AGM 2013 - CEO'S ADDRESS

14 Nov 2013

Thank you Sir John and good afternoon ladies and gentlemen.

Excellent progress has been made throughout Steel & Tube on our One Company approach. Multiple initiatives continue across several fronts, including supply chain, facilities consolidation and upgrades, new plant investments, to name a few and I’ll talk more about some of these initiatives later.

With increasing customer understanding of the benefits, we have formed several new partnerships that will positively impact the current year and beyond.

Our company culture, values and people development continue to receive much attention and it is highly satisfying to see increasing employee engagement, across all areas of the business.

The on-going reinvigoration continues against a backdrop of subdued albeit slowly improving economic activity, but within an intensely competitive industry.

Health & Safety

Our passion for the safety of our people, contractors and visitors remains resolute.

The year has seen us enhance our approach to health and safety with the realignment of the company HS&E Committee, which comprises all of the Lead Team. We have also created a new HS&E Operational Sub-Committee, to ensure new safety initiatives consider operational practicalities, while also aiding commitment and buy-in.

Pleasingly, the number of Lost Time and Medical Treatment Incidents, including contractors working at our sites, reduced by 50 and 41 per cent.

Our Killers & Life Savers Programme focuses on workplace activities that have potential to lead to serious harm, combined with ways to mitigate. This programme has attracted considerable external interest, and we continue to share appropriate details with a number of external partners.

People & Culture

Our people remain critical to our success. Creating the right culture and investing in our people remain key priorities. Our values programme underpins our culture, supporting the brand and how we interact with our customers.  The next phase of the values programme has just commenced throughout the organisation.  Investment to improve capabilities continues, with key leadership and customer-facing initiatives well underway.

We have also just announced our support for the First Foundation, which awards tertiary level scholarships to students from financially disadvantaged families. Two young adults, who have a family member working for Steel & Tube, will be sponsored through their tertiary education. Looking forward we will award one scholarship each year with priority to employee family members.

This is an example of how we are looking to support employees in a multitude of ways and pleasingly, our latest employee survey indicates that all key engagement and collaboration indices continue to improve.  Similarly our health and safety survey affirms we are progressing from a proactive to a mature culture.

One Company

Our One Company transformation continues on multiple fronts and we remain pleased with the progress.  A number of key elements of the supply-chain transformation are now in place and are expected to positively impact this business this year, and beyond.

We are also continuing to invest and looking for new and innovative ways to create value for both customers and ourselves and some examples are provided shortly.

As the Chairman indicated, the facilities rationalisation programme will continue for several more years. You’ve already heard that multiple facilities in Nelson and Hamilton have been consolidated into new single site operations in both locations. The National Support Centre moved from Lower Hutt into a purpose-designed single floor location in Petone, underpinning the One Company culture.

Construction has commenced on a new facility in Palmerston North and plans are underway for the next tranche of facilities to be consolidated and upgraded.

Investment in new plant and equipment also continues. Previously, we have announced leading-edge plate processing equipment in Auckland, to serve the North Island market and enhancements to wire processing in Christchurch, to increase our seismic mesh capacity.

In July we commissioned a state-of-the-art dual roll-forming machine for the Christchurch roofing operation.

In addition, we’ve recently purchased and commissioned a ladder mesh machine to produce 120,000 straight and radial mesh ladders for precast concrete radial liners for Auckland’s Waterview tunnels.  This most recent opportunity saw Steel & Tube demonstrate significant creativity and innovation at the design stage. We presented a more effective time and cost solution, and won the 3,500 tonne reinforcing order from the WellConnect consortium.

As the Chairman also alluded to, part of the reinvigoration is now turning to our IT infrastructure and platforms. Work has begun on upgrading our telecommunications infrastructure and on outsourcing non-core IT services, for example the help-desk service which is now provided by an external agency.

Steel & Tube was New Zealand’s first organisation to implement a JD Edwards Enterprise Resource Planning (ERP) system. Planning is now underway for a new system that will be a key enabler for the business and provide opportunity for greater integration with our customers and suppliers.

Trading Environment

From an external perspective, we were encouraged by the first half year, with Christchurch construction off-setting sluggish activities in other sectors. Our expectations for the second half were that activity levels would continue to build. As it turned out, however, three key circumstances transpired to restrain demand. First, the worst drought in almost 70 years led to caution and limited investment within farming communities. Second, commercial construction activity suddenly reduced, possibly due in part to the Mainzeal collapse which immediately halted 40 or so projects and dented confidence in the sector, particularly amongst sub-contractors. And third, manufacturing eased as the Australian economy worsened.

Despite the difficult environment, demand did start to improve towards the end of the 2012-2013 financial year and has continued into the New Year.

Steel pricing remains challenging. Globally, raw material pricing and finished steel product pricing is volatile, with excess production and sluggish demand leading to continued downwards price pressure.  Domestically, the year started with a price increase, which helped first half financials. But the anticipated second half price increase didn’t materialise due to soft demand both in Asia and domestically, as indicated earlier.

Compared to before the global financial crisis, domestic steel demand is still down more than 20 percent, and with competition remaining intense, margins have been impacted.

Outlook and Key Sectors

Looking forward, there are clear signs that both economic sentiment and activity levels are on the rise.

Within the construction sector, residential building consents for the year ending September 2013 are up 23.9% by value, though they’ve eased in recent months. Non-residential consents have increased by 8.9% for the equivalent period. Both are led by Christchurch and Auckland, backed by encouraging signs in other regions. As is normal, there is a lag between consents and actual building, but we have observed increased activity in Christchurch, and to a lesser extent, Auckland.

Christchurch presents a significant opportunity over the next few years and we note that several anchor projects are due to commence in 2014. Elsewhere, the Government has recently announced several key projects including the Wellington region’s long awaited Northern Corridor roading project, including Transmission Gully, likely to start in the second half of 2014.

With the level of anticipated construction investment over the next five to eight years, the Government understandably appears determined to leverage its’ spend and mitigate inflationary pressures. Through the Ministry of Business, Innovation and Employment, MBIE, the government is positively challenging the construction industry and the traditional contracting processes, to fulfil government objectives, while also hopefully meeting industry needs. We are involved in on-going discussions with MBIE and other agencies and industry associations regarding this issue. The resolution is yet to be determined but it seems inevitable there will be some changes within the construction sector.

Looking at the rural sector, the impact of the drought appears to have been less than some initially feared and buoyant commodity prices have certainly helped to compensate.  Dairy conversions seem to be continuing with debt levels remaining at approximately 50 billion dollars, while a number of milk powder processing projects are planned for the next couple of years.  In viticulture, following the excellent vintage of 2013, there is renewed sector confidence and evidence of new investment.  As a result, we are more optimistic about the rural sector than we have been for some time.

Turning to manufacturing, excluding meat and dairy, seasonally-adjusted manufacturing volumes continue to remain flat at best. While there is increased confidence in the sector, metal manufacturing activity levels in dollar terms for the two quarters to March and June 2013 were the lowest since the September 2009 quarter.  Similarly, the recent Manufacturers and Exporters Association Survey of Business Conditions showed total June 2013 sales down by 29.5% on the previous year. We see little to suggest any change in the short term.

Taking all this into account, we anticipate domestic steel demand will increase over coming years underpinned by construction activity in Christchurch and Auckland, and by other key infrastructure initiatives across the country.

The industry remains intensely competitive and with demand still significantly down on pre global financial crisis, margins remain low. Also, given the lag between consent and build, the impact from the improving construction cycle may be seen more in 2014 -15 and beyond, rather than in the current financial year.

Globally, economic sentiment is generally slowly improving. But excess steel production capacity, particularly in China, continues to weigh on the industry, holding down prices and squeezing margins. The instability of raw material pricing and exchange rate volatility means domestic pricing is likely to continue to be competitive and uncertain.

From a company perspective, we remain pleased with the progress of the various initiatives which we know are positioning us well for the lift in activity. There are still many aspects of the business to address, however. Our challenge continues to be to balance shareholder returns in the short to medium term, and also to allocate the resources to deliver the change initiatives.

We also remain energised by the ‘independence’ brought about by Arrium’s divestiture and are keen to explore opportunities.

The start to the new financial year has seen volumes steadily improve but pricing remaining soft. An October 1 price increase on several distribution products is improving margins, and we expect the first half to be marginally ahead of the corresponding period last year.  If construction activity kicks-in in the second half, as anticipated, we expect results to reflect this, so long as the construction industry changes referred to earlier don’t undermine the steel supply chain.

Overall Steel & Tube is in good shape, increasingly benefiting from the reinvigoration changes, and with a very strong balance sheet. Coupled with a more positive outlook, it seems that the cyclical nature of our business is moving towards the positive.

Thank you.

PLEASE NOTE: This Address was given in conjunction with the Annual Meeting Presentation 2013. You can download a PDF of this presentation, by clicking on this link