Steel & Tube Holdings Limited (STU) Earnings Call Transcript & Summary

[Foreign Language] Good afternoon, and welcome to everybody. I'm Susan Paterson, the Chair of your company. Thank you for coming along to our Shareholder Annual Meeting today in Wellington, and welcome also to our shareholders, staff and advisers and others who may watch this online. Before we get going, there are few formalities that I need to run through. If the fire alarm goes, please make your way down the stairs to the Harbourside entrance, turn right and make your way to the Odlins Square. If you're unsure where to go, please follow instructions from the staff. There are unisex bathrooms on this floor down the hallway straight behind me and more bathrooms on the basement level. There are QR codes at the front of the venue when you came in, and I trust you've all used that coming in. And also, this is for the government contact tracing app. There's hand sanitizers around. We encourage you to use it. And please, as much as possible, maintain social distancing. Today, you'll have the opportunity to hear from myself and Mark Malpass, our CEO, on our strategy and our progress against this. Following the presentations, we are happy to take questions from shareholders relating to the presentations. Please note that only people entitled to speak at the meeting, our shareholders, proxy holders or corporate representatives of a shareholder. We will then move on to the resolutions contained in the notice of meeting. Voting on all resolutions will be by way of a poll, and that will take place at the end of the meeting once all the resolutions have been proposed and discussed. We will then be happy to take general questions from shareholders, proxy holders or corporate representatives in regards to our company and the operations. At the close of the meeting, I invite you all to stay and share some light refreshments with the management team and your Board. Your directors and management are more than happy to talk to shareholders, so please feel free to come and have a chat with any of us. We are pleased to have all our directors with us here today. From my right, we have Mark Malpass, our CEO; Anne Urlwin, who's Chair of our Audit and Risk Committee; Steve Reindler, who's Chair of our Governance and Remuneration Committee; Chris Ellis, Chair of our Quality, Health, Safety and Environmental Committee; John Beveridge; and finally, Greg Smith, our CFO. Anne is retiring from the Board at the end of this meeting, and I would like to take this opportunity to acknowledge her significant and very valued contributions to Steel & Tube and the Board. She has been a respected and supportive director during a challenging time in our company's history as Steel & Tube took -- undertook its significant turnaround program. She has held the role of Chair of the Audit and Risk Committee, and her contributions have been much appreciated. Thank you so much, Anne. Our recruitment program is currently underway to identify and appoint a director with the appropriate skills to join the Board. It is anticipated that this person will take up the role as the Chair of the Audit and Risk Committee. As per the listing rules, that person will stand for election by shareholders at next year's meeting. Also in attendance today are the company's auditors, PricewaterhouseCoopers, who are available to answer questions on the company's financial statements. The Board has a skills matrix, which identifies the competencies and skill sets, which we believe add value to Steel & Tube. Directors' capabilities are considered against the skills matrix, and it is an important tool in our succession planning and appointment of new directors. We believe that the current directors offer valuable and complementary skills, in line with our skills matrix. Importantly, every one of Steel & Tube's directors has either worked in or is involved in directorships in the sector. The industry in which we operate is highly competitive and fragmented. Steel & Tube remains one of New Zealand's largest and most comprehensive providers of steel products and solutions. To safeguard our future, we must continue to innovate and improve to ensure that Steel & Tube is seen as a choice -- as first choice for consumers wanting expert advice and quality products and solutions. We also need to make sure that we are operating as efficiently as possible, maximizing our margins and, as a result, delivering value to our shareholders. For the past 3 years, we have been on a journey to reset our company to make it stronger, more efficient and better performing. Key projects have included the streaming of our network of branches, the introduction of an extensive quality program and improvements to our operations and supply chain, particularly around freight and inventory management. We have also been investing in technology and the digitalization of our business. The steel sector has historically been a bricks-and-mortar industry, and we are at the forefront of transforming this industry. We are embracing technology with digital initiatives, including a new e-commerce platform, web shops, a chatbot and more, to make it easy for our customers to do business with us. Our capital base has significantly strengthened, and borrowings reduced to $10 million at FY '20 year-end. Operating cash flow has grown strongly and was up $5 million year-on-year. One outstanding issue relating to the period prior to April 2016 is the Commerce Commission case in relation to the Fair Trading and steel mesh, which remains ongoing. The latest appeal heard in August, and we're now awaiting the Court's decision. We were disappointed with the Commerce Commission's decision to appeal the High Court's decision, and we continue to stand by our products. The breaches of the Fair Trading Act were unintentional, and the Board and management at the time immediately rectified testing procedures and documentation when advised of the issue. The work we have done over the past years has made us stronger, more efficient and a leaner business and provided us with great resilience for something that none of us foresaw, a global pandemic, which has created enormous challenges for governments, businesses and people around the globe. The Level 4 lockdown saw all sites closed, except where needed to supply essential services. The priorities for the Board were the safety of our people and customers and contingency planning, including financial modeling under various scenarios. We took a prudent approach to capital management, and we canceled the interim dividend payment. We also engaged with our banking syndicate, agreed waivers to our banking covenants for 30th of June and 31st December 2020, and temporarily revised covenants for the remainder of FY '21, which we expect to comfortably meet. Like most businesses, Steel & Tube has not come through the pandemic environment unscathed, with COVID-19 accelerating an already softening trading environment. The Level 4 lockdown occurred during a traditionally high earnings period for our business, and sales were down approximately 50% over March and April compared to the same time last year. During this period, management took the opportunity to progress strategic initiatives, including accelerating the organization restructure, advancing our digital strategy and further staff training. Trading, since we emerged from lockdown, has been better than anticipated and is now close to prior year. In part, this has been due to pent-up demand. However, we have also seen positive signs of economic activity with a number of new projects and longer-term contracts, offsetting some project cancellations. However, volatility in the COVID environment has been demonstrated again recently with the Level 3 restrictions in Auckland, and this has impacted a number of our customers, with a flow-on effect to some parts of our business. I would like to acknowledge and thank our staff, suppliers, customers and other stakeholders for their support during this period. And in particular, I was humbled by the commitment and efforts of the Steel & Tube team who quickly adapted to the new working environment and continued to give their all during a time of significant disruption to their jobs and their daily lives. The results for the FY '20 year reflect that we had been in a softening economic environment and the material impact of COVID-19 on trading as well as the work being done to make our business fit for purpose. As reported in our results announcement on the 28th of August, the 2020 financial year saw us recognize nontrading impairments and adjustments of $58 million. These, together with softened earnings, led to a reported accounting loss of $60 million for the year. Whilst economic conditions are expected to remain challenging throughout our 2021 financial year, I'm pleased to report that we have a stronger balance sheet, we are delivering robust operating cash flows, and we are seeing benefits from the significant structural improvements made over the last 2 years. Excluding the nontrading items, our normalized earnings were just above breakeven. Cash management continues to remain a critical focus for the business. Given the uncertainty and volatility of the COVID-19 environment, the Board made the difficult decisions to cancel the interim dividend and not declare a final dividend. We understand shareholders will be disappointed in this but believe that in the -- believe that the preservation of cash at this time was the most appropriate action to take and in the best interests of the company. Equally, shareholders will be frustrated in Steel & Tube's share price, as are the Board. We recognize we need to deliver improved financial performance, which we are committed to doing. Significant work has been done by management and the Board to position our company for the future and ensure we have the best organizational structure to navigate the new COVID-19 environment. We are positioning our company to be customer-focused and sales-led. With the start of the FY '21 financial year, we have put in place a clear strategy to guide our actions going forward. Our vision is to be a successful company, delivering an acceptable return to our shareholders and seen as the best in the sector, the preferred choice for steel products and solution and a trusted partner for our customers. We aspire to sector-leading employee engagement and to offer a rewarding place to work. However, we are conscious that, like most other businesses in this post-COVID-19 environment, there will still be challenges in the road ahead. We continue to build on the good work that has been done to create a strong organizational platform. Cost efficiencies, inventory management and working capital disciplines remain a priority. Innovation and digitalization are key enablers to help us achieve our goals. This has been an important area of investment, and we have accelerated our plans to create a digitally smart and efficient business as part of our strategy. Finally, we continue to invest in our staff and develop their talents, recognize their efforts and contributions, celebrate and support diversity, encourage flexibility and empower them to add more customer value. We have also continued to support our communities with scholarships and mentoring programs that support people's ambitions. I would now like to hand over to our CEO, Mark Malpass, to talk about our future pathway and strategy in more detail.

Thank you, Susan. Look, I'll start with my management team. You can see there, Steel & Tube is led by a talented group of executives, all of whom have a significant experience in their respective areas and are passionate about our company and also its potential. Our businesses are structured into 2 divisions: the distribution division, which products are sourced from preferred mills and distributed through our network of branches throughout the country; in this -- in the infrastructure business on the right-hand side, our products are typically made-to-order or on a project basis. And often, we include on-site installation services, either performed by our people or by contractors. We have very strong brands. You can see on the chart that sit with inside each of those businesses. Both our divisions, distribution and infrastructure, were materially impacted by the COVID-19 lockdown, but I can report that both divisions are recovering very well. The distribution business is a higher volume, lower-margin business and was impacted by the market segment contraction that we saw in the vertical construction sector and competitive pricing pressure over the last couple of years. Pleasingly, the Project Strive initiatives have significantly improved our cost base in the distribution business, and we've also been able to hold market share. And our pre-COVID revenues and margins had certainly improved. In the infrastructure business, we have continued to win significant project work through innovation, our quality and our service program. Our composite deck floor business is supported by our market-leading ComFlor products, and we've seen very strong market offering there, albeit the vertical construction sector softening did impact the business in the 2020 financial year. Our Roll Forming business within the infrastructure division is a key supplier of roofing products, and we recently won a long-term contract, 4-year contract, with Kainga Ora. Our reinforcing business also continues to build a strong pipeline of project work, although we're very careful to balance risk and reward in that contracting sector. The current environment demonstrates the benefit of Steel & Tube's diversification across a number of sectors. Each of the sectors has been affected differently by the different trading conditions in the 2020 financial year. Construction is about half or 50% of our exposure -- our sales exposure and comprises of nonresidential or commercial construction, residential construction and infrastructure construction. Then we have manufacturing, which is roughly 40% of our sales exposure, and then 10% retail/wholesale. So we're nicely diversified across a number of sectors. There's no question the market has been challenging in this financial year with the impact of COVID having a significant impact on the second half. You can see on the top left there, our nonresidential or commercial consents have been calling off for a while, and that's driven by that slowing down in the vertical construction space. That said, there is a significant increase in value of nonresidential consents. In fact, August just reported this morning was up about 19%. But importantly, for us, there's been a fairly significant decrease in the actual floor area measured by square meter basis that you can see in the red line there. On the top right-hand side, you can see crane activity. So this is a good barometer for nonresidential construction. And you can see that, that declined again, the first time since 2017. And our CFDL and ComFlor businesses are very exposed, as is our structural business, we're exposed to that nonresidential sector. Residential consents on the bottom left-hand side there are still going very strong. In fact, it was reported this morning that annualized consents for August were about 38,200. So that's a couple of percent up year-on-year. And we really haven't seen the expected calling off that many analysts were expecting to see in the residential sector. Also of note, inside that 38,200 for August, we exceeded the number of townhouses and flats and units are consented were over 10,000. So that's the first time since the early 1990s that we've seen that sort of level since the recording had started. You can also see on the bottom right-hand side there, the BNZ Performance of Manufacturing, or PMI Index. This has continued to climb post-COVID-19 lockdown. So it hit 58.8 in July and has since dropped back again to about 50.8 as we've caught up lost ground from the COVID lockdown period. So it's a real mixed bag there in terms of consent data. The vertical construction softening has certainly hurt us. But we are now seeing some fairly good growth in infrastructure, in government work, government projects and education, health and others that are on the horizon. Also, civil works and water management are areas of opportunity for us. So overall, our results for the 2020 financial year reflect the impact of COVID-19 in the second half of the year, with the Level 4 lockdown and progressive return to business occurring during what are traditionally high earnings periods for the business in the April and May months. This followed the first half year impacts of reduced vertical construction activity, the softening that we had seen in the stainless markets and also ongoing competitive pricing pressures. The result included trading adjustments of $58.1 million, which included noncash goodwill and other impairments of $51.9 million and $5.5 million of restructuring and rationalization costs. So revenue over the 12 months was $417.9 million, with a normalized EBIT excluding nontrading adjustments of $0.4 million for the year. On a like-for-like basis, with the prior year, excluding IFRS 16 adjustments, normalized EBIT was a loss of $5.2 million, and the company reported a net loss after tax of $60 million for the year. Our operating cash flows were very robust, with a $39.6 million operating cash flow for the year. And borrowings were reduced to $10 million at the June 30 reporting date, reflecting working capital and capital management discipline. Also our borrowings, as Susan mentioned, were further reduced. In fact, at the 31st of August, the borrowings were reduced to 0. Despite the challenging second half, our balance sheet is very strong, and we had cash of $17.4 million at 30 June, and that has continued to improve since the end of the financial year. Post-balance date, we also completed the sale of a surplus property in Gisborne with net proceeds of $1.4 million, which has been applied to further reduce borrowings. Margins were showing good signs of improvement in the 6 months leading up to COVID lockdown. However, an immediate period following the lockdown, we did see some drop-off in margins, which was driven by competitive activity and also product mix. More recently, in the first quarter of this financial year, we have seen margins improve. And most important priority is to continue to focus on that gross margin improvement. In fact, all of our sales front-facing teams are now incentive on -- excuse me, incentivized on gross margin dollar improvement quarter-on-quarter. So that is a real focus for the business and important that everybody in the company is aligned around growing our gross margin dollars. And the leaner organization structure and move to more digital focus is also helping in this area. So our operating costs have also held flat over the financial year in real terms as cost efficiencies and -- excuse me, cost efficiencies offset inflation pressures and also provisions that we talk for doubtful and bad debts over the period. As Susan said, over the past 2 years, we have done a lot of work in creating a stronger financial platform for the business. We have a more efficient and leaner business, and we're leading the way in digitization and technology across the steel sector. While economic forecast for the financial -- for the various sectors that we're involved in are mixed, all indicators currently suggest that there will be a decline in overall economic activity. We are continuing to adapt our business to ensure that we are well positioned to not only survive but to strengthen our competitive position over this time. To ensure that our business is fit for purpose, we've accelerated restructuring of our operating platform, which includes branch consolidations. And importantly, we've retained our local sales and service presence while creating a leaner business model. This has seen our network reduced from 50 sites in -- or late 2017 to 26 sites as at the end of September. We have also reduced our lease costs over the period by about $3 million per annum. In addition to the operating site changes, we've also closed our Wellington corporate office and have transitioned our finance team to now be based in Auckland. In line with the network restructuring, we have also made the difficult decision to resize our workforce, which sadly has meant a permanent reduction of between 150 and 200 people. That's around 20% of our workforce. As at the end of August, we were -- excuse me, at the end of September, we had 874 full-time equivalent employees, and we expect that number to reduce to about 830 by 31st of December and potentially a further 30, depending on sales levels. With these changes, we have progressed new ways of working. So particularly around digital initiatives, these are not just making it easy for our customers to do business with us, but also enabling a lower cost to serve to those customers. And we're also using digital in terms of our pricing governance and controls in that area, which is an essential part of growing that gross margin dollar improvement that I mentioned earlier. Customer satisfaction is fundamental to our success. Growing our revenues requires a continual focus on looking for ways to add value to our customers. This includes providing products and services that meet our customers' needs. It also means delivering seamless customer service and leveraging our technology expertise. So it also means delivering in full on specification every time, and our sales and logistics teams play huge roles in terms of achieving those goals as does data. We measure customer satisfaction using our Net Promoter Score that you can see on the chart, and this has consistently improved since we started measuring that metric, NPS, since 2018. I mentioned key -- a key enabler is technology, which allows us to improve our sales effectiveness and lowering our cost to serve to customers. We believe that we will provide -- will provide us with a competitive edge going forward and also improve financial outcomes for shareholders. We continue to move quickly to try out new ideas such as our chatbot, Stanley, and also our online customer portal. We are building a market-leading digital capability, which will improve customers' experience and also increase our share of wallet with customers. One example is the chatbot Stanley who's now answering over 100 questions a week for customers. Stanley is designed to assist in various visitors to our website when they're searching for products, locations, opening hours or other information that they're seeking. We also continue to refine and expand BIM-Spec. So this is our Building Information Modeling platform. This provides online technical content about our products that makes it easier for construction and design professionals to be able to work with us and help streamline workflows and estimating information for them. And this has significantly increased the efficiency of our detailing process. So this detailing is basically we are taking and creating shop -- workshop drawings for people to create products. So that BIM-Spec has enabled that process to be more efficient. And it's an important factor in this sector that's rapidly changing, and that focus on customer experience is helping us in this area. We recently launched some web shops. Now these -- for customers, what it means is they can order 24 hours a day, 7 days a week across the entire product range. So 47,000 stock units are now available on our web stores. The web shops have basically provided our customers with a one-stop shop, so for all their product and services needs, with the ability to retrieve order details, shipping information, invoicing information, quotes from one single location. We have also been very pleased with the adoption rates. Approximately 1,000 customers over the last few months have signed up onto our web stores, and there's thousands more that we're now individually targeting through direct marketing campaigns. Even at these early stages, it's obvious that this service is something that our customers see a lot of value in. The overarching goals of our customer experience strategy are to deliver market-leading customer experience and to reduce our cost to serve. We have recently implemented our customer excellence centers with the state-of-the-art technology that's gone into those, so telecommunications and contact center technologies. This is in a single place where all customer interactions come together in one area, be it face-to-face, phone or via e-mail or online. We understand how important it is to get the right products at the right time at the right price to our customers, and our new advanced customer analytics platform is providing some deep insights for our customers -- for us and our customers and also their buying patterns and profiles. These insights have been very helpful to align our sales and service channels around our needs, the needs of our customers, but also highlight market segment and niche opportunities for us to grow and maximize our margins. As an example, the Pricing Optimisation Programme provides us with visibility around price performance by customer, by transaction and by product. And over time, this will also allow us to automate our responses to changing market and competitive conditions. Another example is a new test certificate platform that builds on our already industry-leading product traceability practices. Providing test certificates is currently a very manual process for both us and our customers. The new platform that we've implemented will eventually completely automate all elements of the customer test certificate process. So it effectively means that we can improve convenience and reliability for our customers and further reduce cost to serve for both us and them. While it's early days, we believe that we can drive far better outcomes for customers and shareholders by embracing the use of these new technologies. Our people are obviously the backbone of our company, and our social policies are focused on -- around improving access to education, employment, development and training for our staff as well as students in low decile schools in the areas around our plants. We also celebrate the diversity of our workforce with a -- which is represented across 18 different ethnicities, and support the health and safety and well-being of our people. Pleasingly, we have continued to increase the number of women across our business, creating a stronger and more diverse talent pipeline. Significantly, the number of female reports to general managers has increased from 29% to 36% during the 2020 financial year. And we continue to support the First Foundation, which is a scholarship to nominated family members of our staff to support them through their tertiary study. In 2020, we also participated in the sector for work engagement program, which is a government setup program for school leavers. In fact, that program has recently resulted in 3 people being offered full-time employment from Papakura High School at our plants. We also offer a wide range of staff and skills training and development with increased levels of technical support training during the 2020 financial year, and we averaged about $260 per employee spend to support that training. And this year's employee engagement survey, our engagement score was 7.3 out of 10, which was above the benchmark for the industry. And also the survey was completed during a time of significant restructuring, so we're very pleased with that result. Other highlights include us being in the top 5% of companies for industry caring management support and in the top 10% for peer relationships at work. Mates in Construction. The statistics overwhelmingly show that the construction industry needs to create a more -- to create a workplace where it's okay to share what's on your mind and raise your hand and talk about problems that are occurring in your life. Steel & Tube is a founding sponsor of Mates in Construction, a partnership with the objective of improved health and well-being for those in the industry. During the 2019 lockdown, we shared the Mates in Construction toolbox talk videos and resources within our company. And since reopening post-lockdown, more than 150 manufacturing and warehouse employees have undertaken the Mates induction training program, which creates better awareness of the risk of suicide and provides ways for support for employees that are needing help. We also commenced an advanced program so that every site has a designated employee who has received specialist training to identify and provide support and advice to those most at risk. We've committed to this because we've seen how effective the program is at starting conversations and creating awareness in all sections of our workforce. Health and safety of our employees remains our #1 priority. We continue to actively engage with our staff across the business. And our total recordable injury frequency rate, you can see, has continued to reduce significantly over the last 5 years. In fact, today is about 3.97, so has come down significantly. In recent employee engagement surveys, there was also 2 key health and safety questions that were asked of employees to indicate our health and safety culture within the business. In response to the question, is this organization committed to providing a safe work environment, we were scored 8.8 out of 10. And we were scored 8.6 out of 10 to the question, the person I report to demonstrates commitment to my safety in the workplace. We have completed ISO quality certification for the majority of our businesses, with the remainder expected to be completed during the current financial year. And this demonstrates our ongoing commitment to meeting our customer and stakeholder needs and expectations in terms of ongoing quality improvement across the business. We've also contracted Lloyd's Register to perform assessments of our key international steel mills, with 19 mills across the region being audited since we began that process in 2018. And we continue to make steps to lead the way in quality with audits and certifications from key organizations and recently included the SCNZ Steel Construction New Zealand Charter. We remain committed to creating a sustainable business, one that delivers value for all our stakeholders as well as reducing the environmental impact of our activities. In line with this, over the last year, we have advanced our approach to ESG, environment, social and governance principles. We believe we will enhance the company -- the value of our company through this process. We've identified areas that matter for the long-term sustainability of our business and set key performance indicators across each of those areas. And those KPIs are aligned with our 4 strategic pillars, which we believe are essential to the long-term sustainability of our company and support our social license to operate. We believe a strong ESG proposition will benefit not only our communities with which we operate, but also importantly support revenue growth, cost efficiencies, reduce regulatory and legal intervention and an uplift in employee productivity and optimization of our assets. We continue to take our responsibilities and our commitment to our staff and our shareholders and our suppliers and our customers seriously, and every member of the Steel & Tube team has a responsibility to uphold our values and accountabilities for our actions in this area. In late 2017, we embarked on an extensive company-wide reset to drive long-term sustainable earnings improvement and rebuild shareholder value in the company. Through our Project Strive program, we have laid out a stronger foundation and are moving to a clear strategy that will drive our actions and -- over the next 3 years. As we move forward, we have identified 5 pathways, and each of these are focused on areas of the business that is critical for our ongoing success. Our goal is to be the best in our sector, the preferred choice for steel products and solutions, and also a trusted partner for our customers as well as a rewarding place for people to work while delivering acceptable returns to our shareholders. Our customers remain at the forefront of all that we do, and our focus is on providing new and better ways to deliver information, expertise, purchasing options and making it easier for people to do business with us. In line with this, we will leverage the breadth of our expertise, a wide-ranging product suite as well as strong brands to meet the needs of our customers from the ground up. Equally important is ensuring that we have an efficient and productive business that delivers value to our shareholders, including working -- excuse me, while a significant amount of work has been completed to deliver operational supply chain excellence, and we continue to improve operational disciplines and excellence and customer service. Innovation, digitization and technology are key enablers for our strategy and will remain an important investment area for us. Our work in this area has been accelerated over the COVID-19 period, and there's a pipeline of future initiatives that we have underway. Stronger Together embodies our strategy to effectively bring our staff and our business units together in pursuit of a common purpose and aligns our services, expertise and products to provide the best possible support to our customers and partners. In terms of sector outlook, just under 40% of our sales are in the residential or nonresidential sectors of construction. So residential is approximately a $24 billion market, and near-term demand does remain strong. It's supported by tight supply, low mortgage rates and strong first home and returning expat buyer interest. Residential and business investment is expected to contract as the pipeline does soften and confidence thins in this sector. We estimate that nonresidential consents or commercial has a value of about $8 billion, the market size, and demand continues to soften and increase in number of projects that are being delayed or canceled. However, the government spend and health and education council spend and private developments are expected to help offset that softening in the sector. Infrastructure is a market size of about $9 billion and growing due to the increased government funding, including shovel-ready projects, although, of course, noting construction timing of those projects is uncertain. Food manufacturing and agricultural sectors are expected to fare better as the necessities are in high demand locally and abroad. New Zealand's focus on more resilient local supply chains and increasing domestic manufacturing may help offset export-led decline. Trading in the first quarter of the financial year 2021 has been stronger than we anticipated. The recovery reflects a level of resilience in the economy at present with the support of the government wage subsidy scheme, which we're very thankful for. The construction activity continues to be impacted by softer vertical building activity. However, we are seeing continued strength in that residential construction sector and civil and other works. Our priority, as I mentioned earlier, is around gross margin dollars across each of these sectors and balancing that risk/reward as we go through uncertain times in the economy. The economic environment remains uncertain and with the continuing slowdown in some areas due to reduced business confidence post-COVID and pre-election uncertainty. While trading has been solid for us in the first quarter of this financial year, we expect there will be some deterioration in economic conditions later in the -- in this calendar period leading up to Christmas and also in the second half of the 2021 financial year. The latest restrictions in Auckland and around New Zealand are a continuing reminder of the volatility and unpredictability in a COVID environment. With this uncertainty and expectations of an economic recession, we are taking a very careful and prudent approach to the management of the business. Our strategy sets out a pathway that builds on our competitive advantage. We do -- as we do start the new financial year, we -- our balance sheet is in a very strong position. We have a far leaner cost structure. Our investment in digital technology continues and is supporting a more flexible service model that combines ease of access to our customers and better service for our customers. Steel & Tube is very well positioned to weather a range of forecast economic scenarios and, importantly, to take advantage of the many opportunities that we see ahead of us. So thank you for listening, and I will now pass back to our Chair.

Thank you, Mark. I would now like to invite questions in relation to the annual report or today's presentations. There will be an opportunity to ask questions about each resolution as they are put to shareholders to vote. If you have a question, could you please clearly state your name. If you are a shareholder, or if you are a proxy holder or corporate representative, please state the interest that you represent. Are there any questions? Yes, sir? Just wait for the microphone just coming.

Hello. It's [ Rick ], I'm a shareholder.

Okay.

Since everybody has taken a hit, and I noticed on here these remuneration effects for directors and everything like that. I've taken the staff have been put off, and the shareholders aren't given any dividend, haven't had one for quite some time. Does that mean there's going to be any remuneration increases?

Certainly, at the moment, we haven't made any remuneration increases during the year. And for the year-end, we didn't pay out any short-term incentives to any of the members of staff. So there weren't any incentive payments made. So the staff, for the year, did not get any of those monies that they may have expected. And as we come around to remuneration reviews, we'll certainly take into account the position of the company and how it's performing, noting that there actually is still demand for talent out in the market, and we want to make sure that we will retain our talent. But we believe at the moment that the executives are paid a good wage, but we will review that on a case-by-case basis. But there's no intent for any large increases or anything going forward.

[ Philip O'Brian ], shareholder. Competition. To what extent is competition excessive, you think, and having a poor effect on the company? And what can be done about it?

Thank you, Mr. O'Brian. Certainly, we do face intense competitive pressure. And at times, I must say we would rather that some of our competitors need not try to keep driving market share by driving the prices down and impacting margins. Having looked at the industry, we have decided that the best way to address the competitive pressures for our company, given any other structural change in the industry, is actually to invest in digitalization and become more effective, more efficient and have better data and better information to be making those right pricing decisions. But there's no doubt, it is a competitive industry. We do face strong competition in a number of different areas. That's actually, I guess, good for New Zealand, good for the customers. But we have made significant investments, making it -- lowering our costs and cost to serve to customers, making it easier for them to do business with us and trying to grab that competitive advantage through a number of our digital offerings, delivering in full on time, to specification, having easy chatbots, being able to now allow them to order themselves online, that type of thing. Mark, is there more you'd like to add to that?

No. I just think the only thing I would add is that we're -- as I mentioned, we're very careful with the risk/reward around particularly contract work to ensure that we don't pick up with low margins. And there is a fair bit of that going on in the industry at the moment. As the industry does contract, we've been very cautious about what we actually take on. As Susan mentioned, we're using digital, not only to be an improved service and channel for our customers for ease of workability, but we're also using for pricing information around really across our mass markets to ensure that we're getting our pricing right, and we are incentivizing all of our people around gross margin dollar improvement, right? So we are really wired to -- this is a trading business. 2/3 of our business is trading. So understanding the cost that we're buying product at and moving it as quickly as possible through the system is what we do. That's breaking bulk and distributing products. And so we've now got down to a network, as I mentioned earlier. That's really nice and tight, 26 sites across the country, improving the efficiencies in those businesses, running them well and in pricing well is the game here. And gross margin is everything for us. So we're very, very focused on it. And that digital work is -- 50% of the energy is really around how we can improve gross margin and find niches and opportunities to -- that aren't so commoditized because part of our business is -- it's just in the commodity game of providing structural steel and products that, I guess, is a necessary ticket to trade where we make our money as the services and adjacencies and other businesses that come along with that.

What is the level of uptake amongst staff and customers on this new digitalization?

Yes, early days. It's a good question, but we are starting to see quite rapid uptake. As I mentioned, there's about 1,000 customers came on. We were just talking about it at a Board meeting this morning. Of those, close to 10% of them were new customers that hadn't been with us before. So quite good uptake. So again, it is a durability for our customers so that they can trade with us at any time of day, but we are also -- we've actually been targeting in the early days that are sort of the smaller customers that are quite a high cost to serve, and that's been good to see that pickup rate as we move through. So we're now starting to sort of put the hammer down and move through the rest of our customer groups.

Are there other questions from anybody?

Yes. I'm [ Kim Brian ]. I'd like you to enlarge on a situation with the court case and the commerce, and how large -- how much is involved?

The -- it has gone through the High Court, and we were really disappointed when the Commerce Commission decided to appeal. We then had to appeal to be able to address our side of the story in that appeal hearing. It is covered by insurance, and we have covered that off in the previous years. As you'll be aware, it goes back to before this Board and management's time to 2016, but we've been working through very carefully. If we step -- we have attempted to get a settlement with the Commerce Commission, but they have decided that they will keep challenging the fine that was brought. And as I said, they went to the Court of Appeals, so we had to protect our position. But the appeal was in August, and we are awaiting a judgment, but we do have insurance cover for any fines that come out of it.

And it's [ Ryan Grant ] speaking, and I'm an ordinary shareholder. I -- in view of all the difficulty that a lot of businesses will be having at the moment, is there an increase in your debtors? And how long is it taking for them to pay their accounts?

We took an increased provision, and we've certainly had a huge focus on debtors and with our salespeople in monitoring those debt levels. But I might ask Greg Smith, our CFO. He was updating the Board this morning on the absolute specifics because it's an area that we're very, very conscious of and watching carefully.

You're spot on. It's a key area of risk for our business, something that we closely monitor. I have to say since COVID and lockdown, we've actually seen a very good level of on-time collection rates. It's one of our key metrics that we monitor. So at this point in time, our data book continues to perform in line with our expectations, but we closely monitor it.

Any other questions from anybody?

Yes. [ Brian Beard ], shareholder. In view of the rather said share price that we have at the moment, do you have any regrets about not taking Fletcher Building's [ $1.90 ] per share offer?

That share offer, obviously, came in at a different time. And at that stage, I do need to keep reminding people because it does seem to be forgotten. It wasn't that we didn't accept the offer. We asked for an independent valuation of the company, which we obviously needed to do in order to accept any offer. When we asked for an independent valuation of the offer, Fletcher has then walked away. If there are no further questions, then let me turn to the resolutions. I'd like to now move the resolutions before the meeting. These were provided -- these were notified in the notice of meeting, and explanatory notes have been provided. Voting on each of the resolutions in the notice of meeting will be by way of poll. Please use your voting paper you received in the mail or you were given when you registered for this meeting. If you do not have a voting paper, you will be able to request one when the voting takes place. We have Computershare here to assist. Only shareholders, proxy holders or corporate representatives of a shareholder may vote on today's resolutions. The first resolution is to record the reappointment of PricewaterhouseCoopers as the company's auditors and authorize the directors to fix the auditor's remuneration. Are there any questions on this motion? I would like to move this motion. Do I have a seconder? Thank you very much. Oh, you've got a question, sorry.

Yes. Do the auditors have any other relationships of them during the auditing for Steel & Tube?

We're very careful on the independence of the auditors. We have them do 1 or 2 very minor assignments, but always ensure that those have nothing to do with advising the company on anything which they are auditing. Greg, do you want to just run through very quickly as one small assignment this year?

Yes. So we have engaged PwC for a minor piece of treasury advice. But other than that, they provide the external audit services. Our other services are provided by other firms at this point in time.

Okay. Sorry. Then I would like to move the motion. Do I have a seconder? Thank you very much. I put that motion, and you have your forms to complete. Resolution 2 is the reelection of Chris Ellis. The next 2 resolutions are regarding reelection of our directors. Chris and Steve both retire by rotation and have offered themselves for reelection. Both Chris and Steve are considered valuable members of the Board, and the Board unanimously supports their reelection. A summary of their experience and skills they bring to the company are outlined in the explanatory notes in the notice of meeting. And I will invite them both to say a few words in respect of the reelection. First is Chris Ellis. Chris was appointed to the Board in 2017 and is Chair of our Quality, Health, Safety and Environmental Committee. His particular skill set in relation to Steel & Tube's Board skills matrix includes commercial skills, quality, health and safety, business turnaround, manufacturing, construction, people and culture. I'd now like to invite Chris to say a few words.

Thank you, Susan. [Foreign Language], and thank you for the opportunity to speak to you this afternoon. I've been on the Board of your company since 2017, and I regard it as a privilege and a significant responsibility. I'm seeking your support for reelection for a second term. My background, as Susan mentioned, includes 35-plus years of operational executive CEO and more recently, governance roles in the building materials, construction and engineering sectors. I've been responsible for businesses operating in New Zealand, Australia and internationally and have worked through previous recessions, business cycles and have had hands-on experience, successfully turning around businesses. My other Board roles are also in manufacturing or construction industries. My industry background and my network, many of whom are in influential positions in customer organizations, are beneficial to my role at Steel & Tube. I am able to work collaboratively with other Board members but will retain an independent position on a shoes where that is required. My other Board commitments don't interfere with my work for Steel & Tube, and I am able to devote the necessary time to it. As you've heard this afternoon, we're part of the way through a turnaround process. The business model of our core distribution unit has been under severe pressure for a number of years. For Steel & Tube to be successful, distribution has to be turned around. So coming out of the COVID-19 lockdown this year, we're seeing the early benefits in our cash generation and working capital of that turnaround process. Work done restructuring our footprint, supply chain, and improving our sales channel performance has meant that we have strong operating leverage to lift returns to shareholders as revenues rise post-COVID. So in conclusion, I'm determined, along with my Board colleagues and management, to complete the turnaround process and to provide shareholders with a satisfactory return on their investment. I don't like leaving anything half finished, and I ask for your support reelecting me to see the job completed. Thank you, Susan.

Excuse me, Chris. Chris, stay here. Any questions? Just before we let Chris go and sit down again, are there any matters for discussion or any queries from the floor for Chris?

Just remind us again what your academic background was.

I have a Bachelor in Civil Engineering from Canterbury and a Master of Science from Stanford University.

Thank you, Chris.

Thanks.

Again, I would like to move the motion to appoint Chris Ellis to the Board. Do I have a seconder? Thank you very much. Again, there's a space on your form to vote for the election of Chris. Reelection of Steve Reindler. Steve was appointed to the Board in 2017 and is Chair of our Governance and Rem Committee. His particular skill set includes governance, commercial, health, quality and safety, the steel industry, manufacturing and construction. I'll now invite Steve to say a few words.

Thank you, Susan, and good afternoon, ladies and gentlemen, and thank you to the shareholders who have come along this afternoon. When I offer myself for reelection, I asked myself 2 questions. The first one, do I feel aligned with the company's strategy? And the answer to that is yes. We are very adaptive with the strategy, and we are modifying it to market conditions, but I have that alignment with the business. And then the next question I asked is, am I comfortable with the directors who are seated around the Board table with me? And my answer to that is yes. I should just note, as Susan has said, that we are losing Anne Urlwin. It's been my absolute pleasure to work with her on a number of Boards, Naylor Love and Meridian Energy, as she sets the bar very high for us to find a replacement. So having reached that point in my decision-making, I am a little bit like Chris Ellis. I go back to and I joined the Board in October 2017, and I had a determination to see this business turn around. It has taken longer and it's been harder than I thought, but I'm not one to walk away. So with your support, please, I would like the opportunity to serve another 3 years and to complete the job that I started. Thank you.

Thank you very much. Does anybody have any questions for Steve?

I'm an engineer.

Two engineers. Thank you, Steve. Therefore, I would like to move the motion to elect Steve Reindler to the Board. Do I have a seconder? Thank you very much. Again, there's space on your voting papers. If I can now ask you to fill in your proxy and voting forms, and these will be collected by our share registrar, Computershare. Please complete your voting paper by ticking for, against, or abstain in the appropriate place on the form, and please ensure that you have signed the form. Please do not tick the discretion box. If you have any difficulty or do not have a voting paper, please raise your hand and somebody will assist you. Once everyone has finished voting, the papers will be collected. I wish to advise that proxies have been received in respect of approximately 52 million shares, being 32% of the total shares on issue, with approximately 91% of those votes being in favor of the resolutions. The results of today's voting will be posted on the NZDX as soon as possible. That brings the formal part of our meeting to a close. Is there any other business that shareholders would like to discuss regarding today's presentation or our company? If there are not, in closing, I would like to thank you all very much for your committed support. It has been a challenging year; however, we remain extremely committed to realizing the potential of our business and delivering value to shareholders. Thank you for your attendance today and for those who will be watching online. We'd be delighted if those present could join us for afternoon tea at the back of the room. Just remember, we'll all keep socially distant. But thank you so much for attending and do join the Board for a cup of tea and do ask us any further questions. Thank you very much. I draw the meeting to a close.