Half Year Report - 31 Dec 2008

12 Feb 2009

The Company announced a first half trading result of $20.79 million after tax. This is an increase of $12.23 million when compared with the same period last year and consistent with the 1st quarter earnings announced in October 2008.

Sales increased by $28.23 million to $273.79 million due to the effect of higher steel prices.

A provision for impairment of trade receivables totalling $3.18 million after tax was made reflecting the difficult trading conditions being encountered.

In the same period last year a restructuring provision of $1.57 million after tax was made for the Hurricane Wire business.

The Company also announced that a fully imputed interim dividend of 10 cents per share will be paid on 30 March 2009.

Market Conditions

In commenting on the Company’s operations for the half year the Chief Executive Officer Mr Nick Calavrias said,

“The Company had variable market conditions to contend with during the period under review.

Construction activity over all was down led by a substantial drop in housing starts. Commercial construction activity however did not suffer to the same extent.

The strong demand for our goods and services from the manufacturing sector that we saw in the last quarter of our 2008 year continued into the early part of the new financial year. However, we have experienced a noticeable slowdown since November.

Demand from the rural communities however remained strong through out."

Performance

The Distribution business comprising Steel Distribution, Stainless Steel, Fastening Systems, Piping Systems and Industrial Products on aggregate increased sales revenue by about 13% compared with the previous period with results substantially ahead of the same period last year.

Although the value of commercial building activity and infrastructure projects was ahead of the same period last year, 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 also reduced as the year progressed although this was partially offset by strong demand from the rural areas.

Global demand for steel in the early part of the year led to substantial shortages with most products being on allocation by our suppliers. The division’s response to these trading conditions was to withdraw from high volume low margin indent business and to be more focused on the higher margin mix of products.

The Manufacturing business comprising Roofing Products, Reinforcing Fabrication and Hurricane Wire, increased its revenue by 11%.

The Reinforcing operation posted improved results due to a favorable mix of commercial contracts and strong demand from infrastructure projects. Roofing was able to replace lost revenue from the residential housing sector with higher sales to the light commercial sector and farm shed market.

The Hurricane Wire business showed significant improvement as a result of the restructuring that took place in early 2008.

Inventory

Supply volatility for replacement inventory was encountered for most of calendar 2008. In the first half the combination of shortages and higher input costs for steel making, such as iron ore, coal and scrap metal forced the price of steel products up.

However the supply position improved rapidly in September at the same time as demand for steel began to stall, causing a substantial build up of inventory on hand with levels increasing by $46 million in this reporting period. We expect this to be reduced substantially by April and to be at normal operating levels by year end.

Outlook

There is considerable uncertainty surrounding the extent and timing of the effect of the global economic slowdown on the economy of New Zealand.

The domestic economy has been in recessionary conditions for all of 2008 with the expectation that this will continue for most if not all of calendar 2009. Dairy farmers’ incomes for the 2009 year in aggregate are expected to fall by around $3billion compared with last year as the price of milk powder retreats from its peak in July 2008.

Construction activity is expected to decline further during 2009. However with the Official Cash Rate now at the historic low of 3.5% pa, the construction industry could recover more quickly than previously anticipated.

Although exporters will be assisted by the substantial fall of the New Zealand currency, volumes are likely to be subdued until an upturn in global demand returns.

International steel prices and exchange rate volatility have had significant impact on the Company’s financial results over recent years. Global demand has stalled causing steel producers world wide to cut capacity to match current demand. Although global prices for steel are now in retreat in US dollar terms, the impact will be softened due to the substantial depreciation of the New Zealand dollar.

The government’s current action to counter some of the effects of the global financial crises by stimulating the domestic economy through tax cuts and an increase in infrastructure spending is expected to lessen the impact of the global recession.

In summary, we expect market conditions in the short term to be as tough as we have seen for a very long time with a good deal of uncertainty, and the deteriorating trading conditions are expected to reduce our second half result substantially.

For further information, please contact Mr Nick Calavrias, Chief Executive Officer, Steel & Tube Holdings Limited on (04) 570-5001.