Earnings Call: H2 2021

Aug 23, 2021

Good day, and welcome to the Steel and Tube 2021 Financial Year's Result Call. The conference is being recorded. At this time, I would like to turn the conference over to Mark Marpas. Please go ahead, sir. Thank you, and welcome to everyone on the call. Here with me today is Richard Smith, Steel and Tube's CFO. We're both calling in from home offices due to the COVID-nineteen lockdowns we're currently operating under. We'll start with a quick summary of the financial year end to 30 June 2021 and then move into more detail on our strategic progress and financial results over the last year. We were pleased to deliver a solid financial result driven by the execution of our strategic initiatives, which have delivered growth and was also underpinned by a positive economic outlook and activity. Residential construction has obviously been very strong. There is significant baseload in infrastructure. Commercial construction is starting to pick up and we're also seeing manufacturing expanding. Our volumes and revenues have recovered following last year's lockdown and margin improvements have also been realized. We have continued to deliver further and significant structural cost reductions. We've optimized our working capital whilst investing in inventory to meet customer demand and growth. Our digital initiatives have been now embedded and we're now scaling these up. Moving to the 3rd chart on results snapshot. Our efforts have delivered solid improvement in year on year results with volumes, revenue and margin recovering across the year and a strong pipeline of secured work. Revenue was up 15%. We've locked in a further 13.5% of reduction in our operating costs. We delivered a significant improvement in our earnings with EBITDA at 40,700,000 dollars and normalized EBITDA increasing to $19,000,000 from $400,000 in the prior year. And we're moving ahead with a very strong balance sheet with all debt repaid and cash of $25,000,000 at year end. FY 2021 was clearly a challenging year with a number of factors impacting on our business. While the COVID-nineteen pandemic did not significantly impact us in New Zealand during the financial year, it did have a major impact on global supply chains with shipping and port congestion and also labor constraints. Demand for steel has increased as customers spend up on white wear and cars and other items. Residential construction has soared as governments invest in infrastructure programs to boost economic activity. Steel mills are operating at capacity. And on top of this, supply chains have become increasingly congested with no signs that these headwinds will be alleviated anytime soon. This has led to increasing pricing across a range of steel products. We've seen strong activity in some sectors such as residential construction and a slower recovery in others such as commercial. But as I mentioned, there has been significant baseload in infrastructure and manufacturing is expanding. Steel and tube has a number of advantages in this environment. We're the most diversified steel provider in New Zealand and we're not unduly reliant on any one sector, which provides us with greater stability and demand and activity. Our size and scale provides us with buying power and we have long standing positive relationships with our suppliers in both New Zealand and offshore. Our investment into digital and technology is paying dividends across all areas of our business. We also took the opportunity during last year's lockdown to accelerate the organization restructuring that we had planned and we are now operating with a far more efficient and stronger business platform. You can see on this chart, our sector exposure is across a very diverse range of sectors. 47% of our sales are in the residential, commercial construction sectors with 31% in manufacturing and about 14% in infrastructure. The biggest change year on year for us has been sales in residential construction, which has increased from 15% to 21% with a decline in non food manufacturing. And this is very much in line with the macro trends that we're seeing in the market over the last 12 months. As you can see on these charts, the residential consents have continued their upward trajectory through the year with low mortgage rates, tight supply and strong interest rates from first time buyers underpinning that demand. While capacity constraints may limit the magnitude of further growth future growth, excuse me, we expect this trend to continue for at least the medium term. Full of build of big sheds and warehouses continued through the year. Debt funded vertical construction ground to a halt during the COVID-nineteen lockdowns in 2020 as large commercial buildings, shopping centers and hotels were all put on hold. Some improvement has been seen in the second half of twenty twenty one as this and this is expected to continue to build as activity comes back on stream in the financial year 2022. There are also significant central and local government funded projects such as Kainga Ora, Grace Avenue in education, school and library projects. And we're also seeing ongoing hospital work. Now after a first half in manufacturing that was a lot softer, we began to see some rapid expansion in the second half of 2021 financial year. Infrastructure has had a very strong base load with large ongoing projects such as 3 Waters projects, wharves, piling projects, bridges, rail, etcetera. And we're expecting this to continue to build with increased government funding in the last budget. At the start of the financial year, we put in place a very clear roadmap to guide our actions going forward. We're making really good progress under each of the 5 pathways that we've outlined on this chart, which are focused on customers, our people, technology, service and operational efficiencies. Building on our business, the work that we have done over the past 3 years has laid a strong foundation for our business and we are now seeing the value from these strategic initiatives. We're building on this foundation and continually refining and improving our business and value proposition offer. Moving to the chart on continued investment in quality, safety and training. Our health and safety of our employees remains our number one priority and our recordable injury rate has reduced to 1.86 per 1000000 man hours. And this is well below estimated industry standards. Our goal is to ensure all our employees and contractors go home safely each day. And this year, we have continued to invest in staff training. We have also invested in machine and trucking guarding. We are currently deploying the Intellect software, which is a mobile app based piece of technology, which will provide us with improved access and reporting. Ensuring the high quality, durable and trustworthy products is an essential part of what we do. We now have the ISO 9,000 and 1 certification across all of our businesses. We also have certification from a number of industry organizations such as Steel Construction New Zealand. We utilized Lloyd's Register to undertake our supply mill audits and a further 8 of these were completed in the financial year and we have another 12 supplier audits planned for the upcoming financial year. We're continually improving our traceability program and digital is playing a big role in this, providing easier pathways for customers to access test certificates for products. These initiatives build trust with our customers and make transacting with us faster and more efficient, resulting in reduced costs and improving efficiency for both steel and tube and also for our customers. Regarding our network strategy, while we still see continued efficiency opportunities, the network footprint consolidation is largely complete. We moved from 50 operating sites in 2017 down to about 26 operating sites this year. This along with our accelerated cost out program has delivered a material reduction in our underlying cost structure while still providing a full national service platform for our customers. So we now have an optimized national network, and we're maintaining a regional presence, providing an increased product footprint offering to all of our customers throughout the country. Moving to the chart on structural cost savings. The work that we have done under Project STR1VE and again this year has delivered significant structural cost savings, which are now locked in. This year, we saw a a further 13.5% year on year reduction in our operating costs. That's about $12,500,000 reduction. In addition to the completion of the network footprint program, we've also had a big focus on improving and optimizing our freight, inventory and direct labor. Supply chain management has also been an increased focus for us with the establishment of the new role of GM Supply Chain and distribution centers early in the financial year. During the year, we optimized our working capital and invested in fast moving inventory, which helped us respond to the current global supply chain and capacity issues, while at the same time, we reduced our age inventory significantly by about $9,000,000 We are building a very powerful combination of both people and technology to create customer experiences that are dynamic, that are personalized and effortless. Many of our digital initiatives in the financial year have focused on delivering a seamless omnichannel experience that allows our customers to engage with our company at the same time at any time, excuse me, through this channel that suits them. That can be either by phone, it can be by e mail, online or face to face. An important initiative this financial year was also establishing a central customer excellence team. Now while this still offers a very regional focus, our call center staff have expertise across a range of products and businesses, and they provide product expert support that's available to provide a more specialized information to our customers at any time. We've invested in digital. The use of digital technology to drive our customer experience and operational efficiency is becoming an increasingly valuable strategic pathway for our company. And the technology platform that we've invested in is becoming increasingly integral to our sales and service value propositions. The launch of our web stores and our e commerce platform has been very successful with data showing online customers are buying more, they're buying more frequently and they're buying more broadly and that's delivering a higher margin per customer. While it's still very early days through our e commerce initiatives in the steel industry, we know our web shop revenue and volumes are growing at about 15% per month and we're very confident of significant growth going forward. The growth will be supported by a range of new features that we've got planned to support our new digital channel offering to customers throughout this next financial year. Data analytics was another area of important focus for the financial year and it's helping us better understand our customers and optimize our sales and service performance. As an example of this, the pricing project has helped identify areas of margin improvement across the business and established a more dynamic and responsive pricing regime, which can be optimized for further different customer groups. Digital is also playing an important role in the traceability program. We've introduced easier ways for our customers to retrieve test certificates such as through our chatbot, Stanley, and our web stores. In addition to this, we've also piloted integration of the ordering system for our large scale customers, allowing them to receive test certificates and automatically with their orders. Now this has resulted in significant time savings for both us and for our customers. So we're looking to expand that offering. Cybersecurity also remains a priority and we've put in place extensive amount of work that's been undertaken excuse me in the last 12 months with independent audits and an ongoing program of work. Sustainability is also important to the business and we're committed to creating a sustainable business and delivering long term value for our shareholders. For each of the strategic pillars, we've also identified a number of topics which we believe are essential for the long term sustainability of our company and to support our social license to operate. Our operating initiatives are focused on material efficiency, recycling, reducing energy and reducing our vehicle emissions. And pleasingly, we saw some reductions in our key metrics with fuel consumption down 13%, greenhouse gas emissions down 9%. This was a strong result and given the prior period included 1 month of the lockdown. Steel is an essential construction material and the backbone of New Zealand's built environment and infrastructure. We've been working closely with the sector to promote steel as an important essential and sustainable building material and encourage a cradle to cradle methodology in the product assessment. We believe it's really essential that material choices should be grounded on good science and made by the experts, that's engineers, architects and engineers and not by politicians. In terms of winning team, our aim is to provide a rewarding and welcoming workplace for our employees. We have experienced minimal impact from the labor shortages in the New Zealand market with strong employee loyalty and commitment as well as attraction of good talent into new roles. Our average length of service is 6.1 years reflecting a mix of new and experienced team members. Digital is again playing a role in this area with 50 online training modules currently available for our online training library. 2,000 of those modules were completed by team members in this financial year. And this can be completed by staff in their own time with managers recommending suggested programs for people to undertake. Well-being is also a focus with modules such as how to check on new workmates, dealing with difficult people and the importance of work life balance. We work closely with all our local communities and as well as the successful workforce engagement program with Papakura High School. This year, we introduced new Maori Kedipa programs and also continue to support our 1st foundation program. We regularly engage with our employees and seek their feedback on what we can do better. And over the last 12 months, we're really pleased with our employee net promoter score, which lifted to 19 and our engagement score at 74% or 7.4 out of 10, which is a great score. I'll now hand over to Richard to cover our financial results. Thanks, Mark. I'm really pleased that the first set of results I get to speak to is such a strong result. This chart here shows the comparison to last year. Revenue, earnings and profit were all up strongly compared to last year with net profit after tax of $16,100,000 Normalized results exclude non trading adjustments of a positive $2,800,000 in FY 2021 comprising gains on property sales and IFRS 16 impairment reversals. Continued improvements in working capital management and debt collection has assisted in the generation of robust operating cash flows of $31,500,000 As Mike mentioned before, all debt was repaid during the year with $25,000,000 net cash at year end, which will support future capital investment and our growth strategy. Revenue was up $15,000,000 year on year to $480,000,000 with a positive recovery over the year. Margins have progressively recovered in most sectors, although were impacted in the current year by a sell down of aged inventory. Prudent and disciplined management of expenditure continues and normalized operating expenses are down by over 13% year on year from over $92,000,000 to $79,900,000 The cost savings this year were primarily a result of the improved network footprint structure with reduced indirect labor, employee benefits and restructuring and property expenses. We are seeing the benefits from lower bad and doubtful debts and are continuing to focus on managing our risk exposure. We now have a sustainable fixed cost baseline and our focus for this year is on maintaining tight cost control with some wage inflation expected. We ended the year with a strengthened balance sheet of $25,000,000 in cash, all remaining with borrowings we repaid during the year and we have secured a new $50,000,000 debt facility, which is still undrawn. We are now well positioned for the current COVID like lockdown, investment in targeted organic growth initiatives and market opportunities. We were pleased to continue dividend payments with the final dividend of $0.329 per share, taking our full year dividends to $0.045 per share. This is a payout of 79% of normalized impact excluding the property gains and recognition of previously unrecognized tax losses and represents a yield of 3.9% based on our 30th June share price. We continued our disciplined approach to working capital management with on time debt collection continuing to improve. To mitigate the supply chain issues, we increased our holdings of critical fast moving inventory items to meet customer demand balance. At the same time, we have also reduced aged inventory by $9,000,000 Capital spend was $7,700,000 which was in line with depreciation and amortization in FY 2021 excluding the right of use asset depreciation with the majority of the spend supporting digital and growth initiatives. We expect to continue our investment in digital this year as well as investment in new processing equipment. Increased cash flows will support the capital investment program in FY 2022. I'll now turn to the performance of each of our divisions. Sterling Tube operates through 2 divisions, distribution and infrastructure. We have continued to bring together our businesses by cross selling our extensive offer to customers, leveraging our national footprint and breadth of product offering. Distribution continues to go from strength to strength with gross margin dollar and margin percentage both improving year on year. Revenue growth has been driven by strong residential, infrastructure and managing sectors manufacturing sectors. We are closely monitoring steel commodity input prices, increased demand, capacity constraints and shipping challenges. Inventory and pricing optimization aided by technology ensures that the high demand products are priced appropriately and available where and when needed by our customers. Our optimized network national network of branches and distribution centers, realigned sales team and customer excellence centers are delivering improved customer service and experience. The infrastructure division covers a range of sectors with our specialist made to order products primarily supplied to the vertical construction and infrastructure sectors. Volumes were up versus the prior year with gross margin improvements from the cost out program being partially offset of competitive pricing pressure in some areas. While slower to recover, the increase in volume of activity has been seen in second half of twenty twenty one as infrastructure and large commercial projects come back on stream. We have a strong pipeline of secured work and are seeing an increase in volume of tender activity for large infrastructure and vertical construction projects. Our positioning as a large scale reliable provider focused on improved project methodology, technical advisory services and a deep focus on safety and quality provides us with a competitive advantage. Thank you, and I'll now pass you back to Mark. Thanks, Richard. Just moving to charting our strength. The solid financial performance in the financial year and return to profitability is a first step in our focus from transitioning from turnaround of our business to growth and value add. We're also moving forward with a robust financial and operating platform, leadership positions across many product categories and with strong employee morale. There is always more we can do. And while our focus remains on optimizing the business, we have also identified a number of growth organic growth opportunities within the business. Strategically, we will continue to build on our strong business foundation now in place with a focus on the digital and IT initiatives. We will leverage our breadth and scale to cross sell a wider range of products and services and focusing on our gross margin dollar improvement and operational efficiencies will remain a priority. We're investing in new products and opportunities that will extend what we can build and offer our customers, and we will continue to invest in marketing and sales to build demand. While our primary focus is on organic growth, we also consider opportunities in close adjustment sectors, and we will also investigate potential capital management initiatives. Here's outlook. We are well placed as we enter into the current lockdown period. We have a very positive outlook for the next financial year with a number of identified opportunities. Market conditions look to remain positive for at least the medium term as economic cycle is expected to be stronger for longer. The current residential burn is expected to ease over the next 1 to 2 years. However, commercial infrastructure and manufacturing are all expected to continue to grow. Our focus remains on customer service, growing sales in attractive segments and also gross margin dollar improvement. We have a very strong pipeline of secured work in place and are well positioned to take advantage of the market activity that we see and new product growth. Investing in new processing equipment will also assist in opening up identified new markets as well as drive operating efficiencies, safety and product quality. In addition, we have continued to invest in digital technologies to improve our customer experience and expand on our customer offer, providing further competitive advantage. We're very confident in our strategy, our people and our positioning and look forward to continually building momentum in a strong platform that we now have in place. Depending on how long the current lockdown lasts, we expect to be able to continue our earnings momentum. Thank you for listening. I'll now pass back to the operator to manage any questions. Thank you, Mark. Thank you all. We will take our first question. Your line is open. Please go ahead. Hi, guys. Can you hear me okay? Loud and clear. Great. Just a couple of quick ones for me. Just around cost pressures and supply chain congestion, we called out as headwinds there. How do you see that playing out over the next we will update this cost inflation. We've seen that fairly broadly across the industry. Your costs have been coming down. Where do you see that heading to over the next 12 to 18 months? Yes. Good question. Certainly, the supply chain complexities are still present, and we're spending a lot of our time just managing that. So we have very clear and we've been quite successful in this space actually just in terms of managing the continuous supply through our distribution centers and supporting our customers. So it's obviously a very important area for us. We've increased inventory to ensure that we can manage this and we've been able to really be able to handle that throughout the last financial year. In terms of cost pressures, we are still seeing a supply demand imbalance, which is driving. In fact, most mills we buy from throughout Asia, Australia and New Zealand have us on allocation. You'll have observed most local steel distributors have increased prices and announced forward increased prices in September October just due to that price pressure that we're seeing in the markets. So I guess I was angling more at the labor cost process and the like. Look, there's certainly an inflationary pressure there. We're not seeing anything in excess of the sort of normal CPI levels of increases flowing through the system, but kind of call that roughly 2% over the next 12 months. Yes. Okay. And should we expect to see inventory tick up slightly in terms of making sure that these supply chains remain open? Would you expect to see that number hit up in the short term? I think in the shorter term, obviously, a lot depends on the longevity of the current lockdowns we're in. But we would expect to see slight increases over the next 6 months. But really it moves around a lot in between the half year there where you build obviously for demand and we have normal seasonal sort of reduction around the Christmas, January, February period. So you typically see an increase over the next 2 or 3 months and then softening as you head down towards Christmas. Okay, great. And is there anything further you could say about the potential capital management that you're exploring at this stage, what that might look like? Richard, do you want to cover that point? Yes, sure. So we are investigating a number of potential alternatives. And I mean, the ones that come to mind are some sort of special dividend or a share buyback. It's very early days, and it really depends on COVID. And this lockdown, we want to take a very sensible and slightly conservative approach to spending our cash. But it is something that we are conscious of. We are sitting in like a $4,000,000 or $25,000,000 of cash and we haven't drawn down on our debt yet. Got it. Okay. Thank you. That's all for me. We will take our next questions. Your line is open. Please go ahead. Hi, guys. It's Scott Anderson here from 4th Life Bar. Can you hear me? Yes. Thank you, Scott. First of all, Ron, just sends his apologies. He's just been caught up on another call. But just a couple of questions from me. Just around lockdown, what are you guys able to do at the moment in level 4? And how should we be thinking about impacts, I. E, are you still paying staff in full? And are you thinking about the wage subsidy? Yes. Yes to both of those last questions. We're still paying our staff in full at the moment through to at least the current end of the current duration that was announced yesterday. And we are processing a claim through the subsidy scheme around that as well. In terms of the impacts, I mean, we're currently supporting around 50 essential services type businesses. So we have some very, very limited activity going on. But obviously, we can't transact or open up. And most of our customers are not trading at the moment, Scott. So it's fairly slim. But what we have seen in the past when we go through these lockdowns is, well, obviously, the importance of taking a long term view, making sure you've got really strong strategies in place that look beyond the next quarter or next 12 months, and of course looking after our staff. So a lot of our staff are doing I mentioned training programs before and product training things like that. So we're actively working through that with many of our staff when they're locked down. But what we have seen previously is that all that really happens is economic activity is deferred and delayed during these times. And we do see a sort of a roaring demand as we come back into business once people reopen. So we're just really shifting that demand around. So we're obviously working through that in terms of cash implications and things at the moment. But right now, to the extent that we can foresee, we expect that we'll be recapturing that demand the moment we get out of the gate. All right. Perfect. Thank you. That makes sense. And then secondly, just kind of following on from that. So if Auckland was kind of to remain in level 4, but the rest of the country goes down on alert levels, What kind of impact does that have on supply chain? So how many, I guess, big parts of the supply chain are focused around Auckland? And what kind of issues does that create? Yes. I mean, look, freight is still operating. So obviously, we're one of, I think, the largest importer of tons coming into New Zealand at any one time. So we've still got tonne boats turning up and product that's being offloaded today and it's allowed under the Alert Level 4. So I anticipate that if rest of the country opens up that we would be able to operate those big DCs to be able to replenish product. We're working with New Zealand Steel on some essential businesses right now that we supply Kainga Ora, for example, but for reroofing and things that we're able to supply through small volumes of products from New Zealand Steel through the system. I anticipate when the South Island if the South Island opens up that we would be able to get those big DCs cranked up to support those outlying areas, obviously, operating under the strict government safety protocols. Yes. All right. Perfect. That makes sense. That's all from me. Thanks, guys. Thanks Scott. We will take our next questions. Your line is open. Please go ahead. Good morning, team. It's James Walz here from Craig's. Can you hear me? Hi, James. I can hear you loud and clear. Great. Yes, just my question was just on, I guess, the past year, you've obviously been pretty successful at achieving some significant structural cost out. Revenue in the second half seems to ramp up to kind of back at near pre COVID levels. Just wondering in terms of how you guys are seeing it, in terms of that kind of next step change improvement in gross margin from here with, I guess, volumes hitting those kind of near constraint levels. How do you guys see that? Yes. Good question, James. I mean, we there is always more efficiency opportunities. And our aim is obviously to offset inflation every year with efficiency gains as just kind of an opening mantra. But we continually are looking for further opportunities. For example, in Auckland at the moment, we're looking at how we can more efficiently operate. As we've started running our DCs very effectively, we're starting to see opportunities for further aggregation of products into those DCs as we try and get the very last mile out of them. So we're trying to kind of increase that delivery efficiency into our trial branches. So we see more juice in that coming over the it will take us a little bit of time to execute, but we certainly see more and more benefits coming through from that in the FY 2023 year. But as I say, we're always looking to improve efficiency in the freight, logistics, DC side of the business. We in terms of your gross margin point, we are spending quite a lot of time around optimizing our gross margins and our digital initiatives have really helped us in terms of customer stratification, how we're really thinking about each of our specific sectors within our customer set and using that data just standard elasticity of demand type modeling that we're doing. And we've seen some quite good growth opportunities that have been starting to come through actually in the last half of the financial year and we're optimistic in terms of further margin growth opportunities coming through. We just had a very good July, for example, and that's started to shore up our confidence, I guess, in terms of some of the initiatives that we've been deploying in the margin space. So I'm sort of hopefully, that's clear in terms of the opportunities that we see there. But for us, it's a business, as I mentioned earlier, our really key priority is obviously looking after and providing as many services and products as we can to our customers, particularly our platinum customers, our top 500 customers. And then, of course, optimizing our margins, our gross margin dollars specifically through that set. We've incentivized all of our sales facing employees across the business on gross margin dollars. And so their incentives are crystal clear on that. It's not on volume. It's not on revenue. It's not on margin percent. It's on gross margin dollar growth. And that is also starting to drive improvement in our gross margins. Yes. Thanks, Mark. And just a second one for me. Just in terms of what you're seeing in the last 6 months versus the 6 months before that in terms of that industry dynamic such as steel and bulk and your key competitors, kind of in terms of the amount of cost input pressure you're seeing versus, I guess, how much is being pressured to price and maybe kind of your expectation over the next 6 months? Is that run rate kind of improved or got worse over the last couple of months? Yes, improving on the last question, James. But in terms of the I guess it started out a challenging market place in terms of the some of the global supply chain issues. We know that we are doing well relative to the rest of the market in terms of being able to get product into the country through a lot of supplier shipping mill relationships that we've had for many years and rates that we've been able to lock in and we know that we're advantaged with those. We have seen price increases. In fact, if you jump on our website, you'll see we've announced some price increases for September October. It looks like many of our competitors have also announced similar sort of varying times type of price increases that we'll all be seeing similar cost pressures, I guess, coming through the system from mills that will be fairly common. And just looking at a lot of the mill data yesterday, we're still seeing quite significant price increases coming through across most of our product sets. And how long that will last? For those that are interested, there's a very detailed product update that procurement update on our website that's well worth a look that provides anyone with a fairly detailed analysis there. But our view is at least this calendar year, we'll see prices holding up in the analysis that we've done indicates we may start seeing some softening after Christmas is the best that we can sort of estimate at this point in time. Great. Thanks, Thank you.