Just over two years ago Steel & Tube embarked on a major reinvigoration programme with ‘One Company’ at its heart. 2012 has seen One Company deliver significant and beneficial changes to our business and customers across New Zealand. These positive improvements are both immediate and, we believe, sustainable over the longer term.
In addition to One Company, other new initiatives are also underway to complement and build on the work already completed.
Our staff and customers alike are readily engaging with One Company and the new initiatives we have commenced. Their enthusiasm for our refreshed approach demonstrates a strong commitment to the Company and confidence in our direction.
The Company’s on-going reinvigoration is against a backdrop of continued subdued economic activity. We are seeing increasing variability at the regional level and intense competition across all products and sectors, particularly those heavily aligned to construction.
Christchurch rebuild activity is slowly improving. However, this benefit has largely been offset elsewhere across the country giving rise to a marginal increase in the national steel demand year on year. This is reflected in a $20 million, or five per cent, increase in sales due to improved volumes and pricing.
The six months to 31 December 2011 had sales revenue of $202.9 million and an underlying net profit after tax of $6.4 million. The second half had sales revenue of $202.5 million and an underlying net profit after tax of $6.7 million.
The total sales revenue for the full year at $405 million was up $19.6 million or 5 per cent when compared with the previous year. Underlying profit after tax of $13.1 million was down $3.9 million, or 23 per cent.
Operating cash flow remained strong at $18.8 million, an increase in $4.9 million or 35 per cent over the previous year.
A fully imputed dividend of 6.5 cents per share was declared and paid on 28th September 2012.
Before commenting further on the business, I would like to remark on our health and safety programme. An absolute priority for the Company remains the provision of a safe environment to protect our people as well as the contractors and visitors to our sites.
This year, we increased our health and safety resources and considerably raised the profile on the safety programmes we have in place. In particular, we focused on those workplace activities that have the potential to lead to serious harm. Pleasingly, the lead indicators, which are a measure of actions and input to support the health and safety programme, have all improved.
However, the number of lost-time incidents and medical-treatment incidents over the year increased to a total of 14, with all but one being minor in nature. This number of incidents was disappointing given the commitment and focus we have in place on providing safe working environments.
At the start of the year we launched the first Steel & Tube safety awards as an annual programme. The awards are designed to recognise and reinforce the good behaviours and initiatives many of our people demonstrate day after day.
The programme culminated in an inaugural and highly successful safety awards event, held here in Wellington. Some 23 finalists attended and were recognised for their commitment to safety either as individuals or as teams. It is encouraging and pleasing to note for the first four months of this financial year, our safety performance is improving. So far this year, there have been just two incidents compared with six incidents for the same period last year.
As we indicated at the half year, activity levels remained subdued across the three key sectors of construction, manufacturing and rural. This appears to be somewhat at odds with the general view of an economy slowly gaining momentum. No doubt the global issues in Europe, a slowing Chinese economy and a high New Zealand dollar have influenced the local environment to varying degrees. Certainly investment sentiment has remained cautious and measured.
The economic situation continues to restrain steel demand to levels that are still more than 30 per cent down on the 2005/2006 peak and almost 25 per cent down on pre-Global Financial Crisis demand.
Globally, the steel industry has struggled to balance production with reducing global demands. Both global and local steel prices have been volatile. This instability reflects the variability in both exchange rates and raw-material pricing, albeit the latter against a declining trend.
Domestically, residential construction is improving, particularly in Christchurch and Auckland, although other regions remain soft. Building consents by value improved by 12.1 per cent to year ending June 2012 but from a very low base. Non-residential construction continues to languish, with the year ending June 2012 seeing no appreciable change in the building consents by value.
In Christchurch, rebuild activity is underway with residential and infrastructure developments slowly increasing month by month, although the peak rebuild activities remain some considerable time away.
Commercial activity is primarily associated with companies preparing for the rebuild and establishing new or additional capabilities. This activity is generally in the suburbs. However, the rest of the country remains subdued, with commercial activity in Auckland being particularly supressed.
Excluding meat and dairy, seasonally-adjusted manufacturing volumes remained flat through the period. Although there was a lift in the second half, global and local manufacturing indices signal a deteriorating outlook.
Rural commodity prices continued to soften throughout the period with improved volumes offsetting some of the decline. Concerns with the global situation have impacted farmer confidence, thus curtailing activities in the latter part of the year.
Therefore, unsurprisingly the steel industry remains very competitive and those products aligned primarily to the construction industry, roofing and reinforcing have had their margins impacted to a greater extent. Despite this, it is pleasing to see sales lift by five per cent due to both volume and pricing, with market shares remaining steady or slightly improving across most of our key product categories.
Notwithstanding the economic landscape, we have continued to pursue and invest in the Company’s reinvigoration programme and remain pleased with the on-going external and internal support and encouragement we receive.
The supply-chain transformation continues. Our newly-integrated supply chain aims to deliver greater cost efficiencies whilst providing better product accessibility and options for our customers. New processes have and continue to be implemented with the most noticeable impact to date being an inventory reduction in excess of $13 million from the half-year position and $6 million for the full year position.
Our facilities’ rationalisation programme also continues. For example, there has been noticeable progress at our Nelson operation where three facilities have been consolidated into one new one. The new single site houses the steel, stainless, fastenings and reinforcing businesses, as well as our other product ranges, and greatly enhances Steel & Tube’s profile in Nelson.
In Hamilton, the same approach will shortly see all Steel & Tube operations on one site rather than three separate sites.
The current lease for the National Support Centre in Lower Hutt is soon to expire. We have taken the opportunity to move to a new office, also in the Hutt Valley and which is supportive on the One Company approach.
Another important theme of the reinvigoration is building the skills and expertise of our people as well as improving the capabilities and equipment we have to service our chosen markets. Specifically, we have invested heavily in two development programmes aimed at up-skilling all of our operational managers and account managers. Other people-development programmes are being planned.
With regards to capabilities and equipment, we have recently commissioned new plate-processing equipment to supply higher-quality finished processed plate to the Auckland and the North Island market.
In Christchurch, we have allocated more resources across all parts of the business as demand increases. Processing equipment has been reviewed and capital projects are underway to upgrade equipment in line with the anticipated ramp up in demand.
We are putting greater emphasis on product development, as was signalled to us as an opportunity for improvement in our customer surveys. Earlier in the year, we launched a new range of residential and commercial seismic-reinforcing meshes that are fully compliant with the revised building codes. The new-generation meshes, along with other products from our extensive product portfolio, are aggregated under the One Company philosophy, which has created the Steel & Tube ‘Residential Offer’ for builders and merchants in Christchurch.
We also launched a new roofing profile, called ST963, which provides superior strength and yield for the commercial roofing market.
This year we celebrated, through our Wire Processing business, 80 years of manufacturing and distribution of the iconic Hurricane range of reinforcing, fencing, fence panels, wire, gates and nail products for use in the rural and building sectors.
The start of the new financial year coincided with price increases and margins have improved. However, as the global steel industry grapples with low demand, and fears of a ‘hard landing’ in China increased, raw material prices and, in particular, iron ore prices fell to levels not seen for several years. This along with the intense competition within the industry has created downwards pressure on prices and hence margins.
However, in recent weeks as Europe appears less volatile and the Chinese economic outlook a little stronger, raw material prices have rebounded, which in due course will perpetuate steel pricing volatility in the domestic market over coming months.
From a construction-sector perspective, New Zealand appears to becoming a polarised economy with the Christchurch rebuild offsetting lacklustre activities elsewhere. Generally, outside of the Auckland residential activity, both Auckland and Wellington markets remain subdued with little to indicate an improvement in the short to medium term.
Metal-related manufacturing continues to languish and with an overvalued New Zealand dollar, as well as restrained Australian and Asian economies, the outlook in the short to medium term appears muted.
Despite increasing rural commodity prices, Fonterra have forecast a reduced pay-out for farmers suggesting activity in this sector will remain soft in the short term.
We remain pleased with the progress of One Company and the other initiatives and despite the challenging external economic environment we feel cautiously optimistic about the future. Our people are energised by the on-going regeneration, symbolised by our brand, the new facilities we are moving into and the capability programmes being rolled out.
The divesture by Arrium and subsequent rebalancing of our share registry is not only good news for New Zealand and our shareholders but also provides for greater freedom to set our own course, particularly in a highly-competitive industry.
However, as the Chairman alluded to, the on-going global uncertainties make it difficult to predict the outlook with any degree of confidence in the medium to short term. Following the solid GDP performance of the first half there are mixed views for the second half – some see the New Zealand economy continuing to slowly gain momentum whilst others see the second half as patchy and uncertain. We tend to lean to the second view with the gains around the Christchurch rebuild off-setting soft demand elsewhere.
Therefore, after four months of trading we expect the first half results to be similar or marginally ahead of the same period last year.
In conclusion I would like to reiterate how much the Company is enthused about the new shareholding profile and the various initiatives that are repositioning the business. We have a strong balance sheet, generate strong cash flows, have a strong product range and a strong customer base.
We are ‘Stronger in Everyway’.