Review of Operations
Group profit after tax for the full year was $17.0 million compared to $5.7 million the previous year. This included a minor one-off tax expense of $289k compared to last years one-off tax expense of $4.2 million, both related to tax legislation changes announced in the New Zealand Government’s May 2010 budget.
Underlying profit at $17.3 million is an increase of $7.4 million or 75% when compared to the previous years underlying profit. Sales at $386 million were $6 million higher on slightly increased volumes.
Previously announced results for the six months to 31 December 2010 were sales revenue of $190.5 million and underlying net profit after tax of $8.4 million. For the second half, sales were $195.5 million and underlying net profit after tax was $8.9 million.
A final dividend of 9.0 cents per share was declared.
Overview
The economic environment was slow and subdued, inline with the company expectations outlined in last year’s outlook statement with little upside from a trading perspective. The earthquakes and ongoing aftershocks in Christchurch required significant time and resources to assist staff through a challenging and traumatic period.
In addition, the company embraced a significant change programme to reinvigorate the organisation and to prepare for the future. The new and exciting brand is a visual demonstration of this.
Against this backdrop, it is pleasing to report improved business performance and profitability for the last financial year ending 30 June 2011.
Market Conditions
As anticipated, the New Zealand economy struggled to gain momentum throughout the first half of the reporting period and although the March quarter GDP result of 0.8% suggested an improving economic foundation, from the company’s perspective several key sectors continued to deteriorate thereby offsetting those sectors showing signs of recovery.
Consequently subdued performance in key sectors for most of the period led to ongoing low demands with the continuation of competitive pressures and squeezed margins.
The construction sector in particular, continued to deteriorate throughout the period. Residential construction remained at historical lows and despite a slight recovery in housing turnover, building consents by value declined 14% compared to the previous year.
Similarly, non residential construction deteriorated year on year with building consents by value reducing a further 4% for the year ending June 11. This is on top of the 18% reduction in the prior year. The commercial and industrial construction sectors weakened further with reductions in consents of 29% and 12% respectively.
Manufacturing started the year slowly with most sectors under pressure, however the second half improved, particularly in transport, machinery and equipment manufacturing. Like the previous year, export manufacturing was buoyed by the favourable exchange rate with exporters to Australia enjoying increased demand.
The rural sector started to recover with record commodity prices across almost all sectors and particularly strong demand for dairy within emerging Asia. There is still significant debt to be repaid however increasing confidence produced increased activity levels in the second half.
In other major sectors, oil and gas projects were reasonably strong in the first half but as two large onshore projects concluded, the second half was relatively quiet.
World steel production increased 13% from July 2010 to June 2011 with almost half of the growth coming from China. Raw material prices have all significantly increased within the period at an average of approximately 40%, pushed up further by the Queensland floods limiting coal output used to make coking coal. As a consequence finished goods prices increased in the second half, offset to some degree in New Zealand by the strength of the New Zealand dollar.
Christchurch
Christchurch featured significantly throughout the period as staff both in Christchurch and elsewhere worked hard to deal with the situation. Pleasingly all 120 staff and the 6 facilities came through the September and February earthquakes relatively unscathed. Sadly one employee lost his partner and our thoughts and support continue to be with him and his family.
Many employees’ families have been impacted due to property damage and the ongoing stresses of the situation and the company has continued to find ways to support staff.
Disruptions to business operations were minimal due to the commitment, resilience and the continued focus by staff on supporting the business. Our systems and standards employed in the warehousing and handling of steel products resulted in relatively minor damage to product and facilities. In addition to the support offered to staff, we positioned the Company to assist in the rebuild with many of the organisations involved.
Company Performance
The total domestic demand for steel for the 12 months to June 2011 increased marginally by 4%, however it still remains 20-25% below the highs of three years ago. In contrast, demand for steel distribution products was flat year on year.
Despite the low demand environment, Steel & Tube has again 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.
Distribution, comprising steel, stainless steel, fastenings, piping systems, wire and industrial products, in aggregate had increased sales revenue of 1.5% on 3% more volume over the full year. Like the prior year, piping systems and stainless product groups performed relatively well, reflecting the completion of major projects in the oil and gas sector as well as internal initiatives starting to generate benefits.
Processing, comprising roofing products, reinforcing, wire and mesh products, in aggregate had marginally increased sales revenue on a marginal increase in volume over the full year.
Government infrastructure projects continued to generate much needed work. In Auckland several projects have continued including the Rail Electrification, the Newmarket Viaduct Replacement and a further phase of the Victoria Park Tunnel. In Christchurch, the Southern Motorway upgrade commenced and all continued to positively impact reinforcing activities.
The operating expense gains made in the prior year ($11.8m) were maintained and enhanced by almost $1m despite increasing corporate resources to address the “One Company” initiative.
Cash management and the balance sheet remain a key focus and are actively managed. Trade receivables and inventory costs both increased inline with increasing steel prices. Actual inventory reduced and the company’s exposure to potential customer insolvency continues to be vigilantly managed. Interest rate reductions combined with reduced borrowings for capital management improvements saw interest costs reduce by around $0.5 million.
“One Company”
The company has undergone significant changes within this last 12 months to leverage key differentiating strengths and reposition it for the future. Several initiatives have progressed based on internal and external stakeholder reviews under the banner of “One Company”.
The most visible change is our brand. We have refreshed our logo so that it is modern, vibrant and exciting. We have a positioning statement “Stronger in Everyway” reflecting that S&T is the leading New Zealand steel distributor and will deliver to the customer in every possible way. The new brand is the visible sign, both internally and externally that we have changed.
At the heart of the changes is a new operating model. It is a model that centres on delivering to the customer all of their steel and service requirements in a coordinated manner at the local level through the grouping of geographic businesses. Product specialisation remains a key strength and has been enhanced with additional planning resources.
There are several other initiatives at varying stages of progression, but all are aimed at positioning S&T to be without question, the leading steel distributor in New Zealand and “Stronger in Everyway”.
One of the outcomes of the “One Company” approach is the ongoing rationalisation of our facilities. New Plymouth’s new facility opened in December 2010 substantially increasing the Company’s ability to service the Taranaki region whilst delivering a more cost efficient operation.
The 1,800m2 warehouse extension of the company’s Stonedon Drive operation in East Tamaki, Auckland was completed on time and under budget.
Several other smaller facilities were closed with the operations consolidated into existing larger locations within the same geography to improve alignment and coordination to service customers whilst reducing costs.
Commitment to Health & Safety
Steel & Tube remains committed to the health and safety of employees, contractors and others who visit our facilities. Last year, we modified the safety performance reporting to include contractors, and rebased the prior year statistics to include contractor incidents. This year’s health and safety performance continues to show further improvement, reflecting the company’s ‘zero harm’ focus. Inclusive of contractors there was 1 Lost Time Injury (LTI), compared to 1 LTI in the prior year and 7 Medical Treatment Injuries (MTIs) 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.
Outlook
The economy is starting to show some encouraging signs that the recovery is gaining momentum and appears sustainable this time around. Retail spending is lifting, exports are strong and commodity prices remain high despite some pullback in recent months. The latest GDP data surprised on the upside and confidence indices confirm high business sentiment, however the recent market volatility and uncertainties caused by the US downgrade and ongoing issues in Europe will undoubtedly impact local confidence and possibly the broader New Zealand economy.
Construction, a key market for Steel & Tube, continues to remain weak with consents and gross capital formation forecasts suggesting further decline in the short to medium term.
Residential construction is at historical lows, consents by value are weak and net migration is now negative as more people leave the country. However there are indications of a slowly improving housing market, particularly in Auckland, and with some certainty for at least 5000 Christchurch households there will be a substantial pick up in housing demand in the future. The question is when, and it may be later rather than sooner, possibly impacting the latter stages of this financial year.
Non residential construction remains a concern with most forecasts suggesting further decline until mid 2012. Clearly at some stage the Canterbury rebuild will start to positively impact however we expect non-residential construction to recover only slowly.
Manufacturing was impacted significantly by the global financial crisis (GFC) and although activity and exports have lifted in recent months, particularly to Australia and Asia, to what extent the sector recovers is still in debate. The New Zealand dollar will play a mixed role, most likely aiding exports to the Australian economy, but potentially limiting exports to Asia due to its strength.
The rural sector shows promise with strong exports and relatively high prices all indicating that this sector will strengthen further as those paying down debt move to increased investment.
From a global steel perspective the industry continues to struggle to match production to demand as it has consistently since the GFC. Raw material costs remain high squeezing margins for the steel mills, consequently pricing remains volatile and volume dependant.
The new financial year has started slowly and may be further compounded by recent global events undermining local sentiment resulting in lower demands for steel products. Regardless, competitive pressures on both volume and prices will persist for some time as the industry struggles to off-set further deterioration in the construction sectors, with some limited growth in manufacturing and rural.
The second half may be boosted to a degree with the Christchurch residential rebuild possibly commencing early in 2012.
The internal initiatives continue to progress well and will help reposition the organisation to maximise returns from a mixed external environment. The Company remains in very good shape with strong cash flows and a strong balance sheet and is well positioned for the future.
For further information, please contact Dave Taylor, Chief Executive Officer, Steel & Tube Holdings Limited on (04) 570-5001.