I would now like to hand the conference over to Mr. Mark Malpass, CEO. Please go ahead.
Thank you, and welcome to everyone on the call today. Here with me is Richard Smyth, Steel & Tube's CFO. We're excited to share with you details on a transaction we've announced today, then we'll discuss our 2025 interim results and performance. We'll have time for questions at the end. For us, strategic growth is about firstly going deeper and wider in high-value areas. Secondly, it's about improving our mix of non-commoditized products. Lastly, it's about investing in new products and services that will provide value to our customers. We're in a strong position to leverage our M&A opportunities that are in front of us. We have NZD 17.5 million of cash reserves, no borrowings, and a NZD 100 million facility in place at the end of December 2024.
Today, we've announced the conditional acquisition of Perry Metal Protection, Perry Grating, and Waikato Sandb lasting for NZD 43.5 million, + a 2year-3year earnout of NZD 6 million. The acquisition, including earnout, will be fully funded with a mixture of debt at 70% and equity at 30%. We expect to be earnings accretive from day one, and settlement is expected in May 2025 once all conditions are met. This is a great addition for our business. It introduces a new high-value service and products offer for our customers. It's less cyclical than other parts of our business. It's highly aligned with our customer base, as well as trusted brands with a national reach. The transaction is for Perry Metal Protection, Perry Grating, and Waikato Sandb lasting. Perry Metal Protection is New Zealand's largest and leading corrosion protection and treatment expert, with a 44% market share in hot-dip galvanizing.
This is a process that coats metal in zinc to protect it from corrosion and oxidization, creating a durable layer that can last for decades. In other words, substantially extending the life of steel, which is already a highly sustainable and recyclable product. The grating business is primarily used in the industrial and commercial construction sectors, for example, flooring, steel treads, drain covers, trenches, and mezzanine flooring. Products are typically fabricated to customer specifications. Waikato Sandb lasting provides high-quality blasting services on a wide range of items, including structural steel, heavy equipment, and vehicles. The acquisition price is equal to the previous 3-year average EBITDA multiple of 4.8 x, making it an attractive acquisition. Revenue last year was around NZD 36 million, and normalized EBITDA was just over NZD 9 million. We estimate an accretive of NZD 1.5 cents earnings per share will be delivered in the first 12 months of ownership.
We have good experience integrating new businesses, and planning is already underway. We have estimated integration costs at about NZD 800,000, and an initial assessment of the synergy benefits is for at least NZD 1 million EBITDA per annum following integration. Growth is a key part of our strategy, and we have successfully invested in a number of new products and services over the past four years. We are excited to welcome the Perry Group of Businesses to Steel & Tube. We have an experienced team on board. We are confident in the value of the business, having completed six months' due diligence, and we have a proven track record in this area. In fact, I was on a call with our team earlier today, and they are very excited with the cross-sell opportunities that the business will bring to us.
Steel & Tube is obviously a cyclical business, and the economic and market conditions during the first six months of this financial year were the most challenging we've seen in decades. We have a track record of navigating through these challenging conditions, and the strong fundamentals that we've put in place will set us up to deliver material earnings growth when activity returns. Our first half 2025 financial year results are reflective of the recessionary environment that we've been in, with lower customer activity impacting our volume and earnings. We've continued to increase our operating leverage with a focus on higher margin products and cost management and efficiencies. This will drive profitability as the economy recovers. We've maintained tight control over our working capital, and inventory levels have further reduced, with priority being investment in high-value products and key inventory lines.
Our balance sheet remains strong, with net cash of NZD 17.5 million and a NZD 100 million bank facility providing resilience and optionality for investment and growth. Demand for steel remains at the lowest level since the 1990s, and the cycle bottom has been longer than we anticipated. Pleasingly, this now seems to have bottomed out, and we're starting to see early signs of market improvement with improved customer sentiment and demand. Interest rates continue to lower. There has been an upswing in business confidence, and inflation pressures are easing. It's worth noting around four in every five mortgage loans are expected to be refixed this year at a lower rate, meaning disposable income should support increased activity and renovations and housing.
Our team continues to deliver excellent service to our customers with a focus on maintaining market share, while our sales team is doing a great job responding to the increase in the number of tenders that we're now receiving. We're continuing to prioritize our cash flows and inventory and are well positioned for the economic recovery. Our goal is to build share of sales in growth sectors, so in manufacturing, infrastructure, commercial, and residential construction. As you can see by the next two charts, we have been operating with reduced activity across all of these sectors over the last 6 months-12 months. Manufacturing and commercial construction make up the largest percentage of our sales, and sentiment in manufacturing has improved, as you would have all seen last month. However, it does remain subdued.
Commercial construction has also contracted and should improve as interest rates reduce, and we are already seeing a lift in tenders for reinforcing steel, which is usually the first step in the business process. As it's been well traversed, there has been a steep decline in residential construction activity. Alongside this, we have seen corresponding intensity in competition and pricing pressure across the construction sector. It was good to see the building sector was one of the most upbeat in the recent NZIER business confidence survey. However, we're conscious it will take some time for an increase in the pipeline to translate into construction activity. Feedback from residential group home builders we work with is that there has been an increase in new home build enquiries since the OCR rates have been lowered and expectations of a housing market pickup during 2025 are mounting. Infrastructure has also been constrained.
However, the long-term outlook is positive, with a NZD 68 billion government spend over the next five years, in addition to local and regional projects. There's 149 projects that have been approved for the fast-track consenting process, many of which will require steel solutions, where we have specialist expertise such as roads, bridges, dams, port infrastructure, housing developments, and renewable energy projects. We've seen an uptick in the number of tenders over the past six months compared to the same period in the prior year, with some big projects on the horizon, such as Auckland Airport, Dunedin Hospital, and ferry terminals. We presented this conceptual chart with our last set of results.
In our view, we are at or near the bottom of the cycle, and our main sectors and positive signs are starting to emerge, with lower interest rates, increased government investment in infrastructure, and improved business confidence levels of investment. We expect market challenges to reduce in severity this year, and we will continue to manage them appropriately. The responses that we have undertaken to date are helping to mitigate the impact on our business. Our dual pathway strategy is delivering value as we continue to strengthen the core and grow high-value products and services. It's also worth representing this graph, which shows the significant improvement in earnings or our operating leverage that flows as volumes increase. We have a large proportion of our costs that are fixed, so our earnings will benefit from volume growth.
Our focus is on high-value products and lower costs as also improving that operating leverage, which will magnify our earnings growth when demand does return. You can see in this chart the additional revenue and earnings being delivered from our recent investments. We're seeing a lot of opportunities come forward, and we have several still in active review, in addition to the Perry Metal Protection transaction we announced today. Investing in new products is also part of our growth strategy. For example, we are launching a new roofing profile in April, which will be the first new profile the market has seen in many years. As New Zealand's only BRANZ approved tray profile product, we expect a high adoption rate from architects for New Zealand's premier home segment.
With strong cash flows and good cash reserves and no debt, our balance sheet has provided us with the ability to progress opportunities such as Perry Metal Protection. Our priority focus for the second half of the year is to capture revenue and drive profitability in a weaker market, while positioning our company to benefit from the expected increase in demand from mid-2025 onwards. We are targeting NZD 7 million in annualized costs out for the financial year 2025. This is versus the NZD 5 million we were initially expecting. We continue to focus on efficiencies and optimizing resources across the business. Managing cash flows and inventory remains key, and we are supporting gross margin improvement with a focus on high-value products and services. I'll now hand over to Richard Smyth to talk about our financial results in more detail.
Thanks, Mark. Lower volumes and revenue were reflective of weaker customer demand across all sectors and products. While margins remain competitive, there has been some compression due to competitive pricing. Normalized earnings were down year- on- year, and we reported a net loss after tax of NZD 10.4 million, which included NZD 1.4 million of one-off and non-trading costs. Given the ongoing weak economy, the Board has taken the prudent approach to cash management, and no interim dividend has been declared. The key driver of our results is volumes, which, as Mark has already mentioned, is reflective of the current recessionary environment. Revenues declined 25% year- on- year, with softer customer demand across a range of sectors due to the challenging macro conditions. Steel & Tube is more heavily weighted towards steel rather than metals, which has been more adversely impacted by the recession.
In a lower volume environment, some competitors are actively driving price, which is having a short-term impact on margins. Gross margin dollars per tonne has reduced but remains a priority focus. Improvements will be driven by customer value add, cross-selling, pricing discipline, and cost control, as well as a strategic focus on higher value products and services. We expect to see gross margin improve as economic conditions return to a more normal setting. We have identified further efficiencies and are now targeting NZD 7 million in annualized OpEx savings this year, up NZD 2 million on our previous plan. Initiatives are mostly focused around optimizing our team, tight control over discretionary spending, procurement efficiencies, and other savings. The Roadex freight acquisition is performing ahead of expectations and delivering valuable cost efficiencies. The end result is a more efficient and more streamlined company that optimizes the use of all of our resources.
Although it's easing, inflation still has a considerable impact on the first six months. However, the cost-out program is more than offsetting inflationary pressure. The impact of lower volumes and normalized earnings has been partially offset by higher margins on recent growth investments and cost-out. As you can see, the drop in volumes and pricing pressure were the main drivers for the lower earnings result. We have a strong balance sheet, providing support during challenging times and enabling continued investment and growth. Inventory was further reduced, operating cash flows remained strong, and net cash was NZD 17.5 million at period end, representing a NZD 9 million improvement from the 30th of June 2024. We have no debt and a NZD 100 million undrawn facility to fund growth and other initiatives. We continue to carefully manage inventory to ensure customer availability while shifting product mix towards higher value products.
Inventory levels have been reduced in line with activity, and we're down just under NZD 12 million since June 2024. Our finished product prices remain at elevated levels. We continue to carefully manage cash flow, with benefits from the decrease in inventory and good cash collections in a softened trading environment. Major cash flows were dividends, CapEx, and lease payments. Thank you. I'll now pass you back to Mark.
Looking at the second half of the financial year from January- June, while we expect the market to remain challenging for the next few months, pleasingly, we are seeing some positive signs, which we expect to translate into demand growth from mid to late 2025, which is the first half year of the 2026 financial year. Manufacturing is poised to grow, supported by recovery of both domestic and international markets.
Interest rate cuts over the coming year are expected to stimulate commercial and residential construction markets, with homeowners benefiting from lower mortgage payments. In terms of infrastructure, there are some shorter-term government-funded projects such as Dunedin Hospital that are encouraging. Longer term, there is significant need for new infrastructure and maintenance of existing infrastructure. The government's 5-year infrastructure budget of NZD 68 billion, along with initiatives under the Fast Track Approvals Act, will lead to increased project work, although it will take time before the project work begins. There is a large pipeline of work ahead, and we are well positioned to capitalize on this. Our dual pathway strategy is now delivering tangible results, and this remains the framework for our actions as we continue to strengthen our core and build high-value products and services.
We are navigating a challenging, difficult trading environment and are well positioned for demand as growth returns. We have maintained market share. We have a loyal customer base, and we have quality inventory, meaning that we can provide the products and services we know customers will need when their projects start up again. Steel is one of the most essential and often the only product for many construction needs. The macro trends for our sector remain strong, and we have the balance sheet and expertise to support our growth strategy and deliver value for our shareholders. We're well positioned to deliver material earnings growth as activity increases. Thank you for listening. I'll now hand back to the operator to manage questions.
Thank you. If you wish to ask a question via the phone, you'll need to press the star key followed by the number one on your telephone keypad. If you wish to ask a question via the webcast, please type your question into the ask a question box. Your first question comes from Rohan Koreman-Smit from Forsyth Barr. Please go ahead.
Morning, guys. Thanks for the update. I was just wondering if you could talk to, I guess, initial trading for this year. I know it's hard to get a read given it's only a couple of months in and they're full of holidays. Are we kind of still running at the same sort of run rates that you saw at the back end of last year, or has there been a little bit of a pickup in activity?
Yeah. Hi, Rohan. I'll take that question. I guess it's continued to be pretty tough months so far. January is a 13-day month, so December, 15-day month, January, 13-day month, so very short trading periods. January was tough. February's been tough to date, although, as I mentioned earlier, we have seen a pickup in activity this month right through the businesses. Reinforcing, as I mentioned on the call, we've had a number of new project inquiries that are stacking up. In fact, we've had to take on another estimator in that area. On the roofing side, we've seen a pickup in daily sales rates through those businesses. Coil and processing, same thing. Distribution, most importantly, we've seen a reasonable tick up in our daily sales trading volumes, which is encouraging.
Channel checks out there in the market are supporting that as well. This is on a fairly low base, Rohan. Again, February is only an 18-day trading month. I think as we start picking back up into March, April, May, we're expecting to get back into the black and see some positive trading start flowing through and momentum really start to build from that kind of mid-year period. In all reality, we'll probably see another couple of OCR rate drops by that time and should be enough to also sort of stimulate some of that Resi commercial market.
Thanks. I guess competitive response, margins have obviously been squeezed with a bit of pricing pressure out there. I've just noticed a few kind of price increase notifications in the market. Can you just, I guess, talk to how your competitors are behaving? And if there's anyone out there who's being a little bit more or slower to react on price than others?
Look, it's certainly a mixed bag out there, Rohan. You're probably aware from your own channel checks. There's one or two that are sort of, shall we say, a little less structured with their pricing behavior, maybe destocking or other things going on there. We are seeing one of our key players has announced a price increase. We have also, on our website, you would see that we are considering a price increase and are likely to move on that later this month. There are some grounds for that in the market. We are just working through that at the moment. It really is a mixed bag out there in terms of pricing behavior. We are obviously trying to keep that pricing structure.
We have been making really good progress on our margins per ton up until kind of around that October period when we just started seeing some fairly aggressive behavior in the market. Obviously, you've got to maintain scale so that flows to margin impact, which we haven't been able to avoid.
Thanks. Just on inventories, you've taken another NZD 12 million out. I know some of it's just lower import costs, but that's been a key factor in terms of cash management. Can you just talk to where you are in terms of inventory on hand, in terms of month's sales, and also kind of with the dollar-down pressure on inventory cost? Is the kind of cost out from working capital kind of complete?
Yeah. I mean, we probably have optimized that inventory just about as far as you can go. Also, as you mentioned, we've seen a benefit of a little bit of price reduction. We've seen a steady reduction in, I guess, U.S. dollar price over the last six months. When you translate that into the Kiwi, it is obviously with a lower dollar at the moment. It's kind of been relatively flat. We are seeing an increase in spot prices across most of the finished products that we're purchasing. That will start flowing into price, hence the price pressure that we were talking about earlier and the need to increase prices because you convert that with a low dollar. There is pressure on that. I think that'll influence inventory a little bit as price increases through there. We've obviously got from May, we can expect another NZD 6 million inventory from Perry's coming on board. Other than that, we think we've already started buying in anticipation of improved demand.
That is already starting to flow through our system and has started flowing in in January, February. Not significant. I mean, we're sort of balancing that very carefully. We're still keeping hold of anywhere between three and a half and four and a half times forward demand, which obviously varies depending on some of our products that are coming from far away. Generally, we're sort of aiming at about that four times, and we've been able to maintain that and keep a tight control over inventory.
Thanks. Maybe kind of two-part final question just on the acquisition. It's a bit of a different acquisition to the three that you called out. It's larger in scale, and it's not, I guess, pushing volume through your existing network. Can you talk to, I guess, the similarities in customer sets and the cross-selling opportunities you kind of briefly talked to in your presentation? On the second point, you'll be probably 20 or so, NZD 10 million-NZD20 million net debt once this completes at the end of the financial year. What's the kind of banking arrangements like given, obviously, the current business is probably going to be reasonably challenging still for the next six months in terms of banking?
Yeah. Sure. Perhaps I'll cover the first question and then hand over to Richard to cover the second part. Yeah. Look, it's a really good business for us, this one. If you look at a customer base, you've got about an existing 75% overlap of our customers. So obviously, that other 25% creates a great opportunity for us to be able to sell steel to those customers. We are looking forward to that opportunity. As I mentioned, as I briefed in the team about the acquisition this morning, we're very excited about that. There's also opportunities with ourselves where we're currently using the other competitor, Valmont, which have about, I call it, 33%-35% of the market. We're using them a lot. That, of course, moves across to Perry's, assuming the transaction completes.
We see opportunities there and also within, as I mentioned, Perry's existing customer base to sell more steel to. Really nice adjacency for us. We've done quite a lot of due diligence over the last six months. In fact, even before the NBIO, we'd spent close to six months researching the sector and the business and have got ourselves quite comfortable with the business are a few conditions that we have to work through over the next three months, but very reputable business. The owner is known well to us as a key player in the Waikato sector, and we've been working with for a number of years. We have a nice earnout structure there with a two-year earnout and an option to extend that to a third year.
We will be working closely with the vendors over that two-year period to try and make sure they're successful with their earnout, but also a great opportunity for us to have a very experienced team of owners on board working with us to ensure that the business is optimized. We feel, with the work that we've done and understanding of the sector, we've even been to Europe and visited galvanizers over there just to make sure that we're across changes in the market and what we can expect to see. We feel like we've got an experienced team on board. I personally spent a lot of my life in M&A, and the team that we've got on board has got some very good processes in place to ensure that this integration goes well.
The key focus for us in really the first 12 months is all about the team, the staff on board, and the customer base. We have proven with Kiwi, sure, it was only a NZD 10 million transaction, but by protecting that customer base and extending it across our platform in terms of cross-selling is just absolutely critical in the first 12 months-24 months of any transaction. Some of the back-end stuff comes along quite quickly, which is an easier part of the integration. Really, the key for us is focusing on cross-selling and the people involved in bringing and welcoming that team on board. Hopefully, that answers the first part of your question. I'll just hand over to Richard to talk about the other financing question you had.
Okay. Hi, Rohan. Our facility agreement requires us to get permission from our bank syndicate to draw down for M&A. We have reached out to them recently, and we are taking them through this process. They are supportive. They've got their own processes, as I'm sure you're aware, and they're working through those. We're not seeing any significant stumbling blocks or concerns there. There is a process that we do need to work through.
Thank you. I'll let someone else ask a question.
Thank you. Once again, if you wish to ask a question via the phones, please press star one on your telephone keypad. If you wish to ask a question via the webcast, please type your question into the ask a question box. Your next question comes from Cameron Parker from Craigs Investment Partners. Please go ahead.
Morning, guys. Thanks for the presentation. Hey, just with regards to Perry Metal Protection, the conditional terms for the transaction going ahead, is it solely based around sort of funds, or is there another element around customer base and so forth? Can you talk to that?
Hi, Cameron. Sure. Look, there's a few conditions there. Financing is one of them. We have also got conditions around environmental baseline reports being established. Obviously, the plants are operating zinc, acid, so it's prudent for us to make sure that we understand the environmental footprint of the sites before acquiring the businesses. We are working through a process with some outside consultants, which we are sharing the cost of Perry's on to work through that process to ensure that we have a really good understanding of that and then endeavors and other things that come with that. Another one is really around the leases. Perry Charitable Trust will continue to own three of these large galvanizing sites. We are working through lease arrangements on those, we have agreed heads of terms across those. We have also got a couple of sites that are third-party sites.
Just working through those new leases will be something that we'll be working through. There are other sort of smaller conditions that you'd expect in any transaction that we'll work through over the next three months. We're aiming for completion towards the end of April. We should own the business from early May.
Okay. Great. Thanks, Mark. Just really the last one is really the green chute you're starting to see in your pipeline and so forth. Can you remind us how quickly the conversion is from pipeline to work put in place and perhaps just touching on the different areas of those green chutes just a little bit further.
Sure, sure. Yeah. Like a reinforcing project can take 6 months-12 months before we actually see steel going out the door. There is a bit of a gestation period there on some of the larger project work, in the infrastructure space or in the kind of large commercial space. What is encouraging or what has certainly given the board and myself some comfort is that the manufacturing activity is starting to turn. You saw the PMI last month jump up into the expansionary mode, which was the first time in, I think, 23 months. We have really been in the doldrums there in the mid-40s to pop up into, I think, it was 51.2 or something like that. That is a really good sign.
We have started seeing it in our numbers this month where that flows straight through our distribution businesses. We start seeing manufacturing, a little bit of an uptick in the light commercial space as projects start to flow through. We're seeing some early work on the Auckland Airport that started flowing through in January, and that sort of started to kick along a little bit. We've got a strategic partnership there with Hawkins. We're seeing some other opportunities, things like Dunedin Hospital that are kicking on earlier, that will take a little bit more time before we start to see the volume flow through. There are already large commercial projects and a lot of our partner constructor companies that we work with. We're starting to see some activity.
We secured a couple of projects in the reinforcing business this month that are due to start, actually things like the Drury South second stage extension that we'll start seeing some reinforcing flow through in the next month or so. Some are well advanced, Cam, and some of the 149 fast track projects are well advanced, but others will take 6 months-12 months. The key I would want to point to is manufacturing, which even in this environment is about 34% of our sales, is really starting to show some signs of life, which is really encouraging.
That's awesome. Thanks, guys.
Thank you. There are no further phone questions at this time. I'll now hand back for any webcast questions.
We've got a couple of online questions. First one, what is the expected rate of return on the latest acquisition?
We've pointed to a sort of backward multiple over the last three years on an EBITDA basis that we've called out in the report there. I think about how we've noted we've also called out at least NZD 1 million of synergies and EBITDA flowing through in the first year. The return on the project is strong. I'm not going to quote the NPV IRR numbers, but obviously, we have some very clear criteria before we even enter a gate around any M&A and getting to an NBIO, a non-binding indicative offer. We have clear hurdles around return on funds employed, NPV, IRR, and actually both the previous multiple as well as the forward-looking multiple, including synergies and other things. This particular acquisition clears all of those hurdles plus some.
We believe it's the right time to be buying. We probably wouldn't be able to afford this acquisition in another three to five years' time as the market improves, but it has demonstrated steady performance. You can see the charts that we've included around the prior period, EBITDA generation, even in a recessionary environment. There's been a little bit of compression to the top line, but it's very little compared to the other players in the industry that have seen quite significant reductions in revenues. Second question, with regards to M&A, is there the possibility the focus on M&A causes a loss on operations focus? Look, it's a good question, but we believe we've got that well covered. We have a team that we established about 18 months ago just to focus purely on M&A.
That team is led by our previous Distribution General Manager, Marc Hainen. He also has a unique set of skills, and he can run businesses as well as acquire them. Marc will be working with me to integrate this business and be responsible for capturing the synergies that we've laid out and ensure that the business and the people come on board and that we get those cross-sell opportunities picked up. The business will report into me, but as I say, that M&A team are responsible for the first couple of years to really ensure that we capture synergies. That's worked very well for us with the three businesses we've bought to date. We're in a very fortunate situation to have an individual like Mark who is able to both structure deals as well as execute against them.
We feel very comfortable that we can manage both the integration of this business under Marc's stewardship and also the ongoing running of it.
Next online question, what is the geographic expansion opportunities of the new acquisition?
Yeah. Four locations, or actually six locations. A couple of them are non-galv sites throughout the country. We plan to be able to use our distribution network to be able to be a, I guess, a cross-dock opportunity for the galvanizing. This happens already in Tauranga for Perry Metal Protection, where they have customer drop-off pickup, and they're able to deliver out of Hamilton, which is where the galv bath is placed into that Tauranga and also the Hawke's Bay market. Quite a—and that's all about distribution delivery times. One of the things that we're able to bring to the party is with our Roadex truck acquisition.
Perry also has some of their own trucks, and it will enable a lot more of our facilities to be utilized as drop-off pickup zones for galvanizing as we're able to capitalize on our existing fleet and leverage those trucks to be able to transport galvanizing products to customers. The galvanizing plants are in Auckland, Hamilton, Wellington, and Christchurch. You can swing a very wide radius from all of those sites. Perry have demonstrated this is a great quality company with excellent customer relationships, and we'll be able to leverage that through our wider distribution network.
No more online questions. I'll hand back to the operator.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.