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

Good day, and welcome to the Steel & Tube 2021 Interim Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to CEO, Mark Malpass. Please go ahead, sir.

Okay. Thank you for joining us today. I'm Mark Malpass, and I'm joined here by Greg Smith, our CFO, who will also take you through the financial section of the presentation. Turning to Chart 2, we are pleased to deliver a normalized EBIT of $7.6 million, which was slightly above our December 2020 guidance and a 33% increase on the prior first half year. The earnings improvement has been driven by the execution of strategic initiatives, particularly our network consolidation and streamlining, digital investment and structural cost reduction. We've also paid down all our debt and had cash of $23.9 million at year-end to support our growth initiatives. We had a progressive improvement in trading during the first half with some flow on impact of COVID-19 April lockdown in the first quarter and a stronger second quarter, returning to prior year trading levels. The market is improving. Residential construction sector has been strong. Infrastructure has been solid and the manufacturing system has been improving. These sectors are all offsetting a softer nonresidential construction market. We have a robust pipeline of secured work for the rest of this financial year and have a forward pipeline and have been awarded a number of new longer-term contracts and project work. Just in the turnaround of our performance and the improved economic outlook, the Board has been pleased to resume dividend with an interim unimputed dividend of $0.012 per share. Being a diversified business means we have limited exposure to any one sector. Approximately half of our sales are in the construction and infrastructure markets, with about 11% being sold through merchants and the remaining 36% in the manufacturing sectors. Of that manufacturing sector, about 1/3 of it ends up in the construction sector. So that would put our overall construction, including merchants and infrastructure sector at about 75% of our overall mix. Our activity has recovered in most sectors since the April lockdowns. In particular, residential construction has rebounded strongly with the high demand underpinned by low mortgage rates, tight supply and strong interest from first time buyers in the business. There's also been a pronounced shift in high-density multi-unit dwellings, which have a obviously smaller floor areas and lower steel input. The large infrastructure projects are ongoing, such as bridges and rail and roads and wharf, our piling projects and treat waters. We're also expecting growth due to increased government funding, although that will take some time to flow through as those projects come on stream. The manufacturing sectors have been fairly steady with local demand helping to offset some of the export-led decline. We are starting to see some expansion in the second half with a good start to the calendar year in the manufacturing sectors. What's offsetting the positive recovery on these sectors has been the nonresidential construction sector. A number of large projects have been completed, such as the Westfield Newmarket and Commercial Bay projects. And other projects have either been delayed, such as high-rise buildings or hotels. We're even seeing shipbuilders and maintenance yards a little bit slower. However, there is work ongoing in that nonresidential construction market. We're seeing low warehouse activities, so main freight Bunnings, Woolworths, our Pick n' Save type projects. We're also seeing central and local government-funded projects such as the [ Sola ] or our [ Grade Avenue ] project, which has just commenced supply to. We're seeing a number of education projects that we've been providing products into schools and libraries and even hospital unit. These projects are partly offsetting that reduction in the vertical building market that we've seen in the medium term. Investor demand for commercial property has been resilient, and we expect to see an ongoing gradual recovery in the commercial building activity over the coming year. Our goal is to be seen as the best in the sector, the preferred choice of steel products and solutions and a trusted partner for our customers as well as a rewarding place to work, while delivering an acceptable return to our shareholders. We have a very clear strategy to guide our actions, and we are making good progress along the initiatives under each of the 5 key focus areas you can see on the chart. The work that we have done in the past 3 years has laid a very strong foundation for our business. Cash flow and cash are increasing, all debt is being repaid, costs have reduced significantly, and our working capital has improved with reduced inventory, improving receivables and increased payable days. Benefits are now being realized from our strategic initiatives that we've undertaken, particularly the digital work with the introduction of websites and e-commerce channels in the first half of the financial year as well as the development of advanced digital analytics, our platforms for our customer segmentation, our pricing initiatives and also our product traceability. Our customer experience team has also been established. And the customer satisfaction levels, which we measure through our Net Promoter Scores, have continued to trend upwards, which I'll talk about on that later on. The network consolidation program is now mostly completed. We're down to 26 locations nationally, providing service to all our customers nationally. And we've seen a corresponding rightsize of our labor force, which has resulted in net savings after restructuring costs of about $2.2 million in the first half of the financial year. The focus continues to be on gross margin dollars. So a combination of volume and margin. And we're also focused on continuous improvement in productivity and cost efficiency. I'll now hand over to Greg, who will take us through the financial chart.

Thanks, Mark. This chart shows our results on a like-for-like basis compared to the first half in the prior year, noting that both years are now reported under IFRS 16. Our normalized results for the first half '21 excludes non-trading adjustments of $1.3 million, seeing $0.8 million on the reversal of prior year lease asset impairments arising from the successful execution of sub leases on vacant properties earlier than we'd otherwise anticipated, and $0.5 million gain on sale of property. As Mark has noted, our normalized EBIT excluding these items was $7.6 million, which is up 33% on the prior year and above our December '20 guidance range. We have reported net profit of $4.3 million, up from a loss of $37 million from the prior year and ended the period with a strengthened balance sheet with cash available to support capital investment and growth strategy. In terms of our revenue and margin, revenue was slightly down on the prior year to $226.3 million as sales progressively recovered over the 6-month period to go back to prior year levels. Primarily level 4 lockdown and initial bounce back from trading, our group margin was impacted by product mix and pricing pressures as well as reduced activity in the nonresidential construction market, which occurred across the period. Soon, the softer nonresidential construction market, margins have progressively recover to prior year levels in most sectors and gains from cost efficiencies and pricing disciplines were realized. An example of the work undergoing on cost efficiencies in the business, you can see there, the freight cost efficiency, where our freight cost of sales have reduced compared to the prior year through work being done on load planning and simplifying and coordinating our freight logistics as well as market tenders. In terms of operating expenses. Our normalized operating expenses reduced by 12% as the benefit from labor cost reduction, lower doubtful debt and depreciation and amortization as well as benefits from the network consolidation undertaking. This has led to our OpEx as a percentage of our sales reducing, which is a pleasing trend. Our operating cash flow increased by 40% to $24 million with ongoing improving working capital management and, in particular, good debt collection rates as well as managing our inventory. We're continuing to target further working capital improvements. And our second half cash flow is expected to benefit from the property sales of our remaining property, which we announced in December, a further $6.6 million of cash -- of settlement due to arrive in the March proceedings. So overall, net cash has increased, as Mark noted, to $23.9 million, which is up by $16.5 million from the end of the previous financial year with all of our debt repaid. Bank covenant waivers and revised covenants remain in place for FY '21. And in February, we secured a new $50 million debt facility for a 3-year term. Our balance sheet is strong. The net cash -- and our net cash position will support capital investment and growth initiatives. And as Mark noted, we are pleased to resume dividend payments with an interim dividend of $0.012 per share unimputed to be paid on the 26th of March 2021. We continue to manage our capital expenditure with a priority on projects supporting digital and business improvements and growth initiatives. Key projects in the first half included establishing web shops and data analytics platforms and the continuing enhancement of traceability. Our increased cash flow will continue to support the capital investment program through the second half of our financial year. Steel & Tube operates 2 divisions. The distribution division saw a significant improvement in earnings year-on-year with the doubling of its earnings. Our infrastructure division, which is a little bit more exposed to the nonresidential construction sector softened slightly with increased competition and tightening market conditions in that sector. Pleasingly though project work and contracts continue to be won with a solid pipeline of activity secured for the second half of the financial year. Thank you, and I'll now pass back to Mark.

Thanks, Greg. We have a clear strategic plan and are well positioned to invest in growth with a strong balance sheet, a leaner cost structure and efficient national branch network. We have leadership positions across many product categories. We have an enhanced digital platform and engaged workforce. We have good diversity across multiple sectors and are a trusted partner by our customers with our Net Promoter Scores continuing to increase now at 39 year-to-date. Investment in product quality systems continues, including the Lloyds Register domestic and offshore mill attestation and also independent test certificate verifications locally. We are committed to creating a sustainable business and delivering long-term value for our shareholders. The health and safety of our employees remains our #1 priority, and our total recordable injury frequency rate is now down to 3.5 and is below the estimated industry standard of 5. Our goal is to ensure all our employees and contractors come home safely every day, and we're always looking at new ways to identify areas for improvement. We started measuring our environmental impact last year. We have initiatives in place and are taking action in a number of areas where we can reduce our carbon footprint. This construction material steel is safe, it's strong and it's low waste. It is the ideal circular economy material. It's [ ultimately ] recyclable without product degradation and easily reused and repurposed. Steel offers many other benefits. It is made using predominantly renewable energy sources, there is less construction waste and it lasts a lot longer. We now have a workforce of around 830 people, and our focus is on improving access to education, training and development and employment for our staff as well as students and [indiscernible] schools. We are involved with the [ Manica ] school to workplace scheme with the Papakura High School, and we were delighted to be able to offer jobs to 3 of the students involved in the first placement. We've also launched a new online employee library, which provides a learning platform with free courses on a range of topics to our employees. Looking forward, we are focused on higher-margin growth opportunities. We will continue to build on our strong business foundation now in place with a focus on digital and IT initiatives. Gross margin dollar improvement, as I mentioned earlier, and operational efficiencies remain our key priority. We will leverage our breadth and scale to cross-sell a wider range of our products and services as possible. We are investing in new products and opportunities that will extend what we can offer to our customers. And we'll continue to invest in marketing and our game on promotions, which have really started to build demand over the last half year. While our primary focus is on organic growth, we will also consider other opportunities that are in adjacent sectors. The outlook is improving, and the Board is maintaining a cautiously optimistic view to the future economic environment. However, there are still potential risks from COVID-19 and associated supply chain issues. Therefore, we're not providing FY '21 guidance at this point in time. The residential construction and infrastructure markets are looking good, and we do have a solid pipeline here. We're seeing improvements in manufacturing in this new half. However, mill residential construction remains constrained and there are labor and international freight cost pressures starting to come through. The second half of the year has seen less -- 7 less trading days than the first half. January was a softer start as people took extended holidays, and this has been followed by a very strong February with a positive rebound so far. We expect the final dividend in line with policy, assuming current trading performance continues and there's no further impact from COVID-19. Steel & Tube is very well positioned with a clear strategic plan, a strong balance sheet and a leaner cost structure. We will continue to build on the strong foundation that we've now put in place with increasing focus on higher-margin growth opportunities. I'd also like to take the opportunity just as I conclude to say thank you to Greg Smith, who has provided the Board with outstanding support -- the Board and myself with outstanding support for close to 3.5 years. And I look forward to welcoming Richard Smyth as our CFO at the end of April. Thank you for listening, and I'll now pass back to the moderator for Q&A.

[Operator Instructions] We'll go ahead with our first caller.

It's Grant Lowe here. Just a couple of questions for me. Firstly, the use of cash, you signal on the announcement reporting capital investment and growth initiatives, I think, were the words used. Obviously, you've got the digital program, which you've discussed. Can you give us a sense of what that sort of capital investment, if that's over and above the sort of digital stuff and give us a bit more of a sense around these growth initiatives?

Sorry, Greg, you're breaking up quite early. I think that the gist of your question was, could we give some view around our forward CapEx pipeline?

It was around the growth initiatives, capital investments?

Grant, Greg here. So look, as we've noted in the presentation, we are prioritizing the allocation of our capital towards digital and growth projects. And clearly, there is an element of our capital, which is -- to support BAU. But we have a clear pathway ahead with that CapEx program. We are -- with the CapEx to date has been in line with D&A. And as we look forward, and you mentioned the cash, we'll be evaluating how we used that cash to support the growth initiatives of the business. But clearly, our capital program is more weighted to digital and growth projects at this time.

Got it. Got it. Okay. And the second point, you sort of alluded in the announcement to increased competition, particularly in the infrastructure division. Can you give us a sense of how that's tracking at the moment? Or how that centers to that competition?

We've seen a good recovery in the general infrastructure markets. The businesses that we've been exposed there across our roll forms, our roofing and coal and fillings and then, of course, our reinforcing in [ coking coal ] businesses and all are not short of revenue, there are plenty projects out there. It's really a profitable risk balance for us. And so we're careful as to what we've been taking on, but we're not shortage of -- there's a strong pipeline for this financial year and the foreseeable medium term, we're seeing some quite good growth coming through there, as I mentioned earlier through some of the areas that we've been securing and projects that we've been winning.

We will go to our next question.