I will now hand the presentation over to CEO of Steel & Tube, Mark Malpass. Please go ahead.
Thank you, and welcome to everyone on the call. Here with me today is Richard Smyth, Steel & Tube's CFO. Today, we'll cover our financial results and strategic progress over the last six months before looking at what we expect for the second half of the financial year. Turning to the half year review, the first half of the 2023 financial year has been another strong performance for Steel & Tube. We saw solid demand for steel continue despite easing in activity across most sectors, as the super cycle conditions that we had been seeing through the 2022 financial year started to normalize. Macroeconomic headwinds, including inflation, higher interest rates, a tight labor market, and ongoing impact of COVID, continued to provide plenty of challenges for us.
Our focus has really been to strengthen our balance sheet to support the business through the economic cycle, and we are now in a very good position as a result of those efforts. Moving to the financial results snapshot. The first six months of the year, the year ended 31 December 2022, we are pleased to deliver a second consecutive record half-year revenue result and continued strong earnings. The Steel & Tube board is also pleased to declare an interim dividend of NZD 0.04 per share, which will be fully imputed. This is equivalent to the first half 2022 financial year dividend of NZD 0.055 a share, which was not imputed. Turning to the current challenges and how to respond to them.
I won't go in through all of the detail on this chart, but what I will say is, with regards to pricing, supply chain, and labor constraints, as well as cost pressure and cash management, we've proven over the last few years that our agile approach to planning and use of data analytics allows us to adapt quickly to market conditions changing. We're actively managing the current market challenges to drive positive outcomes for our shareholders, our customers, and our team. Just to talk a little bit more about our steel pricing and procurement area and what's happening in that space. China makes up about half of the steel demand used globally. We saw their demand fall over the first 12 months as their economic growth slowed.
We do expect this to return to a more normal growth trajectory now that China has relaxed their COVID restrictions and are investing in economic stimulus. Steel prices peaked last year as mill space capacity constraints. These constraints have now receded, a combination of factors, including the Russia-Ukraine, anticipated China forward demand, and the lower Kiwi dollar, has seen international prices firming in New Zealand dollars through the December, January, and February to date period. What we've also seen is that there's some price volatility that we saw last year that has started to abate as the mill production catches up with demand and supply chain constraints ease. Demand for steel over the last couple of years has been extraordinarily high.
What we are seeing is that there is some the super cycle activity is starting to ease as a result of the macro conditions that I talked about earlier. For Steel & Tube, our sector diversification does provide us with a lot of resilience and ensures that we are not unduly reliant on any one or two sectors and that we can take advantage of the opportunities that arise. We're also seeing some value coming through from our strength and growth strategies. Our recent strategic investments were the expansion of plate processing, the acquisition of Kiwi Pipe & Fittings and Fasteners NZ. All are delivering to plan and are in line with our focus on high-value products, services, and sectors in existing and adjacent sectors.
We're also continuing to invest in digital. We are a leader in our industry in this space. Our digital capabilities, such as customer data insights, pricing, inventory management, and our webshop, provide significant value for our business and also our customers' businesses. Our long-term aim is as financially rewarding for our shareholders and positive for our people, our customers, and the planet. Our key metrics all continue to improve across customer satisfaction, employee safety, employee engagement. I'll now hand over to Richard Smyth to talk through the results in a bit more detail.
Thanks, Mark, and thank you everybody for joining us this morning. This chart shows a summary of our financial performance compared to the prior first half year. We are very pleased to present another great result. As Mark said, we delivered record revenue and strong earnings for the half year with a net profit after tax of NZD 11.8 million. OPEX, normalized OPEX has remained in line with inflation and net operating cash flows have improved significantly as we have managed down our inventory levels. We are using these cash flows to reduce net debt and fund our growth strategies, while also paying dividends in line with our policy of between 60% and 80% of adjusted net profit.
We have had a big focus on building the strength and resilience of our balance sheet and are in a strong position for current market conditions and the potential easing in sector activity, while also having the ability to invest in opportunities as they arise. Very pleasingly, inventory has reduced from June's NZD 192.5 million to NZD 175 million at half year. We expect inventory to continue to decline over the next six months, notwithstanding our continued strategic investments. Net debt is down to NZD 32.5 million at December 2022 from NZD 43 million at the end of FY 2022, and reduced further during January to close at NZD 25.9 million. We have substantial bank facilities in place to fund both working capital requirements and growth.
Revenue of NZD 115.3 million was a record first half result and above the five-year average for first halves. Sales have been driven by a focus on the customer, trading disciplines and positive market conditions. Volumes remain strong with sustained customer demand for a comprehensive range of products. The average sales price per ton has continued to increase. Gross margin was 21.7%, with gross margin dollar per ton increasing to NZD 850. This includes freight and direct and subcontractor labor. Excluding these costs, our product margin was 33%. We saw some margin reduction in the first half as we focused on reducing inventory balances and also due to higher input costs. We are continuing to monitor and manage all costs.
An important part of our strategy is to grow higher value, higher margin products and services, which will deliver increasing margins. Our policy is to sell at the right margin rather than simply chasing volumes. The distribution business, which is high volume, high turnover, is more sensitive to market conditions. It has delivered a solid performance, and we expect margins to improve over the longer term as we invest into higher value, high margin products and services such as plate processing. The infrastructure business is more project-based and delivered a strong result. We have done a lot of work to reduce and appropriately price risk and are focusing on projects where we can leverage our experience and wider offering. Normalized operational costs as a percentage of sales continue to decline, and we are managing these closely.
The increase in normalized OpEx in the first half is primarily due to wage and salary inflation pressures, property cost increases, as well as increased depreciation. It is very important to us that we support our people with appropriate pay. All of Steel & Tube employees are on the Living Wage at a minimum. Going forward, we expect base inflation, business inflationary pressures to be largely offset with operating efficiencies. Earnings were down slightly in the prior period, with a small reduction in volumes and cost pressures offsetting the gains from improved pricing practices. We increased our inventory levels in FY 2022 in response to supply chain issues and to ensure product availability for key customers. We are now unwinding some of this higher inventory position with a 25% reduction in volumes on hand during the first half of the year.
It is worth noting that industry lead times between order and delivery of inventory with international mills are around three to five months, so we will always see some lag between costs and sales pricing. As part of our inventory management discipline, we use data analytics to ensure we are investing in fast-moving products. This helps to manage margin squeeze as prices stabilize or ease. Pleasingly, our inventory turns have remained consistent with prior previous periods. We are very pleased with the cash being generated by the business, with strong cash inflows as in-inventory levels are reduced. This is enabling us to pay down debt and invest in growth opportunities. We continue to carefully manage funds against a backdrop of challenging macro conditions. Our primary investments are into digital projects and business improvement and growth, with expenditure supported by our increased cash flows.
Thank you for your time, and I'll now pass you back to Mark.
Thanks, Richard. Just turning to our forward strategy. Our goal is simple: to make life easy for our customers needing steel solutions and to be their preferred choice of supplier. We continue to build on initiatives under each of the five pathways, which again are focused on customers, our people, technology, service and operational efficiency. We're very focused on growth. In particular, our efforts are being concentrated on two key areas to drive gross margin improvements. The first being continuing to strengthen our core foundation, and secondly, growing higher-value products, services and sectors. As you can see on the slide, we have a number of key programs underway under each of these that will deliver increasing contributions as they come to fruition. Our most recent initiative has been the entry into the aluminum market from this month.
Our strategy here is targeted towards a select range of high demand, high value products, largely servicing existing customers. This product diversification provides us with scale, customer share of wallet growth, and is immediately accretive to earnings. Initial demand has been very pleasing and further shipments are underway. In the last 18 months, we've also expanded our plate processing offer, and we acquired Kiwi Pipe & Fittings and Fasteners NZ. These are all performing well and in line with our expectations. Plate processing is a high value category with strong demand providing attractive margins. It builds on our existing offer, and we already have a very solid pipeline of work in place. Kiwi Pipe & Fittings specializes in fire and water reticulation products and is performing well, as is Fasteners NZ, and we are introducing new products into that range. Moving to the market outlook.
Our conditions in the second half of the financial year. The macro trends seen in the first half of the 2023 financial year are expected to continue, including ongoing inflation, high interest rates, tight labor market, and the ongoing impacts from COVID. Following the prolonged super cycle, steel demand is now expected to moderate, and that easing of activity is already occurring in the residential construction area. Steel pricing has stabilized above the pre-COVID levels and in the first half of the financial year. We are now seeing some further firming of international prices from December through to the current period. In terms of the outlook, adverse weather conditions in January and February has impacted on customer projects in the North Island in particular and resulted in a number of delays.
We remain very focused on our customers and have a healthy pipeline of infrastructure and commercial projects in place. It's also important to remember that manufacturing is a big part of our portfolio and remains fairly steady for us. We have a strong balance sheet and cash flows to support our growth initiatives. Our focus remains on our gross margin dollar per ton initiatives and continuing to actively manage cost inflation. Our business growth will continue through both organic expansion and smaller programmatic M&A, and further strategic initiatives are expected to be reflected in the results from the 2024 financial year and onwards. Thank you for listening. I'll now hand back to the operator to manage questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll take our first question from the line of Grant Swanepoel with Jarden. Please go ahead.
Mark, good morning. Excuse my son of a French there. Just in terms of GP per ton of NZD 850, how do you see that playing out over the next year or so? Are you expecting to hold on to that sort of eye-watering number or, is that expected to dip off?
Grant, sorry, it's quite hard to hear you. Just, the first part of your question drifted. Could you please repeat that?
I'm just talking about your NZD 850 per ton, current run rate. Is that expected to continue at that sort of level? Do you think you'll be able to hold on to that? As we turn down the cycle, will that become much more competitive and trace to older numbers?
Obviously, you know, a key focus for is our gross margin per ton. You know, it's a big part of what our strategic initiatives are around. We've done a lot of work in the pricing space in terms of analytics and to support our initiatives and insights in that area. We're, you know, intending to hold those sort of numbers, you know, for the next half. That's our key focus.
Thanks. When you talk about your volumes being down 2.2%, can you give some more color on that? Are you giving up some contracts to hold on to your NZD 850 per ton? Is there some benefit from your recent acquisitions or bolt-ons? What is the underlying trend in the markets please?
Yeah. The question is primarily around volume. You know, as I mentioned, we are seeing some softening in that residential space, but it's a relatively small part of our overall customer mix, Grant. It's about 10% of our, of our mix. You know, a big part of our business is obviously commercial manufacturing, so the engineering space. We're seeing, you know, the manufacturing PMI did soften a little bit over that November, December period, but strengthened again in January. Still some way off the long-term average, but, you know, we are seeing some positive activity in that manufacturing, engineering space. We do expect overall some moderation off the super cycle that we've had for the last few years. I mean, it has been an unusually unprecedented period.
If you look over a five-year average, you know, our first half volumes at 80,000 tons were, you know, well up above that kind of five-year average. We will expect some moderation going forward. You know, that's just the reality of the macro impacts that are coming into the economy in terms of interest rates and other factors. You know, I'd expect that those will have some impact on activity. Yeah.
Thanks. Mark, I know you're a busy man, but are you still approving every purchase order or have you softened on that a little bit?
No. We're still Richard Smyth and I are still actively involved in procurement. It's, you know, obviously a key part of our business. We're a trading firm and we are, you know, actively involved. We're using a lot more analytics in that space as well, Grant, so we have some really good information around forward trajectories around, you know, demand. We closely monitor that in our cover bands. Although, you know, inbound freight has eased somewhat. You know, on average, about 60% of our products are purchased outside New Zealand. Those cover bands are really important and flow through to inventory. We watch that very closely and, you know, it's just part of our business model.
In terms of the weather impact, so it's been quite severe in North Island. Can you give a quick update on your North/South Island revenue mix? Also, do you expect to catch up whatever you've lost in terms of trading days through this weather cycle, through the final quarter of this year?
It's from 2022 trading days, there's 119 in the back half. In terms of, you know, deferral of the demand that's possibly been lost through the, you know, the flooding and the, you know, the recent storm events, I mean, we would expect that activity will just be deferred. You know, whether it flows back in the second half, you know, you've seen the reports of potentially NZD 1 billion worth of damage that's been caused. I mean, it does take some time for that to flow through the system. You know, there will be increased activity as a result of the weather damage that we've seen that may have some, you know, sort of offset to some of the things I mentioned earlier.
In terms of the North/South split, typically you're sort of somewhere between 60% and 70% in North Island as a, as a reasonable proxy.
Thanks so much. Those are our questions for today.
We'll take our next question. Please state your name and your company name before stating your question. One moment. Your line is open. Please state your name and your company name. Please check your mute button. We're not able to hear you.
Ryan Lee from Craigs Investment Partners.
Hi, Ryan.
You may ask your question.
Hi, Mark.
Yes. We can hear you loud and clear.
Hi. Yep. Yeah, just a follow-up question on Grant's one on gross margin, profit margin per ton. You've had NZD 850 in the first half of FY 2023, and obviously that's been impacted by the sales of some excess low margin inventory. Can you just talk to what's the normalized gross profit margin per ton if you exclude those abnormals?
Hi, Ryan, it's Richard here. I don't have that number to hand. The inventory that we've sold down while we've taken a bit of a margin haircut on that, the volumes aren't absolutely huge in comparison to our total volumes sold. If you were to strip those out, that NZD 850 would end, but I wouldn't expect it to increase. We are trying to maximize the margin we do get on the inventory we're selling down.
Thanks. Second one is on your volume. Actually, your volume in the half was down about 4% compared to last year. Last year it was impacted by COVID, and there was five weeks of disruption. Can you talk about the magnitude of the decline if you normalize the first half of FY 2022? What kind of level of decline are you seeing in the first half?
Could you repeat the question?
It's on your volume decline. Your volume decline was about 4% this half on the first half of last financial year.
Are you asking what the impact of COVID was on the comparatives? On our investor presentation on Page three, the decline is just under 3%. You'll recall when we had COVID, we had a period where we weren't operating, and then we were able to supply to essential customers. We had a very strong recovery for those couple of months after restrictions came off. With regards to the distribution business, we actually think it was fairly not terribly big impact. It was more of an impact on the infrastructure businesses last year.
Yeah, thanks. Last one is on inventory. Are you happy with the current level of inventory you're holding? What's the plan for the second half?
As Richard said, we moved through, you know, a fair bit of inventory over the last few months. Really we'd built inventory to support customer demand in the first half period, Ryan. We saw very, you know, in fact the last FY 2022, also very strong demand. So we built positions to support that. As we've, you know, as we've seen activity come off a little bit, we've moved some of that inventory out. It hasn't been a significant debit to margin, but there's been a little bit as we've moved through November, December.
We're at a volume, inventory cover volume at the moment that is about, we've got a few more thousand tons to move, but we're kind of fairly happy with our inventory positions at the moment. As you'd appreciate, it's a balance around, you know, your forward-cover expectations or demand expectations versus, you know, what your cover bands need to be to get product into the country. You know, shipping has certainly improved, but, you know, it's by no means back to what it was pre-COVID. Although rates are coming down, the actual reliability of shipping, congestion issues, you know, the recent weather issues, are all contributing to a supply chain that's, you know, by no means out of the woods yet. We're cognizant of that as well.
You know, there's still although we've come off the super cycle, there's still a very busy market out there, you know, very strong infrastructure, commercial markets, manufacturing, as I mentioned earlier. You know, for us, maintaining appropriate levels of cover is really important. So I know some industry participants are probably quite long on residential exposed products. As I mentioned, that's not really a major driver for us. You know, we're being more about making sure our tons cover bands are right. Now in dollar terms, obviously prices are still very elevated. We're not seeing any relaxing of the pricing at the moment.
In dollar terms, our inventory levels will still maintain, you know, reasonably high numbers that we're seeing at the moment, until we see that COGS start to come down. You know, the actual product prices start to come down, which we're not anticipating to happen, just given the factors I mentioned earlier around Russia, Ukraine, you know, the forward expectations around China demand. That is, you know, I see even this morning that, you know, oil exports into China have increased quite significantly, even just over the last week. You know, that will continue to put pressure on that, you know, price point. The supply demand curve is still tight.
Thanks, team. There are no further questions for me.
There appears to be no further questions at this time. Please go ahead.
Okay. There is one question that's come in online, regarding what are we seeing in terms of, I'm struggling to read it.
In terms of price competition from competitors, competition for work, et cetera.
Look, I mean, it's a competitive market that we're operating in, you know, and we're not seeing significant changes in any of the dynamics there. You know, it continues to be a competitive market and, you know, that market seems to be functioning appropriately. We're not seeing, you know, there's obviously different projects are more contested than others, but, you know, the market seems to be behaving fairly rationally.
The second online question is, could you provide some more color on the aluminum products and customers that you are servicing by your new acquisition?
Yeah, look, I mean, it's early days. We've identified, actually through our programmatic M&A opportunities, one of the various businesses that we've done due diligence on, we could see that the, you know, there were components within the aluminum market that were quite attractive and sat within our wheelhouse in terms of our product suite. We decided rather than the M&A pathway, we would progress through an organic pathway, which is frankly our preferred route, less risk. We know what we're doing in terms of our existing business model. We've chosen to import a fairly narrow but tight range of products that we believe, you know, are in the sweet spot of our customer needs.
In fact, there's north of 100 of our customers that are already buying some of those products from competitor companies that are importing it for them. Those loyal customers have committed to purchasing through us. We're seeing quite. We've been surprised at the demand in that space. I've actually put in some further forward orders to progress ahead of what we were expecting to. It's playing out early days, but playing out positively at this point in time. Are there any further questions? Okay, that's the end of the online questions. I don't think we have any more calls on questions on the call. I'll hand back to you, moderator, to close the call.
Thanks to those that have joined and listened in.