Earnings Call: H1 2021

Feb 25, 2021

Good day, and welcome to the Steel and 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. Moving to Chart 2, we are pleased to deliver a normalized EBIT of $7,600,000 which was slightly above our December 2020 guidance and a 33% increase on the prior first half year. Year end improvement has been driven by the execution of strategic initiatives, particularly our network consolidation and streamlining, digital investment and structural cost reduction. We've also paid down all our debt and had cash of $23,900,000 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-nineteen April lockdown in the Q1 and a stronger Q2 returning to prior year trading levels. The market is improving. Residential construction sector has been strong, our 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 un imputed dividend of $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 1 third of it ends up in the construction sector. So 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 anchor lockdowns. In particular, residential construction has rebounded strongly with the 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 a obviously smaller floor areas and lower steel input. The large infrastructure projects are ongoing, such as bridges and round and road and wall, piling projects and trade water. 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 rate decline. We are starting to see some expansion in the second half with a good start to the calendar year in the manufacturing sectors. This 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 other 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 activities, so main freight bunnings, Woolworths, pack and save type projects. We're also seeing central and local government funded projects such as the solar or a grade avenue project, which we just commenced supply to. And we're seeing a number of education projects that we've been providing products into schools and libraries and even hospital work. These projects are partly offsetting that reduction in the in the vertical building market that we've seen in the medium term. Investor demand for commercial property has been resilient and we 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 the 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 and we are making good progress along the initiatives under each of the 5 key focus areas you can see on the chart. The work that we have done in the past 3 years has laid a very strong foundation for our business. Cash flow and cash are increasing, all debt is being repaid, costs have reduced significantly and we'll work and our working capital has improved with reduced inventory, improving receivables and increased payable base. 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 platforms for our customer syndication, 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 little bit later on. The network consolidation program is now mostly completed. We're down to 26 locations nationally, providing our service to all our customers nationally. And we've seen a corresponding right size of our labor force, which has resulted in net savings after restructuring costs of about $2,200,000 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 we're also focused on continual improvement in productivity and cost charts. Thanks, Mike. This chart shows our results on a like for 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 twenty twenty one exclude non trading adjustments of $1,300,000 paying $800,000 on the reversal of prior year linked asset impairments arising from the successful execution of subleases on vacant properties earlier than we otherwise anticipated and $500,000 gain on sale of property. As Mark has noted, our normalized EBIT excluding these items was $7,600,000 which is up 33% on the prior year and above our December 'twenty guidance range. We have reported net profit of $4,300,000 up from a loss of $37,000,000 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 226 $300,000 as sales progressively recovered over the 6 month period to be back to prior year levels. Following the 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, you can see there is our freight cost efficiencies, where our freight cost of sales have reduced compared to the prior year through work being done on load planning and simplifying and coordinating our freight logistics as well as market changes. In terms of operating expenses, our normalized operating expenses reduced by 12% as a benefit from labor cost reduction, lower doubtful debt 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 $24,000,000 with ongoing improving working capital management and in particular, good debt collection rates as well as managing our inventory. We continue to target through the working capital improvements. And our second half cash flow is expected to benefit from the property sales of our remaining property, which we announced in December up to $6,600,000 of cash, the settlement due to rise in March this year. So overall, net cash has increased, as Mark noted, to $23,900,000 which is up by $16,500,000 from the end of the previous financial year with all of our debt repaid. Bank covenant waivers and revised covenants remain in place for FY 2021. And in February, we secured a new $50,000,000 debt facility for a 3 year term. Our balance sheet is strong. The net cash and our net cash position will support capital investment and growth initiatives. And as Mark noted, we are pleased to resume dividend payments with an interim dividend of $0.012 per share unimputed to be paid on 26th 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. Eden Tube operates 2 divisions. The distribution division saw a significant improvement in earnings year on year with the 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. Please note project work and contracts continue to be 1 with a solid pipeline of activity secured for the second half of the financial year. Thank you. And I'll now pass 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 registered domestic and offshore mill attestation and also independent tests to get verifications 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 a number one priority and our total recordable injury frequency rate is now down to 3.5 and is below the estimated industry standard of 5. Our goal is to ensure all our employees and contractors come home safely every day, and we'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 degradation and easily reused and repurposed. Steel offers many other benefits that 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 8:30 people and our focus is on improving access to education, training and development and employment for our staff as well as students and low decile schools. We're involved with the Manukau School to Work Workplace Scheme with the Papakurea High School and we were delighted to be able to offer jobs to 3 of the students involved in the 1st placement. We've also launched a new online employee library, which provides a learning platform with 3 courses on a range of topics around 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're 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-nineteen 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 here. 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 less 7 less trading days than the first half. January was a tough start, and as people took extended holidays for many. And this 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-nineteen. Zealand tube is very well positioned with a clear strategic plan, a strong balance sheet and 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 opportunity. I'd also like to take the opportunity, just as I can conclude, to say thank you to Greg Smith, who has provided the Board with outstanding support and Board and myself with outstanding support for close to 3.5 years. And I look forward to welcoming Richard Smith as our CFO at the end of April. Thank you for listening and I'll now pass back to the moderator for Q and A. A. We'll go ahead with our first caller. Caller, you may go ahead. Your line is live. Hi. It's Grant Lowe here. Just a couple of questions for me. Firstly, the use of cash, you signaled 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 what that sort of capital investment, if that's over and above the sort of digital stuff and give us a bit more of a sense around these growth initiatives? Hi, Craig. Hi. You're breaking up quite early. I think that the drift of your question was could we give some view around our forward CapEx pipeline? It was around the growth initiatives in capital investment? Hi, Grant. Greg here. So look, as we've noted in the presentation, we are prioritizing the allocation of our capital towards digital growth projects. Clearly, there is an element of that capital, which is to support BAU. But we have a clear pathway ahead with that CapEx program. We are with the CapEx to date has been in line with D and A. And if we look forward and you mentioned the cash, we'll be evaluating how we use that cash to support the growth initiatives of the business. But 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 how that's tracking at the moment? Or how that you have a sense as to that competition? We've seen a good recovery in the general infrastructure markets. The businesses that we've got exposed there across our well performance of roofing and coil and curling and then of course our reinforcing and confluence businesses and all are not short of revenue. There are plenty of projects out there. It's really a profitable risk balance for us. So we're careful as to what we've been taking on, but we're not sure there's a strong pipeline for this financial year. And in the foreseeable medium term, we're seeing some quite good growth coming through there, as I mentioned, earlier through some of the 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. 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 8.30 FTE number that you talked about perhaps in terms of division or how many are in administration now. So it's been quite a big change year on year. So just interested in the composition of those of that workforce. And then lastly, 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. Steve, look, I think I let's start with the first Steve, look, I think I let's start with the first question here. Look, you're seeing around the rising steel prices and how that's impacting on the business. Obviously, since kind of 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, there's an interesting point for those observing the steel markets. The global steel production over the last 2020 year was kind of 1.9 1,000,000,000 tons and about 1.4 of that was produced in Asia. And of that, on the 1,000,000,000 tons is out of China. So the demand is incredible up in that Asian, Chinese region, which is really driving the price for iron ore and other ingredients, Coca Cola and nickel and other items. And so of course, that flow through into the local markets. We have progressively moved prices up. And 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 really up to 15% movement securing in mid March that is flying into the system. But that has been, I think, our 3rd move over the last 9 months of product prices that we've had to pass through the system as we move to more replacement cost type model. On the question on employees, yes, we have seen a significant reduction down to 830. You recall in January last year, we're about a little over 1,000. So we've reduced about 180. Of that, around 50 is really a group of steel fixes that we're working in reinforcing business that we've now moved to contract relationships. So some of that cost will come back, albeit as we move to tonnage rates on many of our projects at a more efficient level. So that accounts for 50 of that 180. And the 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. So there's a structural sort of 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. So we're running at a kind of around 8:30 type number at the moment, which is a significant reduction for us and of course, we'll file lower salary and wages cost structure. Now that has progressively moved through the first half. So we've got, as I mentioned, dollars 2,200,000 of net benefit coming in, in the first half, but obviously it sort of improves as the year goes on. Yes. So and I think the last part of your question was really around the construction 90% or supply chain in terms of freight driven? Yes. Just Yes. Just whether or not you're holding any sort of buffer inventories or whether or not your customers are having any problems importing products. Yes, just around sort of I suppose the question is just around the issues around container imports and supply disruption. Sure. It's a good question. Yes. We've been able to manage that pretty quickly since October November. We were carefully building stock as we're starting to see some of the issues occur. And so we're really focused on 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 3 or 4 month period. So we've been fortunate we've been able to keep our availability in default levels for our customer base fairly. So there has been a few misses, but we've been largely unaffected. We've worked obviously very closely with the Dillon Steel, Pacific Steel and BlueScope and local suppliers to shift if you like some of our supply points to ensure that we can keep our customers whole. So we haven't been that effective. We have built in Zimtree in some areas over the last 3 months. We've been building carefully to ensure that we haven't had some of your problems. This is always a fair amount of guidance in transit coming into the country. So we're just playing that carefully and then we get through okay. That's useful. Thanks, Mike. The sorry, just a follow-up to the first question. Can you give us an idea of what your sort of stock turn is 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? Well, Stephen, we don't split out our stock tune by the business at this point, but that's not a bad proxy. We obviously do internally in fact on a daily weekly basis, but we're not it's not going to share that externally at the moment, Steve. Yes. No problem at all. And Greg, all the best in your future endeavors and thanks for all your help over the years. Thanks, David. And we will go to our next question. Caller, you may go ahead. Your line is live. Hi, guys. It's Ron here from Forsyth Star. 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 results. Cheers.