Vulcan Steel Limited (VSL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Vulcan Steel Limited VSL FY '26 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Gavin Street, Managing Director and Chief Executive Officer. Please go ahead.

Thank you, everyone, for joining the call for the FY 2026 results Vulcan. On the call today, we have our CFO, Kar Yeo; Adrian Casey, our COO; and [indiscernible]; and myself, Gavin Street. If we turn to the agenda on Page 8, in this call this morning, we will cover the overview of results, financial operations, priorities and outlook and [indiscernible] time for Q&A. If we go to the overview on page 6, to cover a few points on the performance of our business for the FY '26, revenue was $1.159 billion, up 22% on the prior year and included 9 months of sales from our acquisition of [indiscernible] industries. Underlying business grew with momentum building into the second half. Adjusted EBITDA was up 16% to $130 million and included the impact of [indiscernible] from October 1. Underlying business was steady compared to prior year. Gross margin was down 1% to 33.2%, reflecting the impact of mix and addition of roofing industries and gross profit per ton was relatively [indiscernible]. The Vulcan Board has approved interim dividend of $0.045 per share, taking the full year dividend to $0.07 up 16%. If we turn to Page 7, the key strategic and operational highlights. The final payment for roofing industries in January 2026. The integration of the business has gone very well. We are very pleased with the performance of the business as a strong culture and alignment to the Vulcan values. Improving underlying volume with year-on-year growth, and we also saw increased momentum into the second half of the year. The team has continued to focus on our delivery in full on time, our [indiscernible] metrics ensuring we have the right stock, the right location at the right time. We are continuing to execute on our hybrid locations with a new location added in Queensland in the second half of FY '26. Costs have continued to be closely monitored. Underlying costs have been impacted by inflation and investment in the hybrid sites and increasing capacity to support growth in customer service levels. We have continued to generate cash flow and manage working capital to support the investment in our business and our focus on reducing debt cover to 2.9x. If we turn to Page 8, we'll [indiscernible] volume and financial trends. The graph here provides the half year trends in revenue, tons per day and EBITDA, all growth includes the impact of [indiscernible] Industries. Improvement in revenue year-on-year line businesses increased momentum in the second half Total sales of tonnes per day increased year-on-year with underlying sales revenue up on the prior year. Adjusted EBITDA reflects the inclusion of [indiscernible] Industries and an improvement in the online performance of the business in the second half. If we go to Page 9, we'll go to the Vulcan business highlights. With the purchase of [indiscernible] Industries, we now operate in 7 verticals, 4 divisions under our Steel segment, which now includes industries and roll-forming and solving and 3 divisions under metals. New Zealand represented 40% of our sales and Australia 60%. Importantly, as we look at some of the growth opportunities into Australia, Queensland is the largest state representing 23% of total group sales. If we turn to Page 10, we have the map of our current footprint in [indiscernible] with the addition of recognition, we now have 82 sites across Australia, up from 81%, with the addition of our new site in [indiscernible]. We're supported by over 1,650 employees serving over 26,000 customers. On Page 11, we have our growth strategy. And under here, we have some very clear principles on we've had in place for a long time on how we can grow our business, and we'll continue to look at opportunities to improve and expand further. If we turn to Page 13 and the operating backdrop during FY '26. In Australia, we've seen increased interest rates, geopolitical risk and domestic fiscal policies have provided some uncertainty with moderating activity in some segments. Importantly, activity on our East Coast of Queensland, New South Wales and Victoria has continued to be positive year-on-year. FY '26 [indiscernible] increased with strong improvements in the second half. In New Zealand, interest rates supporting our improved technology activity from a low base. Some uncertainly remains with the impact of geopolitical activity, FY '26 [indiscernible] a day increased year-on-year with more pronounced impact in the second half of FY '26. From a global and economic perspective, there is still some uncertain geopolitical environment. Metal product prices have increased in FY '26 with more significant impact in the second half FY '26 driven by aluminium and nickel increases. And from a cost pressure perspective we are continued focus on costs and inflation impact across ANZ. I'll now hand it over to Kar Yeo, who will take you through to performance.

Thank you, David. Good morning to everyone on the call. I'd like to spend the next couple of minutes on Slide 14, our 22% year-on-year revenue growth in a year 2026 was a combination of 2 things. First, contribution from the addition of roll farming; second, improvement in our underlying business volume, of which a majority started to come through in the June part. Our 18% increase in volume is a combination of low format acquisition and significant improvement in our underlying business in the June half. Underlying business margin in 2026 was steady year-on-year. Overall gross margin, as Gavin mentioned, was down 1%. This was due to the percentage mix between our underlying business and [indiscernible]. Encouragingly, gross profit [indiscernible] was up slightly, the result of better underlying steel and metals dollar profitability, higher dollar per ton profit for [indiscernible] and some currency translation impact from our Australian operations. Our earnings before interest, tax, depreciation and amortization or EBITDA for the year increased 16% with profit contribution from [indiscernible] as well as underlying improvement in our business in the June -- in our underlying business and a [indiscernible] which helped offset the decline that we recorded in the first half of our from the year just completed. Operating cash flow increased 30% in the year. This reflected the benefits to operating cash flow in the previous year from significant reduction in working capital in financal year 2025. Our return on capital employed, while respectful relative to industry peers is well below our internal expectations. As shown on the next slide, virtually all of our EBITDA improvement in the year was the result of volume growth. including the addition of reforming and improvement in underlying steel higher volume contributed $61 million to profitability. Operating expenditure or OpEx increased $44 million during the year. This reflects the combination of the addition of [indiscernible] currency translation of Australian operations and investment in additional employees to support growth, not just during the financial 2026, but also for beyond. At the segment level on the next slide. Our steel results benefited from the refarming acquisition as well as improvement in underlying volumes, especially in the June half. a 19% gross profit do become in 2026 contributed to EBITDA improvement, as I mentioned earlier on, driven by the addition of [indiscernible] as well as improvement in underlying business in the June half. Turning to our Metals segment. The performance was mixed across Australia and New Zealand, EBITDA in aggregate for the segment fell 10% in the year. Volume in the Metal segment was broadly steady. Gross margin declined in the year but this show improvement in the June half on a year-on-year basis. On the next slide, as mentioned earlier, our operating expenditure increased $44 million in 2026 financial year. This reflected the addition of roll forming to increase underlying business volume translation impact -- translation impact of a stronger Australian dollar into New Zealand dollar as well as unit cost inflation. Excluding [indiscernible] and the current translation impact our underlying OpEx increased 9% year-on-year. The majority of those coming in, in people cost [indiscernible] 2026 and beyond. Now turning to our cash flow on the next slide. Our business generated $73 million in cash from operations, from which $26 million was recycled into capital expenditure and $31 million used for repayment of lease liabilities. The $94 million capital raised in the first half of our financial year was used substantially -- purchase of roofing industry as well as [ pay 4 ] related transaction costs, including further investment into roll-forming as well as spend carryover projects from 2026. We expect to spend between $30 million to $35 million in 2027 financial year for capital expenditures. Finally, on our 2026 financials on Slide 19, as Gavin mentioned earlier on, our final dividend has been set at $0.045 per share, 1% from a year ago, bringing total dividends for the year to $0.07 per share. [indiscernible] dividend will be fully included and franked. Net debt finished at $227 million which translated to 2.9x net debt to post-rent EBITD cover, an improvement from the 3.4x from a year ago. Turning the session back to you, Gavin.

Now I turn to Page 21. We'll go through the priorities. We'll continue to focus on driving our organic growth with the focus on customer service and margin improvements. Capital and opportunities Cities through the improvement across the business cycle and in growth segments. We continue to both integration and invest in roof industries to build on a solid base, develop our people and leverage investment in our pipes and exploration to further grow our business across ANZ. We now turn to Page 22. Whilst conditions are still challenging in both countries, we're beginning to see some signs of recovery. in New Zealand supportive ministration environment with some segments already showing signs of improved activity. Building construction activity stabilized versatility maybe take a little bit longer, but overall, the recovery momentum is anticipated to strengthen throughout 2027. In Australia, the high interest rates potentially to cap the rate of rate of economic growth [indiscernible] build was starting back Queensland, we have 23% of our business. Safeguard measures propagated steel cans being considered by the Australian FY '27, if introduced, likely to have a positive impact and we'll continue to focus on driving our high grid side initiative to drive some volume benefit. That's our presentation. I'll now open up for any Q&A.

[Operator Instructions] The first question today comes from Grant Swanepoel from Jarden.

That was an impressive 12-minute presentation and I love your [indiscernible]. Roofing EBITDA, look, this result is meaningless without you guys giving some color on that acquisition. Can you supply some volume statistics, EBITDA and anything else relating to roofing that's within this result?

Yes. So in our annual report, we actually stayed for the volume that we've got for the 9 months revenue. We've got the 5 months roofing industry, so the $135 million. for the 9 months. So I think, Grant, that should give you the ability to back solve some of your numbers.

Not really. [indiscernible] indicated that EBITDA was $5 million for roofing, and it was on track to about $14 million, $15 million for the year. That did come out about $14 million, $15 million on a post EBITDA basis.

Right. So Grant, obviously, there are some commercial sensitivity in regards to talking specifically about margin and EBITDA. But what I can help you bridge analytics that you're looking for is if you look at one of the acquisition not in our NorCity account, as Gavin mentioned, there's $135 million in revenue for the 9 months contribution obviously, we do that the net profit after tax relating to roofing that came from roofing industry for the 9 months was just a little bit over $8 million. That's net profit as tax basis. What I can share with you also is that there is no funding cost associated with that net profit after tax of just over $8 million. Now that's the 9 months, we did also say in the same node that we -- had we owned the whole business for the whole 12 months the net profit after tax would be closer to the $10 million. Now if I draw your attention back to when we first acquired it back in September 2025, the depreciation on a post-rent basis, depreciation and amortization on a [indiscernible] basis was June of between $6 million to $7 million. So if you can rework the net profit after tax back to PBT, given there's no funding cost, you can get a number that's pretty close to what you're looking for in terms of helping to bridge those numbers for you.

And then was there any inventory benefit in the final quarter? That was a really good half year-on-year. Is it anything that comes out in a wash in terms of extra costs that were passed on to customers in that half?

No, there wasn't really any major inventory benefit that comes through in the second half. You see the impact of volume has built over the quarter. There has been some impact to inflation for some of our metals distribution business, but there's no major impact of any or adjustments to that for the second half [indiscernible].

My final question, just on the fairly conservative dividend payout of 47%. Are we going to move back to mid that range as things continue to pick up of 40% to 80%.

Yes. So I think we've kept it at 47% for the year. We think that's the right level for the current year given where we're managing our debt profile, our earnings and returns. And as we've indicated to the market depends on where we are, will range between 40% and 80% throughout the next period of time. And I please as we continue to improve the opportunities to change that dividend.

The next question comes from Harry Saunders from E&P.

Firstly, just on strong second half momentum. I mean can you just talk through the anticipated seasonality benefit in the first half '27 versus the second half '26 alongside the extra 3 months of overall falling before we then look at sort of layering on any end market improvement? And sort of is it fair your outlook comments in aggregate by calling for end market pick up across both segments and geographies?

Sorry, Harry, it's breaking up a little bit. Can you just on them through again?

Yes, sure. So just on the strong second half momentum, can you talk through the anticipated seasonality benefits in the first half '27 versus second half '26 alongside the extra 3 months of roll forming before you look at end market improvement? And is it fair your outlook comments in aggregate a call for end market pickup in both segments and both geographies?

Yes. Look, I think from us, I think the key point we saw in FY '26 results [indiscernible] we are building into the second half. We'll have 5 extra days into first half over the second half. So that's the seasonal impact on the adjustment we will see. And I do think we're going to have the extra 3 months, obviously, from [indiscernible] coming to the numbers. So I think you're going to take that in account when you contemplate what FY '27 looks like. But for us, the momentum is building, and the incentives continue to work through that, improving in both metals and steel across both countries, and build that into the second half, as I mentioned, we have 5 extra days.

And then just even though this is noncash, could you just talk through the drivers behind the increased D&A that we saw in the guide just to help us for?

Sorry, just picked up your question, reference to cash. Is that right?

No, I'm just asking in reference to the increased depreciation and amortization in the result and the guidance even though this is noncash, could you just talk through the drivers for us or please?

Yes, sure. Thanks for that question. So Harry, so what's happened is, obviously, as rates continue to rise in some perform both in the [indiscernible]. We obviously have got an obligation to rework our capitalized lease obligation requirement. And that [indiscernible] led to some increases coming through from in terms of interest expense side. And obviously, terms and condition changes for our lead as we continue to roll forward with renewals with some of our analogs across the portfolio, that then requires us to reassess the right release asset value, which then find its way into depreciation and amortization for the rights of use components. So since the invention of looking at EBITDA post rate basis, in [indiscernible] is always help us measure it. But as providing that guidance range relating to financial '27 is to make line a little bit easier for people that don't necessarily have the same level of detail as a company as well.

And sorry, it was a bit of a bad line, but are you indicating that negotiations leading us high rent costs or just purely driving the right-of-use reassessment?

It's a combination of the 2 as when we roll forward with our rent, we obviously have to revisit whether the right-of-use assets [indiscernible].