Good day. Welcome to the Steel & Tube 2021 Interim Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to CEO, Mark Malpass. Please go ahead, sir.
Okay. Thank you for joining us today. I'm Mark Malpass, and I'm joined here by Greg Smith, our CFO, who will also take you through the financial section of the presentation. On to Chart two, we are pleased to deliver a normalized EBIT of NZD 7.6 million, which is slightly above our December 2020 guidance and a 33% increase on the prior first half year. The improvement has been driven by the execution of strategic initiatives, particularly our network consolidation and streamlining, digital investment, and structural cost reductions. We've also paid down all our debt and had cash of NZD 23.9 million at year-end to support our growth initiatives. We had a progressive improvement in trading during the first half, with some flow-on impact of COVID-19 April lockdowns in the first quarter, and a stronger second quarter returning to prior year trading levels.
The market is improving. Residential construction sector has been strong, infrastructure has been solid, and the manufacturing sector has been improving. These sectors are all offsetting a softer non-residential construction market. We have a robust pipeline of secured work for the rest of this financial year, and have a forward pipeline, and have been awarded a number of new longer-term contracts and project work. Given the turnaround in our performance and the improved economic outlook, the board has been pleased to resume dividend, with an interim unimputed dividend of NZD 0.012 per share. Being a diversified business means we have limited exposure to any one sector. Approximately half of our sales are in the construction and infrastructure markets, with about 11% being sold through merchants and the remaining 36% in the manufacturing sectors. Of that manufacturing sector, about one-third of it ends up in the construction sector.
That would put our overall construction, including merchants and infrastructure sector, at about 75% of our overall mix. Our activity has recovered in most sectors since the April lockdowns. In particular, residential construction has rebounded strongly with a high demand underpinned by low mortgage rates, tight supply, and strong interest from first-time buyers and investors. There's also been a pronounced shift in high-density multi-unit dwellings, which have obviously smaller floor areas and lower steel input. The large infrastructure projects are ongoing, such as bridges and rail and roads and wharf, piling projects in 3 Waters. We're also expecting growth due to increased government funding, although that will take some time to flow through as those projects come on stream. The manufacturing sectors have been fairly steady, with local demand helping to offset some of the export-led decline.
We are starting to see some expansion in the second half, with a good start to the calendar year in the manufacturing sectors. Offsetting the positive recovery in these sectors has been the non-residential construction sector. A number of large projects have been completed, such as the Westfield Newmarket and Commercial Bay projects, and o ther projects have either been delayed, such as high-rise buildings or hotels. We're even seeing shipbuilders and maintenance yards a little bit slower. However, there is work ongoing in that non-residential construction market. We're seeing low warehouse activity, Mainfreight, Bunnings, Woolworths, PAK'nSAVE type projects. We're also seeing central and local government-funded projects such as the Tolaga or Graves Avenue project, which we've just commenced supply to. We're seeing a number of education projects that we've been providing, you know, products into schools and libraries and even hospital work.
These projects are partly offsetting that reduction in the vertical building market that we've seen in the medium term. Investor demand for commercial property has been resilient and w e expect to see an ongoing gradual recovery in the commercial building activity over the coming year. Our goal is to be seen as the best in the sector, the preferred choice of steel products and solutions, and a trusted partner for our customers, as well as a rewarding place to work while delivering an acceptable return to our shareholders. We have a very clear strategy to guide our actions. We are making good progress along the initiatives under each of the five key focus areas you can see on the chart. The work that we have done in the past three years has laid a very strong foundation for our business.
Cash flow and cash are increasing, all debt has been repaid, costs have reduced significantly, and our working capital has improved with reduced inventory, improving receivables, and increased payable days. Benefits are now being realized from our strategic initiatives that we've undertaken, particularly the digital work with the introduction of websites and e-commerce channels in the first half of the financial year, as well as the development of advanced digital analytics and platforms for our customer segmentation, our pricing initiatives, and also our product traceability. Our customer experience team has also been established, and the customer satisfaction levels, which we measure through our Net Promoter Scores, have continued to trend upwards, which I'll talk about a bit later on. The network consolidation program is now mostly completed. We're down to 26 locations nationally, providing service to all our customers nationally.
We've seen a corresponding right size of our labor force, which has resulted in net savings after restructuring costs of about NZD 2.2 million in the first half of the financial year. The focus continues to be on gross margin dollars, so a combination of volume and margin, and w e're also focused on continual improvement in productivity and cost efficiency. I'll now hand over to Greg, who will take us through some of the financial charts.
Thanks, Mark. This chart shows our results on a like-to-like basis compared to the first half in the prior year, noting that both years are now reported under IFRS 16. Our normalized results for the first half 2021 exclude non-trading adjustments of NZD 1.3 million, paying NZD 0.8 million on the reversal of prior year lease asset impairments arising from the successful execution of subleases on vacant properties earlier than we'd otherwise anticipated, and a half million NZD gain on sale of property. As Mark has noted, our normalized EBIT, excluding these items, was NZD 7.6 million, which is up 33% on the prior year and above our December 2020 guidance range.
We have reported net profit of NZD 4.3 million, up from a loss of NZD 37 million from the prior year, and ended the period with a strengthened balance sheet with cash available to support capital investment and growth strategy. In terms of our revenue and margin, revenue was slightly down on the prior year to NZD 226.3 million, as s ales progressively recovered over the six-month period to be back to prior year levels. Following the Alert Level 4 lockdown and initial bounce back in trading, our group margin was impacted by product mix and pricing pressures, as well as reduced activity in the non-residential construction market, which occurred across the period. Excluding the softer non-residential construction market, margins have progressively recovered to prior year levels in most sectors, and gains from cost efficiencies and pricing disciplines were realized.
An example of the work undergoing on cost efficiencies in the business, as you can see there, is our freight cost efficiency, where our freight cost for sale has reduced compared to the prior year through work being done on load planning and simplifying and coordinating our freight logistics as well as market tenders. In terms of operating expenses, our normalized operating expenses reduced by 12% with the benefits from labor cost reductions, lower doubtful debts and depreciation and amortization, as well as benefits from the network consolidation undertaken. This has led to our Opex as a percentage of our sales reducing, which is a pleasing trend.
Our operating cash flow increased by 40% to NZD 24 million, with ongoing improvement in working capital management and in particular, good debt collection rates as well as managing our inventory. We're continuing to target further working capital improvements. Our second half cash flow is expected to benefit from the property sale of our remaining property, which we announced in December, observed a NZD 6.6 million of cash with settlement due to arrive in March of this year.
Overall, net cash has increased, as Mark noted, to NZD 23.9 million, which is up by NZD 16.5 million from the end of the previous financial year, with all of our debt repaid. Bank covenant waivers and revised covenants remain in place for FY21. In February, we secured a new NZD 50 million debt facility for a three-year term. Our balance sheet is strong. Our net cash position will support capital investment and growth initiatives. As Mark noted, we are pleased to resume dividend payments with an interim dividend of NZD 0.012 per share, unimputed, to be paid on the 26th of March 2021. We continue to manage our capital expenditure with a priority on projects supporting digital and business improvement and growth initiatives. Key projects in the first half included establishing web shops and data analytics platforms and the continuing enhancement of traceability.
Our increased cash flow will continue to support the capital investment program through the second half of our financial year. Steel & Tube operates two divisions. The distribution division saw a significant improvement in earnings year-on-year with a doubling of its earnings. Our infrastructure division, which is a little bit more exposed to the non-residential construction sector, softened slightly with increased competition and tightening market conditions in that sector. Pleasingly, though, project work and contracts continue to be won with a solid pipeline of activity secured for the second half of the financial year. Thank you and I'll now pass it back to Mark.
Thanks, Greg. We have a clear strategic plan and are well-positioned to invest in growth with a strong balance sheet, a leaner cost structure, and efficient national branch network. We have leadership positions across many product categories. We have an enhanced digital platform and engaged workforce. We have good diversity across multiple sectors and are a trusted partner by our customers with our Net Promoter Scores continuing to increase, now at 39 year- to- date. Investment in product quality systems continues, including the Lloyd's Register domestic and offshore mill attestation and also independent test and verification locally. We are committed to creating a sustainable business and delivering long-term value for our shareholders. The health and safety of our employees remains the number one priority, and our total recordable injury frequency rate is now down to 3.5 and is below the estimated industry standard of five.
Our goal is to ensure all our employees and contractors come home safely every day and w e're always looking at new ways to identify areas for improvement. We started measuring our environmental impact last year. We have initiatives in place and are taking action in a number of areas where we can reduce our carbon footprint. As a construction material, steel is safe, it's strong, and it's low waste. It is the ideal circular economy material. It's infinitely recyclable without product segregation and easily reused and repurposed. Steel offers many other benefits. It is made using predominantly renewable energy sources, there is less construction waste, and it lasts a lot longer. We now have a workforce of around 830 people. Our focus is on improving access to education, training and development, and employment for our staff, as well as students in low decile schools.
We're involved with the Manukau School to Work workplace scheme with the Papakura High School, and we were delighted to be able to offer jobs to three of the students involved in the first placement. We've also launched a new online employee library, which provides a learning platform with three courses on a range of topics for our employees. Looking forward, we are focused on higher-margin growth opportunities. We will continue to build on our strong business foundation now in place with a focus on digital and IT initiatives. Gross margin dollar improvements, as I mentioned earlier, and operational efficiencies remain our key priority. We will leverage our breadth and scale to cross-sell as a wider range of our products and services as possible.
We are investing in new products and opportunities that will extend what we can offer to our customers, and we'll continue to invest in marketing and our Game On promotions, which have really started to build demand over the last half year. While our primary focus is on organic growth, we will also consider other opportunities that are in adjacent sectors. The outlook is improving and the board is maintaining a cautiously optimistic view to the future economic environment. However, there are still potential risks from COVID-19 and associated supply chain issues. Therefore, we're not providing FY 2021 guidance at this point in time. The residential construction and infrastructure markets are looking good, and we do have a solid pipeline ahead. We're seeing improvements in manufacturing in this new half. However, non-residential construction remains constrained and there are labor and international freight cost pressures starting to come through.
The second half of the year has seen seven less trading days than the first half. January was a softer start and as people took extended holidays for many, and t his has been followed by a very strong February with a positive rebound so far. We expect a final dividend in line with policy, assuming current trading performance continues, and there's no further impact from COVID-19. Steel & Tube is very well positioned with a clear strategic plan, a strong balance sheet, and a leaner cost structure. We will continue to build on the strong foundation that we've now put in place with increasing focus on higher-margin growth opportunities. I'd also like to take the opportunity, just as I conclude, to say thank you to Greg Smith, who's provided the board with outstanding support, the board and myself with outstanding support for close to 3.5 Years.
I look forward to welcoming Richard Smyth as our CFO at the end of April. Thank you for listening, I'll now pass back to the moderator for Q&A.
If you would like to ask a question, please signal by pressing start 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. A voice prompt on the phone line will indicate when your line is open. Please state your name before posing your question. Again, press star one to ask a question. We'll go ahead with our first caller. Caller, you may go ahead. Your line is live.
Oh, hi, it's Grant Lowe here, and j ust a couple of questions for me. Firstly, the use of cash. You signal in the announcement supporting capital investment and growth initiatives, I think were the words used. Obviously, you've got the digital program, which you've discussed. Can you give us a sense of that sort of capital investment, if that's over and above, you know, the sort of digital stuff? Give us a bit more of a sense around these growth initiatives.
Sorry, Grant. Hi. You're breaking up quite badly. I think that the drift of your question was could we give some view around our forward CapEx pipeline, yeah?
It was around the growth initiatives and capital investment.
Hi, Grant. Greg here. Look, as we've noted in the presentation, we are prioritizing the allocation of our capital use towards digital and growth projects. Clearly, there is an element of our capital which is to support BAU, but we have a clear pathway ahead with that CapEx program. The CapEx to date has been in line with D&A, and as we look forward, and you mentioned the cash, you know, we'll be evaluating how we use that cash to support the growth initiatives of the business. Clearly, our capital program is more weighted to digital and growth projects at this time.
Got it, got it, okay, and the second point, you sort of alluded in the announcement to increased competition, particularly in the infrastructure division. Can you give us a sense of, you know, how that's tracking at the moment or how that senses to that competition?
Yeah, we've seen a good recovery in the general infrastructure markets. The businesses that we've got exposed there across our roll forming, so roofing and coil and purlins and then, of course, our reinforcing and ComFlor businesses, and all are, you know, not short of revenue. There are plenty of projects out there. It's really a profitable, you know, a risk balance for us, we're careful as to what we've been taking on. There's a strong pipeline for this financial year. In the foreseeable medium term, we've seen some quite good growth coming through there, as I mentioned earlier, through some of the, you know, areas that we've been securing and projects that we've been winning.
Okay. Thank you. That's all for me.
Thank you. We will go to our next question. Caller, you may go ahead.
Good morning, Mark and Greg. It's Steve Hudson here from Macquarie. Just a couple of questions from me. I just wondered if you could comment on the impact, if any, of the reasonably steep rise in steel prices that we've seen over the half and over this half, particularly in your distribution business, how you think that's washed through in terms of margins. Secondly, I just wondered perhaps if you could sort of split out that 830 FTE number that you talked about, perhaps in terms of division or how many are in administration now. There's obviously been quite a big change year-on-year, so just interested in the composition of that workforce, and then l astly, there's been some reasonably well-documented issues around containerized freight, particularly in imports. I just wondered if you can talk about how that has or will impact on you and/or your customers.
Okay. Hi, Steve. I think let's start with the first question there. You've seen around the rising steel prices and how that's impacting on the business. Obviously, since August last year, we've seen a strong run-up in steel prices, and a lot of that is driven by, of course, demand regionally, particularly Asia. I mean, it's an interesting point for those observing the steel markets. The global steel production over the last 2020 year was 1.9 billion tons, and about 1.4 of that was produced in Asia and, you know, o f that 1 billion tons was out of China. The demand is incredible up in that Asian-Chinese region, which is really driving the price for iron ore and other ingredients, coking coal and nickel, and other items. Of course, that's flowed through into the local markets. We have progressively moved prices up.
For those that are more interested, you'll see some procurement update on our website that provides customers in particular with more details around the drivers for those price increases. We have a range of products moving, you know, many up to 15% movements occurring in mid-March that is flowing into the system. That has been, I think, our third move over the last nine months of product prices that we've had to pass through the system as we've moved to more of a replacement cost-type model. On the question on employees, yes, we have seen a significant reduction down to 830. You'll recall in January last year, we were about a little over 1,000. We've reduced about 180. Of that, around 50 is really a group of steel fixers that were working in the reinforcing business that we've now moved to contract relationships.
Some of that cost will come back, albeit as we've moved to tonnage rates on many of our projects at a more efficient level. That accounts for 50 of that 180, and t he other 130 are really, as I mentioned earlier, with our site consolidations and streamlining, we've reduced our workforce significantly through that and other administrative roles as we've improved processes and systems. There's a structural shift of white collar and a few blue collar workers in that 130, but mainly white collar that have come out of those location reductions. We're running at around 830 type number at the moment, which is a significant reduction for us and of course, with our lower salary and wages cost structure, and t hat has progressively moved through the first half.
We've got, as I mentioned, NZD 2.2 odd million of net benefit coming in in the first half but, obviously, it improves as the year goes on. I think the last part of your question was really around the construction market. Is that right, Steve, o r supply chain in terms of our freight movement?
Yeah, j ust whether or not you're holding any buffer inventories or whether or not your customers are having any problems importing products, you know, I suppose the question is just around the issues around container and ports and supply disruptions.
Sure. It's a good question, yeah. We've been able to manage that pretty carefully since October, November, we were carefully building stock as we were starting to see some of the issues occur. We're really focused on, there's realistically about 3,000 SKUs that are extremely important to our customer base, and we've made sure we've been able to manage availability on those through this sort of three-month, four-month period. We've been fortunate we've been able to keep our availability and stock levels for our customer base fairly good. There's been a few misses, but we've been largely unaffected. We've worked obviously very closely with New Zealand Steel, Pacific Steel, and BlueScope, more local suppliers to shift, if you like, some of our supply points to ensure that we can keep our customers whole. We haven't been that affected.
We have built inventory, in some areas over the last three months. We've been building carefully to ensure that we haven't had some big problems. There's always a fair amount of goods in transit coming into the country. We're just playing that carefully and been able to get through okay.
That's useful. Thanks, mate. Sorry, just a follow-up to the first question. Could you give us an idea of what your average stock turn is in your distribution business? Would sort of like a 4x kind of stock turn be about right at the moment?
Stephen, we don't split out our stock turn by division at this point. That's not a bad proxy. We obviously do internally inspect on a daily, weekly basis, we're not just going to share that externally at the moment, Stephen.
Yeah, no problem at all. Greg, all the best in your future endeavors, and thanks for all your help over the years.
Thanks, Stephen.
We will go to our next question. Caller, you may go ahead. Your line is live.
Hi, guys. It's Rowan here from Forsyth Barr. Most of my, well, in fact, all of my questions have been answered, but I'll probably have some more for our follow-up call later on. Thanks and congratulations on the result. Cheers.