For the Year Ending 30 June 2009
Financial Performance
The Company announced a full year after tax result of $26.1 million. This is an increase of $3.6 million, or 15.9% when compared with the previous year’s result. Sales at $484 million were $20 million lower than last year. This full year result comprises two very different half year performances which reflect the market conditions described below.
Previously announced results for the six months to 31 December 2008 were sales revenue of $274 million and net profit after tax of $20.8 million. For the second half of the financial year the sales revenue was $210 million and net profit after tax of $5.3 million.
A final dividend of 9 cents per share was declared.
The Company’s result represents an EBIT return on year end total funds employed of 21.9% and an after tax return on average shareholders funds of 17.9%.
Market Conditions
In commenting on the Company’s operations the Acting Chief Executive Officer, Mr Tony Candy said,
“The Company saw considerable volatility in market conditions in the period under review as residential building consent issuance was down across the whole year finishing with the lowest annual number of consents since these records began in 1965. Commercial construction activity as measured by the value of consents issued rose by 7.6% which 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 first half of the financial year was characterised by substantial shortages of product due to world demand. Suppliers implemented stock allocation policies at that time and prices rose significantly. The Company’s response to these trading conditions was to withdraw from high volume low margin indent business, and to be more focussed on the higher margin mix of products.
Local demand was mixed as the volume of product consumed in commercial building activity declined even though the value of building consents increased. Volume to the manufacturing sector declined as the year progressed while demand in the rural segment of the market was strong in the early part of the year.
Although tax cuts and interest rate reductions helped to ease the plight of the retail sector in the face of rising unemployment, the second half of the financial year also saw the manufacturing and rural sectors under increasing pressure with a volatile currency, softening demand and reductions in commodity prices.
The second half also saw a substantial drop off in steel demand leading to removal of allocations by suppliers. Lower demand available from the domestic market also saw a contraction in margins. Profitability of the Company’s businesses declined sharply and bad debt write offs increased as the slowdown in the construction sector took hold.
The international price of steel reduced in line with reductions in world wide demand, however a drop in New Zealand currency meant this effect was not so apparent in the local market.
Performance
Health and safety performance showed continuing improvement during the year with no lost time injuries recorded and the number of medical treatment injuries reduced by seven to a total of ten for the twelve months. The results achieved in this area of the business are something of which all staff can take credit and be very proud.
The Distribution business comprising Steel Distribution, Stainless Steel, Fastening Systems, Piping Systems and Industrial Products in aggregate saw a reduction in sales revenue of around 4% over the full year. Pricing volatility of replacement inventory and supplier allocations saw an increase in sales and margins occur in the early part of the year with a subsequent reduction in sales and margins when 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 but suffered from the slow down in the rural sector in the latter part of the financial 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.
The overall reduction in volumes led to a no staff replacement policy being applied to the businesses, and in combination with some redundancies this saw the work force reduced by fifty between January and June.
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, 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.
Outlook
There is considerable uncertainty as to when the New Zealand economy will emerge from recession. Unemployment continues to rise and commodity prices have weakened, while inflation has reduced, house prices have fallen and interest rates are near to historic lows.
The economy has been in a recessionary state since early 2008 and this has continued throughout the 2009 year to date. Dairy farmers’ incomes will drop again in the coming year.
Based on forecasts from Fonterra returns from dairying will be $4 billion less than those achieved in 2007/08 and this will eventually flow through to the overall economy. Returns for beef and sheep farmers are expected to increase although volumes processed will be lower as a result of earlier drought conditions.
Exporters of other products and services will continue to struggle until the New Zealand dollar drops back to the lows seen late in 2008. Lower demand for imports from our trading partners flowing from global financial market turmoil will also impact adversely on the exporting sector.
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.
Residential construction has fallen to lows not seen since the early 1960’s. 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 lower mortgage interest rates.
International steel prices have seen considerable volatility over recent years. This when combined with substantial exchange rate movements and sudden shifts in demand and supply, have resulted in fluctuating profit margins. There are signs that international steel prices are beginning to increase at the same time that production volumes are stabilising. The currency however remains at levels above where the Reserve Bank appears to be comfortable.
In the first half of the new financial year the company expects to see a continuation of the current soft volumes and resultant pressure on margins.
A number of initiatives to maintain profitability have been taken. These include freezing management salaries and directors’ fees, changing incentive programmes, reviewing human resource requirements, reducing working capital usage, lowering of capital expenditure, relocating businesses and introducing targeted product growth programmes.
Although there is a large degree of uncertainty as to the timing, there is some prospect of an improvement in 2010, if as economic forecasters predict the country emerges from recession and demand picks up”.
For further information, please contact Mr Tony Candy, Acting Chief Executive Officer, Steel & Tube Holdings Limited on (04) 570-5001.