Vulcan Steel Limited (VSL) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I would like to welcome everyone to the Vulcan Steel First Half Results for 2024 Financial Year Conference Call. [Operator Instructions] I will now hand the call over to Mr. Rhys Jones, Chief Executive Officer and Managing Director. You may begin your conference.

Thank you, and welcome, everybody, to Vulcan's first half year '24 results. If I start on the performance highlights page, I'd like to put the context that there's been a challenging first half year with higher interest rates and high inflation. It's certainly been an environment where demand for products has been lower. Despite this, we have achieved an adjusted EBITDA of $82 million and an adjusted NPAT of $26 million. Other elements worth noting are that we had generated operating cash flow of $105 million and a particular highlight, 12,646 clients transacted us during the period which is 4% higher than the prior period equivalent. Turning the page, you'll see the description of Vulcan's business. We've got three components or verticals in Steel and three in Metals. It's important to note that in Metals, we now include aluminum and aluminum is a significant contributor in Metals and Steel revenue-wise of similar size now. I'd like to highlight how we're widely spread in geography, and we've got a diversity of market segmentation which means that we've been able to weather the storm well in this difficult environment due to the fact that many of our geographies or markets are actually surviving well in this environment. Others are struggling. But overall, there's a benefit to this diversification. The following page, we talk about our value creation and growth strategy. We focus on value-accretive growth and have demonstrated over time, disciplined expansion into new steel and metals verticals through greenfield, brownfield and acquisition over time. And we will continue to explore opportunities to increase the breadth, scale and scalability of our business. We're satisfied with the performance of our aluminum business, which is tracking to plan. The following page shows our network. We have 69 sales branches across Australasia. It also highlights the fact that we can expand that platform further over time, and we have 1,283 employees. With regard to our business implementation on the following slide, we are continuing to focus on lifting our service levels, roll out more hybrid sites, drive more efficiencies, including in our logistics area. We continue to optimize working capital in line with market outlook and our growth goals. The key elements there are in terms of hybrid sites, Bathurst, Darwin, and Auckland have been launched, and we're on track to launch another four hybrid sites near the financial year-end. And we've also got additional hybrid site opportunities that will roll out at a later date. I'd now like to go on to the operating backdrop during the first half of '24. As you appreciate, conditions were very challenging. We have a rapidly increasing interest rates. We also had high inflation and the trading conditions certainly weakened during the first half year, and we believe hit a bottom around December-January period. We saw the uncertainty around the general election in New Zealand had a negative effect, which slowed up activity and postponed a number of projects, which certainly impacted volumes in the first half year. We also had a strong demand for products in the Metals segment in Australia during the period, basically linked to mining. But we also saw quite a weak activity level in steel in Australia and particularly in Victoria. I'd now like to hand over to Kar Yue, who's going to go through the global sector indicators and the general economic outlook within our company for Australia and New Zealand.

Thank you, Rhys. Good morning to everyone on the call, and welcome to the results conference call for Vulcan's first half earnings. Firstly, I'd like to cover off on Slide 12, the global demand for metal products that are relevant to Vulcan. Demand growth for steel was approximately 2.3% year-on-year basis in calendar year 2023. We are expecting based on projections across various market commentators for growth in calendar year 2024 to be relatively modest at approximately 2%. [ Production ] growth has been running at very similar rates in the second half of calendar year 2023. The demand growth for aluminum in 2024 is projected to be slightly stronger at about 3% compared with production lift of about 2.7% in the second half of calendar year 2023. Turning to the next slide, what this all mean for pricing for steel, stainless and aluminum. The generic benchmark for prices for this category has been relatively range bound and are expected to continue to do so in the coming months. We are continuing to watch the ocean freight prices closely for Asia and oceanic route given the spike in generally global pricing for freight across various lanes. And turning to the next slide in terms of business conditions and outlook, investment intentions and business outlook appears to be improving in New Zealand. In Australia, that has been generally neutral in terms of expectation based on lead activity indicators, but it does vary. We cautioned that it does vary significantly from segment to segment and state to state. I'd like now to turn it back to Rhys to cover our overall group financials.

As you'll note in the overall group financial performance sheet that overall revenue declined 12% year-on-year, and that was due to a combination of volume reduction of 6% and the revenue per tonne reducing by 5%. The positive news was that we did increase our active trading accounts, as I referenced earlier, and that we achieved despite the reduced EBITDA cash flow of $105 million. I'd like to look at the next slide now in the bottom right-hand chart shows our return on capital employed. And this is a chart or a metric we use to measure our business very closely. The yellow bars indicate the pre-IFRS return on capital employed and the blue bars represent the poster for us. What you'll see there in the first half year for the 12-month period up to December, that the pre-IFRS return on capital employed was 27% and the post-IFRS return on capital employed was 18%. We believe these are credible results in an environment where, particularly in New Zealand, we were facing an environment which was very close to the GFC level of demand, a very poor outlook. So we are happy with those results. I now turn to the next slide and hand over to Kar Yue. He's going to go through the key drivers of the EBITDA change.

Thank you, Rhys. So turning to Slide 18. As Rhys referenced the 30% year-on-year decline in EBITDA translates to approximately $35 million reduction in our EBITDA in the first half of the current financial year compared with previous corresponding period. Approximately $15 million is due to lower volume and another $15 million due to lower gross profit dollar per tonne. The residual impact of $5 million relates to higher OpEx because of one additional month of aluminum operation that we had in the first half of financial year 2024 compared with previous corresponding period. Now turning now to the segmentals around steel on the next slide. Steel EBITDA decline of 39% was principally driven by the operating leverage impact of volume falling by about 11%. Steel margin in terms of gross profit dollar per tonne declining by 4% year-on-year basis. Overall, operating costs for this segment was lower by $1 million on a year-on-year as well. And turning over now to the Metals segment. As you will see, the decline in Metals' EBITDA was more moderate at about 19%. If we were to adjust the impact for the one additional month of aluminum revenue and OpEx and the additional corporate cost allocation, underlying EBITDA would have been down only approximately 5% compared to the headline number of 19%. On Slide 21, where we aggregate the OpEx to demonstrate our overall performance and discipline around cost efficiency, the like-for-like OpEx is down approximately $1 million in the first half of financial year '24 compared with previous corresponding period. We think this is a very strong effort from our team to contain costs in the face of high inflation environment. Turning over to Slide 22 on cash flow. As Rhys mentioned, $105 million operating cash flow was driven by very disciplined inventory management as well as the focus on various aspects of our operational disciplines as well. Just to reiterate our guidance for CapEx, that currently remains unchanged between a range of $25 million to $30 million for financial year 2024. Let me turn over now to our balance sheet setting and dividend. We are well positioned to fund our growth opportunities going forward. We continue to optimize between distribution of earnings to our shareholders and investing for growth. On this basis, we've declared a $0.12 per share dividend for the first half. This is to be fully franked and imputed. With that, I'd like to turn the session back to Rhys.

Thank you, Kar Yue. In terms of the outlook, what we want to reiterate is that we believe that the November, December, January period looks like it's the bottom. We believe that inflation is abating. Also that aluminum improvement of run rate continues, and we also have the rollout of hybrids. So our sensors and coupled with the information we have in terms of forecast, customer on activity, that activity should improve and volume should improve, particularly in New Zealand quarter 2, quarter 3 this calendar year. In Australia, we believe metals will continue on as per the stable results we've been getting. And steel, despite the challenges in Victoria, we see some improvement there, but Victoria will still be at a very challenging environment. The only caveat I place on the New Zealand outlook of improvement is the fact that we are seeing some discussion around increased interest rates to a further level. This could have a dampening effect on the recovery. All in all, we're confident that we should see some improvement in demand in the near term. I'd like now to just thank everybody, but I'd highlight just one last comment that the second half year for our company does have a 7 lease working days in the first half year, and that needs to be considered when calculating the second half year estimated results. Any questions, please?

[Operator Instructions] Our first question comes from the line of Will Wilson of UBS.

Just wondering how you're managing stainless, given the recent moves in the nickel price? And secondly, just a bit of color on what you're seeing in end markets, but particularly around Australia and the risk there in the second half of this year.

Okay. With the nickel price, what's interesting about that is the nickel price went up significantly, but the actual buy price of stainless didn't trend with it well. So that was a departure. So what's actually happened is the nickel price has come down, and it's now back in line with the relativity of stainless. So the stainless price hasn't really changed or gone down much at all so that will be the first comment. Secondly, in terms of the color in Australia, what we're seeing is quite -- Victoria has definitely been in a weak period, the economy over here is more analogous to what New Zealand has been through. Other parts of Australia, we're seeing quite robust like all the mining segments, your Mackays, Perths, all the mining areas, Newcastles are all quite robust. It's the metro centers that have been a bit weaker, and it's principally driven by the interest rates and the postponement of major projects and the dampening effect of people postponing investment in new business. Our sense is that Sydney will pick up and improve. Our sense is that so -- and in the coming quarters, we'll also see there in Brisbane. We're less certain about Victoria simply because it's coming off a weak base, but we also observe that there's a huge influx of immigrants into Victoria and Sydney, so the genuine demand for more accommodation in multi-rise residential buildings, which is a big driver of steel in that area. So that's probably just a postponed element that will come back at some point in the near term. We're just not confident enough to predict that immediately.

Our next question comes from the line of Liam Schofield of Morgans Financial.

Just two quick questions. Firstly, if we just back out that first 4-month guidance that you gave in the latter part of last year, you're down to 18%. Can you just sort of split that out between price and volume? Was that decline for the last two months, really just fewer working days quite a period? Or was there something more to it? Probably first of that question.

I'll just put a general comment and then I'll let Kar Yue comment. What we saw in the first half year across the board a slow decline in volume across New Zealand, in particular, and we saw a lot of price competition, particularly in Australia for steel where the demand dropped off, particularly in Sydney and Melbourne near the end of the year. You need to appreciate that December is a very short month, and a lot of people finished up early. So it's a lot shorter working day month that we're very sensitive to that. So that's part of it. But I'd also get Kar Yue to make any additional comments.

Sure. Thanks, Rhys. So if you think about the month of December, we tend to think of month of December, effectively being around 15 trading days compared to other typical months, it could be anywhere between 19 to 22 trading days. So it does vary. And as Rhys mentioned, we are a distribution business and therefore, with a relatively fixed cost base in any given month from month-to-month, you end up with operating leverage impacting on our business, depending on how long the trading months are.

Just one other quick question, if I may. The GP dollars per tonne, down $122. What I'm just trying to understand is the relationship, I suppose, between those GP dollars per tonne and the hot-rolled coil price. And I suppose there's an interplay there in the cost of your inventory as that moves around. Can you just sort of perhaps talk to me about that relationship?

Okay. I might have a crack and then let Kar Yue comment. I think it's quite a hard -- that gross profit per tonne total is a blended number between stainless, aluminum and all the different types of steel. So that is quite a leap just related to hot-rolled coil because I think there's some things that just don't relate. That will be my first observation. Second observation is we believe we've managed the gross profit per tonne well in their environment, considering how tough it is. I'd like to hand over to Kar Yue for any other additional comments you want to make on it Kar Yue.

So specific to -- I concur with Rhys' comment around the blend, it is very hard to just use our hot-rolled coil price as a reference point to compare and contrast GP dollar per tonne movement. But what I will say is that over the last 3 years, the price movement in steel using hot-rolled coil as a generic benchmark price for steel has been so significant, the gyrations up and down, with our gross profit dollars, which historically, I would say, has been generally stable. Gross profit dollar per tonne for steel category has been generally quite stable. Got pushed up quite meaningfully and at the same time, got pushed down quite meaningfully when we saw a significant downdraft in steel prices globally.

Our next question comes from the line of Rohan Koreman-Smit from Forsyth Barr.

First question just on New Zealand. I was wondering if you can give some extra color on I guess your optimism around improving other than just, I guess, business sentiment. You talked to November through to January being the bottom, but I was just wondering if there are some internal indicators you can kind of give us some color on that suggest volumes are picking up or about?

Rohan, look, the comment would be that if I go segment by segment, it will give you some sort of sense. If I sort of looked at, say, the forestry segment, which is a big user of steel bit, that's still pretty negative with the China not investing in buying our logs which then affects our end clients. So that segment is -- the signs of improvement there are low. Then I look further a few or just general engineering, where people are saying, right, I've got a project I'm going to build something or invest in my business. There are a number of clients of ours saying that they're seeing an uptick in activity, postpone projects being repriced, people are saying, look, it looks like it's going to go forward. So a whole of the stuff that's been postponed, people are starting to talk about that's going to get refreshed. Now that's generally across the board. Then if I look at general commercial construction, residential construction, Rohan, you'd know better than me that still looks quite weak, and there's a lack of confidence in particularly around interest rates, but we've got an immigration issue where we've got a housing and postponement of projects. So I would anticipate something to come forward, but I can't honestly say there's a huge glut of projects coming forward. All we're getting is some inquiries and people are saying these things might be activated, so it's still quite weak. Then I head off to say, stainless steel and the water infrastructure area. As you probably appreciate, Three Waters meant that councils didn't actually invest much at all thinking that their assets are going to be taken off them. So a number of those projects have been reactivated since they're going to retain ownership. And obviously, there's a lot of planning and projects around Three Waters that are starting to come forward. So I'm quite optimistic that there'll be a lot of demand in that area so that's a positive. And then in aluminum, the advantage we have there is we've improved our service availability and our service level. So we're seeing quite good signs of improvement there as well. And that's probably more self-help. So Rohan, I'm not saying it's going to jump out of the water or anything like that. But what I am saying is that our clients are genuinely saying they're seeing some signs of improvement, green shoots and more inquiry and activity. But I think it's going to be a slow upward tick. Does that help you?

Just on Ullrich, I noticed there wasn't a ton of comments around how that business is trading, and now it's part of the Metals business, there's a lot less visibility. But if I split the gross profit dollar per tonne between the two divisions, there's a bit of a larger fall in Steel than there was in Metals, and that actually looks like it's holding up relatively well, pretty flat, sequentially half-on-half? But going forward, or is that improvement that we're seeing in Metals gross profit dollars per tonne, is that the synergies that you're getting through from pricing, stock availability, is that all kind of where we should start to see it and then should it improve upward?

Yes. Look, the quick comment I'd make, Rohan, the blended gross profit per tonne across all the metals is quite a challenging statistic to look at. But I would comment that aluminum is tracking well. And remember, New Zealand, we indicated last time that New Zealand was well progressing and well progressed in terms of its IT systems around and we're getting the systems and process out and our business model underway, basic availability, service levels, et cetera. In Australia, we really only got the IT system in at Christmas. So it's a much harder process. So we're in very early phase in Australia and a lot more to do there. So I'm probably 1 foot in either camp there. One is going well and contributing, one's got some way to go before it really contributes. But overall, we're very satisfied with our results in aluminum and the team of people we've got there, and we're optimistic that we'll see further improvement over time. The comment about hybrids, early days, but definitely some advantages, cross-selling is going on and as we roll out the hybrids, particularly in Australia over the next 18 months, there'll be a significant advantage particularly the stainless division which will be able to have more access to available markets through the greater number of branches that we'll be operating out of.

Just to clarify for you, Rohan. So we cut over IT platform to the Vulcan IT platform in New Zealand and December of 2022 and then we subsequently cut over the IT platform for our Australian aluminum operation in May of 2023. So that 6-month lag also meant that in terms of visibility and having dashboard to be available to our site leaders and our team on the run meant that we're probably a bit quicker off the mark on the back of more time spent with familiarizing themselves with the IT platform.

And then final one, just inventory and net debt. There's been for the last kind of 6 months, 12 months reduction with overstocking and there's also been Ullrich, which was overstocked. Is there more to come? And kind of when do you expect that to settle?

I'll just have a quick comment and then I'll let Kar Yue go. Look, the reality is that we're here to adjust the stocking level to the reduced demand. We also have, as you say, well into the overstock, particularly in some segments and in aluminum. The bulk of that activity has been completed. But appreciate pleased that -- and we're really in quite a good state in terms of product availability. So we're very satisfied with that. We're also stocking for the future. There is an uptick we believe will be coming, and we're also stocking for the hybrids. So there should be some fine-tuning, but nothing significant. Do you want to comment, Kar Yue?

Yes. I think in terms of stock position, we always continue to look at the overall market position and market outlook and our own internal team forecast and work back from there to optimize our stock levels overall as well as the priority stock level.

[Operator Instructions] We have our next question from Luan Nguyen from Jarden.

So in terms of your interaction with your customers, are you still saying that they're still holding on to a lot of stock? Because I think last -- in the last update, you were saying that destocking has largely finished in the market. But now this time you're saying it's still ongoing?

Am I getting the question correctly? Are you saying our customers were destocking. Is that right?

Yes.

Yes. No. So most -- vast majority of customers were other than one or two that speculate and board a lot of product, vast majority clients do not carry super stock right now that is being flushed out of the system. And that probably happened in the last 3 to 4 months. There would be very rare cases where a couple of people bought a huge amount of stock, and [ I speak on that manner ], but that's pretty rare. So the balance is to return to the industry generally. And I believe that's one of the problems we had in Australia steel, where there was a bit of a downturn that happened quite rapidly and people adjusted their stock levels and aggressively sold at lower prices to manage their inventory down. So that's why we're anticipating some sort of improvement there. It may not be in volume but it may be in margin, but it's still uncertain. That's why we're saying we've been cautious in our outlook.

The next question is on synergy. So just a follow-up on Rohan's question. Because before you quoted, and you quoted that you're going to achieve $10 million plus synergy from the Ullrich acquisition. Are you still tracking that number? And is it tracking close to that $10 million?

Yes. We're well on track to that. And we -- basically, I think we indicated when we said that $10 million, we're talking hard synergies. We're talking costs, site rationalizations, et cetera. And Kar Yue maybe want to comment on this, but employee number reductions, et cetera, we're well on track to that number. Do you want to comment?

Sure thing. So when we quoted the $10 million synergy, obviously, it was a combination of revenue as well as cost. But as far as cost in the context of synergies, that's before factoring in inflation, right? So this comment around synergies of $10 million if you assume that to be cost and [ cost component ], which, of course, is not. We've already achieved those outcomes based on the overall integration of the business across various platforms. Pre-inflation obviously, adjusted.

Our next question comes from the line of Grant Swanepoel from Jarden.

Just a few questions. So can I take it that your forward look aren't showing a turnaround at this stage and that your commentary that something might turn around April to September, somewhere along that period is more from your anecdotal evidence?

Grant, it's a tricky one to answer that question. The quick -- well, the facts of the matter are that we've actually seen a bit of an uptick in January versus December, and we've seen a solid start to February. As you probably appreciate, December and January are [ variable ] month to estimate simply because they're short working day months with holidays and the like. And on the other side, we've seen a number of projects being kicked off and going forward. So it's a combination, I would argue. But look, we're very sensitive to the fact that in New Zealand, in particular, if you had an increased interest rate, you could have a dampening effect on that improvement. Look, the other comment I would make, particularly -- sorry, I'll just give you one more comment on the New Zealand context, when I talked about water infrastructure and the like, that is genuinely happening, and large contracts have been awarded. So that's definitely happening.

That sounds a lot more bullish than your release. Just one other question. Is there something specific about Vulcan that stops it from giving EBITDA guidance at this stage in the year, assuming most other companies do at the interim results?

Yes. Look, we wish we could be, I guess, more clear in our outlook statement, but the reality is there's still a lot of uncertainty and depending on segment by segment, steel in Australia is challenging. New Zealand is some of the economics forecast commentators does come to pass around further rate rises then the risk is that you may not actually get an improvement in terms of our tonnes per day for the current second half of the current financial year compared with the first half. That's the risk. And that's why, I guess, we've been quite transparent in what our tonnes per day, how our tonnes per day have been tracking and the trajectory, we're hopeful that there could be recovery, but there's just still a lot of uncertainty around it.

Kar Yue, I hear that, but that's no different from any other company in your sector at this stage, and they can do that. Could I ask that you could give a range in future if your Board to approve something like that.

There appears to be no further questions at this time. Rhys Jones as Chief Executive Officer and Managing Director, I'll turn the call back over to you.

Thank you, everybody, for attending the call. It's privileged to present our results, and thank you for your attendance.

Thank you, ladies and gentlemen. This does conclude today's conference call. We thank you for participating, and you may now disconnect.