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

Another virtual investor webinar hosted by NZX. Thanks a lot for joining us. My name is Doug Vrame with the Capital Markets Origination team in Willington. For those of you that aren't familiar with the format, we've got 3 listed companies here to present today, each company will have 15 minutes, and then it will be followed by about 5 minutes of Q&A. You can enter your questions on the chat function in the webcam and feel free to fire away on questions, and we'll try and get to as many as we can. What we don't get through, we'll send out via e-mail, so you get your answers. So hopefully, that is self explanatory. To get into it today, we have the 3 companies we have are Steel & Tube. We've got Mark, is it Malpass -- I'm sorry, Malpass. Yes, the CEO of Steel & Tube. We've got Todd Hunter from Turners Automotive and Jason Bull from Vital Limited. So we will get started with Steel & Tube and Mark, I'll just give you a little introduction. Steel & Tube was formed in 1953 and is one of the leading providers of steel solutions in New Zealand. Mark joined Steel & Tube as an Independent Director in 2017 and became the permanent CEO in 2018. So Mark, thanks for joining us. And with that, I will turn it over to you.

Thank you, Doug. Okay. Welcome, and thanks for joining me. I look forward to talking to you about Steel & Tube, our growth strategy and opportunities for our company. Our purpose is simple to make life easy for our customers needing steel solutions. Our goal is to be the best in the sector, the preferred choice of steel products and solutions are rewarding place to work and an attractive investment for our shareholders. We do this by investing in the things that matter, our people, our customers digital innovation, our professional excellence, quality, health and safety. We've got a great team leading our company, passionate people who are focused on delivering the best solutions and experiences for our customers.

Mark, other results.

Did you see that, okay?

We can. Yes, clear.

Yes, good. So Steel & Tube operates through 2 divisions: our distribution and infrastructure division. Distributions where we source products from preferred mills and distribute them through our national network. We have a significant amount of procurement scale that enables us to buy well and then sell in smaller quantities. The Infrastructure division is where we process products before sale, this is typically on a contract basis. For example, that includes things like steel products that are created to an engineer or an architect specifications. Roofing and composite deck floor systems are through to large reinforcing assemblies for infrastructure projects such as bridges, tunnels, working farms. The key competitive advantage we have is our ability to cross-sell our extensive offer and leverage our national footprint. You can see from our range that we offer New Zealand's most comprehensive range of steel products, services and solutions. We operate in all of the key sectors, more than any of our competitors. And importantly, we've identified growth targeted sectors that we are supplying products that both strengthen our core offer and also capture high-value growth within those sectors. Steel is one of the world's most sustainable and essential building products. So it's permanent. It's forever reusable and mostly recycled subsequence on the planet. On a cradle to cradle basis, Steel's environmental performance are compares favorably to other materials such as concrete and timber. And in New Zealand, it's estimated that 85% of steel from demolition sites has actually returned to steel mills for recycling. For many construction and manufacturing applications, steel is really the only choice as we saw in the Canterbury rebuild, steel is the optimal choice for construction materials. It builds faster, it's less disruption, it's flexible, extends building life and has minimal waste and generates optimal thermal performance. Our strategic goals are clear. Our forward strategy is a strong operating platform and the capacity to invest in growth. Our goals are fourfold. To position Steel & Tube as a preferred supplier for steel products and solutions, to increase Steel & Tube's valuation by growing our existing offer and through programmatic smaller M&A and adjacent sectors and to also deliver increasing returns and value for our shareholders and to create sustainable -- excuse me, a sustainable long-term business that adds value and is positive for our people, our customers, our shareholders and, of course, the plant. So the slide you should be on there's strategic pathways, Doug?

So I think we're on a -- I think the slide you're showing is one ahead. Here you go.

Okay, great. So our overall goal is to deliver gross margin improvement. And we're concentrating our efforts on 2 key pathways, continuing to strengthen our core foundation and investing in high-value products, services and sectors. Continuing to strengthen our core involves building a business foundation of building on that foundation at same place, for example, best-in-class customer service, our industry-leading digital platform, cross-selling a wider range of products and services and operational efficiencies. Investing in high-value products and services and sectors is about focusing on and extending what we can offer to our customers, and this includes adjacent materials and value-added services. While our primary focus is organic growth, we also are considering opportunities by programmatic M&A in adjacent sectors. We're obviously very mindful of the investment that shareholders make in the company and do not believe in growth per se. And still, we have a very disciplined approach to investment and new opportunities to ensure that we will deliver financial and strategic value. As you can see on this slide, there are a number of strategic initiatives underway and each of these will deliver increasingly -- increasing contributions as they come to fruition. In the last 2 years, we've been able to expand our plate processing offer and have also acquired Kiwi Pipe & Fittings and Fasteners NZ. Plate processing is a high-value category with strong demand providing attractive returns that builds on our existing product offer, and we have a solid forward workload in place. Kiwi Pipe & Fittings specializes in the fire and water articulation products area and is performing very well. As Fasteners NZ we're introducing new products across both of those ranges and expanding the geographies in which those companies are participating in. Our most recent initiative has been the entry into the aluminum market from February this year, and this is targeted towards a select range of high-demand, high-value products and largely servicing existing -- our existing customers. This product diversification provides us with scale. It increases our customer share wallet and has been immediately accretive from an earnings perspective. Initial demand has been really pleasing, and we've also received additional shipments to meet further demand. So these new strategic investments now account for about 7.5% of our distribution division's earnings. Following the successful conclusion of our 5-year turnaround program, the financial year 2023 demonstrated the value of our strategy. We also saw strong and resilient financial performance and shareholder value carry through into the first half of this 2023 financial year. Our ESG metrics, as you can see on the chart here, all continue to improve across customer satisfaction, employee safety and employee engagement, and we exceed industry benchmarks across all of those metrics. The cyclone and flooding events this year have been devastating, of course, for our people, communities and business across the North Island. The government have estimated that the rebuild cost will be between $9 billion and $14.5 billion with around half of that related to public infrastructure, so bridges, roads, rail links, power substations and the like. In addition, there's an estimated 4,000 new households plus repair work to damage for residential properties. Steel is an essential construction material and Steel & Tube have the capability and capacity as well as the expertise to deliver innovative solutions to assist with the rebuild -- rebuilding the Vital assets and homes that's going to be required. In terms of operating conditions, the tightening macroeconomic conditions are impacting demand for steel along with the weather events that we saw in January and February and this week in October, of course. However, there are very positive macro trends that will help drive demand over the medium to long term. Residential construction has softened however, robust demand and an undersupply, particularly in the social housing area underpin long-term growth in this sector. We also see a positive trajectory forecasted forward for commercial construction, infrastructure and manufacturing. And you can see on the chart that we're very well diversified and are not limited to one particular sector. In terms of outlook, we're actively managing the current market challenges, and we see the medium- to long-term outlook is positive for our company. There are significant opportunities for our business across infrastructure and distribution, and we have a healthy pipeline in place. We continue to assess opportunities that complement our existing business and provide growth pathways. We have a strong balance sheet and a substantial bank facility in place to fund growth and take advantage of opportunities. Today, we provided an update on trading conditions April year-to-date performance as well as guidance on the 2023 financial year, which concludes on June 30. We continue to perform well against the backdrop of a tightening economic conditions and the weather events earlier in the new year. Our revenues have continued to grow driven by the elevated international steel pricing, although higher input prices and cost pressures have impacted on our margins. We've built a resilient platform exhibited by a significant reduction in our net debt and a reduction in inventory positions. We've also shown very solid underlying cash generation. Given the changes in the operating environment, the second half 2023 financial year is expected to be 10% to 15% of volumes, excuse me, are expected to be 10% to 15% less than the first half of the financial year. As such, we are forecasting the 2023 financial full year on a normalized EBIT basis of earnings between $28 million and $32 million and normalized EBITDA of between $48 million and $52 million. We have a track record of effectively navigating changes through economic cycles, and we're undertaking a comprehensive cost-out program, which is focused on about $5 million of costs coming out and the full 2024 financial year. So as a result of that program, we're expecting to be able to keep our 2024 cost structure in line with our 2023 financial cost structure. It's the last time investing in Steel & Tube. So Steel & Tube is at -- we're nimble and strongly positioned to take advantage of the market and sector opportunities that we have ahead of us. As noted earlier, we have a strong track record of effectively navigating changes in the economic cycle. We're delivering attractive shareholder returns and value, and we have a clear forward strategy with growth opportunities. We're looking forward to adding value to our shareholders, and we don't believe the current share price really reflects the potential demonstrated by our business. Thank you for listening. I look forward to taking questions.

All right. Thank you, Mark. We do have a few questions coming in. I don't know if we'll get to all of them, but they tend to be around the announcement today, not so much the earnings, but looking into the future in areas that if macro conditions continue to kind of weaken and how do you anticipate the future and some of the things you can do to offset those I guess, weaknesses in the economy, and talked about the acquisition opportunities and all of that, what do you see for the future or big focus points?

Yes. Look, I mean, we're certainly seeing some softening in construction, particularly residential construction activity. But as I mentioned, there is also some underlying support in the larger scale construction -- commercial construction areas, very large infrastructure build programs. The government have announced a strong 5-year pipeline, which we're very exposed to. Also manufacturing is a key part of our business more, and that's over 40% of our sector. And if you look over the long-term manufacturing is usually quite a stable -- steady part of our sector. When you're seeing internationally as well some good stability and growth in the manufacturing areas. So overall, we see certainly, there'll be some shorter term volume impacts that we're seeing in the residential construction activity calling, but we do see medium to longer term, a strong pipeline a year, is the focus for us is really keeping -- particularly in a recessionary environment, really, the 2 things that matter are managing debt. And we've been actively working over the last 12 months to manage down our net debt to, as we announced this morning to a low level at about $9 million, I think, at a time close of April. We also -- the second thing that really matters is cost structure. And so we've worked pretty hard over the past 5 years, actually, but certainly more recently just to ensure that we do find ways to offset inflation. And we believe going forward into the next financial year, we have locked on some changes that will enable us to offset inflation going forward. So those are the 2 things that really matter. And for us, it's focusing on gross margin dollars per tonne hunting opportunities for improving those gross margin dollars per tonne. And we're doing that through both organically through a lot of the digital conversions that we've done have enabled us to lower cost to serve, but also find opportunities within our existing sector, increasing share of wallet. And then of course, building on those smaller M&A projects that we've done over the last 12, 24 months that we're now expanding through our network that are helping to drive those gross margins.

Mark great answer, and thank you very much. There are a few more questions that we'll send them through. I appreciate you taking the time to join us and put the slides together and very informative. Thank you very much.

Okay. Thank you, Doug.

Again, if you have any more questions, for him, even if we get to other presenters, we will get everyone answers. So now we will move on to our second company and presenter, we have Todd Hunter, from Turners Automotive. Todd is the CEO of Turners Automotive Group and has been with them since 2006, I believe. Took over the CEO role of the Turner Group in 2016. Turners is New Zealand's largest auction house and vendor of second-handed cars, trucks and machinery. So with that, I will turn it over to you, Todd, and we'll be back for questions later.

Great. Thanks. Can you see my screen, okay. So I want to check on that.

It looks good on the front page. Go ahead.

Thank you very much. Okay. I'll just start with a quick history of the group. So a lot of heritage in the Turners Automotive Group dating back to the old Turners auctions business and the Turners car auctions division, which started in 1967. Likely with the business since 2006, I started with Turners auctions and took over as Group CEO is to exceed late 2016. And really, the shape of the group now is really emerging of the old Deutsche is the finance business and Turners auctions, which happened in 2014. The way we think about the group is sort of 4 key divisions. So the Automotive Retail division, the Turners Cars business and Tina, I'm sure a lot of people have seen recently, which is the largest buyer and seller of used cars in New Zealand. Trucks and machinery and we also sell a lot of damaged vehicles for the insurance industry as well. The consumer finance business, Oxford, which is originating loans out of our own Auto Retail division, but also originating loans through third-party dealers and brokers as well. We have an insurance business, which largely underwrites mechanical breakdown insurance. And we do resell comprehensive motor vehicle insurance, but there is not a product that we underwrite. We resell the Vero product there. And in the last division in the business is a credit management debt collection business, which does contingent debt collection. We don't purchase debt. We got to only collect on a contingent basis and our big customers there are the banks here in New Zealand, large government agencies like ACC, and we're doing quite a lot of work for SMEs, both in New Zealand and Australia. Obviously, the core parts of the business are auto, retail, finance and insurance, very sort of dependent and operate around the used car ecosystem. And there's a lot of sort of interrelationship between auto retail, finance and insurance, with finance and insurance originating both the sale of insurance policies and finance contracts through our own auto retail division. I think we've built up a really strong track record of performance. So just looking at the business performance and sort of 3-year blocks with dividends and profits. Yes, obviously, there was sort of a bit of a recovery on the Deutsche's business back in the sort of 2010, 2011 period. Business was quite acquisitive during FY '14 to FY '16. I'd say, in the middle period, there's a lot of consolidation and simplification, which often follows a high acquisition period. And then we've really been very focused around executing our organic growth strategy. And the growth that we've seen really from FY '17 through to FY'23 is all delivered out of organic growth. So we're very proud of the fact that we've been able to achieve the growth that we had out of our own resources. We operate a very simple formula in this business. We talk about this a lot internally. If we provide a quality environment for our people and quality customer experiences, we should deliver a quality outcome for our shareholders. And I think one of the sort of secret sauces in this business and probably something we don't talk enough about is the strong culture and sort of ownership effect that our people have in this business. We have over 700 people. We have extremely high engagement scores as a leadership team in this business right through from me, right through the organization. This is something that we talk about and focus on a lot and I think we see scores that reflect the energy and effort that we put into this. We have launched an employee share scheme over the last year. We've had just under half the team take up that offer. It's an interest free loan that gets them an amount of shares over 3 years. We plan on rolling that out every year, and I'm very confident that we'll see that 50% proportion growing from here. In terms of our customer experience, we are fortunate and have earned the rights to operate off a platform of trust. You can see here that we've won the most trusted used vehicle dealership award 4 years running. And I think this, again, is one of our key competitive advantages, operating off a platform of trust in a market that generally tends for the absolute opposite of that is a very strong place to operate from and is only continuing to get a stream. We're delivering good returns for our shareholders. We pay a quarterly dividend, which is definitely different for most businesses. We pay out 60% to 70% of after-tax profits, and we're in line for a $0.23 payout this year with $0.16 already declared of that $0.23. I'll skip over to the results and just focus on the segments and give you a quick update here. So the car market has been interesting. As you can see from the bar graph, transactions have definitely been coming off. So that is the total New Zealand market of used cars bought and sold. And one of the key drivers of that reduction, particularly over the last couple of years, has been the introduction of the clean car standard and the clean car discount. So these are the government regulations with the introducer of the objective of helping to clean up the New Zealand vehicle fleet. But the impact of it is at least used imports are coming into the country. So that has definitely put quite a constraint around supply. That's made it difficult for fringe operators to continue to operate in the market. So we've seen registered dealer numbers decline. They're declining at about 1% a month at the moment, but down almost 20% from the peak in 2017. We see that as a good thing for our business, the strong gets stronger. So yes, definitely a good position for us to be in. And demand is certainly shifting out of those higher price points and into the lower value price point segments as a result of the sort of economic conditions. So in a market that's going down, you'll notice the red line, which is our sales is going up. So we're very pleased with the market share gains we've made and the fact that we are growing the numbers of cars that we are selling in a market that's gone back by 10% over the last year. In Auto, we're really pleased with the new branches that we've rolled out. We've got a great pipeline developing of both new locations and upsized existing locations. So that pipeline is really filling out very nicely from our perspective. You can see that chart, which I think is just a really interesting reflection on our sort of ownership in this used car category. So the red line being searches for Turners cars and the blue line being searches for used cars and Turners car searches have now overtaken used cars, which is really pleasing from us from an ownership in this category point of view. One of the big opportunities that I think is we want people to really understand is just the number of cars that we are still selling through our wholesale auction channel that we are looking to shift into our retail consumer channel. So nearly half of the cars we sell are still down the auction lane and are still being bought by dealers. A large portion of those are the lease cars, it's lease cars. So we've got a big opportunity to help redeem shift those sales into our retail channels, try and get those cars sold to end users, we will sell them for more money but also create the opportunity to write a finance contract and attach an insurance policy to those sales. We've seen really good uplift in our damaged vehicle sales as well. So the results of the weather events, but also just the aging fleet in New Zealand as it gets older, there are just more cars being written off as they become uneconomic to appear, we are seeing damaged vehicle numbers continuing to increase year-on-year. In our finance division, growth has certainly become a secondary priority for us. We think the right thing to do is focus on quality and our margins. So pricing has been a real area that we've concentrated hard on. We've pushed through 12 price increases to our base rate over the last sort of 18 months or so as the OCR is lifted. And as you can see from that graph here, that is the average Centrix credit score by half over the last 6 or so years. And you can see the effort that we put in to improving the quality in our loan book and debt is going to stand the test of the changing economic conditions. I think we're in a very good position in that we are not reliant just on finance revenues in this business. We've got an auto business performing very, very well. Insurance business that's going well. And just provides the opportunity for us to be a bit more conservative about the way that we're running our finance book. And I think this is the right time to be conservative and just trim back the risks that we're taking. We're still tracking really well. Very marginally up on March last year, but significantly below where we see the wider auto loan portfolio arrears numbers, so 2.6 for us plays 5.4 for the wider auto loan portfolio, which really does reflect the focus we put on quality. In the Insurance division, we've been very focused on risk pricing in our digital distribution claims ratios continue to just drop away, which is a reflection of the risk pricing that we've put in place, but also the claims frequency dropping back. And I think that is just a result of people driving lease, whether it's are they working from home more or they're driving this because of cost of living and cost of fuel. The other interesting point I wanted to make was, particularly the last few years and really proven out that we have no catastrophe risk across this portfolio. So both through the pandemic and the more recent weather events we've seen no spike in claims as a result of those events. So we're really pleased with how this broader portfolio is performing. And then in Credit Management, really, the message I wanted people to understand here is that times are getting better for easy credit in the de-collection business. Deloads on the rise. You can see from this chart here from Centrix that consumer arrears across the market are increasingly now back to pre-pandemic levels and the trend is certainly up. So our expectation and what we're hearing from the customers that we deal with the banks and government departments and usually business, those customers are getting more active around collecting their debt and they've got more debts to collect. So yes, things are going to simply improve for our Credit Management division. In terms of outlook, we are super conscious about the challenges. On that list of 5, I would say we've put in a number of good initiatives to mitigate the bottom 3 and we certainly are outperforming the market in terms of the car sales. So I think we've adjusted our stock and kind of positioning it for where demand is. So that's great from our perspective. The interest rate environment is what it is, is having some impact on our margins and our finance company. But as soon as we had Peakon OCR and out the other side, we'll see margins expanding within the finance division. So I think we're in a good position, but certainly aware of the challenges ahead of us. Guidance-wise, we issued new guidance in March. So many people know that we would be ahead of last year's record results, so posting another record result this year. We've had a very good March results in terms of the new financial year, very strong actual result. So seeing super performance out of our auto business arrears performing at expected levels and finance have certainly recovered well from the typical seasonal Christmas spike in insurance and credit businesses are performing strongly as well. Just a few key messages to finish up with, yes, we are producing robust and reliable earnings. I think this business is demonstrating some real resilience and environment that is certainly challenging. We're continuing to grow market share in our auto retail segment. So the branch expansion strategy and shifting sales out of the wholesale auction channel into retailer are definitely delivering good growth for us. And I just want to remind people about just how resilient this used car market is, even though it's down, we still have over 900,000 transactions every year, of which we have less than 10% of that market. And we have a very old vehicle fleet in New Zealand. So 1 in 5 cars is over 20 years old. So there are a big cohort of cars that need replacing in the short to medium term. So we feel very confident about future growth across the Turners business. Okay, Doug, I'll hand back to you for a quick Q&A.

Thanks, Todd. There's few questions on different topics, and I'll just start with the segue and maybe on the last one about the aging fleet of cars. In terms of replacing more future, are you -- what are you seeing in terms of demand for electric vehicles in New Zealand and what the consumers are kind of looking at there?