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

Thank you for standing by, and welcome to the Steel & Tube Holdings Limited FY '26 Results Call. [Operator Instructions] I would now like to hand the conference over to 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 discuss our financial year 2026 results and performance and have time for questions at the end. New Zealand has now experienced 3 recessionary years in a row with the downturn continuing longer than we had anticipated. While it is good to see the improvements this year, it has been uneven with continued market weakness, delaying the return to profitability. As a cyclical business, we're highly leveraged to the economy. We started to see some positive recovery in demand across the first 3 quarters of the year and achieved positive normalized earnings in March and breakeven in May before the market disruption as a result of the Middle East conflict and preelection caution. The emerging recovery gave us confidence initiatives that we put in place to strengthen our operating leverage of working. We saw margins start to expand, earnings improve and converted modest revenue growth to stronger financial outcomes. Normalized EBIT was improved 23.7% on last year, and second half earnings were improved 40% on the first half. This reinforces to us the changes that we've made in the past few years are working and will deliver more meaningful uplift and financial performance as the market demand returns. Over the past 5 years, we've acquired a number of high-performing businesses. The acquisition of Perry Metal Protection last year was a bottom cycle purchase with a favorable deal structure. However, as so our borrowings increase ahead of the market recovery, which put pressure on our balance sheet. To manage this, we've paused our M&A activity, we've put CapEx restrictions in place and dividends are on hold. Importantly, we renewed our banking arrangements with the ANZ for a further year until September 27, providing additional financial stability for the company. We've also undertaken a comprehensive portfolio review to ensure our capital is allocated towards the highest value opportunities. Initial outcomes of this review have been to exit our reinforcing and wire business. and our plate processing operations. These are currently in the consultation phase. We're also closing 7 smaller sites and 2 larger sites. While still below desired levels, this year's results are a solid improvement on last year. Volumes are up 15.9%, revenue increased 13.9% alongside improved earnings, although we're not yet at the level needed to generate profit. This year's results include a $51.9 million impairment to reflect the write-down of the carrying value of our business units as well as other nontrading adjustments of $3.8 million. including these, the statutory loss was $61.2 million after tax. It's clearly disappointed to report another loss, and our focus is firmly on restoring the strength of our balance sheet and returning the business to sustainable profitability. Looking at the backdrop in a bit more detail, as I said, the start of the financial year 2026 was encouraging. Inquiry levels lifted, forward orders improved and customer sentiment showed some recovery. First half revenue and tonnes per day both improved year-on-year, along with a lift in product margin. The improving trend continued to about April this year, supporting increased revenues and volumes. However, the renewed geopolitical uncertainty, cost inflation, pre-election uncertainty and the persistent caution amongst our customers affected what appeared to be the early stages of recovery. Despite growth momentum slowing in the fourth quarter, our second half revenue and tonnes per day were still well ahead of the same time last year and ahead of the first half performance, although margins were impacted by product mix and competitive pressure and cost inflation. Normalized earnings also improved in line with the market recovery with a strong improvement year-on-year and continuing growth momentum from the first half to the second half of the financial year, with a return to positive normalized earnings in March and breakeven in May. We saw quite a marked difference in demand across sectors and regions. Manufacturing and export was strong while construction and infrastructure remains subdued, with the New Zealand currently in the worst construction sector recession and decades. Activity in the South Island was stronger than in other regions. The recovery manufacturing sector was mixed month-on-month, but the overall trend bodes well for this year. Residential consents also recently improved but we are cautious about how these will translate into building activities. Likewise, for commercial construction that's also been very slow, which impacts on demand for reinforcing and mesh in particular. While a number of infrastructure projects have been commenced, public sector activity was still fairly subdued and well below what New Zealand needs. With an election [indiscernible], we don't expect there to be much of a tick up in the infrastructure space in the short term. Export markets remained strong, driven mainly by dairy and agricultural industries, and this benefits us with demand across our product range. Looking at key priorities as we progress over the past year. The recent macro uncertainty highlights the importance of continuing to evolve our business model to be less dependent on construction cycles. We're consciously expanding our sector diversity, growing into areas where we can create competitive advantage and galvanizing is a very good example of this. The cost discipline is a continued focus for us with the third phase of our cost-out program in the financial year 2026, optimizing our supply chain, rationalizing our SKUs has also benefited our cost line. Lower cost and increased efficiency as well as the focus on higher-value products and services will continue to support margin expansion as volumes recover. We're conscious that over -- that our customers are also operating in a very challenging environment with cost pressures that are significant for them. Our approach is to maintain a disciplined pricing approach ensuring we deliver fair value while maintaining the quality, service and expertise our customers rely on us for. We're also looking ahead at how our business models can further adapt AI and other technology to deliver smarter, more profitable ways of servicing our customers. Rebuilding our balance sheet capacity continues to be a key priority for the Board and management. We have a disciplined approach to capital allocation as demonstrated by the recent portfolio review and decision to exit businesses that do not meet our investment criteria. The acquisition of the Paris business was a strong endorsement of our strategy to grow into high-value products and services. It's now being part of our group for just over a year and has continued to outperform with revenue and earnings trending above both the business case and prior year performance and the cross-sell and revenue synergies that we had expected are coming through as planned. Our other acquisitions are over recent years such as kiwi Pipe & Fittings and [indiscernible] trucks and in-house fleet and organic growth of our aluminum business have all delivered and are providing value for our group. In the past year, we've further expanded our range of aluminum products in response to customer demand, extended the reach of Kiwi Pipe & Fittings into the South Island, and we've grown our in-house fleet and launched a number of new products in different categories. Disappointingly, however, as our plate processing business has been an outlier and returns have been below the investment criteria. Over the past several years, we have taken decisive action to reshape the business, strengthen our operating model and position Steel & Tube for long-term success. And this slide shows the significant work that's being done. We are now more focused, leaner and a more efficient company. In quarter 4 this year, we commenced a comprehensive portfolio review to ensure that capital is directed to the highest value opportunities. We assist our current portfolio against clear criteria and prioritize product services and markets where we can create the greatest value. We also considered new opportunities that offer strong returns, sustainable competitive advantage and long-term growth. The review has confirmed the areas where our recent investments are delivering value and where we see further growth potential while also identify businesses that no longer meet our criteria. As such, we'll be exiting [indiscernible] and wire business and plate operations, and these are currently going through the consultation process with [indiscernible] team. Even with the market-leading specialist support and outstanding talent and excellence service, the competitive dynamics in the reinforcing and wire market and prolonged low activity across the construction sector has continued to see returns below are the value needed for a sustainable profitable operation. Plate processing has been one of the outlines of our strategic growth initiatives outlined me, of our strategic growth initiatives. And despite the early success that we saw, the returns from our investment have been below expectations due to the extensive competitive pressure. Our priority is to maximize the value of both of these businesses through the sale of the assets with proceeds used to pay down debt. We've received an offer from Euro Corporation for the reinforcing [indiscernible] assets, and we've agreed terms, any sale to euro would be conditional on obtaining the necessary approvals and also satisfactory engagement with the Commerce Commission. Under their offer terms, euro would assume customer contracts and acquire the inventory and assets. Euro would also consider effective staff for future employment opportunities. Separately, we are also conducting a marketing process for the reinforcing wire and plate processing assets over the next few months to ensure that the full market value of those assets is realized. The sale of the assets is expected to realize a value of about $11 million to $12 million for the assets and inventory, excluding cost for the reinforcing and wire business. We're also working closely with the effect of team members through this process and exploring ways to support. As we mentioned at the half year, we have also reviewed our lease portfolio. Over the next 12 months, we'll exit 7 smaller sites, lowering our operating costs, improving returns on capital through more efficient use of assets. Our regional hubs won't be affected and will continue to provide our customers with a one-stop shop. As part of the portfolio review, we're also exploring the exit of 2 further larger sites. I'll now hand over to Richard to talk through the financial year 2026 results in more detail.

Thanks, Mark, and welcome, everyone. A relentless focus on financial discipline over the past few years underpins the year-on-year improvement in our FY '26 trading results. Volumes and revenue increased. Earnings growth was ahead of revenue and a meaningful uplift on prior years, and we benefited from the long-term cost out program with lower structural costs supporting increasing operating leverage. The statutory results this year include impairment losses and other adjustments mentioned by Mark earlier, these are noncash with the impairments reflecting a write-down in the carrying value of the Steel & Tube's business units as a result of accounting assessments made at this point in time each year. While impairments reduced the carrying value of assets today, they may be partially reversed as performance improves and recoverable values increase. As you can see in the graph, the emerging market recovery through the first 3 quarters drove upward momentum in demand and revenue. First half revenue and tonnes per day both improved year-on-year, along with the lift in product margin. While growth continued in the second half, the pace slowed in Q4 due to macro headwinds. Despite this, second half revenue and tonnes per day was still ahead of the same time last year [indiscernible] first half performance, although margins were down slightly due to product mix and cost inflation. Average selling price reflects increasing price pressures in a tighter market, offset by the higher value galvanizing service. While we seek to be competitive and meet the market, we are not necessarily the cheapest, nor do we want to be, so maintaining market share is a good reflection of our value in a price-sensitive market. Margins lifted year-on-year as a result of the governing acquisition offsetting base business margin decline. Efficiency initiatives in freight and warehousing are also delivering the interfere. While we have had achieved some margin to retain volumes, we are still being disciplined about pricing and adding value through our service offer. We've built a more efficient business so that when demand returns, we're well positioned to compare into stronger margins and improved earnings. The increase in operating expenses year-on-year is directly attributable to inflation and the addition [indiscernible] business. Excluding these, OpEx was almost flat year-on-year. A further $6 million program is underway, and we expect to deliver a $3 million benefit to operating expenses from FY '27. The cost program has been a big focus for the past 3 years. We've looked to make our business more efficient, more competitive and more profitable. We're keeping close control of the costs with the further measures for FY '27, including constrained salary increases no management incentive program, reductions in inventory and a freeze on mergers and acquisitions and discretionary expenses. The site consolidation over the coming months is expected to deliver an annualized cash saving of approximately $2 million in FY '28. Normalized EBITDA improved year-on-year from [ $2.1 ] million, $9.9 million, an increase of 376%. Looking at the waterfall on this page, you can see the positive impact of growth investments largely driven by [indiscernible] group freight initiative. Volumes in our base business have increased. However, this was offset by a decline in the base business margin. The impact of inflation is less than recent periods has been largely offset by our cost-saving initiatives. Rebuilding our balance sheet remains a priority following the acquisition of [indiscernible] last year. The portfolio review has identified opportunities to release capital and exit loss-making operations. In June, we extended our banking facility with ANZ to September 2027 and agreed revised bank covenants which provides us with financial stability and flexibility. The Board weekly reviews the company's capital structure and is comfortable that the group's financing position remains sound. Net operating cash was $12.7 million for the period, with borrowings reflecting the [indiscernible] acquisition as well as support for ongoing operations. We are managing our cash flow very carefully with good cash collections in a softened operating environment and a disciplined approach to inventory and supply chain. Working capital continues to be prioritized with close cash control mechanisms in place. We have a prudent approach to CapEx in the current environment and priority spend is guided by our strategic framework. CapEx was $7 million in FY '26 with approximately 2/3 of that being maintenance spend. We continue to carefully manage our inventory to make best use of working capital with year-end inventory of $111 million. We have continued to invest in the products and locations where customer demand is strongest while reducing slow-moving and obsolete inventory, sometimes at reduced margins. This has seen SKUs decrease from 23,000 to around 13,000. The implementation of our net stock forecasting platform has enabled better purchasing decisions and more disciplined stock management. Our deep supplier relationships have allowed us to progressively turn towards a more just-in-time inventory model with shorter lead times. This provides greater operational flexibility supports working capital efficiency enables us and enables us to respond more quickly to changing customer demand. I'm happy to take questions at the end of the presentation. But in the meantime, I'll hand you back to Mark. Thank you.

This year demonstrated our operating leverage and improved our ability to increase earnings and margin as volumes improve. Although the timing and pace of the economic recovery remain uncertain, there are encouraging signs that activity across several sectors is gradually improving. We're cautiously optimistic, but do expect that any recovery will be gradual and uneven rather than a sharp rebound. Exporter manufacturing activities should remain comparatively resilient and infrastructure work continues, although the timing of major projects and funding constraints means workloads are likely to be remain uneven. Residential construction should improve from a low base. However, the recovery is expected to be gradual with headwinds continuing to impact the translation from increased consents to spaces on the ground. Commercial construction is likely to lag with businesses remaining cautious about committing to new projects and longer time lines. We are well placed for the opportunities ahead of us. as we showed this year will benefit the operating leverage as volumes start to recover. We have a clear pathway to improving performance and returns. Our strategy remains unchanged, to strengthen the core and grow high-value products and services. Our immediate priorities are to continue to improve capital allocation and strengthen the balance sheet through the exit of loss-making businesses, retaining our focus on cost and margin growth, capturing value from our initiatives and acquisitions, as well as building on our customer alliances and partnerships to increase market share and revenue. In summary, Steel & Tube enters the financial year 2027 well prepared for market recovery, but we still have some work to do as one of New Zealand's leading steel solutions providers. We have the scale, customer relationships and technical expertise in operating leverage to benefit as the demand does improve. Our focus remains on disciplined execution, growing returns and creating long-term value for our shareholders. Thank you. We're now happy to take questions, and I'll hand over to the operator to manage this.

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

Just first one from me is on [indiscernible]. You've talked about the fact that acquisition is tracking about 30% ahead of business case. But from memory, it was historically spitting out about $35 million of revenue and $8 million of EBIT. And I guess just looking at your annual report on Page 46, it looks like EBIT was $32 million and -- I'm sorry, revenue was $32 million, EBIT was about $5 million. So can you just talk us through how we should sort of triangulate those comments and what's going on there?

So the main difference between those historic numbers that we talked about was our corporate revs a sizable amount of Mark and I and various other people's cost that we allocate that didn't exist in the [indiscernible]. So these numbers that you're referring to impact that. You are right, revenue is about $33.5 million, which is -- we actually think that's slightly up on the prior period like-for-like basis and earnings are up about just over $1 million on prior year per the presentation there.

Right. But it's sort of fair to say that you're not expecting much additional growth from that business going forward?

I mean it's been incredibly resilient given the general volume environment. It's increased, as Richard noted, about $1 million of revenue. We've seen a lot of cross synergy benefits between Steel & Tube that are actually continuing to grow. So perhaps way to describe it as about 25% of [ Perry's ] customer base. We weren't servicing, we were servicing about 75% of it. So we've been progressively building for steel and the volumes from Perry's customers and some and vice versa customers that we were having galvanizing with various competitors. We've been switching those across to Perrys. So there's been some synergies I guess, growth both ways. It's maintained -- it's a strong earnings that we've been able to continue to build on from previous ownership. So we're quite happy with the performance.

Okay. Just on the portfolio and business reset, I think you mentioned about $11 million in potential proceeds from asset sales and the reinforcing and business and then also the exit of 9 or so sites. Can you just talk us through the timing of those potential asset sales and also what EBIT benefit you expect to flow through the business and as you exit those leases and close down the loss-making businesses?

Yes. Look, the number that we quoted here, the 11 to 12 is both [indiscernible] inventory release. We're expecting to wind the -- we'll start with the reinforcing and wire business. We started a consultation on that today, and we are winding that down over a 2- to 3-month period as we fulfill customer contract obligations. There's 3 or 4 contracts that are more enduring longer term, and we're working through solutioning around those. We have an agreement -- an early agreement with or [ MBO ] with the Euro team that are interested in buying those asset sets, of course, subject to Commerce Commission approval, and that process will also likely take a few months to work through. So -- there's -- by Christmas, we should have realized quite a lot of that value. We haven't disclosed specifically around the earnings expected from those transactions on the reinforcing and why at this point, I'll let Richard comment on that further on plate processing. We're also winding down that business, announcing that to employees again this morning, and that's expected to yield some further cash as we unwind that business over the next month [indiscernible] and regarding the site consolidations, they've been in train, as we mentioned at the half year, and they're progressively working their way through and will be completed by the end of this financial year, and they're expected to realize some value, which I'll let Richard comment on as well.

Kieran, just to expand on Mark's comments. So for each of Rio and plate a chunk of that proceeds comes from the disposal or usage of inventory and non-replacement -- so that will start -- assuming we are going through consultation with our staff, assuming that proceeds, the inventory reductions will occur reasonably quickly over the next coming months. And then the proceeds from the actual sale of the assets and residual inventory will be subject to negotiations. As Mark said, we are hopeful that in the calendar year, we'll have everything in the delivered. The cash might follow slightly after that. With regards to the site consolidation. So Mark mentioned [indiscernible] lots of sites. One was the 7 million -- sorry, the 7 sites, which will give us net cash of $2 million when it's fully executed. That will be the end of 2027 was starting '28. There's a significant amount of costs associated with exiting the sites. So we expect a small cash benefit in '27, that will primarily occur towards the end of the year because we have the costs that we incur in the beginning. And then the other 2 large sites, we haven't provided any guidance on those because we're strong in discussions on those.

That's very helpful. I guess that's a good segue into the next question, which is just around your net debt and the $18 million unwind in working capital through the period, sort of factoring in the comments you've just made, is it fair to say we're going to see inventory reduce further over the year ahead? Or do you think kind of as you build that inventory into a cyclical recovery. It will stay sort of flat or perhaps even increase a bit from here?

Yes. Look, it's actually relatively flat. I think Kieran it is probably the right answer is times and now it's going on there, obviously, with the [indiscernible] there's a reduction. But then also as we see volume growth as the market does start to improve, we'll see some increase. We do have -- you can see over the years, there's been a lot of work going into that working capital management, and we've achieved, I think, really good results where we've seen a 16% or almost 16% increase in volume but we've been able to reduce our inventory levels from prior period. So we've been able to increase the efficiency of that inventory through a SKU reduction and a bunch of other tech and initiatives that we've put in place to enable tighter management of our inventory turns. And so we've been quite pleased the progress in that space as well as the financial receivables, payables, net balance. We've been able to improve as well.

Can I just expand the site consolidation allow us to be more efficient in holding safety stock as well. So we don't entail space stock from each site. So we have a reduction from that as well.

And then maybe I'll just squeeze in one last one. I guess more broadly on the macro backdrop, appreciate it's pretty challenging to give any sort of guidance at this stage of the year. But can you just give us any sort of steer on what your expected volumes are for the year ahead? Or how you expect earnings may be skewed between the first half and the second half or anything around pricing and margin expectations?

Well, I think you can see in the numbers there in the presentation and some of the graphics as well here, Kieren, that we saw the first 3 quarters of the year, some nice steady trading performance improvements in terms of just tonnes per day the capture of margin. We've been able to even net of periods, we've been able to grow our product margins. Product margins are coming back up at a reasonable pace. We've had the disruption of the Middle East conflict and that has obviously -- it took a few months to impact, but I think what we saw is some customers pulling back and putting the breaks on some projects that have been deferred. I think most of those projects are still there, and we'll move forward that impact that commercial construction in our space, which is a key part of our business. You can see in the mix that we now have over 50% of our business associated with manufacturing in the rural economy. And so that's where we've been able to sort of drive that performance, and we're continuing to drive into sectors, I guess, a nonconstruction cycle to be dependent, and that's meant that our mix has improved as well. We're not giving forward sort of forecasts on earnings. But I think you can see in the trajectory that we were on up until the Iran conflict, we were making some fairly good progress in having most months getting around that kind of breakeven mark to improving above the line in March that we saw a reasonably good sort of trajectory that we are on. So it gives you an indication of, I think, the potential more second half weighted, I think the calendar year is when we should start seeing some improvement coming through in terms of macro volumes. But this first half of the calendar -- excuse me, the financial year, we're expecting it to be sort of still fairly variable. Hope that helps.

Your next question comes from Rohan Koreman-Smit from [indiscernible].

First one, congratulations on the volume growth, 13%, but revenue only up 6%. If I look at Page 15 of the preso the lines between revenue and volumes get closer together over the year. This suggests that margins are shrinking. Is that how we should read that?

Rohan, what chart you want to -- yes. Yes, okay. I think that's more just the conflict, I think, and the impact that that's had over the sort of most recent period. But I think that just to correct you as well there on the revenue growth, I think it was more like 13.9% year-on-year. whereas volume is about 15.9%. So there hasn't been that much compression. And you can see the product margin graph as well just shows that general improvement. And that's obviously including periods even if you net out periods, as I mentioned earlier, there's about a $5 million improvement in core product margins. So that gives you an idea of that there has been an improvement flowing through there. And we've continued to see our own mix as we've deliberately shifted our mix to the sectors I mentioned before to Kieran's questions.

Just also going back to the question on Perry, obviously, there's an overhead that's gone in there. If you go to the graph on Page 18 and look at the growth investments period, you said earned $8 million, maybe $9 million of EBIT. I'm sure there's some lease costs in there. So EBITDA should be higher again. That's well above the $6 million of growth investments. There's obviously some overhead sitting in that number. If you were to take those overheads out because that stuff you've acquired and put them in the base business, bars to the right. At the moment, it looks like base business is fairly stable, but I think all that's happened here is there's been an allocation of overheads to these growth investments. If you were to reverse those allocations, what does the base business look like on a margin? And our OpEx and other cost inflation basis?

If you just -- if we -- on a like-for-like basis, look at [indiscernible] just purely at an EBIT level, it's improved about 1.1 million year-on-year. So we've got tight lock on that, Rohan, when you just look at it on a like-for-like basis. So -- it hasn't just been a case of shifting overhead into that business. Yes, of course, it's carrying part of the group over here because it is part of our network now. But if you normalize for that, that business has continued to grow and improve. And we -- it's been incredibly resilient and a great acquisition for us that was bought at the bottom of the cycle at a good multiple. So deal structure that's been very successful for us. Obviously, we've taken on $30 million of net debt with that acquisition, which has flowed into the balance sheet, obviously, that we're managing at the moment, but the fundamentals of that business have been fantastic.

I'm sorry, I'm not questioning that. I'm just saying that the way you're presenting it suggests the base business is more stable than it really is, given the allocation of overheads to these acquisitions.

Yes, there is an allocation.

Yes. Okay. Then on net debt, can you give us an idea of what net theaters today, payables up $20 million year-on-year is the main reason net debt didn't go up as much as expected. Inventory came down in the second half as well, $6 million, payables up $8 million. there would have been a sizable lift in net debt if those 2 things didn't happen. And I understand the SKU rationalization on inventory, but you can't rationalize SKUs to 0 and new suppliers eventually need to be paid. When do those tailwinds kind of stop?

Yes. Can I answer in a second. I think just going back to your earlier question, Rohan, on the base business. I think that the observation I'd make here is the metals businesses, so the stainlesses and aluminums and other mechanical services type businesses that we have all been performing well and continue to improve. The steel commodity business is the challenge that I think any industry participant would say at the moment, there's been short on vertical construction, incredibly competitive in a very difficult space in New Zealand right now on the core steel commodity heavy business. And that has flowed into our results, of course. But what we've been able to do is diversify optimize as much as we can, the way that we're running that steel core business through all of the initiatives I've talked to you on the call, and really refocus on those metals. We're continuing to try and find ways to optimize our cost structure and site reductions we've talked about exiting out of the [indiscernible] and wire business. It's been a real drag and as part of that core commodity steel space and even plate processing will put into the same bucket that is just an unattractive part of the business model at the moment. So hopefully, that gives a bit more as an answer to your earlier question. I think on the net debt, that $48 million that we closed at we're in a very similar position to that today, Richard. Today is not a good day. You actually have to look at month end, the gross we do go up during the month. So we're not too dissimilar to that at the end of July, and we won't be too dissimilar to that at the end of August.

Okay. And just because you touched on the wire closure in the plate processing closure. Can you help us quantify those. What percentage of the FY '26 sales were those? Obviously, you described them as loss making. So it helps at the bottom line, but what comes out at the top line.

Yes. We haven't disclosed those numbers, Rohan to date, but it's the...