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

Thank you for standing by, and welcome to the Steel & Tube 2024 Interim 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's CFO. We'll start with a quick summary of our first half of the 2024 financial year and an update on strategic progress and then move into more detail on the results before taking any questions and answers. We've delivered a solid result in a more challenging environment with normalized EBIT and EBITDA both above our December 2023 guidance. Pleasingly, normalized EBIT of $11.3 million was ahead of the second half of the 2023 financial year, despite continuing economic headwinds. Our inventory was further reduced down to $128.6 million and we ended the period with no bank debt and a strong cash balance of $26.3 million. The financial results have been driven by our focus on customer service, initiatives supporting sales activity, tight management of cash flows and our cost-out program, which has offset inflation increases, which has meant that we've been able to keep costs below prior year levels. The macro trends that we have seen in the second half of the 2023 financial year continued. The economic recovery took longer than we anticipated, inflation remains high as to interest rates and that has put pressure on customer demand, resulting in subdued trading and volumes remaining under pressure. Activity has also been softer ahead of the 2023 general election in October. And while business confidence has increased, investment intentions remain flat. We've seen some easing in the labor markets, but do not expect an overall improvement in the economy until at least the fourth quarter of our financial year. So it's sometime middle calendar year this year. We've remained focused on our strategy, providing high levels of customer service and really controlling the controllables. Strategic investments into high-value products, services and acquisitions continue to perform strongly and we see plenty of opportunity to build on our track record in this area. Organic growth is also an opportunity, and we have invested into new equipment that ever expands what we can offer or allows us to operate more efficiently. We've seen some positive market share growth in the key categories that we've been chasing and continue to generate strong margins. The cost-out program is progressing well, with costs offsetting inflationary pressure in the first half of '24 with costs being below prior period. We're actively managing market challenges. We have seen significant operating leverage. So when we do see activity start to pick up, we will capture that in earnings benefits. This has been well publicized, both residential and nonresidential building consents are down and manufacturing is clearly subdued. The infrastructure pipeline remains strong with multiple long-term projects underway. We are looking forward to more clarification from the coalition government on both longer-term and mega projects. We're pleased to have maintained our interim dividend at $0.04 per share. This is the same level as last year despite this being significantly above our dividend payout range of 60% to 80% of adjusted NPAT. This provides a gross dividend yield of 10.3% based on the 31 December 2023 share price and demonstrates the Board's confidence in our performance and our outlook. Our dual pathway strategy is continuing to drive our performance as we focus on strengthening the core and investing in high-value products and services. Continuing to strengthen the core involves building on business foundations that are now in place with a focus on best-in-class customer experience, leveraging our breadth and scale to cross-sell a wider range of products and services and driving improvement in gross margin dollar per tonne along with operational efficiencies. Current initiatives in this area include the $5 million cost out program I mentioned, Project Strong, which is focused on maximizing returns from our Auckland palletized operations. and our continued investment into digital platform, which underpins our customer service and data analytics. I'll talk further about our investment to high-value products and services on the next chart. Organic growth is obviously important to us. And in the last 6 months, we've invested into new plate processing equipment, a new drillings machine, automated stacking system and new mesh straightening equipment. We've also continued to invest in the aluminum range of products. Our M&A strategy has also proven successful with Kiwi Pipe & Fittings and Fasteners NZ now fully integrated and part of our operating business platform. Most recently, we have signed an exclusive supply agreement with ROBOS, which is a business that provides safer and faster flexible steel and road barriers across Australia and New Zealand. As part of this, we will provide a loan facility with an option to take equity in the business if we wish. Our long-term aim is to operate the business in a way that is financially rewarding for our shareholders and positive for our people and our customers and planet. Our key metrics remain positive with continuing improvement in customer satisfaction and employee safety. Employee satisfaction remains well above industry averages. Sustainability is integrated into our strategy and is a key part of our decision-making across the group. The increase in carbon emissions per tonne is due to the lower volumes I mentioned. However, when you look at total carbon emissions, they have reduced year-on-year. I'll now hand over to Richard Smyth to talk through the financials in more detail.

Thanks, Mark. As Mark has said, we have delivered a solid 6-month results despite the more challenging environment. While revenues were lower due to reduced volumes, we are pleased to continue growing margin dollars per tonne. Our cost-out program is mitigating the inflationary pressure, and we ended the year with a cash balance of $26.3 million. We started the half year with a strong balance sheet and has strengthened us even further, reducing inventory and increasing our cash. We have maintained tight control over debtors with minimal bad debts. We have an undrawn $100 million facility in place, which, along with strong cash flows will fund our growth and other strategic initiatives. There was a limited reduction in volumes and revenue from second half '23, which was a good result in the challenging economy. Volumes were down 5% or revenues of $261.8 million were down 4.4%. There has been continued demand for a range of steel products and solutions supported by our focus on greater customer service. Gross margin dollars per tonne continues to grow with an improvement in gross margin percentage compared to second half '23. This is mainly as a result of effective product mix, pricing discipline and cost control. Our strategic focus on high-value products and services is also driving an increase in gross margin. Steel & Tube's distribution business is more susceptible to economic headwinds, particularly with the construction slowdown. However, our sector diversity is an advantage, and we are not reliant on any one sector. This has helped the distribution business deliver a solid performance. This division has significant operating leverage, and we expect margins to improve as the economy recovers. Infrastructure is generally longer-term projects. The reinforcing business continued its turnaround with a strong performance. We are continuing to move away from solely being a commodity provider by offering innovative, high-value solutions and services such as pre-fabrication. We are focusing on supply on new projects and have a solid pipeline of work from new tenders. Inflationary pressures remain, although with some easing in some areas such as labor costs. We commenced our $5 million cost out program on May '23 to offset inflationary pressures, and this has continued and will continue into the second half of '24 as well as the cost benefits. Continued efficiencies have resulted in network leverage and led to a year-on-year reduction in total carbon emissions. Normalized EBIT was at the top of our guidance. The benefit of improved pricing disciplines and cost management have been offset by increased costs and lower volumes. We have been steadily decreasing our inventory since building it up in 2020 in response to the previous supply chain issues. Inventory normalized at the end of FY '23 and has been further reduced in line with activity and optimizations. Inventory covers remain within our target ranges. Active stewardship and detailed analytical tools are being used to ensure investments are made in high-value products with a reduction in lower-value products held an inventory. Data management has been a priority in the current environment, and our cash collections remain high. Cash has been freed up as inventory has reduced. Major cash outflows in the first half with dividends, CapEX, tax and lease payments. We continue to manage our CapEx carefully with priority allocation to business improvement and growth projects as well as continued support for our digital initiatives. CapEx in the first half was $4.4 million, and we expect a similar spend in the second half. Thank you for your ongoing interest. I'll now pass you back to Mark.

Thanks, Richard. So as you know, Steel & Tube is well diversified, and we see opportunities for growth across a range of sectors. Manufacturing is expected to remain subdued in the short to medium term, along with residential and commercial construction. However, longer term, these sectors are supported by positive macro trends which will support a rebound in activity as the economy recovers. The infrastructure sector is more immune to short-term economic trends. There has been significant underinvestment for many years, and there is a massive demand across almost every area of this category, from water services, health care infrastructure, land transport, renewable energy, tourism infrastructure, climate resilience and rebuilding following weather events. While some large mega projects have been delayed, canceled or have been reviewed, the new coalition government is supportive of and understands the need for investment. Steel is an essential and sustainable building product. 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. Steel & Tube is well recognized as a leading quality provider of steel, delivering innovative solutions on time and on spec. We are a preferred partner with significant experience and expertise across infrastructure projects. Looking forward to the second half of the financial year, the economic cycle is expected to remain challenging, with some easing anticipated by mid this calendar year, which will be later in the fourth quarter of our financial year. We note also that there are six fewer trading days in the second half of the financial year compared to the first half. In a recessionary environment, the most important thing that we can do is ensure a strong balance sheet, and we tightly manage costs. We are well positioned to benefit from increasing activity and demand when the economy does recover with a strong balance sheet and healthy cash flows. We have a solid pipeline of work in place, particularly in that infrastructure space. We remain focused on our strategy and our growth through organic expansion and M&A. There are a number of opportunities to add value to our business, including some that will present themselves as a direct result of the economic environment, and we're well positioned to take advantage of these. Steel & Tube is well managed and well governed and a stable and a consistent performer. Our positive track record over the last 6 years since the implementation of Project Strive turnaround program in 2018 demonstrates our resilience and agility through the economic cycle. The value of our dual pathway strategy is also now becoming clear, and this remains the framework for our actions as we continue to strengthen our core and build that high-growth products and services. Thank you for listening. I'll now hand back to the operator to manage any questions.

[Operator Instructions] Your first question comes from Ryan Lee with Craigs Investment Partners.

Guys, can you hear me okay?

Yes, Ryan.

Congrats on delivering on your guidance in a tough market. So first question is on your outlook. I appreciate in the outlook statement that you expect economic condition will remain challenging in the near term. But can you just provide a bit more color around what you're hearing from your customers for both distribution and infrastructure divisions?

Yes. Yes. Look, I mean it's not a straightforward answer across our various sectors because they're all functioning at different speeds. Manufacturing is about 1/3 of our revenues. And you've seen the PMI fairly soft through certainly, the last quarter of the calendar year -- last year, and then it's had a fairly slow start into January and February, though it is picking back up again, I think, in the sort of [ 47s ], which is an improvement on where we were in December, January. So we do see it subdued at the moment in that manufacturing space, but all showing signs of life, which is great. On the commercial construction side, really, we're actually pricing still quite a lot of projects into the areas such as reinforcing steel, infrastructure, commercial, similar number of projects to prior period, but what we're seeing is the weight of steel going into those projects increase, which kind of indicates that there's more infrastructure projects coming on stream although we're still waiting for those mega projects to be reignited, really, is dependent on coalition government for a number of those. But we do see that there's primed up infrastructure demand, and we're starting to see some [ reasonably big ] water projects starting to come online. We've got specialist expertise in those areas. A lot of seismic work strengthening type work. So there's definitely signs of life there. Of course, residential, although still running at an annualized 37,000 [ consents ] which is probably not too far off capacity is, still fairly busy for our roofing business as [ fast as ] businesses, that type of thing, but not quite what it was. So hopefully, that gives you a bit of an overview, Ryan.

Yes, that's very helpful. And then secondly, just on infrastructure. Obviously, that's a standout for the result. So can we expect gross margin for that business to be around that level going forward?

Yes. I think it's probably sustainable about where it is. We've made a number of structural changes in our infrastructure business units that have really taken place over several years, and we're now seeing the benefits of those flowing through those gross margin dollars that you're seeing.

Yes. Great. And on Page 3, so you've mentioned that the timing of commissioning for a few machinery investments. Can you just talk about what kind of margin improvement you're expecting from those investments?

Look, they all meet our IRR and [ NPV ] payback return requirements. We're starting to see some straightening, for example, plate processing up now and commissioning phases down and Christchurch we'll see some [ peeling ] machines and things like that arriving later in the year, early next year. So they're all on track with -- in terms of their investment plans. I'm not going to comment on specific gross margin improvement out of those investments. But as you've seen with our other -- both organic and M&A investments, we've provided fairly good visibility on an ongoing basis as to how they've been tracking versus return requirements. Anything to add, Richard?

I was going to say, the only thing I'd add to that is you don't turn these on and have them producing margin at the level that we want on Day 1. There is a little bit of a ramp-up on the -- which is what we planned for, so it's as expected, and I would expect to see that continue with any of these new additions to our plant.

Okay. And then lastly, what's your expectations for your inventory position in the second half. Obviously, you've managed to reduce that quite a bit in the first half which was good to see.

Look, yes, thank you, Ryan. I think in terms of -- we're doing a reasonably good job of getting our cover bands on a tonnes basis between the 3.5 to 4x, which is really where, as you know, we've been targeting and are pleased to be here. So really, that inventory very much depends on tonne consumption as the business goes forward. We're not, as I mentioned earlier, expecting more activity to start flowing through until later in the fourth quarter of our financial year. So given that we can expect inventory levels to stay fairly flat, we're seeing price forecasting forward the analysts that we use to understand what's happening in global steel pricing are all indicating when you compare back to New Zealand Dollars that pricing for most products will remain fairly for the foreseeable sort of medium term. So that kind of leads you to similar levels of inventory in terms of dollar terms.

Your next question comes from Rohan Koreman-Smit with Forsyth Barr.

Congratulations on delivering a pretty solid first half in trying times. First of all, I just want to look at this improvement in gross profit dollars per tonne. I was just wondering if you could kind of give me a bit of a breakdown on the different products, fasteners, [ rear ], longs, flats, et cetera, and then I'm just trying to get an idea of what's like-for-like and then what is actually you having better pricing disciplines or just higher aluminum sales or those products that have a higher gross profit dollar per tonne?

Yes. They're good questions, Rohan. We're probably not going to go down to split individual product categories out. But to give you some sort of general guidance. I mean, certainly aluminum is one of our highest-margin categories, and we're certainly doing quite well in that area, now selling anywhere between $0.5 million to $1 million a month, which is something that we only started organically back in April last year. So we're quite pleased with that. We also have invested in a number of other areas that we've talked about in terms of high-value products and services. So things like Kiwi Pipe & Fittings, that business is performing extremely well for us in relatively high margins in that fire water reticulation area. We've been able to take what was an Auckland-based business and expand it through most parts. There are certainly five large geographies through our other site locations in the country, which has been exactly what we intended to do with that acquisition. We're also seeing similar things in the [ fastening ] space and other areas where we've got good margin growth. And to Ryan's question earlier around the infrastructure businesses as well. We have seen that -- you will be familiar with the reinforcing steel and some of the other businesses in that segment. We've been working pretty hard to drive new disciplines in those areas in terms of how we go to market. So really leveraging our sector expertise, working with clients on value engineering for projects. And what that means is that we're now seeing as a key provider into those infrastructure and commercial construction markets. And of course, with that, we're able to capture a premium. For example, we're doing pre-fabricated engineered products rather than just working on site in situ, which has made it a lot easy for our clients. We're using [ BIM ] spec, digital 3D modeling for clients to help just manage intersection points on projects, make their lives a lot easier. And so those types of programs are now being specified and now being almost demanded by some of the key infrastructure horizontal players. And what that's meaning is now, of course, we're able to get in early with those projects and work very closely in a collaborative fashion. And so there is margin growth, of course, that comes with that. So overall -- and I guess the last and most important thing is just straight out price discipline. We have very regular meetings just around pricing, ensuring that we're capturing trading gains. And so I'm not -- for a second claim in all of these structural improvements, but certainly a lot of it is and in terms of trading games, we're working every angle on a weekly basis. And I think that's one of the other areas that's led through to improvements in those margins and, of course, managing inventory very tightly to ensure that we're looking at our -- we look at our products on a return on inventory basis and we look at the top 10, bottom 10 constantly to try and replenish, grow into those higher-value products and services, which is where we know that we will continue to achieve margin growth from. Ryan, anything to...

Yes. The other thing I would add to that, Rohan, is that our cost focus is not just on OpEx. So we are also applying that to every part of our business. So there's nothing too small for us to look at when it comes to cost management. We're looking at things like freight recovery. For example, we look at all of those indirect labor costs. We're making sure that the rate is fixed with volumes. And so we have just a constant focus on both revenue and the cost element to maximize margin.

Next question. You talked service levels as well. Can you give us some of your service level metrics, stock availability and [indiscernible]?

Yes. Well, [indiscernible], we look at really very closely. We're running up above [ 97% ] on [indiscernible]. I don't know whether we've got it in the package there, Richard, but that's a standard metric for us that we watch on a plant-by-plant basis and obviously, availability by key product lines, [ flanges ] and with that, we have our typical A-line categories and B, Cs and Ds and we're watching those on a weekly basis. So hopefully, that helps answer your question here.

Mark, I have a weekly meeting with inventory positions, and we're not just looking at how we reduce inventory. We're always focusing on the other end as well and to make sure that we have the right products. So we are looking -- we do focus on that availability quite closely.

Just thinking about your inventory reductions and the context of a potential cyclical rebound and kind of how you think you're positioned there. But also maybe you could give some color on that in terms of how trading finished last year, obviously, pretty weak. And have you seen any incremental improvements that you can kind of point to for the first almost 2 months of the year?

Yes. Look, I mean, on the first part of your question on inventory positions here, we do -- we've actually been steadily building high-value inventory because we know that as the recovery comes through, we want to be in a position to take advantage of that, and we've done that in prior periods where I think you've made the observation where we've been positioned well. So we've been quick to offload inventory, probably a year ago now that we started that process. I mean, we're down almost [ $47 million ] of inventory on a year-on-year basis and that's just that kind of active management, if you like, of inventory and making sure that we've built strong positions on products that move. In terms of trading, yes, I mean the second half -- the first half, excuse me, December, January above 15-day months, so very short. I think we saw in January, we're fairly well traversed by other companies but I think many of our contractors took advantage of actually having the summer that got stolen last year. So I think we're certainly seeing a lot of kind of softer activity through that January month. February is back in the game. I think we're probably all seeing it just on the roads around Auckland here, but we're seeing activity has picked back up again and certainly indicated businesses like roofing things like that, we're starting to see some fairly good activity come back as contractors and the industry started to get and hopefully, also some positive messaging coming from the coalition government there may be helping as well.

[ Operator Instructions ] Your next question comes from [indiscernible] with Jarden.

Mark, Richard, can you hear me?

Yes.

Yes, good results. Thanks for the update. So my first question is referring to Slide #16. So I understand you have the cost out program, $5 million. So the slide says you have a cost saving of $2.9 million in the first half of year collectively. So should I -- should we expect another $2.9 million in the second half and you're exceeding your $5 million cost saving goal?

You want to take that?

Yes. I wouldn't exactly double it. We -- there are 6 days left, Mark, as reminded me. But we are very comfortable with the $5 million, and we are not stopping there by any means. But I wouldn't necessarily take a simple doubling of that number.

Yes. Could you give us a bit more color on the loan agreement size for ROBOS and how big that...

Your question was the size of ROBOS?

Yes, the size and what that loan agreement looks like.

Yes, sure. Look, it's a start-up business, in fact, they've just won their first job down in Nelson that we're supplying some steel into it's eroding barriers business, starting initially in New Zealand, and they have plans to move into Australia and [indiscernible] at all of [ W beans ] and [indiscernible], the stuff that we see on the motorway at the moment. So it's a [indiscernible]. So there's effectively a replacement for the wire and rope type business and introducing a new competitor. So we've been working with ROBOS for a while. We have an option -- our right to exercise a swap for that loan for equity if we want any time but it's a really good partnership. We always see an opportunity to have exclusive supply to steel.

Yes. So just a final question for me. So your interim dividend was being paid out at the top end of your policy range. And you noted that you're confident about the future of the business but it's going to be challenging. So what's your view on your final dividend? You're going to stay at the top of the range? Or you're going to be more cautious?

Obviously a Board decision, [indiscernible]. So it's something that will be planned on at the February meeting. But I think we -- as I mentioned earlier, with the response to Ryan's question on the outlook, we're not expecting our cash flows to get worse. So that probably gives you an indication of how we're thinking about dividend at this point in time. Obviously, there's a lot of water to slide below -- beneath that bridge, but we'll see how trading performs. But at this point in time, we think we're probably kind of past the worst of the market and that we are moving into a phase of growth at some stage in the next 3 to 6 months.

[indiscernible], can I just add just one clarification on your question. We're not at the top end of our normal range for dividends. We actually went above that range significantly because we are and the Board is confident in the future of this company.

Just to clarify on your question on OpEx. I mean, it is extremely difficult to offset inflation in this environment, and we'll be interested in watching other entities just to see how that has gone because as Richard said, this is from everything to operational efficiencies, our teams and the plants through to business travel, every little thing we do is being kind of checked and seeing how we can offset this inflation to offset close to $3 million there in that first half has been difficult necessary to be able to hold up our earnings. But I think it is just critical for us to be able to go forward to achieve that $5 million full year so that we can ideally land the year with a flat real kind of cost with prior periods so that we're able to [ eat ] inflation and that's our goal right of any good businesses to be able to eat inflation every year, grow your cash reserves and hopefully improve ROCE, so that should flow behind that. So that's the [indiscernible].

There are no further following questions at this time. I'll now hand back to address any webcast questions.

We've got a couple of questions online. First one, I would like to know if you are currently looking at any businesses to possibly purchase this year?

Yes, we are. We've got at least a half a dozen businesses that we're looking at in any one time. I guess as we get anyone who's been involved in the M&A type processes will know that there's quite a stage process that you work through here from the initial sort of dating arrangements through to figuring out whether there's a good fit and then getting to a sort of a once you commit resources to investigate things in, an NBI or a nonbinding indicative offer and in from there moving into sort of due diligence and potentially contracting a transaction. So we're fairly are optimistic that the M&A environment is improving. We're seeing more and more deal flows, if you like, coming to the table of different businesses that ideally are needing a trade buyer. We would normally try and grow organically wherever we can. But where we see an opportunity to improve our capability or our reach and that high-value products and services in M&A is the right way to do it. And so we're reviewing at any one time at least half a dozen businesses. We have a team of a couple of people that are dedicated just around those activities. We've got a very robust process that involves regular stewardship with the Board as well.

Thank you. The next question. With the reduced inventory, how quickly can the company respond in an upturn?

Yes, it's a good question. And we're -- as part of that, weekly process Richard talked about, we look very closely at forward demand and we've worked shipping arrangements throughout the Asia Pacific. We have 11 laneways locked in at very favorable shipping rates. We have preferred arrangements with 40 odd-mills throughout Asia that we've had to [indiscernible] register a test, and we are working very closely with them around demand forecasting. So as we see opportunities, we're able to move very quickly through that combined logistics shipping, freight arrangements that we have in place. We have an excellent hub and spoke model in New Zealand, where we have four very large locations spread out through the country that act as kind of mother centers to feed our regional and child branches. And so that model is a model that's been developed and evolved over the last 5 or 6 years and is working very well to enable us to keep inventories in that 3.5 to 4x cover band but also take advantage of opportunities as they come through.

Last question online. There's a backlog of residential consents in 2022. Do you think these projects will get built or will many be canceled or deferred?

That's a good question. I can't offer that an answer with a lot of granularity, but there is a sort of a back of a wave flowing through at the moment of residential consents that are being put in place. You are still seeing, as I mentioned earlier, sort of last month, we still saw 37,000 on an annualized basis consents coming through. The composition of those is a lot more multi-dwelling rather than single-dwelling consents, but there is still fairly strong even in the nonresidential sectors. When you look at our floor area year-on-year, it's still fairly flat. So there is still reasonable demand in that residential space. We also have a relationship with [indiscernible] where we have a maintenance contract for all their re-roofing and that has been a fairly busy activity pipeline for us as well as the new builds that we're servicing a lot of the industry on that as well. So the social housing element, I guess, of the residential market is fairly strong for Steel & Tube as well.

Thank you. That's all for the online questions. Back to you, operator?

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