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

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

Thank you, and welcome to everyone on the call. Here with me today is Richard Smyth, Steel & Tube's CFO. We're both calling in from home offices due to the COVID-19 lockdowns we're currently operating under. We'll start with a quick summary of the financial year-end to June 30, 2021, and then move into more detail on our strategic progress and financial results over the last year. We were pleased to deliver a solid financial result driven by the execution of our strategic initiatives, which have delivered growth and was also underpinned by a positive economic outlook and activity. Residential construction has obviously been very strong. There are significant baseload in infrastructure, commercial construction is starting to pick up, and we're also seeing manufacturing expanding. Our volumes and revenues have recovered following last year's lockdown, and margin improvements have also been realized. We have continued to deliver further and significant structural cost reductions. We've optimized our working capital whilst investing in inventory to meet customer demand and growth. Our digital initiatives have been now embedded, and we're now scaling these up. Moving to the third chart on result snapshot. Our efforts have delivered solid improvement in year-on-year results with volumes, revenue and margin recovering across the year and a strong pipeline of secured work. Revenue was up 15%, we've locked in a further 13.5% of reduction in our operating costs. We delivered a significant improvement in our earnings with EBITDA at $40.7 million and normalized EBIT increasing to $19 million from $0.4 million in the prior year. And we're moving ahead with a very strong balance sheet with all debt repaid and cash of $25 million at year-end. FY '21 was clearly a challenging year with a number of factors impacting on our business. While the COVID-19 pandemic did not significantly impact us in New Zealand during the financial year but did have a major impact on the global supply chains with shipping and port congestion and also labor constraints. Demand for steel has increased as customers spend up on whiteware and cars and other items. The residential construction is soared as governments invest in infrastructure programs to boost economic activity. Steel mills are operating at capacity. And on top of the supply chains have become increasingly congested with no signs that these headwinds will be alleviated any time soon. This has led to increasing pricing across a range of steel products. We've seen strong activity in some sectors such as residential construction and a slower recovery in others such as commercial. But as I mentioned, there has been significant baseload in infrastructure and manufacturing is expanding. Steel & Tube has a number of advantages in this environment. We're the most diversified steel provider in New Zealand, and we're not unduly reliant on any 1 sector, which provides us with greater stability and demand and activity. Our size and scale provides us with buying power, and we have long-standing positive relationships with our suppliers in both New Zealand and offshore. Our investment into digital and technology is paying dividends across all areas of our business. We also took the opportunity during last year's lockdown to accelerate the organization restructuring that we had planned, and we are now operating with a far more efficient and stronger business platform. You can see on this chart, our sector exposure is across a very diverse range of sectors. 47% of our sales are in the residential, commercial or construction sectors, with 31% in manufacturing and about 14% in infrastructure. The biggest change year-on-year for us has been sales in residential construction, which has increased from 15% to 21%, with a decline in nonfood manufacturing. And this is very much in line with the macro trends that we're seeing in the market over the last 12 months. As you can see on these charts, the residential consents have continued their upward trajectory through the year with low mortgage rates, tight supply and strong interest rates from first-time buyers underpinning that demand. While capacity constraints may limit the magnitude of further growth -- the future growth, excuse me, we expect this trend to continue for at least the medium term. All the build of big sheds and warehouses continue through the year, debt-funded vertical construction ground to a halt during the COVID-19 lockdowns in 2020, as large commercial buildings, shopping centers and hotels were all put on hold. Some improvement has been seen in the second half of 2021, and this is expected to continue to build as activity comes back on stream in the financial year 2022. There are also significant central- and local government-funded projects such as [indiscernible] [ Grade ] Avenue in education, school and library projects, and we're also seeing ongoing hospital work. Now after a first half in manufacturing that was a lot softer, we began to see some rapid expansion in the second half of 2021's financial year. Infrastructure has had a very strong baseload with large ongoing projects such as treat waters projects, wharfs, piling projects, bridges, rail, et cetera. And we're expecting this to continue to build with increased government funding in the last budget. At the start of the financial year, we put in place a very clear road map to guide our actions going forward. We're making really good progress under each of the 5 pathways that we've outlined on this chart, which are focused on customers, our people, technology, service and operational efficiencies. Building on our business. The work that we have done over the past 3 years has laid a strong foundation for our business, and we are now seeing the value from these strategic initiatives. We're building on this foundation and continually refining and improving our business and value proposition offer. Moving to the chart on continued investment in quality, safety and training. Our health safety -- health and safety of our employees remains our #1 priority. And our recordable injury rate has reduced to 1.86 per million man hours, and this is well below estimated industry standards. Our goal is to ensure all our employees and contractors go home safely each day. And this year, we have continued to invest in staff training. We have also invested in machine and truck in guarding. We are currently deploying the Intellect software, which is a mobile app-based piece of technology, which will provide us with improved access and reporting. Ensuring the high-quality, durable and trustworthy products is an essential part of what we do. We now have the ISO 9001 certification across all of our businesses. We also have certification from a number of industry organizations such as Steel Construction New Zealand. We utilize Lloyd's Register to undertake supply mill audits and a further 8 of these were completed in the financial year, and we have another 12 supplier audits planned for the upcoming financial year. We're continually improving our traceability program, and digital is playing a big role in this, providing easier pathways to customers to access test certificates for the products. These initiatives build trust with our customers and make transacting with us faster and more efficient, resulting in reduced costs and improving efficiency for both Steel & Tube and also for our customers. Regarding our network strategy. Well, we still see continued efficiency opportunities, the network footprint consolidation is largely complete. We moved from 50 operating sites in 2017 down to about 26 operating sites this year. This, along with our accelerated cost-out program, has delivered a material reduction in our underlying cost structure, while still providing a full national service platform for our customers. So we now have an optimized national network, and we're maintaining a regional presence, providing an increased product footprint offering to all of our customers throughout the country. Moving to the chart on structural cost savings. The work that we have done under Project Strive and again this year has delivered significant structural cost savings, which are now locked in. This year, we saw a further 13.5% year-on-year reduction in our operating costs, that's about $12.5 million reduction. In addition to the completion of the network footprint program, we've also had a big focus on improving and optimizing our freight, inventory and direct labor. Supply chain management has also been an increased focus for us, with the establishment of a new role of GM supply chain and distribution centers early in the financial year. During the year, we optimized our working capital and invested in fast-moving inventory, which helped us respond to the current global supply chain and capacity issues, while at the same time, we reduced our age inventory significantly by about $9 million. We are building a very powerful combination of both people and technology to create customer experiences that are dynamic, that are personalized and effortless. Many of our digital initiatives in the financial year have focused on delivering a seamless omnichannel experience that allows our customers to engage with our company at the same time -- at any time, excuse me, through this channel that suits them. That can be either by phone, it can be by e-mail, online or face to face. An important initiative this financial year was also establishing a central customer excellence team. Now while this still offers a very regional focus, our call center staff have expertise across a range of products and businesses, and they provide product expert support that's available to provide a more specialized information to our customers at any time. We've invested in digital, the use of digital technology to drive our customer experience and operational efficiency is becoming an increasingly valuable strategic pathway for our company, and the technology platform that we've invested in is becoming increasingly integral to our sales and service value propositions. The launch of our web stores and our e-commerce platform has been very successful with data showing online customers are buying more, they're buying more frequently, and they're buying more broadly, and that's delivering a higher margin per customer. While it's still very early days for our e-commerce initiatives in the steel industry, we know our webshop revenue and volumes are growing at about 15% per month, and we're very confident of significant growth going forward. The growth will be supported by a range of new features that we've got plan to support our new digital channel offering to customers throughout this next financial year. Data analytics was another area of important focus for the financial year, and it's helping us better understand our customers and optimize our sales and service performance. As an example of the pricing project to help identify areas of margin improvement across the business and established a more dynamic and responsive pricing regime, which can be optimized for further different customer groups. Digital is also playing an important role in the traceability program. We've introduced easier ways for our customers to retrieve test certificates, such as through our chatbot Stanley and our web stores. In addition to this, we've also piloted integration of the ordering system for our large-scale customers, allowing them to receive test certificates and automatically with their orders. Now this has resulted in significant time savings for both us and for our customers. So we're looking to expand that offer. Cybersecurity also remains a priority, and we've put in place extensive amount of work -- has been undertaken, excuse me, in the last 12 months with independent audits and an ongoing program of work. Sustainability is also important to the business, and we're committed to creating a sustainable business and delivering long-term value for our shareholders. For each of the strategic pillars, we've also identified a number of topics, which we believe are essential for the long-term sustainability of our company and to support our social license to operate. Our operating initiatives are focused on material efficiency, recycling, reducing energy and reducing our vehicle emissions. And pleasingly, we saw some reductions in our key metrics with fuel consumption down 13%, greenhouse gas emissions down 9%. This was a strong result and given the prior period included 1 month of the lockdown. Steel is an essential construction material and the backbone of New Zealand's built environment and infrastructure. We've been working closely with the sector to promote steel as an important, essential and sustainable building material and encourage a cradle-to-cradle methodology in the product assessment. We believe it's really essential that material choices should be grounded on good signs and made by the experts. That's engineers, architects and engineers and not by politicians. In terms of winning team, our aim is to provide a rewarding and welcoming workplace for our employees. We have experienced minimal impact from the labor shortages in the New Zealand market, with strong employee loyalty and commitment as well as attraction of good talent into new roles. Our average length of service is 6.1 years, reflecting a mix of new and experienced team members. Digital is again playing a role in this area with 50 online training modules currently available for our online training library. 2,000 of those modules were completed by team members in this financial year. And this can be completed by staff in their own time, with managers recommending suggested programs for people to undertake. Wellbeing is also a focus with modules such as how to check on new workmates, dealing with difficult people and the importance of work-life balance. We work closely with all our local communities and as well as the successful workforce engagement program with Papakura High School, this year, we introduced new Maori cadetship programs and also continue to support our First Foundation program. We regularly engage with our employees and seek their feedback on what we can do better. And over the last 12 months, we're really pleased with our employee Net Promoter Score, which lifted to 19, and our engagement score at 74% or 7.4 out of 10, which is a great score. I'll now hand over to Richard to cover our financial results.

Thanks, Mark. I'm really pleased that the first set of results I get to speak to is such a strong result. This chart here shows the comparison to last year. Revenue, earnings and profit were all up strongly compared to last year with net profit after tax of $16.1 million. Normalized results exclude nontrading adjustments of a positive $2.8 million in FY '21, comprising gains on property sales and IFRS 16 impairment reversals. Continued improvements in working capital management and debt collection has assisted in the generation of robust operating cash flows of $31.5 million. As Mark mentioned before, all debt was repaid during the year with $25 million net cash at year-end, which will support future capital investment and our growth strategy. Revenue was up $15 million year-on-year to $480 million with a positive recovery over the year. Margins have progressively recovered in most sectors, although were impacted in the current year by the sell-down of aged inventory. Prudent and disciplined management of expenditure continues and normalized operating expenses are down by over 13% year-on-year from over $92 million to $79.9 million. The cost savings this year were primarily a result of the improved network footprint structure with reduced indirect labor, employee benefits in restructuring and property expenses. We are seeing the benefits from lower bad and doubtful debts and are continuing to focus on managing our risk exposure. We now have a sustainable fixed cost baseline, and our focus for this year is on maintaining tight cost control with some wage inflation expected. We ended the year with a strengthened balance sheet of $25 million in cash, all remaining with borrowings we were paid during the year, and we have secured a new $50 million debt facility, which is still undrawn. We are now well positioned for the current COVID lockdown, investment in targeted organic growth initiatives and market opportunities. We were pleased to continue dividend payments with a final dividend of $0.0329 this year, taking our full year dividend to $0.045 this year. This is a payout of 79% of normalized NPAT, excluding the property gains and recognition of previously unrecognized tax losses and represents a yield of 3.9% based on our 30th of June share price. We continued our disciplined approach to working capital management with on-time debt collection continuing to improve. To mitigate the supply chain issues, we increased our holdings of critical, fast-moving inventory items to meet customer demand balance. At the same time, we have also reduced aged inventory by $9 million. Capital spend was $7.7 million, which was in line with depreciation, amortization in FY '21, excluding the right-of-use asset depreciation, with the majority of the spend supporting digital and growth initiatives. We expect to continue our investment in digital this year as well as investment in new processing equipment. Increased cash flows will support the capital investment program in FY '22. I'll now turn to the performance of each of our divisions. Steel & Tube operates through 2 divisions: Distribution and Infrastructure. We have continued to bring together our businesses by cross-selling our extensive offer to customers, leveraging our national footprint and greater product offering. Distribution continues to go from strength to strength with gross margin dollar and margin percentage both improving year-on-year. Revenue growth has been driven by strong residential, infrastructure and managing sectors -- manufacturing sector. We are closely monitoring steel commodity input prices, increased demand, capacity constraints and shipping challenges. Inventory and pricing optimization aided by technology ensures that the high-demand products are priced appropriately and available via and when needed by our customers. Our optimized network -- national branches and distribution centers realigned sales team and customer excellence centers, delivering improved customer service and experience. The Infrastructure division come as a range of sectors with our specialist made-to-order products primarily supplied to the vertical construction and infrastructure sectors. Volumes were up versus the prior year with gross margin improvements from the cost-out program being partially offset with competitive pricing pressure in some areas. While slower to recover, the increasing volume of activity has been seen in the second half of '21 as infrastructure and large commercial projects come back on stream. We have a strong pipeline of secured work and are seeing an increasing volume of tender activity for large infrastructure and vertical construction projects. Our positioning as a large-scale, reliable provider, focused on improved project methodology, technical advisory services and a deep focus on safety and quality provides us with a competitive advantage. Thank you, and I'll now pass you back to Mark.

Thanks, Richard. Just moving to chart on our strengths. The solid financial performance in the financial year and return to profitability as a first step in our focus from transitioning from turnaround of our business to growth and value add. We're also moving forward with a robust financial and operating platform, leadership positions across many product categories and with strong employee morale. There is always more we can do. And while our focus remains on optimizing the business, we have also identified a number of growth -- organic growth opportunities within the business. Strategically, we will continue to build on our strong business foundation now in place with a focus on the digital and IT initiatives. We will leverage our breadth and scale to cross-sell a wider range of products and services and focusing on our gross margin dollar improvement, and operational efficiencies will remain a priority. We're investing in new products and opportunities that will extend what we can build and offer our customers, and we will continue to invest in marketing and sales to build demand. While our primary focus is on organic growth, we also consider opportunities in close adjustment sectors, and we will also investigate potential capital management initiatives. [indiscernible] outlook, we are well placed as we enter into the current lockdown period. We have a very positive outlook for the next financial year with a number of identified opportunities. Market conditions look to remain positive for at least the medium term as the economic cycle is expected to be stronger for longer. The current residential boom is expected to ease over the next 1 to 2 years. However, commercial infrastructure and manufacturing are all expected to continue to grow. Our focus remains on customer service, growing sales in attractive segments and also gross margin dollar improvement. We have a very strong pipeline of secured work in place and are well positioned to take advantage of the market activity that we see in new product growth. Investing in new processing equipment will also assist in opening up identified new markets as well as drive operating efficiency, safety and product quality. In addition, we have continued to invest in digital technologies to improve our customer experience and expand on our customer offer, providing further competitive advantage. We're very confident in our strategy, our people and our positioning and look forward to continually building momentum and a strong platform that we now have in place. Depending on how long the current lockdown lasts, we expect to be able to continue our earnings momentum. Thank you for listening. I'll now pass back to the operator to manage any questions.

[Operator Instructions] We will take our first question.

Guys, can you hear me okay?

Loud and clear.

Great. Just a couple of quick ones for me. Just around cost pressures and supply chain condition you called out is headwinds there. How do you see that playing out over the next -- we will -- obviously, cost inflation we've seen that fairly broadly across the industry? Your costs have been coming down. Where do you see that heading to over the next 12 to 18 months?

Yes. Good question. See, the -- certainly, the supply chain complexities are still present, and we're spending a lot of our time just managing that. So we have very clear and -- we've been quite successful in this space actually and just in terms of managing the continuous supply through our distribution centers and supporting our customers. So it's obviously a very important area for us. We've increased inventory to ensure that we can manage this. And we've been able to -- really be able to handle that throughout the last financial year. In terms of cost pressures, we are still seeing a supply-demand imbalance, which is driving. In fact, most mills we buy from throughout Asia, Australia or New Zealand have us on allocation. You'll have observed most local steel distributors have increased prices and announced forward increased prices in September and in October, just due to that price pressure that we're seeing in the market.

Okay. I guess I was angling more at the labor cost prices and the like.

Look, there is certainly inflationary pressure there. We're not seeing anything in excess of the sort of normal CPI levels of increases flowing through the system, but kind of call that roughly 2% over the next 12 months.

Yes. Okay. And should we expect to see inventory tick up slightly in terms of making sure that these supply chains remain open? Would you expect to see that number heat up in the short term?

I think in the shorter term, obviously, a lot depends on the longevity of the current lockdowns we're in. But we would expect to see slight increases over the next 6 months, but really it moves around a lot in between the half year there where you build obviously for demand and we have normal seasonal sort of reduction around the Christmas, January, February period. So you typically see an increase over the next 2 or 3 months and then softening as you heat down towards Christmas.

Okay. Great. And is there anything further you could say about the potential capital management that you're exploring at this stage? What that might look like?

Richard, do you want to cover that point?

Yes, sure. So we're investigating a number of potential alternatives. And I mean, the ones that come to mind are some sort of special dividend or a buyback. It's very early days, and that really depends on COVID. In this lockdown we want to take a very sensible and a slightly conservative approach to spending our cash. But it is something that we are conscious as we are sitting in likely $25 million of cash, and we haven't drawn down on our debt yet.

[Operator Instructions] We will take our next question.