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

Thank you for standing by, and welcome to the Steel & Tube Holdings Limited First Half '26 Results Call. [Operator Instructions]. I'd now like to hand the conference over to Mr. Mark Malpass, CEO. Please go ahead.

Hi, everyone. Thank you for joining us. With me is Richard Smyth; Steel & Tube's Chief Financial Officer. Today, we'll talk through our 2026 half year financial results, and then we'll take questions at the end. Steel & Tube is a cyclical business that's primed for the upside as the cycle recovers. There's no doubt that the first 6 months of 2026 financial year was very challenging. In fact, July was one of the slowest months on year due to weather despite what many economists and businesses were hoping for, the rate of economic recovery has been patchy. On the positive side, we did see a gradual improvement in November and December which has flowed through to the start of this year, and that's despite wet weather in January and the impact of whether events in February. It is tepid recovery so far, but it is heading in the right direction. The highlight of the first 6 months is the outperformance of the Perry's galvanizing business, which we acquired in May last year. We knew at the time that Perry's was a large transaction for a company our size at the bottom of the cycle. We're now focused on rebuilding our balance sheet capacity and carefully controlling our cash inventory and working capital, which we'll cover later on. Perry's is performing well ahead of its expectations. It's done exactly what we wanted, providing consistent high-value earnings, which have helped to offset the margin squeeze in the base business. Looking forward, we see some positive signs. Manufacturing demand is on the rise, fast-track projects will support the infrastructure pipeline and low interest rates should flow through to the commercial and construction sectors. We have significantly improved the business platform over the last 2 years, making it leaner and more efficient, which means that as demand and volumes recover, so will our margins and earnings. Looking at our top line results. The Perry acquisition was a real game changer, and the primary driver behind our revenue uplift helping to offset the lower results in the base business. That said, volumes were also the key improvement area from our base business. Normalized EBITDA remained positive even at the bottom of the cycle as did operating cash flows. The benefits from our cost out and efficiency programs are being realized and helped to support margins alongside the increased demand for high-value products and services. The improvement in the product margin is largely driven by Perry's, which we'll discuss later in the presentation. The increased net debt year-on-year includes the $30 million of debt that we took on for the Perry's acquisition. This chart demonstrates the cyclical nature of our business, and you can see it's been a long trough due to the recessionary impact of negative GDP per capita, which has obviously been tough, particularly in the construction and manufacturing sectors. Putting aside COVID impacted 2020 and '21, our volumes and revenues have been at historic lows. If you look at that orange line on the graph, which represents the low point in the cycle, you can see we've gone deeper than previous cycles. In response, we initiated 3 ways of structural cost reductions that have removed about $12 million of cost over the last 2 years, which has essentially offset inflationary pressures and another $6 million of annualized savings has been initiated in the first half of this financial year, which Richard will talk to shortly. As well as structural cost savings, we've also changed the shape of our business over the last couple of years, where we have invested in our strategy to grow high-value products and services, which makes Steel & Tube a lot more resilient going forward. These additions include inorganic growth such as the acquisition of Perry's galvanizing and Kiwi Pipe and Fittings. And we've also grown organically, adding expanded aluminum range, plate processing as well as a trucking fleet. We believe the cycle floor is now passed, and we are seeing the early stage of a recovery, which will drive demand and revenue growth. We have diversified exposure across growth markets. Manufacturing makes up nearly 40% of our revenues and has been improving with the PMI in expansionary mode for 10 of the last 12 months. We have a lot of customers in this manufacturing sector, and they're mostly buying high-value products and services from us like engineering steel, sheet and coil, aluminum and fasteners. Commercial or sometimes referred to as nonresidential has been impacted by higher cost of money, business confidence and government spend. Infrastructure has the potential for us to double or even triple as the government responds to New Zealand's infrastructure deficit. Our diversification across these sectors means we are well placed as different sectors of the economy recover. The broader construction sector is just over half of our revenues, long-term outlook is positive with forecast growth across commercial, residential and infrastructure. In the short term, while the economy and sector measures are improving, we've yet to see any consistent material increase in demand. The rollover of fixed mortgages at lower interest rates and easier access to credit will help stimulate construction. There will also be nearer-term demand and infrastructure from the fast-track projects. Longer term, the national infrastructure pipeline recently concluded that there's $181 billion of initiatives either underway or in planning. The pipeline of products includes land, transport, hospitals, social infrastructure, energy, water and education. These are all areas where there is a need for a lot of steel and a quality supply chain. Perry's was a measured move at the bottom of the cycle, and it's delivered well above expectations. In fact, we've only owned it for 8 months, and it's already exceeded its first year target. That puts us in a strong position to pick up more share of wallet in an economy which is slightly improving. We've already seen significant growth from Perry's customers as we realize the benefits of dealing with one company for both their steel product supply and also galvanizing needs. The acquisition price and terms were favorable, including an ongoing equity investment by the vendor, Simon Perry, who has significant undeveloped land holdings that we will be advantaged by. We have currently paused our M&A program while we optimize our recent investments and strengthen our balance sheet. However, M&A remains an important part of our long-term growth strategy, and we'll always look for deals at the great opportunity comes to us. As mentioned, the Perry's acquisition has ticked a lot of boxes and has significantly exceeded our expectations. Integration is well on track and proceeding well. We've got a very structured program on how we absorb businesses and a lot of internal experience in buying and selling businesses. Health and safety and operational resilience areas that we've carefully invested in to bring Perry's up to the standards across -- that we have across Steel & Tube. We are actively managing market challenges with close control over our cash and also our cost initiatives. We're very focused on our competitive advantage, which is really grounded around cross-selling a wide range of high-value products and services to our loyal customer base and also ensuring that we're a preferred choice when activity returns. Perry's obviously improves our resilience over time. However, that increased our short- to medium-term debt, which has been closely controlled. The uplift in revenue was driven by Perry's. And pleasingly, customer satisfaction scores remain high, and our team is doing a great job of maintaining base business market share and winning new customers who are looking for a one-stop shop alongside great service quality products and technical know-how. Volumes in the base business is starting to improve, however demands are still fairly lumpy. The modest improvements have continued into the new year, although bad weather impacted January and February. It's fairly standard practice that at this stage in the cycle, we always see volume lead ahead of an improvement in margins. The Perry's acquisition has driven the recent improvement in product margins alongside the benefits from inventory efficiency program that we've deployed over the last few years. The base business margin has been under pressure, mostly due to a highly competitive environment. And while we have had to shed some margin to retain volumes, we still are very disciplined around pricing and adding value through our service offer. And the recent improvements we've seen in the base business, our pricing across the sector are very encouraging. And although it's early days, we're hopeful that's representative of a more rational market behavior. I'll now hand over to Richard to talk to our financials in more detail.

Thanks, Mark. As Mark has said, the results reflect the lower demand environment, particularly for commodity steel partially offset by the strong performance from Perry's. We have significant operating leverage and the return in demand will drive profit expansion, an annualized $6 million cost-out program looking at both direct costs and OpEx is underway, further strengthening our leverage. Normalized EBITDA remains positive as do operating cash flows. We reported a net loss after tax for the 6-month period of $12.4 million. The Board has made the prudent decision not to declare a dividend, reflecting careful stewardship of funds and capital. Over the past 2 years, we have reduced costs by $12 million, offsetting inflationary pressure. These have been focused on back-office functions site consolidations, efficiencies and close control of discretionary spending. A third wave of cost out is now underway, and we expect $3 million annualized OpEx benefit from this in FY '27. Excluding growth investments, normalized OpEx was maintained in line with first half '25. Normalized EBITDA remained positive at $2.8 million and was a slight improvement on the prior year. Looking at the waterfall on this page, you can see the strong impact of the growth investments, largely driven by Perry's and our brokerage initiative. Volumes in our base business have increased. However, this has been more than offset by the decline in base business margin. The impact of inflation is less than recent periods and has been almost fully offset by our OpEx cost-saving initiatives. We expect our various cost initiatives will save $3.5 million in direct and operating expenses in FY '26. We have a disciplined approach to the use of funds, particularly in the current economic cycle. The focus on this over the short term is on rebuilding that balance sheet capacity and capturing value from our recent investments and growth initiatives. We completed a capital structure review at the end of last year, and the Board is comfortable that our structure remains appropriate. We recently agreed new debt facility terms with the ANZ with maturity moving to March 2027 and revised covenants in place until that time. Net debt over total debt plus equity sits at 20%, which compares well to peers. Net operating cash was $5.6 million for the period, with the year-on-year debt increase due to the period acquisition as well as support for the ongoing operations. Working capital continues to be prioritized with close cash control mechanisms in place. We have taken some additional steps to protect cash through the cycle low, including a pause on M&A, CapEx restrictions, the forementioned third wave of cost control and a hold on dividends. We are also undertaking a comprehensive review of our lease portfolio to ensure our sites remain fit for purpose and to identify further lease consolidation opportunities. We continue to carefully manage inventory with a focus on higher-value products and ensuring we have sufficient stock to meet current and near-term customer demand. As demand has fallen over the last few years, we have reduced our inventory levels, which are now at $115 million at period end. As we move back towards the mid-cycle, we expect this could increase to up to $130 million. We have carefully reduced the number of SKUs and are down from 23,000 December 2023 to about 15,000 a day with a greater emphasis on higher value products that our customers want. Thank you. We're happy to take questions at the end of the presentation. But in the meantime, I'll pass you back to Mark.

The economy continues to remain challenging. We're starting to see some recovery in demand However, we remain cautious and expect any sustained improvement to be slow and steady over the 2026 calendar year. Planned residential construction work appears to be increasing and manufacturing demand is on the rise. There will also be some additional short-term infrastructure work as a result of the recent weather events. Reinforcing provides an early view of what's coming up. We are seeing a modest lift in demand off a very low base. Tender activity is increasing and the pipeline is starting to build. The team are doing a great job winning projects, including the Te Papa Biodiversity Center, and University of Waikato School of Medicine. As the economy continues to improve, we expect this improving demand trend will flow through to our other end markets. With the current suppressed margin environment, we are seeing some market consolidation occurring as well. We are focused on maximizing the recovery and returning to growth. Our short-term focus is on continuing to rebuild the balance sheet capacity and to optimize inventory and supply chain. We have a clear pathway to improving our performance and returns. And in the medium term, our plans are to reduce debt, recommence dividends and continue with our M&A strategy. As a sizable business, we're very attuned to the economy. And as it does recover, we will benefit. We have significant operating leverage, and we are well placed to deliver material earnings uplift as the demand builds. Thank you. I'll now hand back to the operator to manage questions.

[Operator Instructions]. Your first question today comes from Kieran Carling from Craigs Investment Partners.

Could see some improvement in revenue run rate over the last 2 months of the half. But I guess just focusing on EBIT, your first half losses worsened year-on-year despite the contribution from Perry's, which I estimate to be about $4 million based on the past numbers you've provided? And yourselves and some of your competitors have signaled ongoing margin compression and no material lift in activity levels until calendar year '27. So I guess just on that basis and sort of triangulating it with your outlook commentary, what would you see as a reasonable outcome for the second half -- would it be losses in line with last year at around $12 million. Are you expecting some improvement there?

Kieran, it's Mark. Look, we are seeing some improvement in demand, as I mentioned. You can see on the charts that we've shown in the January and February to date numbers there starting to lift a little. As I mentioned, it's fairly tepid, but we are seeing an improvement there. We're also seeing those product margins starting to firm, which indicates that more rational market as volumes do increase, and it's typically what we see in other cycles. We've gone back over 3 various cycles, and you do see that sort of volume, precipitate the margin improvements. And so with the backdrop of a reasonably solid manufacturing sector, just that PMI 10 of 12 months an expansion remote, a big part of our revenue exposures as well as the lower interest rates, cost of money coming down. A little bit of improvement in business confidence started to come through in the private sectors. We can expect that I think our EBIT will start lifting in the second half and getting back to breakeven is obviously key for us, which we're expecting in the coming months in terms of monthly performance. So there is a backdrop there that is reasonably encouraging. I think all of our competitors have recently noted similar backdrop, so we should see a better second half than what we've seen in the first half.

We're not giving any guidance. Sorry, Kieran.

Okay. No problem. I guess just again on your outlook, given your exposure to non-resi, are you concerned at all by the trajectory of consents in that area, which still seems quite soft?

Yes. Look, as you know, it's fairly patchy and confidence is the key here. And I think we are starting to see just reinforcing business that I mentioned earlier, quite a few projects coming through with dates on them. But we'd seen probably last year, Richard, I mean, I thought less than 40% actually had start dates. Now we're seeing something 80% or 90% of those projects have start dates and which gives us a little bit of confidence that's at the front end of the construction cycle that we are seeing activity building. And we know that sort of second and third quarter this year, there's a fair bit of work in the pipeline that's actually got start dates on it, although there has been delays in this first quarter. We're fairly comfortable with that early phase construction. And a lot of it is commercially driven near, Kieran, rather than government infrastructure stuff.

That's helpful. Next question is just on your balance sheet positioning. Obviously, net debt continued to rise despite the $15 million unwinded net working capital through the half. Just given it's quite an important consideration at the moment, can you clarify what your revised covenant thresholds are? How much headroom you have available against those? And just sort of with any of these CapEx restrictions or the pause on M&A is sort of in dictated by the banks as opposed to just internal decisions.

Kieran, so we don't typically say exactly what our covenants targets are, but we do disclose that clearly, they're not our standard bonds that were linked to ratios because the minute you have a dollar on loss, they don't work. They're related to absolute normalized EBIT targets and an absolute quarterly net debt position. So we are managing those our projections have reasonably comfortably meeting those in the future. The question on CapEx and M&A, it's a little bit of both. We were making decisions because we're managing the cash flows anyway. It would be fair to say that the bank is very supportive of those of those restrictions as well. But we're very comfortable with the decisions that we are making on CapEx. And we're still so investing on CapEx is essential. We're just carefully managing and ensuring that every should be spent now and is going to deliver value -- either immediate value uplift or health and safety concerns.

You can see, I guess I'd add -- you can see the working capital there that we're -- continue as we have done for a long period, manage working capital carefully, but the key for us is obviously customer availability. And so we've actually probably the fourth or almost availability that we've ever had in terms of making sure our line and B line products are available for our customers because this is a really important point in the market where we have to hear that working capital on the ground available for customers right place, right time and at the right price. So we've been not holding back on our working capital investment. I guess, the CapEx, we've kept -- I mean, we spent about $3 million year-to-date on productive plant, new Purlins lines, new folding machines, all that sort of stuff. So we continue to invest in productive capital. We've just been careful to obviously manage our debt down and rebuild their balance sheet given Perry's was a sizable transaction for us. And it's obviously put some debt on the balance sheet, but we are fairly comfortable and debt to debt plus equity. So we're not in a stressed situation there.

Yes. I guess I'm just looking at the absolute level of net debt and given the effect you're loss-making. I mean all of your comments make sense, but are you able to give us a steer on working capital movements and expected net debt by year-end?

We don't give precise guidance. But as we did mention, over time, inventory will need to track up. That $130 million is not what we're targeting per se, but it is what we think will happen in the medium term. So clearly, we have to fund that. We keep control, a very tight control on both cash inflows and outflows. So when we are increasing there and spending a little bit of money on inventory, we are very careful to manage cash inflows from our customers as well. So we've maintained a really high collection rate on our debtors.

Okay. Great. And then I'll just finish with one last one on Perry's. You mentioned a number of times that it's outperforming expectations, which is great to hear. But can you just give us some specifics around what the revenue and EBIT in that business did through the first half relative to its historical track because I guess you sort of benchmarked it against your internal targets, but just to sort of let us know how it's going.

We haven't actually published specifics what we did at the time of transaction, Kieran, but we are up on prior period, both revenue on EBIT is up on prior period EBITDA and EBITDA up on prior period. So it is performing well. What we are seeing is a significant it's not like most businesses where you capture a lot of cost synergies. It's been very as expected, very small cost-out synergies between the 2 businesses, but we've seen significant revenue uplift as we've been able to pick up customers that Perry's head, their books that we didn't have. And so there's been a great sort of a lot of activity in terms of driving Steel & Tube sales into those customers. But we've also seen conversely Steel & Tube customers that we've been able to convert across to Perry's galvanizing. And so there's been a really nice synergistic play there as well as some actual incremental stuff that we hadn't anticipated through. We've got a national network of branches being -- and of course, there's 4 golf plants across the country. But being able to pick up the rest of our network, where we've got trucks going back and forth that can offer a great galvanizing services to customers that traditionally haven't been able to get access to a galvanizing service in those more rural locations. So there's another silver lining to it that's starting to build as well.

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

Maybe just to pick up on Kieran's last question. Can you talk to your product margins, excluding Perry's. I know there's been a tick up, but Perry's has no tonnage. But obviously, you're including the gross margin and your group gross margin to show the tick up in product margin. So I was just wondering what happened to underlying product margins in the half versus last year and maybe even second half of '25.

Yes. Rohan, Mark. Look, on that, you can see that there's only I think 43-odd tonnes and periods and galvanizing whereas the rest of our business is plus 54,000 tonnes. So it is less than 1% of our actual tonnage. So it does have a sort of inflationary impact on those margin per tonne numbers. But if we were to exclude periods from those numbers, we're still seeing about a $30 per tonne growth in base business or excluding Perry's margins. So we've gone from second half '25, about $942 up to about $971 in the first half of '26, which gives you an indication that we have seen those margins kind of as I was mentioning on the call that we've had an improvement in that base business product margins despite periods. And then look, if you look at a percentage perspective, we've gone from sort of 26% side up to about 27% roughly percent of product margin, which is encouraging.

Okay. And -- that's helpful. And I guess going back to the balance sheet, you talked about an absolute level of EBIT and you're quite comfortably within that in your projections. What's the key driver of getting EBIT to that absolute level given you're kind of suggesting you're going to be loss-making for another few months? Is it volumes and margin? And is that EBIT like a 12-month rolling number? Or is it like 3 months annualized? What sort of metrics are they looking for in terms of the business being stabilized?

So they are -- well, first of all, the targets in the short term are negative. So we -- our commitment is to not lose as much as the number. So there are actually a little bit of a combination. We've agreed precise numbers for FY which are sort of related to the FY '26 results. And then after in '27, we have another set of targets from the bank as well.

And then when you look at the working capital and the debt reduction, it looks like you received more from your customers because your receivables are down and your payables are up. So is it really just a time in the year? And kind of, I guess, what's happened on the payables side for that to lift as much as has there been any change in terms of trade? And should that normalize out going forward?

So we've -- and I think we've been talking about this probably for a couple of years we've been on a constant strategy of extending into the greatest extent possible all of our vendor terms. So in some cases for some of the overseas mills, we have up to 120 days credit that doesn't change, that will continue. When we place orders, we have choices of where we place those orders. So we try to maximize the credit term minimize the price that we pay, minimize the minimum water quantity, et cetera. At the same time, for our customers, we've been focusing on carefully managing our exposure in this current economic environment, I think it's -- you see in the paper quite frequently about liquidation is increasing. We've been very careful, and we've had very, very little downside from that. But it is because we stayed very close to our debtors.

And then just on the comments about breakeven in a few months. To get back in semantics of accounting numbers, but are you talking after all lease payments? Are we talking kind of an old world EBIT breakeven? Or are we talking a new world as in you've still got the interest on your leasing to pay?

It's a new world. So our normalized EBIT. So that includes the depreciation on those leases, the right-of-use assets, but clearly because the interest is part of I -- it doesn't include the interest.

Sorry. And 2 more. I know you talked about SKUs in rationalization and that you've got good cover on your top end of your SKU range. I'm just kind of curious in terms of you're rationalizing SKUs at the bottom of the market, you're potentially rationalizing your network at the bottom of the market. You're taking head count out at the bottom of the market. What leverage are you losing to the cycle? 8,000 SKUs out of 23,000 is quite a big chunk, and I'd assume that's a decent amount of your -- or historically, a decent amount of your revenue, otherwise, you wouldn't have carried them for this long. So I'm just wondering what sort of leverage you're losing to the cycle and market share you're giving up and doing this?

Yes. That's a really good question, Rohan. And I think we've actually been trimming back our SKUs for a number of years now. We've come down from north of 40,000 SKUs down to 15,000, what we call active SKUs today that we are actively buying to. We still have a number of SKUs that are what we call our lines that are really SKUs that have become redundant that we no longer see a market for that we've replaced with either new products, we're watching, scanning. We have product managers looking all around the world in terms of new products and higher-value products that we can bring into the market. So it's a net number you're seeing there where we actually bring in new SKUs. We also have a number of lines that we've expired that we're trying to move through the system. It's a bit like listening to [ Roger Briscoe], the other day was constantly specially off the low end of your SKUs. We have the same thing where we discreetly manage our SKUs that are retiring and -- but we have 15,000 plan SKUs. And we anticipate that we can probably take another couple of thousand out of those planned SKUs over the next few years. We think we've really made a good job of getting it down to a base level. But you do drive a lot of complexity and cost around SKU is one of our core competitive advantages is that we have a wide range of products. So it's absolutely critical to your point that we maintain that breadth of SKUs that our customers value. But at the same time, we don't want a very long tail because you end up with that tail getting old and long and you carry product where prices are moving around quite frequently. We try and hold on average, no more than months of inventory on the ground at any one time on average. And so there's obviously a mix inside that. But it goes to the efficiency of the overall business model. And it's really important. We're moving that inventory through frequently, accurate pricing for our customers, but also the SKUs that our customers value and care about. So we're pretty happy with that. We monitor our NPS really closely. We're talking to our P1, top 1,000 and P2, top 2,000 customers on a regular basis to understand how their mix is changing and what they want. So it's quite quiet science behind this, and it's something that we've certainly found to be very important in our distribution business is getting that SKU capacity right.

Can I just also add? It's not a, set don't forget. So we do talk to our as Mark said, a top couple of thousand customers. And if they need something, and that we can agree on an appropriate price, we and will order on -- to get that done for them. So it's not set and forget.

Rohan, you mentioned you had a couple of other questions there.

Sorry, I had muted myself because there's a bit of noise in the office. That was helpful.

You gave ...

It's all right. The -- sorry, I'm just trying to remember my questions after my previous one. Just looking at your banking facilities, you said you've got $80 million available, what is I guess, the ability to draw on the balance because you've got 50 drawn so far and you've got a little bit of cash here to get through, but it could get a little bit tight in the months -- in the coming months?

So one of the things that we are managing is the peakiness of our cash flows. So we have quite a high peak intra-month debt level. What we typically find is our customers pay from the 20th to the last day of the month, but our outflows throughout the month. So the reason we have $80 million as opposed to the amount that we've got drawn at the moment is because we draw down intra-month and then we pay back for the last basically the last 10 days of the month. So what we have been doing as well as the initiatives that we outlined before, is we're looking at initiatives to manage down the peak debt and sort of try to smooth out some of those outflows. So we have the ability to draw down the -- well, I guess, the whole $80 million but we don't need that towards month. We just need more debt in the peak period. It peaks around between the 14th and the 20th of the month.

I'm sorry, last one, and I've taken a lot of time, but you stopped M&A in the short term, but has there been any pressure from the bank to maybe sell some businesses?

No, not at all. Yes. I mean we're always looking at that with our Board in terms of capital recycling, but we know.

[Operator Instructions] Your next question comes from Harrison Elliott from Jarden.

Just one question for me. I saw that great chart on Page 4. Am I correct in assuming that graph includes Perry in it? So then my question would be excluding Perry. How did underlying like-for-like volumes trend for the half, particularly into that final quarter?

Yes. I guess that the volumes is reasonably small. It's less than 1%, probably about 0.7% of our overall volume mix. So that volume line doesn't really it's not influenced that much by Perry's. The revenue, there is a little bit of influence there. But -- so does that answer your question?

There are no further phone questions at this time. I'll now hand back over for any webcast questions to be addressed.

We have no webcast questions at this time either.

Okay. Thanks, operator. Let's close the call.

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