Group profit after tax for the full year was $5.7 million compared to $26.1 million the previous year. This included a $4.2 million one-off charge in tax expense related to the removal of tax depreciation on buildings as announced in the New Zealand Government’s May 2010 budget.
Underlying profit at $9.9 million is a decrease of $16.2 million or 62% when compared to the previous year. Sales at $380 million were $104 million lower than last year primarily due to lower steel prices.
Previously announced results for the six months to 31 December 2009 were sales revenue of $191 million and net profit after tax of $3.2 million. For the second half, sales were $189 million and underlying net profit after tax was $6.7 million.
A final dividend of 5 cents per share was declared.
New Chief Executive
I have joined Steel & Tube at a challenging time for the Company and the New Zealand steel market. Steel & Tube is a strong Company with significant potential and with the market showing signs of recovery, albeit slow and perhaps somewhat uncertain, the Company is ready for a fresh perspective, and is motivated to meet the challenge.
Market Conditions
Market conditions for the period continued to decline with many sectors deeply affected by the continued impact of the Global Economic Crisis. The New Zealand steel industry was no exception. This financial year has been one of the most difficult trading years in Steel & Tube’s history, yet despite this and a poor first half result, initiatives employed by the Company to manage through these tough times generated an improved second half result.
Although the New Zealand economy produced a slight recovery in the later half of 2009 and early 2010, the flow-on effects of this recovery did not significantly impact those industries important to Steel & Tube. Many sectors continued to struggle with market volatility, competitive pressures and reduction in demand.
The construction industry continued to be affected by weakness in property markets and the property development sector in particular. 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 consent figures with office construction down a significant 42%. The exception to the decline was the contribution from construction projects associated with the Rugby World Cup 2011 and government infrastructure, including hospitals, education facilities and major roading projects.
The residential market has shown signs of recovery but from a very low base, and certainly not to the extent expected earlier in the year.
Although parts of the manufacturing sector remain under pressure, slightly increased demand was seen late in the period for those selling into the Australian market. Conversely, manufacturing for local demand continued to find market conditions tough and tightening of credit facilities contributed to an overall contraction of the sector.
Rural industries continued to demonstrate a slow recovery. The sector experienced a period of significant volatility and stress, driven by volatile dairy prices, a tightening in credit conditions and drought affecting some farming regions. Dairy prices rebounded strongly in the latter half of 2009.
In other major sectors, Oil and Gas projects were reasonably strong and will remain so for the next few years. Development in the Taranaki Basin continues to yield solid and steady business for the Company.
World steel production increased 14% from July 2009 to June 2010 as steel mills restarted production in the belief that market demand would grow during the period. As a consequence, supply of steel products was much improved on the previous year and with increasing raw material prices, international steel prices increased in the second half.
Company Performance
The domestic demand for steel products for the 12 months to June 2010 was down by 6% on the previous year and 26% from the highs of two years ago. Despite the subdued market conditions, Steel & Tube has maintained a steady market share position in its core products. Strong competition saw margins impacted, although they recovered to some degree in the second half year.
The Distribution business comprising Steel, Stainless Steel, Fastening Systems, Piping Systems and Wholesale, in aggregate saw a reduction in sales revenue of 25% on 2% less volume over the full year. Piping Systems and Stainless product groups performed relatively well in the period, reflecting the completion of major projects in the dairy processing and oil and gas sectors. Fire protection was also an influential segment for the Piping Systems product range, assisted through several Rugby World Cup 2011 projects and a number of major hospital redevelopments throughout the country.
The Manufacturing business, renamed Processing, comprising Roofing Products, Reinforcing, Fabrication and Hurricane Wire Products, in aggregate saw a reduction in sales revenue of 16% on 5% less volume over the full year.
Government infrastructure projects continued to generate much needed work particularly with major roading projects in Auckland. Notably, the Newmarket Viaduct Replacement and the Victoria Park Tunnel projects positively impacted Steel & Tube’s reinforcing product range during the period and will continue to do so into the future.
As part of the facilities rationalisation, the Roofing and Purlins Auckland operations moved into a new purpose built facility in Highbrook.
Development of New Plymouth’s new facility commenced during the year. Planned to open late 2010, the facility will substantially increase the business capacity for the Taranaki region and offer a more cost efficient operation.
Steel & Tube’s Stonedon Drive operation in East Tamaki, Auckland is undergoing further expansion to add 1,800m2 of warehouse space for the Steel Processing operation.
Commitment to Health & Safety
Steel & Tube remains committed to the health and safety of our employees. This year’s health and safety performance showed further improvement on the previous year’s result, reflecting the Company’s ‘zero harm’ focus. No Lost Time Injuries (LTIs) occurred and Medical Treatment Injuries (MTIs) reduced to 7 compared to 10 MTIs in the prior year.
The Company continues to work to improve the health & safety performance and care for its employees and contractors through the Company’s iCare programme.
Managing for the times
The decline in market conditions generated a number of initiatives within Steel & Tube to ensure that the business was “right sized” for the period and beyond. Many initiatives were undertaken to reduce overheads within the business and to strengthen the balance sheet.
These initiatives have seen the rationalisation of premises with 4 sites merged into other locations and plans for a further consolidation. Operating expenses reduced by $11.8 million compared to prior year including approximately $6 million in labour force reductions over the course of the year.
In strengthening the balance sheet, focus has again been applied to cash management that has seen the Company’s exposure to debtors reduced, and further inventory reductions during the year. Steel & Tube have continued to actively manage debtors to minimise exposure to potential customer insolvency. Interest rate reductions combined with reduced borrowings for capital management improvements saw interest costs reduce by around $4 million.
The full extent of some cost reductions and cash management initiatives will continue to flow into the business over the following year, as some measures were initiated later in the period.
Listening to our Customers
In early 2010, Steel & Tube conducted a comprehensive survey of steel and allied product customers. The aim of the survey was to establish the key drivers of the relationship with those customers and their attitude to Steel & Tube’s performance.
Overall, Steel & Tube fared well against all drivers when compared to other competitors in the market and were the most preferred choice of supplier of the consumers surveyed. The detail results will be used to improve our service levels and performance to maintain our leadership in the New Zealand steel market.
Outlook
Although the economy has now entered its second year of recovery and should be gaining momentum, the economic outlook from a Company perspective remains subdued, with growth expected to be slow and gradual with a degree of uncertainty in some sectors.
Business confidence has fallen sharply from the highs in February across virtually every sector. Households remain cautious and consumer spending is restrained.
Housing, although recovering from 40 year lows, continues to remain sluggish with house prices still under downward pressure. This is compounded by reducing net migration inflows.
Of particular concern is the lack of private investment in the non residential construction market and the commercial construction sector, with the potential for further retraction over the next 12 months.
Government infrastructure spending is providing some relief by partially filling the construction gaps created following completion of several of the world cup projects.
Although the rural sector had started to show some signs of recovery on the back of strengthening global dairy wholesale prices, recent price declines may lead to further caution by farmers.
Manufacturing and exports have continued to gather pace, particularly to Australia aided by the currency exchange rate, and to China. This is expected to continue.
Global steel demand has continued to recover from the early 2009 lows, led predominantly by China. However the industry continues to wrestle with matching production to demand, leading to temporary product surpluses or deficits. This coupled with shorter term raw material contracts, is prolonging international steel pricing volatility.
In the first half of the new financial year, the Company expects to see continued pressure on volumes with the declines in non residential construction being offset by gradual increases in other sectors.
The recent domestic steel price increases flowing on from rising global steel pricing in the first half of 2010, may come under more pressure if global prices now continue to soften, squeezing margins again.
Imminent tax changes for both individuals and companies should provide stimulus to the retail sector, assist a recovery in business investment, enhance profitability and encourage economic growth.
We have continued to reposition the business to reflect the current and foreseeable economic environment in addition to progressing key elements of our revised strategy.
The Company remains in very good shape with strong cash flows and a strong balance sheet and is well positioned for the future.