporters of other products and services will continue to struggle unless our dollar drops back to the lows seen late in 2008. Lower demand for imports from our trading partners flowing from global financial market turmoil is also impacting adversely on the exporting sector.
International steel prices have seen considerable volatility over recent years, and when combined with the substantial exchange rate movements, and sudden shifts in supply and demand, have resulted in fluctuating profit margins.
There are signs that the international demand for steel is increasing driven by the Chinese recovery and international steel prices had started to recover, however recent pricing declines have overturned some of the gains.
Residential construction has fallen to lows not seen since the early 1960’s. Net migration inflows have started to increase as fewer people are leaving the country while arrivals are increasing. The increased inflows will over time result in a boost to housing starts which will also be assisted by relatively low mortgage interest rates.
Construction projects associated with the Rugby World Cup will help to sustain commercial construction in the immediate future but there is a noticeable drop off in the number of square metres of new construction projects approved. There is an expectation that infrastructure projects, initiated by the government, will assist volumes later in 2010 and beyond.
When the annual results were announced in August, the Company expected to see in the first half of the new financial year, a continuation of the current soft volumes and resultant pressure on margins. In the event, the market is proving to be more difficult than foreseen at that time, with volumes and margins in the first four months lower than those experienced in the second half of the last financial year.
A number of initiatives to maintain profitability have already been implemented.
These include freezing management salaries and directors’ fees, changing incentive programmes, reviewing human resource requirements, reducing working capital usage, lowering of capital expenditure, relocating and consolidating businesses and introducing targeted product growth programmes.
Opportunities for improvements in materials handling equipment, product storage methods and other systems and operational changes continue to be reviewed and instigated.
The economic conditions impacting New Zealand are expected to continue to dampen local steel demand growth. International steel market trading conditions continue to be variable. The strength of the New Zealand Dollar also adds to the uncertainties of the trading environment that face the Company in the balance of the financial year.
Although there continues to be uncertainty as to timing, there is some prospect of an improvement in 2010, if as economic forecasters predict the country emerges from recession and demand picks up. However, it is too difficult to predict whether this will have a significant impact on this financial year.
Since joining the Company I have been impressed by the underlying strength of the business and its people. The Company has already initiated the appropriate actions for the current environment and coupled with a strong balance sheet, we are well positioned to take advantage of the recovery, regardless of when it may commence.
For further information, please contact Mr Dave Taylor, Chief Executive Officer, Steel & Tube Holdings Limited on (04) 570-5001.