Thank you, and welcome to everyone on the call. Here with me today is Richard Smyth, Steel & Tube's CFO. We'll start with a quick summary of our financial year 2023 to 30 June , and we'll then move into more detail on our results and strategic progress. We'll then finish with questions and answers. We saw a solid demand for steel continue in the H1 . However, as activity eased due to macroeconomic headwinds, volumes reduced about 12% year-on-year. The inflationary cost increases and tight labor market that developed over the last couple of years continued, with some easing in the H2 of the financial year as more foreign workers gained entry. Elevated steel pricing softened in the H2 of the financial year, although pricing remains above pre-COVID levels.
Pleasingly, supply chain constraints and international freight rates eased at the end of the H2 of the financial year. However, fuel compliance costs are on the rise, and we expect to see further increases in the financial year 2024. During the year, we saw consumer spending come under pressure, higher interest rates impacting on the housing market, and a reduction in business and residential investment. Commercial construction remains stable, and manufacturing has held up well, although it did fall in the H2 of the financial year. Infrastructure investments continues to strengthen after a long period of low investment. The market remains challenging, and we continue to control the things that we can control. We have a number of carefully considered responses underway, including a comprehensive NZD 5 million cost-out program, with benefits to be seen in this current 2024 financial year.
We've also tightly controlled our debtors and cash flow. We're a people business, and we've kept a continued focus on our culture and our employee value proposition to ensure that we attract and retain the very best talent. We also continue to invest in the right inventory and services as we shift towards higher-value products and solutions. This is really important for us. Despite the current conditions, demand for steel remains solid, and long-term macro trends are positive. The 2023 financial year demonstrated the resilience and strength of our business as we delivered solid results at the top of our guidance in a challenging environment. Revenue was the second-highest reported, following the super cycle of the 2022 financial year. Operating cash flows were a record at close to NZD 100 million.
We finished the year with very strong balance sheet, with a 28%, excuse me, a 28% reduction in inventory, which represents about a 35% reduction in total tons on-hand. Combined with tight data management, meant that we had no debt, no bank debt, and a positive cash balance of NZD 6.5 million. Our goal is simple: to make life easy for our customers needing steel solutions and to be their preferred supplier of choice. We have a very clear focus on two strategic pathways. Firstly, continuing to strengthen our core business and secondly, to grow by investing in high-value products, services, and sectors. I'll first talk about strengthening the core, which involves building on our business foundation that's now in place.
We're focusing in on creating a best-in-class customer experience, leveraging our breadth and scale to cross-sell a wider range of products and services wherever we can, and continue driving improvement in gross margin dollar per ton and delivering operational efficiencies. Some of the key activities that we delivered during the year include customer segmentation, to ensure that each of our customers is serviced in the most appropriate manner. Our pricing policies and analytics were rolled out, and we enhanced our digital offering, including our omnichannel platform and web shops. The NZD 5 million cost-out program I mentioned will deliver further synergies across the year. One of the bigger initiatives we started during the year was Project Strong, which is focused on maximizing the returns from our Auckland palletized operations.
The goal of Project Strong is to increase our palletized product capacity and improve our service offer and productivity. We are reconfiguring our West Auckland warehouse and investing in an upgraded trade shop on the site. Our palletized operations are also being consolidated in the Highbrook campus. We're investing in new racking to optimize our footprint, as well as new warehouse management technology and systems. This will effectively double our Auckland warehouse capacity. This allows us to store a larger range of high-value distribution products in one place, delivering improved productivity, utilization, and customer service. We'll invest about NZD 1.5 million in Project Strong, and in the 2024 financial year, there'll be one-time costs of about NZD 700,000. In terms of our growth and high-value products, services, and sectors, our overall goal here is to deliver gross margin dollar improvement.
In the last 2 years, we have invested in aluminium and plate processing. We have also acquired 2 new businesses, Arcer NZ and Kiwi Pipe & Fittings. These recent initiatives now account for about 10% of our distribution business's EBITDA. They have all been earnings accretive from day 1 and have forward growth potential. Before we already offered plate processing, our investment into new machinery allowed us to really step up our game here, with plate processing revenues up 76% year-on-year and gross margins up 75%. We're currently processing plate in Auckland, but we're also investing further in Christchurch to better service our South Island customers. There are a number of growth opportunities in the plate processing that we're actively pursuing in this space.
Our new high-value aluminium range was launched in March 2023, with an initial limited range of products focusing on supporting our existing customers. This has been very well received, and we are now expanding the products we put on offer. Product gross margin dollar per ton has exceeded our expectations, and aluminium is now one of our highest value product ranges. In terms of ongoing M&A, Kiwi Pipe & Fittings is a specialist business, which we acquired this time last year. Our revenue is predominantly generated through distribution of fire pipe valves, fittings, and associated products. Currently, the offer is based out of our Auckland and Waikato sites, and we're currently expanding this throughout our regions so that we can leverage our national footprint. Earnings per share were positive in the first year. Fasteners NZ was acquired in 2021.
That's a very good business. It is known for its high-quality products and continues to perform despite the slowdown in the residential construction area. New product range extensions are supporting growth in this business. We're mindful of the investment shareholders make in our company and do not believe in growth for growth's sake. Instead, we have a disciplined approach to invest in new opportunities to ensure that we deliver financial and strategic value. We look at best-fit acquisitions in categories that offer high margins and where Steel & Tube's share has been typically low. Over the last couple of years, we've assessed a total of 17 companies. This has resulted in 2 acquisitions being completed and 8 opportunities are currently under review. This demonstrates the rigor of our process and our willingness to only proceed if we are very confident that our criteria have been met.
Our long-term aim is to operate the business in a way that is financially rewarding for our shareholders and positive for our employees, our customers, and the planet. Customer satisfaction is at very high levels and reflects our focus on customer service and solutions. Our people satisfaction score is well above the industry average and demonstrates our commitment to providing a rewarding and safe working environment, with learning opportunities and career pathways for our people. We're also proud to have been able to pay the living wage in the 2023 financial year, and have continued multiple programs to develop our people and their wellbeing. Health and safety is a key priority across our business, and our safety metrics remain at record levels. We're also mindful of our greenhouse gas emitting during steel's production.
We're closely monitoring new technologies to decarbonize steel, but are also conscious that these are still very, in the very early stages. In the meantime, we're focusing on initiatives to control our operational emissions, optimize energy consumption, and minimize waste. For example, we're piloting EVs in our fleet. We're also, we've also transitioned all of our lights at our operating plants to LED lighting, and that's further reduced our power consumption by about 13% in doing so. We're also ensuring that we minimize rework and the associated waste with that. Pleasingly, our DIFOTIS measure, which is delivered in full on time and spec, rates very highly at about 97%. I'll now hand over to Richard Smyth to talk through the financials, providing an update on our str- before I provide an update on our strategic progress. Thank you.
Thanks, Mark. As Mark has said, revenue is our second highest ever, following the super cycle result in the previous year. We have also reported record operating cash flows. Despite the 12% decrease in volumes, revenue is only down 2% as sales price, prices lifted. Benefits are being realized from our focus on higher-value products, improved pricing disciplines, and leveraging data analytics and capabilities. The business has successfully repositioned our balance sheet, providing strength for potentially more challenging times and enabling continued investment and growth. Inventory was reduced significantly as supply chain issues eased. This freed up cash to fully repay debt. We ended the year with no bank debt. We have a substantial NZD 100 million bank facility in place to fund growth, and this was renewed in August of this year.
FY23 revenue of NZD 589 million was the second highest reported by the company, with sustained customer demand despite the recessionary environment. Sales momentum continued, elevated pricing from steel mills almost offset softer volumes. gross margin dollar per ton was ahead of prior year. However, there was some margin percentage reduction. Revenue per ton tends to move more quickly than cost of sales per ton, which is based on our moving average cost price. During 2023, margins contracted as the selling price didn't increase as fast as the increase in the inventory moving average price. However, in the three months May to July, margins have improved as the inventory moving average price has reduced or average selling prices have been stable. There was also some impact from it, on our margin as excess inventory was reduced.
Distribution delivered a strong performance despite market conditions, as it benefited from strong inventory management, pricing, and supply chain disciplines. Our distribution business is high volume and more susceptible to market and economic conditions. Momentum into the H1 of the year was strong and then eased off in the H2 as the weakening economy began to impact customer projects and demand. Compared to the extraordinary demand in the prior year, volumes were down 13% year-on-year. Distribution has significant operating leverage, and we expect margins to improve in the medium to longer term. Our infrastructure business focuses on products that are processed before sale, and includes reinforcing and rollforming. The last two years have seen a significant improvement in the performance of the reinforcing business as we move away from solely being a commodity provider by offering innovative, higher value solutions and services, such as prefabrication.
Reinforcing revenue primarily comes from large infrastructure and commercial developments, such as the Christchurch Stadium. Weather events and economic conditions have delayed some projects and created uncertainty around timings. Demand remains strong. In rollforming, commercial roofing demand remains strong, with a big uplift in inquiries and tenders, whilst residential roofing slowed over the year. Coil and sheet sales and fabrication work has moved back towards more normal levels, following the super cycle effect on the manufacturing sector in the prior year, and we are seeing good growth in customer numbers. Gross margin dollar per ton improved by 37% as we focus on contract revenue management, cost control, and move further towards more supply-only reinforcing projects. Normalized OPEX increased in FY23 as a result of inflation and increased depreciation and amortization.
OPEX, as a percentage of sales, has remained reasonably constant over the last 3 years, between 15% and 16%. We have an ongoing focus on streamlining costs and are making good progress on the NZD 5 million cost out program that Mark mentioned earlier. Normalized earnings before interest and tax was NZD 32.1 million, compared to NZD 47.9 million in FY22. This was mostly attributable to the volume decline, with pricing benefits offset by inflationary pressures. As you are aware, we increased inventory levels in FY22 in response to supply chain constraints, a congestion, and to ensure our customers had access to priority products. This saw inventory increase to over NZD 190 million. Our focus this year has been on reducing those inventory levels, with a 35% reduction in tons, taking inventory to NZD 139 million at year-end.
Our finished product prices still remain at elevated levels. Inventory cover has been reduced by 1.1 months, as we carefully manage our inventory levels and free up cash. This chart provides a bridge from our FY22 net debt of NZD 43 million to our FY23 net cash position of NZD 6.5 million. We have already talked about our record cash inflows, reflecting steady revenues and the positive benefits of decreased inventory. The major cash outflows were the acquisition of Kiwi Pipe & Fittings, dividends, tax payments, and lease payments. We are carefully managing our CapEx in the current environment. In FY23, 63% of the spend was allocated to maintenance and growth projects, and 37% to digital. We will continue this focus in FY24. Earnings per share were NZD 0.103, with net tangible assets per share at NZD 1.17.
A final dividend of NZD 0.04 per share, 100% imputed, has been declared, taking the full year dividends to NZD 0.08 per share. This represents 75% of our adjusted net PAT, and is a gross yield of 10% when including the benefit of imputation credits. We believe this compares well to our peers. Return on Funds Employed was 10% for the year, down on last year, reflecting the reduced impact for the group. Thank you for your time, and I will now pass you back to Mark.
Thanks, Richard. Turning to macro opportunities, steel is one of the world's most essential and sustainable building products. It's permanent, it's forever reusable, and the most recyclable substance on the planet. For many construction applications, steel is the only choice, and it offers a number of advantages in the future, where climate change and extreme weather events are likely to become more common. We have proven expertise and capability to deliver for climate resilient projects such as port rebuilds, wind and solar energy developments, coastal protection, and resilient buildings. We are also well positioned to support New Zealand's infrastructure rebuild, including essential water services and the cyclone and flood rebuilds over the next few years. There are plenty of green shoots ahead of us. The diversity of our customer base is a significant advantage, in that we are not overly exposed to any one particular sector.
Commercial construction is expected to improve. There is still a pipeline of residential from consents that were granted previously, and while manufacturing is expected to remain subdued in the short to medium term, solid demand for steel continues. Infrastructure has a strong long-term outlook, with the New Zealand Government allocating NZD 6 billion to build back better, following the recent weather events, and a further NZD 71 billion infrastructure spend over the next five years. In addition, there are many opportunities to add value to our business, including some that will present themselves due to the softer economic environment. In other words, as some players struggle, we will be in a position of strength to grow. The value of our dual strategy pathway is now becoming clear, and this remains the framework for our actions as we continue to strengthen our core and build out in our high-value products....
services, and sectors. Current economic conditions are having a roll-on effect on many sectors, which, with projects delayed or demand reduced. As you all know, in a recessionary environment, the most important things that we can do are ensure that we have a very strong balance sheet, and that's maintained, and we tightly manage our costs. We are cautiously optimistic that the calendar year 2023 represents the bottom of the cycle, and although we don't expect a fast recovery, we anticipate that there will be improvement from early calendar 2024. That's the H2 of our 2024 financial year. We have proven our ability to deliver solid results in challenging conditions and would expect any uplift in activity and demand to be reflected in our results. Thank you for listening. I'll now hand over to the operator to open up for questions.
Thank you. If you wish to ask a question via the phone, you will need to press the star key followed by the number one on your telephone keypad. If you wish to ask a question via the webcast, please type it into the Ask a Question box and hit Submit. Your first question comes from Rohan Koreman-Smit, from Forsyth Barr. Please go ahead.
Morning, guys, congratulations on another year, done and dusted. Just, hopefully some quick and easy ones for me. The first one, just H2 run rates. If we're to look at volumes, can you just talk to how that's playing out so far this financial year? Yeah, are you still at those sort of run rates? It kind of seems to be the implication, given the kind of H1 , H2 , split in your guidance comments or outlook comments.
Hi, Rohan. Thanks. Guessing your question is the beginning of 2024, as opposed to the end of 2023. We've seen a bit of a continuation of what we, we saw during the H2 . We are starting to see some shoots, some little bit of positivity, but, I, I am cautious 'cause we are only one month and three weeks into, into 2024. Yeah.
Thanks. If you look at that improvement in gross dollar margins that came through, particularly in the infrastructure division, I'm guessing that's, you know, a new sustainable position going forward? You know, that's kind of where you expect things to be, or is there, is there more to come?
You know, that's, that's right, Rohan. I mean, we are, we are expecting that to be kept up. We've, we've had quite a focused effort in our, particularly our reinforcing business over the last two or three years. Those efforts have resulted in quite a structural change in that business, where we've been focused a lot more on our supply-only projects and also focusing where our capability can be leveraged. We're working very closely with many, you know, horizontal builders and, and other players in the market. I mentioned, you know, wind farms and seismic strengthening work. We've become, you know, a trusted partner in many of those areas of the infrastructure markets.
So that's led to a, you know, a longer-term platform and also a, a, a more resilient, I guess, risk profile for that business, where we've been able to, you know, shift to more a supply only rather than being involved in on-site construction project contract risks. We've also been steadily working on our, you know, coil and purlins and roofing businesses that have resulted in some improvements in, in those, in both those businesses.
Thanks. Last one, you know, that acquisition slides are quite interesting. The top row, two things on it. The top row, you talk about complete. I'm guessing we should add complete to the non-actives to kind of get an idea of, you know, how many you looked at and how many were rejected. Then if we look at the actives, of those six that are at the non, non-binding offer stage, can you just give us an idea of, you know, what you're looking at, the size, you know, just, just to get a feel of, you know, what, what's to come in the year ahead?
Yeah, I mean, look, we, we-- I mean, being realistic, once, once you start a process here, from the early initial proposal, you, you realistically probably only ever gonna complete 1 in 10. If you're, if you're, you know, disciplined about the process that you follow through. You can see there in that non-binding, non-binding offer, phase, that, you know, the, the non-active ones, there were 6 offers that we'd, we'd progressed and, and that went down to 4. Then as you get into due diligence, 3 of them dropped away, and there's only 1 there that went through to a binding offer that didn't complete.
You know, the current phase with, with the 6 and another couple that we've got in the, in the, in the non-binding sort of due diligence phase, you know, I'm expecting possibly one of those will play out. Rohan, we've got a pretty tight process here, through a lot of experience that we are, are very thorough in terms of working through. As we've gone into due diligence even, we've found that, you know, businesses just haven't been, you know, what we're expecting or that, you know, there's a significant price gap that we just can't close out.
Excellent.
Did that answer your question?
Yeah. Sorry. I'll let someone else have a go. Thanks.
Thank you. There are no further phone questions at this time. I'll now hand back to the speakers to address your webcast questions.
The first question is from Paul Merriman: When were your borrowings repaid?
We repay, we track this, well, every day and end of month end. In probably May was our first month end, we ended with no bank debt. We have, and most of our cash flows, cash inflows occur towards the end of the month, and we have cash outflows evenly throughout the month. We are drawing down a little bit of our facility mid-month, but we have continued to repay that fully for the last three or four months.
The next question is from Lewin at Jarden: 'Could you provide any timeframe expectations for the M&A opportunities that you're actively considering?' Second question: 'Given distribution gross margin per ton decreased, do you still target to grow this in FY24?'
Sure. Hi, Lewin. Mark speaking. Look, as I mentioned to Rohan there, the, the timing is, is on, on M&A stuff is, is not really that definitive. We don't want to be, you know, pressed on, on rushing any deals through. At the end of the day, it's all about what's going to contribute greatest value for our shareholders. I guess it's probably worth just flagging, our preference is always to grow organically, and we really, you know, have moved into M&A in areas like Kiwi Pipe, where we didn't have the expertise in fire pipe, water reticulation.
We knew it was going to take us too long to grow, and we've, you know, found just the right business to be able to buy that gave us that capability as well as a business that we could stretch through the country, which, you know, works well. Same with New Zealand Fasteners. I guess, as we get into M&A, we're just very conscious that we need to be careful to ensure that they're accretive from the get-go. As I mentioned to Rohan's question, we've got a disciplined process there.
We've got a couple of people, you know, working on this, that, as we go through the process, you know, we obviously kiss a few frogs and, you know, and that's probably a good, a good thing because, you know, we do, we do get quite good at teasing out where the value really is. In some cases, like aluminium, we looked at, several aluminium businesses that have been out there, and, and we decided that we would grow organically into that space, and it's served our purposes very well rather than taking on the risk of M&A. We're just very conscious that, you know, that, that we need to tread carefully in this area, and I anticipate completing 1 to 2 deals, per annum, in, in, in this space.
The second part of your question around distribution gross margin, dollars per ton. Yeah, look, we're very focused on, on that metric. That is, kind of what we live by on a, on a daily, weekly basis, and we expect to be able to hold up that distribution gross margin dollar per ton as we go forward. It's, it's really important as we brought in some higher value growth components to the business, that the key driver there is to, you know, just focus in, as I mentioned, on that gross margin dollar per ton. We expect to be able to keep, you know, those numbers north of, of kind of where we, where we landed at the end of the FY23 financial year.
Our next question is from Chris. 'Is there any buyback plan under capital management and shareholder value?'
Capital management is something that is continuously reviewed by our board, management and the board, and we have considered this recently. At this stage, there's no plan to do a buyback program.
Another question from Lewin: 'Is there still some low-margin products and inventory that remain to be optimized in FY24 that can further improve margins or is this largely complete?'
Oh, look, I, I, I... As a general comment, largely complete, Lewin, but we are constantly... we, we use what we call PMROI, which is Product Margin, Return On Inventory, as a key metric for how each category is performing. We have really detailed category plans that are either developed or being developed for each of our specific product categories. Within that, there are always some products within the lower PMROI that we're focused on, either, you know, sort of jettisoning out of our, out of our supply chain. You know, just as, as through the life cycle of products, there are new products coming in that we're bringing in.
The, you know, part of the deal with that, of course, is those that are reaching the end of their life cycle, they've got to be exited, you know, through sale, you know, or worst case, having to discount them and, and, and move them more quickly. That did have a impact on percentage margins in the financial year as we carefully managed our inventory positions, because we had had, you know, longer positions to support congested supply chains and support our customers in New Zealand. As we, you know, moved a lot of that inventory, and we've been at this since, probably almost this time last year, because we could see the, you know, the trajectory coming forward.
We very quickly moved to move as much inventory as we could out of the system to shore up our balance sheet, to enable us to be able to bring in current products at current pricing. That's worked very well for us because we've now got, you know, an inventory turn on tons of about 3.5 times, which is, you know, I'd kind of stretch to probably say it's one of the best inventory turns across the business that we've ever had. We're now in a very sort of tight position in terms of inventory, but there are always some products within some categories that need to be moved on.
Thank you. We've got one more online question before we move back to the phone questions. The share price seems to like the results. Any comment?
I totally agree with that.
Yeah. Yeah, now heading back to the operator, please, for phone questions.
Thank you. Your next question comes from Cameron Parker from Craigs Investment Partners. Please go ahead.
Morning, guys. Just wondering if you could comment on just what you're seeing in terms of competitive pricing, destocking and so forth, and volumes, and what sort of visibility you get off that, as, as you go through this down cycle?
Yeah. Hi, hi, Cam. It's a good question. I think the industry had seen, you know, quite a lot of inventory in the system. As I mentioned earlier, you know, from probably this time last year, maybe at Christmas, it was becoming fairly obvious that the kind of super cycle was coming to an end, and I think most participants in the industry had started destocking. You know, the early products you see, you know, particularly for the residential markets, where there has been quite a slowdown. So products like reinforced mesh, for example, you know, you saw those volumes coming down quite quickly. So, as I mentioned, we were pretty quick to offload inventories in those areas. I think most inventory participants have.
Probably, we may have been earlier than others. I think at about this point, you know, there'll be a few there still carrying, you know, significant inventories. I think in general, we've seen the market kind of rationally move through those larger positions and, you know, seems to be behaving, you know, reasonably, rationally across most categories. Obviously, we're a, you know, we're a large player in the, you know, across the Steel & Tube market to New Zealand. We've got a, you know, a leadership role there as well. We certainly are very careful to leverage our pricing power where we have it. I think we're sort of seeing other participants being fairly are rational around that at the moment as well.
Great. Thanks, mate. Just, just the last one I'll read. In terms of the infrastructure projects, obviously, you know, you've highlighted quite a pipeline ahead of us. What are you seeing in terms of speed to market on that, on those types of projects? If, you know, in terms of timings, interested on your thoughts around that.
Yeah, yeah, look, it's, it's a good question, and we had seen, well, it's, it's pretty well documented, fairly slow progress on things like shovel, you know, shovel-ready projects. You know, I think over the last, particularly the last quarter, we've seen quite a pickup in just, just that tendering activity. You know, we're still, you know, tendering at least 250 jobs a month. You know, even on the quieter months, you get down to sort of 230, which is kind of line ball with prior period in terms of tender work. The interesting thing is the mix of those tender.
I'm talking mainly for the sort of infrastructure businesses, Cam, so reinforcing steel, things like that, where we're doing bridges, dams, you know, quite large, you know, sort of, either motorway or wind farm-type projects and port projects. What we're seeing is the sort of mix of the volume has increased quite significantly. You know, that, that tons involved in those projects is up quite a lot, even though there's sort of, you know, less projects but, but, quite big volumes. That's a good indicator that infrastructure projects are starting to, are starting to kick in.
Great. Okay. Thanks. Thanks, guys.
Thank you. You have a follow-up question from Rohan Koreman-Smit. Please go ahead.
Thanks. Sorry, just on this NZD 5 million cost out, can you just give us an idea of, you know, how much you're expecting to realize in FY24? Then I'm guessing you get the full run rate benefits from FY25 onwards.
Rowan, you're quite quiet, so I, I think you're asking how much we expect to realize in FY24. If that is the case, we're expecting to realize the NZD 5 million in FY24. So the cost out program is a whole variety of a lot of little things. As you would expect, there isn't, you know, one thing sitting there that we can turn off and save NZD 5 million. We're working through that. There's significant plans in place, and we made a lot of progress against them, so I would expect the whole NZD 5 million. Now, remembering, we are still facing a high inflation rate, so that's fighting us, and we're consistently sort of doing battle with that as well.
Thanks.
I guess the, the thing here, is really, Rowan, is about staying flat nominal, is what we're trying to achieve. You know, to be able to offset that, that inflation and, and keep our keep our OPEX at same level as last year, is the key. As you get that carry in, that Richard's saying, in terms of inflation, if we can offset that inflation, so flat real, and then, then we've achieved, achieved what we're setting out to do.
Thanks. I guess the follow-up is: Does that mean that, you know, if it's phased in over 2024, that, you know, the annualized run rate in 2025 is larger, or is it literally just NZD 5 million and then-?
Yeah. Yeah.
something else?
Correct. You're correct.
Okay, thank you.