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

Thank you for standing by, and welcome to the Steel & Tube FY '23 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Mark Malpass, CEO. Please go ahead.

Thank you, and welcome to everyone on the call. Here with me today is Richard Smyth, Steel & Tube CFO. We'll start with a quick summary of our financial year 2023 till June 30, and we'll then move into more detail on our results and strategic progress. We'll then finish with questions and answers. We saw solid demand for steel continue in the first half. However, as activity eased due to macroeconomic headwinds, volumes reduced about 12% year-on-year. The inflationary cost increases and tight labor market that developed over the last couple of years continued with some easing in the second half of the financial year as more foreign workers gained entry. Elevated steel pricing softened in the second half of the financial year, although pricing remains above pre-COVID levels. Pleasingly, supply chain constraints and international freight rates eased at the end of the second half of the financial year. However, fuel compliance costs are on the rise and we expect to see further increases in the financial year 2024. During the year, we saw consumer spending come under pressure, higher interest rates impacting on the housing market and a reduction in business and residential investment. Commercial construction remains stable and manufacturing has held up well, although it did cool in the second half of the financial year. Infrastructure investments continues to strengthen after a long period of low investment. The market remains challenging and we continue to control the things that we can control. We have a number of carefully considered responses underway, including a comprehensive $5 million cost out program with benefits to be seen in this current 2024 financial year. We also tightly controlled our debtors and cash flow. We're a people business, and we've kept a continued focus on our culture and our employee value proposition to ensure that we attract and retain the very best talent. We also continue to invest in the right inventory and services as we shift towards high-value products and solutions. This is really important for us. Despite the current conditions, demand for steel remains solid and long-term macro trends are positive. The 2023 financial year demonstrated the resilience and strength of our business as we delivered solid results at the top of our guidance in a challenging environment. Revenue was the second highest reported following the super cycle of the 2022 financial year. Operating cash flows were a record of close to $100 million. We finished the year with a very strong balance sheet with a 28% -- excuse me, a 28% reduction in inventory, which represents about a 35% reduction in total tonnes on hand, combined with tight debt management meant that we had no debt -- no bank debt and a positive cash balance of $6.5 million. Our goal is simple, to make life easy for our customers needing steel solutions and to be their preferred supplier of choice. We have a very clear focus on 2 strategic pathways: firstly, continuing to strengthen our core business; and secondly, to grow by investing in high-value products, services and sectors. I'll first talk about strengthening the core, which involves building on our business foundation that's now in place. We're focusing in on creating a best-in-class customer experience, leveraging our breadth and scale to cross-sell a wider range of products and services wherever we can and continue driving improvement in gross margin dollar per tonne and delivering operational efficiencies. Some of the key activities that we delivered during the year included customer segmentation to ensure that each of our customers is serviced in the most appropriate manner. Our pricing policies and analytics were rolled out, and we enhanced our digital offering, including our omnichannel platform and webshops. The $5 million cost out program I mentioned will deliver further synergies across the year. One of the bigger initiatives we started during the year was Project Strong, which is focused on maximizing the returns from our Auckland palletized operations. The goal of Project Strong is to increase our palletized product capacity and improve our service offer and productivity. We are reconfiguring our West Auckland warehouse and investing in an upgraded trade shop on the site. Our palletized operations are also being consolidated in the hybrid campus. We are investing in new racking to optimize our footprint as well as new warehouse management technology and systems. This will effectively double our Auckland warehouse capacity. This allows us to store larger -- a larger range of high-value distribution products in one place, delivering improved productivity, utilization and customer service. We'll invest about $1.5 million in Project Strong. And in the 2024 financial year, there will be onetime costs of about $700,000. In terms of our growth in high-value products, services and sectors, our overall goal here is to deliver gross margin dollar improvement. In the last 2 years, we have invested in aluminum and plate processing. We have also acquired 2 new businesses, Fasteners NZ and Kiwi Pipe & Fittings. These recent initiatives now account for about 10% of our distribution businesses even. They have all been earnings accretive from day 1 and have forward growth potential. While we already offered plate processing, our investment into new machinery allowed us to really step up our game here with plate processing revenues up 76% year-on-year and gross margins up 75%. We are currently processing plate in Auckland, but we're also investing further in Christchurch to better service our South Island customers. And there are a number of growth opportunities in the plate processing that we're actively pursuing in the space. Our new high-value aluminum range was launched in March 2023 with an initial limited range of products focusing on supporting our existing customers. This has been very well received and we are now expanding the products we put on offer. Product gross margin dollar per tonne has exceeded our expectations and aluminum is now one of our highest value product ranges. In terms of ongoing M&A, Kiwi Pipe & Fittings is a specialist business which we acquired this time last year. Revenue is predominantly generated through distribution of fire pipe, valves, fittings and associated products. Currently, the offer is based out of our Auckland and Waikato sites, and we're currently expanding this throughout our regions so that we can leverage our national footprint. Earnings per share were positive in the first year. Fasteners NZ was acquired in 2021. It's a very good business. It is known for its high-quality products and continues to perform despite the slowdown in the residential construction area. New product range extensions are supporting growth in this business. We're mindful of the investment shareholders make in our company and do not believe in growth for growth sake. Instead, we have a disciplined approach to invest in new opportunities to ensure that we deliver financial and strategic value. We look at best-fit acquisitions in categories that offer high margins and where Steel & Tube's share has been typically low. Over the last couple of years, we've assessed a total of 17 companies. This has resulted in 2 acquisitions being completed and 8 opportunities are currently under review. And this demonstrates the rigor of our process and our willingness to only proceed if we are very confident that our criteria have been met. Our long-term aim is to operate the business in a way that is financially rewarding for our shareholders and positive for our employees, our customers and the planet. Customer satisfaction is at very high levels and reflects our focus on customer service and solutions. Our people satisfaction score is well above the industry average and demonstrates our commitment to providing a rewarding and safe working environment with learning opportunities and career pathways for our people. We're also proud to have been able to pay the living wage in the 2023 financial year and have continued multiple programs to develop our people and their well-being. Health and safety is a key priority across our business and our safety metrics remain at record levels. We're also mindful of our greenhouse gas emitting during steel production. We're closely monitoring new technologies to decarbonize steel, but are also conscious that these are still in the very early stages. In the meantime, we're focusing on initiatives to control our operational emissions, optimize energy consumption and minimize waste. For example, we're piloting EVs in our fleet. We're also -- we've also transitioned all of our lights at our operating plants to LED lighting, and that's further reduced our power consumption by about 13% in doing so. And we're also ensuring that we minimize rework and associated waste with that. Pleasingly, our DIFOTIS measure, which is delivered in full, on time and spec, rates very highly at about 97%. I'll now hand over to Richard Smyth to talk through the financials, providing an update on our -- before I provide an update on our strategic progress. Thank you.

Thanks, Mark. As Mark has said, revenue was our second highest ever following the super cycle result in the previous year. We have also reported record operating cash flows. Despite the 12% decrease in volumes, revenue was only down 2% as sales prices lifted. Benefits are being realized from our focus on higher value products, improved pricing disciplines and leveraging data analytics and capabilities. The business has successfully repositioned our balance sheet, providing strength for potentially more challenging times and enabling continued investment in growth. Inventory was reduced significantly as supply chain issues eased. This freed up cash to fully repay debt. We ended the year with no bank debt. We have a substantial $100 million bank facility in place to fund growth, and this was renewed in August of this year. FY '23 revenue of $589 million was the second highest reported by the company with sustained customer demand despite the recessionary environment. Sales momentum continued and elevated pricing from steel mills almost offset softer volumes. Gross margin dollars per tonne was ahead of prior year. However, there was some margin percentage reduction. Revenue per tonne tends to move more quickly than cost of sales per tonne, which is based on our moving average cost price. During 2023, margins contracted as the selling price didn't increase as fast as the increase in the inventory and movement average price. However, in the 3 months, May to July, margins have improved as the inventory moving average price has reduced while average selling prices have been stable. There was also some impact on our margin as excess inventory was reduced. Distribution delivered a strong performance despite market conditions as it benefited from strong inventory management, pricing and supply chain disciplines. Our distribution business is high volume and more susceptible to market and economic conditions. Momentum into the first half of the year was strong and then eased off in the second half as the weakening economy began to impact customer projects and demand. Compared to the extraordinary demand in the prior year, volumes were down 13% year-on-year. Distribution has significant operating leverage, and we expect margins to improve in the medium to longer term. Our infrastructure business focuses on products that are processed before sale and it includes reinforcing and roll forming. The last 2 years has seen a significant improvement in the performance of the reinforcing business as we move away from solely being a commodity provider by offering innovative, higher value solutions and services such as prefabrication. Reinforcing revenue primarily comes from large infrastructure and commercial developments such as the Christchurch Stadium. Weather events and economic conditions have delayed some projects and created uncertainty around timings, but demand remains strong. In roll forming, commercial roofing demand remained strong with a big uplift in inquiries and tenders, whilst residential roofing slowed over the year. Coil and sheet sales and fabrication work has moved back towards more normal levels following the super cycle effect on the manufacturing sector in the prior year, and we are seeing good growth in customer numbers. Gross margin dollars per tonne improved by 37% as we focus on contract revenue management, cost control and move further towards more supply-only reinforcing projects. Normalized OpEx increased in FY '23 as a result of inflation and increased depreciation and amortization. OpEx as a percentage of sales has remained reasonably constant over the last 3 years between 15% and 16%. We have an ongoing focus on streamlining costs and are making good progress on the $5 million cost out program that Mark mentioned earlier. Normalized earnings before interest and tax was $32.1 million compared to $47.9 million in FY '22. This was mostly attributable to the volume decline with pricing benefits offset by inflationary pressures. As you are aware, we increased inventory levels in FY '22 in response to supply chain constraints -- congestion and to ensure our customers had access to priority products. This saw inventory increase to over $190 million. Our focus this year has been on reducing those inventory levels with a 35% reduction in tonnes taking inventory to $139 million at year-end. Our finished product prices still remain at elevated levels. Inventory cover has been reduced by 1.1 months as we carefully manage our inventory levels and free up cash. This chart provides a bridge from our FY '22 net debt of $43 million to our FY '23 net cash position of $6.5 million. We have already talked about our record cash inflows, reflecting steel revenues and the positive benefits of decreased inventory. The major cash outflows were the acquisition of Kiwi Pipe & Fittings, dividends, tax payments and lease payments. We are carefully managing our CapEx in the current environment. In FY '23, 63% of the spend was allocated to maintenance and growth projects and 37% to digital. We will continue this focus in FY '24. Earnings per share were $0.103, with net tangible assets per share at $1.17. A final dividend of $0.04 per share, 100% imputed, has been declared, taking the full year dividend to $0.08 per share. This represents 75% of our adjusted net PAT and there's a gross yield of 10% when including the benefit of imputation credits. We believe this compares well to our peers. Return on funds employed was 10% for the year, down on last year, reflecting a reduced impact for the group. Thank you for your time, and I will now pass you back to Mark.

Thanks, Richard. Turning to macro opportunities. Steel is one of the world's most essential and sustainable building products. It's permanent, it's forever reusable and the most recyclable substance on the planet. For many construction applications, steel is the only choice and it offers a number of advantages in the future where climate change and extreme weather events are likely to become more common. We have proven expertise and capability to deliver for climate-resilient projects such as port rebuilds, wind and solar energy developments, coastal protection and resilient buildings. We are also well positioned to support New Zealand's infrastructure rebuild, including essential water services and the cyclone and flood rebuilds over the next few years. There are plenty of green shoots ahead of us. The diversity of our customer base is a significant advantage and that we are not overly exposed to any one particular sector. Commercial construction is expected to improve. There is still a pipeline of residential from consents that were granted previously. And while manufacturing is expected to remain subdued in the short to medium term, solid demand for steel continues. Infrastructure has a strong long-term outlook with the New Zealand government allocating $6 billion to build back better following the recent weather events and a further $71 billion infrastructure spend over the next 5 years. In addition, there are many opportunities to add value to our business, including some that will present themselves due to the softer economic environment. In other words, as some players struggle, we will be in a position of strength to grow. The value of our dual strategy pathway is now becoming clear, and this remains the framework for our actions as we continue to strengthen our core and build out in our high-value products, services and sectors. Current economic conditions are having a roll-on effect on many sectors with projects delayed or demand reduced. As you all know, in a recessionary environment, the most important things that we can do are ensure that we have a very strong balance sheet, and that's maintained and we tightly manage our costs. We are cautiously optimistic that the calendar year 2023 represents the bottom of the cycle. And although we don't expect a fast recovery, we anticipate that there will be improvement from early calendar '24, that's the second half of our 2024 financial year. We have proven our ability to deliver solid results in challenging conditions and would expect any uplift in activity and demand to be reflected in our results. Thank you for listening. I'll now hand over to the operator to open up for questions.

[Operator Instructions] Your first question comes from Rohan Koreman-Smit from Forsyth Barr.

Congratulations on another year done and dusted. Just, hopefully, some quick and easy ones for me. The first one, just second half run rate, if we were to look at volumes, can you just talk to how that's playing out so far this financial year? Are you still at those sort of run rates? It kind of seems to be the implication given the kind of first half, second half split in your guidance comments or outlook comments?

So guessing your question is the beginning of '24 as opposed to the end of '23. So we've seen a bit of a continuation of what we saw during the second half. We are starting to see some shoots -- some little bit of positivity, but I am cautious because we are only 1 month and 3 weeks into '24. Yes.

And if you look at that improvement in gross dollar margins that came through, particularly in the infrastructure division, do you think that's a new sustainable position going forward? That's kind of where you expect things to be? Or is there more to come?

That's right, Rohan. I mean, we are expecting that to be kept up. We've had quite a focused effort in our -- particularly our reinforcing business over the last 2 or 3 years. And those efforts have resulted in quite a structural change in that business, where we've been focused a lot more on supply-only projects and also focusing where our capability can be leveraged. So we're working very closely with many horizontal builders and other players in the market. I mentioned wind farms and seismic strengthening work. We've become a trusted partner in many of those areas of the infrastructure markets. And so that's led to a longer-term platform and also a more resilient, I guess, risk profile for that business, where we've been able to shift to more a supply-only rather than being involved in on-site construction project contract risks. We've also been steadily working on our coil and purlins and roofing businesses that have resulted in some improvements in both those businesses.

And last one. That acquisition slides are quite interesting. The top row, 2 things on it. The top row, you talk about complete. So I'm guessing we should add complete to the non-actives to kind of get an idea of how many you looked at and how many were rejected. But then if we look at the actives, of those 6 that are at the nonbinding offer stage, can you just give us an idea of what you're looking at, the size, just to get a feel of what's to come in the year ahead?

Yes. I mean, look, we -- I mean being realistic, once you start a process here from the early initial proposal, you realistically probably only ever going to complete 1 in 10 if you're disciplined about the process that you follow through. You can see there in that nonbinding offer phase that the non-active ones, there were 6 offers that we had progressed and that went down to 4. And then as you get into due diligence, 3 of them dropped away and there's only one there that went through to binding offer that didn't complete. So at the current phase with the 6 and another couple that we've got in the nonbinding sort of due diligence phase, I'm expecting possibly one of those will play out. Rohan, we've got a pretty tight process here through a lot of experience that we are very thorough in terms of working through. As we've got into due diligence even, we've found that businesses just haven't been what we're expecting or that there's a significant price gap that we just can't close out.

There are no further phone questions at this time. I'll now hand back to the speakers to address your webcast questions.

The first question is from [ Paul Merriman ]. When were your borrowing repaid?

So we repaid -- we track this every day and at month end. So probably May was our first month end we ended with no bank debt. We have -- and most of our cash flows -- cash inflows occur towards the end of the month, and we have cash outflows evenly throughout the month. So we are drawing down a little bit of our facility mid-month, but we have continued to repay that fully for the last 3 or 4 months.

The next question is from [ Louem Jordan ] Could you provide any time frame expectations for the M&A opportunities that you're actively considering? Second question, given distribution gross margin per tonne decreased, do you still target to grow this in FY '24?

Sure. Mark, speaking. Look, as I mentioned to Rohan there, the timing is -- on M&A stuff is not really that definitive. We don't want to be pressed on rushing any deals through the end of the day. It's all about what's going to contribute the greatest value for our shareholders. And so we're -- I guess it's probably worth just flagging we -- our preference is always to grow organically. And we really have moved into M&A in areas like Kiwi Pipe, where we didn't have the expertise in fire pipe, water reticulation. We knew it was going to take us too long to grow, and we've found just the right business to be able to buy that gave us that capability as well as a business that we could stretch through the country, which works well, same with New Zealand Fasteners. So I guess as we get into M&A, we're just very conscious that we need to be careful to ensure that they're accretive from the get-go. And as I mentioned to Rohan's question, where we've got a disciplined process there. We've got a couple of people working on this as we go through the process. We obviously kiss a few frogs. And that's probably a good thing because we do get quite good at teasing out where the value really is. And in some cases like aluminum, we looked at several aluminum businesses that have been out there and we decided that we would grow organically into that space and it served our purposes very well rather than taking on the risk of M&A. So we're just very conscious that we need to tread carefully in this area. And I anticipate completing 1 to 2 deals per annum in the space. The second part of your question around distribution gross margin dollars per tonne. Look, we're very focused on that metric. That is kind of what we live by on a daily, weekly basis. And we expect to be able to hold up that distribution gross margin dollar per tonne as we go forward. It's really important as we brought in some high-value growth components to the business. The key driver there is to just focus in, as I mentioned, on the gross margin dollar per tonne. So we expect to be able to keep those numbers north of kind of where we landed at the end of the FY '23 financial year.

Our next question is from Chris. Is there any buyback plan and the capital management to add shareholder value?

So capital management is something that is continuously reviewed by our Board of Management and the Board, and we have considered this recently. At this stage, there is no plan to do a buyback program.

And another question from [ Louem ]. Is there's still some low margin products in inventory that remains to be optimized in FY '24 that can further improve margins? Or is this largely complete?

Look, as a general comment, largely complete, [ Louem ]. But we are constantly -- we use what we call PMROI, which is product margin return on inventory as a key metric for how each category is performing. And we have really detailed category plans that are either developed or being developed for each of our specific product categories. And within that, there are always some products within the lower PMROI that we're focused on either sort of jettisoning out of our supply chain. Just as through the life cycle of products, there are new products coming in that we're bringing in. But the part of the deal with that, of course, is those that are reaching into their life cycle, they've got to be exited through sale or worst case, having to discount them and move them more quickly. And that did have an impact on percentage margins in the financial year as we carefully managed our inventory positions because we had longer positions to support congested supply chains and support our customers in New Zealand. And as we moved to a lot of that inventory -- and we've been at this since probably almost this time last year because we could see the trajectory coming forward. And so we very quickly moved to move as much inventory as we could out of the system to shore up our balance sheet to enable us to be able to bring in current products at current pricing. And it's worked very well for us because we've now got an inventory turn on tonnes of about 3.5x, which is I'd kind of stretch -- probably say it's one of the best inventory turns across the business that we've ever had. So we're now in a very sort of tight position in terms of inventory. But there are always some products within some categories that need to be moved on.

Thank you. We've got one more online question before we move back to the final questions. The share pricing to like the results, can you comment?

I totally agree with that. Yes.

Okay. I now hand back to the operator, please, to phone question.

Your next question comes from Cameron Parker from Craigs Investment Partners.

Just wondering if you could comment on just what you're seeing in terms of competitive pricing, destocking and so forth in volumes? And what sort of visibility you get off that as you go through this down cycle?

Yes. Cam, it's a good question. I think the industry had seen quite a lot of inventory in the system. As I mentioned earlier, from probably this time last year, maybe Christmas, it was becoming fairly obvious that the kind of super cycle was coming to an end. And I think most participants in the industry had started destocking. And the early products you see, particularly for the residential markets, where there has been quite a slowdown. So products like reinforced mesh, for example, you saw those volumes coming down quite quickly. And so as I mentioned, we were pretty quick to offload inventories in those areas. And I think most inventory participants have probably -- we may be earlier than others. But I think at about this point, there'll be a few there that are still carrying significant inventories. But I think in general, we've seen the market kind of rationally move through those larger positions and seems to be behaving reasonably rationally across most categories. Obviously, we're a large player in the -- across the steel market in New Zealand, and so we've got a leadership role there as well. And we certainly are very careful to leverage our pricing power where we have it. And I think we're sort of seeing other participants being fully rational around that at the moment as well.

Great. And then just the last one for me. In terms of the infrastructure projects, obviously, you've highlighted quite a pipeline ahead of us. What are you seeing in terms of speed to market on those types of projects, and if -- in terms of timings? Interested on your thoughts around that.

Yes. Yes. Look, it's a good question. And we had seen -- well, it's pretty well documented, fairly slow progress on things like shovel-ready projects. But I think over the last -- particularly the last quarter, we've seen quite a pickup in just tendering activity. We're still tendering at least 250 jobs a month. Even on the quieter month, you get down to sort of 230, which is kind of aligned board with prior period in terms of tender work. But the interesting thing is the mix of those tenders. And I'm talking mainly for the sort of infrastructure businesses, Cam, so reinforcing steel, things like that, where we're doing bridges, dams, quite large -- sort of either motorway or wind farm type projects and port projects. And what we're seeing is the sort of mix of the volume has increased quite significantly. So that tonnes involved in those projects is up quite a lot. Even though there's sort of less projects, but quite big volumes. And so that's a good indicator that infrastructure projects are starting to kick in.

You have a follow-up question from Rohan Koreman-Smit.

Sorry. Just on this $5 million cost out, can you just give us an idea of how much you're expecting to realize in '24? And I'm guessing you get the full run rate benefits from [Technical Difficulty]?

Ron, you were quite quiet. So I think you're asking how much we expect to realize in FY '24. If that is the case, we are expecting to revise the $5 million in FY '24. So the cost-out program is a whole variety of a lot of little -- as you would expect, there isn't one thing sitting there that you can turn off and save $5 million. So we're working through that. There's significant plans in place and we made a lot of progress against them. So I would expect the whole $5 million. Now remembering, we're still facing a high inflation rate. So that's fighting us. And we're consistently sort of doing better with that as well.

The thing here, Ron, is really, Ron, is about staying flat nominal is what we're trying to achieve. So to be able to offset that inflation and keep our OpEx at the same level as last year is the key as you get that carry. And Richard is saying in terms of inflation, if we can offset that inflation, so flat [ reel ], then we've achieved what we're setting out to do.

I guess the follow-up is, does that mean that if it's phased in over '24 that the annualized run rate in '25 is larger? Or is it literally just $5 million? And then next you'll turn out something else?

Yes. Correct. You're correct.

There are no further questions at this time. I'll now hand back to Mr. Malpass for closing remarks.

Thank you very much for participating.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.