This has been a particularly challenging year as we, along with many other industries and organisations around the world, continued to deal with the impact from the Global Economic Crisis.
The first half saw further deterioration in many of our markets, which led to lower market demand and as competitors tried to maintain volume, prices and hence margins reduced. We responded quickly and appropriately with various initiatives to address the challenge.
The second half, initially buoyed by increasing optimism and confidence in the recovery, saw some gradual improvement in demand. Global steel production continued to recover, as did global steel prices. This led to price increases in the domestic market, which along with slowly increasing volumes provided some opportunity to improve profitability.
Thus, the six months to 31 December 2009 had sales revenue of $191 million and net profit after tax of $3.2 million. The second half had sales revenue of $189 million and an underlying net profit after tax of $6.7 million.
In total for the full year, when compared with the previous year, sales revenue at $380 million was down $104 million, or 21% and underlying profit after tax of $9.9 million was down $16.2 million, or 62%.
Health and Safety
Before commenting further on the business, I would like to start with Health and Safety and again acknowledge the effort and commitment of our staff towards the ongoing improvements in this area.
During the course of the year, there were no lost time incidents and the number of medical treatment incidents reduced by 3 to a total of 7. This performance has continued into the new-year and the Company has now completed 3 full years with zero lost time incidents and the number of incidents requiring medical treatment also continue to reduce.
The safety reviews this year have identified the areas of high risk for both employees and contractors working at our facilities and we are now implementing additional initiatives to address these risks. Going forward, contractors will be included in the Company safety statistics to ensure we have a complete view of our safety performance.
Market Commentary
Although the New Zealand economy produced a slight recovery, the flow-on effects did not significantly impact those sectors and industries important to the Company.
The construction industry and in particular the commercial sector, continued to be affected by weakness in property markets.
Non- residential construction for the 12 months to June 2010 was down 18%. Major segments of the construction sector were down on the previous year’s consents, with office construction down 42%.
Residential construction has shown signs of recovery, but from a very low base and certainly not to the extent expected midway through the year.
Government infrastructure has helped to fill some of the void with the Company benefiting from some notable projects such as the Newmarket Viaduct Replacement, the Supreme Court development here in Wellington and the Victoria Park Tunnel and Viaduct, to name a few.
Manufacturing had started to show signs of improvement as the review period progressed and those manufactures exporting to Australia and China faired better than those meeting local needs.
Similarly Rural, despite earlier volatility had started to show signs of improvement on the back of increasing dairy prices however, reducing debt remains a major focus for most farmers.
Company Performance
The domestic demand for steel was down 6% on the previous year and approx. 25% from two years ago.
Despite this and the competitive pressures, the Company has maintained its leadership position in many core products. Distribution, comprising Steel Distribution, Stainless Steel, Fastening Systems, Piping Systems and Industrial Products saw a reduction in sales revenue of 25% on 2% less volume.
Processing, comprising Roofing Products, Reinforcing and Fabrication and Hurricane Wire Products saw a reduction in sales revenue of 16% on 5% less volume.
Given the challenging environment, the Company initiated numerous measures to reduce costs and protect the balance sheet whilst positioning the business for the upturn.
Operating expenses reduced by $11.8m as we cut overheads and discretionary expenditure and further rationalised our labour requirements by almost 10% throughout the course of the year.
As part of the facilities rationalisation, some of which we touched on at the last Annual Meeting, we are in the final stage of transferring the Auckland Stainless operation into an extended Steel Distribution facility in East Tamaki. A new purpose designed facility in New Plymouth is due to be opened shortly which will consolidate 3 separate facilities providing a more cost effective and efficient operation to service our customers in the Taranaki region.
Four other facilities were consolidated into larger premises through the course of the year with plans for further rationalisation in line with our new strategy. It is important to appreciate, that despite this facility rationalisation, our geographic coverage, which we recognise as a core strength and differentiator, is not prejudiced.
In protecting and strengthening the balance sheet we again focussed on cash management: Inventory levels decreased in the first half and then increased marginally in line with the second half activity levels. That said final inventory levels were still $6.6m below the start of the year.
Also, we have actively been managing our exposure to debtors to minimise the risks associated with potential customer insolvency.
The combined effects of our efforts to reduce working capital, coupled with lower interest rates, saw our interest costs reduce by approx. $4.5 million.
For the first time, we undertook an extensive survey of our customers to understand their key drivers and their attitude towards Steel & Tube. I am pleased to advise that we fared well against all key drivers and comparative service levels from competitors.
The feedback has been used to establish customer and service improvement plans across all of our business.
Early in 2010, management presented its revised strategy and plans for the Company. The core theme is to leverage the key strengths that differentiate us from others in the industry. To that end a new operating model was designed and implemented in the last quarter of the review period and the first quarter of this new financial year which effectively removes many of the internal barriers and should allow us to maximise the full potential of our products with all of our customers.
In addition to the new operating model, there are several new strategic initiatives underway aimed at improving the effectiveness of the organisation whilst addressing the growth objectives.
Also, as you may have seen in the Annual Report, we have established a new leadership team, combining existing and new talent that I believe will drive the business forward over the next few years.
Outlook
Looking forward and although the New Zealand economy is in its second year of recovery, it remains slow and is weaker than projected from a Company perspective. Business and consumer confidence has fallen sharply from the highs of February amidst uncertainty with both the domestic and international economic outlook. Households remain cautious and consumer spending is restrained.
The Christchurch earthquake had minimal effect on our facilities reflecting the high standards we employ for the storage and handling of steel products. Some of our people however faired less well with serious damage to their personal property and we continue to support them and all of our people through what has been and with the aftershocks, continues to be, a testing and stressful experience.
We have established a Christchurch steering team to oversee the challenges and opportunities that the rebuild will bring. In the short term we are seeing a softening of demand as business continuity has been impacted for many customers and the Council and other organisations complete their reviews and rebuild preparations. In the medium and longer term, which certainly will extend into several years, we expect to fully participate in the rebuild, although it is too early to say what the size of this opportunity may be.
The construction industry, with the exception of infrastructure, is expected to remain subdued: Of particular concern is the lack of private investment in non residential and weakening demand for commercial properties. As a result of this reduced investment, we are experiencing a significant downturn in structural steels and associated products for fabricators and we expect this to continue for the rest of the current year. We do expect however, a rebound at some stage of the 2011/12 financial year.
The housing market has remained subdued in respect to both turnover and median house prices. It is pleasing to note that recent positive net migration has reversed mid year trends which along with the personal tax cuts, low interest rates and gradually improving economy may start to create demand.
We had expected Manufacturing to continue to gradually improve led by exports to Australia and China. However it was disappointing to see the majority of manufacturing sectors, particularly metal products and machinery and equipment still in decline in the June quarter GDP data. It is expected that this will improve over time aided by the favourable exchange rate with Australia.
The rural sector is expected to continue to improve due to strengthening dairy prices, however recent adverse weather conditions have impacted livestock numbers.
World steel production surprisingly hit a new peak of over 120 million tonnes per annum in May this year, led primarily by China. It has tailed off in recent months to levels similar to those prior to the Global Economic Crisis, but even at these levels we remain concerned that production is in excess of global demand and may negatively impact global steel prices.
Quarterly contract raw material prices are a new dynamic contributing to the volatility of international steel prices. Coupled with the industry’s ability to match production with demand, steel price volatility is expected, compounded by the volatility in the NZD. That said, pricing in recent months has steadied and is expected to stay at current levels in the short term.
The gradual but sustained volume and price gains that we experienced in the latter half of the review period initially continued into the early part of this financial year. However since the GST increase on October 1 there are concerning signs that demand has softened with pressure on pricing. However, we do believe that the first half of this financial year will exceed the underlying performance of the second half for the period under review.
The new operating model has been well received both within the organisation and with customers and coupled with the other internal initiatives, will position the Company to maximise the opportunities in the short and longer term.
The recovery in New Zealand’s economy remains slow and with low business sentiment and households remaining cautious, is not expected to offer much upside for the remainder of this financial year.
The last 12 months have been challenging and difficult but with the actions and initiatives undertaken, the Company remains in very good shape, with strong cash flows, a strong balance sheet and is well positioned for the future.