For the Year Ending 30 June 2009
Financial Performance
The Company announced a full year after tax result of $26.1 million. This is an increase of
$3.6 million, or 15.9% when compared with the previous year’s result. Sales at $484 million
were $20 million lower than last year. This full year result comprises two very different half
year performances which reflect the market conditions described below.
Previously announced results for the six months to 31 December 2008 were sales revenue of
$274 million and net profit after tax of $20.8 million. For the second half of the financial year
the sales revenue was $210 million and net profit after tax of $5.3 million.
A final dividend of 9 cents per share was declared.
The Company’s result represents an EBIT return on year end total funds employed of 21.9%
and an after tax return on average shareholders funds of 17.9%.
Market Conditions
In commenting on the Company’s operations the Acting Chief Executive Officer, Mr Tony
Candy said,
“The Company saw considerable volatility in market conditions in the period under review as
residential building consent issuance was down across the whole year finishing with the lowest
annual number of consents since these records began in 1965. Commercial construction
activity as measured by the value of consents issued rose by 7.6% which was not enough to
offset the decline in the residential sector. The overall reduction in value of building consents
issued was $1.9 billion or 16%.
The first half of the financial year was characterised by substantial shortages of product due to
world demand. Suppliers implemented stock allocation policies at that time and prices rose
significantly. The Company’s response to these trading conditions was to withdraw from high
volume low margin indent business, and to be more focussed on the higher margin mix of
products.
Local demand was mixed as the volume of product consumed in commercial building activity
declined even though the value of building consents increased. Volume to the manufacturing
sector declined as the year progressed while demand in the rural segment of the market was
strong in the early part of the year.
Although tax cuts and interest rate reductions helped to ease the plight of the retail sector in the
face of rising unemployment, the second half of the financial year also saw the manufacturing
and rural sectors under increasing pressure with a volatile currency, softening demand and
reductions in commodity prices.
The second half also saw a substantial drop off in steel demand leading to removal of
allocations by suppliers. Lower demand available from the domestic market also saw a
contraction in margins. Profitability of the Company’s businesses declined sharply and bad
debt write offs increased as the slowdown in the construction sector took hold.
The international price of steel reduced in line with reductions in world wide demand, however
a drop in New Zealand currency meant this effect was not so apparent in the local market.
Performance
Health and safety performance showed continuing improvement during the year with no lost
time injuries recorded and the number of medical treatment injuries reduced by seven to a total
of ten for the twelve months. The results achieved in this area of the business are something of
which all staff can take credit and be very proud.
The Distribution business comprising Steel Distribution, Stainless Steel, Fastening Systems,
Piping Systems and Industrial Products in aggregate saw a reduction in sales revenue of around
4% over the full year. Pricing volatility of replacement inventory and supplier allocations saw
an increase in sales and margins occur in the early part of the year with a subsequent reduction
in sales and margins when prices declined and replacement inventory became abundant later in
the year.
The Manufacturing business comprising Roofing Products, Reinforcing and Fabrication and
Hurricane Wire Products was generally also affected by the same conditions with a reduction in
sales revenue of 4%. The Reinforcing operation posted improved results due to a favourable
mix of commercial contracts and strong demand from infrastructure projects. Hurricane also
had an improved result overall but suffered from the slow down in the rural sector in the latter
part of the financial year. Roofing operations were able to replace some lost revenue from the
residential housing sector with higher sales to the light commercial sector and farm shed
market. Its result however was lower than the previous year.
The overall reduction in volumes led to a no staff replacement policy being applied to the
businesses, and in combination with some redundancies this saw the work force reduced by
fifty between January and June.
Inventory values increased significantly in the first half of the year when prices increased
considerably. When demand stalled, a concerted effort to reduce inventory holdings across all
businesses saw a reduction in inventory value of $43 million in the second six months, at a time
when sales volumes fell below expected levels. This reduction when combined with lower
accounts receivable contributed to a reduction in borrowings of $36 million in the year.
Outlook
There is considerable uncertainty as to when the New Zealand economy will emerge from
recession. Unemployment continues to rise and commodity prices have weakened, while
inflation has reduced, house prices have fallen and interest rates are near to historic lows.
The economy has been in a recessionary state since early 2008 and this has continued
throughout the 2009 year to date. Dairy farmers’ incomes will drop again in the coming year.
Based on forecasts from Fonterra returns from dairying will be $4 billion less than those
achieved in 2007/08 and this will eventually flow through to the overall economy. Returns for
beef and sheep farmers are expected to increase although volumes processed will be lower as a
result of earlier drought conditions.
Exporters of other products and services will continue to struggle until the New Zealand dollar
drops back to the lows seen late in 2008. Lower demand for imports from our trading partners
flowing from global financial market turmoil will also impact adversely on the exporting sector.
Construction projects associated with the Rugby World Cup will help to sustain commercial
construction in the immediate future but there is a noticeable drop off in the number of square
metres of new construction projects approved. There is an expectation that infrastructure
projects, initiated by the government, will assist volumes later in 2010 and beyond.
Residential construction has fallen to lows not seen since the early 1960’s. Migration inflows
have started to increase as fewer people are leaving the country while arrivals are increasing.
The increased inflows will over time result in a boost to housing starts which will also be
assisted by lower mortgage interest rates.
International steel prices have seen considerable volatility over recent years. This when
combined with substantial exchange rate movements and sudden shifts in demand and supply,
have resulted in fluctuating profit margins. There are signs that international steel prices are
beginning to increase at the same time that production volumes are stabilising. The currency
however remains at levels above where the Reserve Bank appears to be comfortable.
In the first half of the new financial year the company expects to see a continuation of the
current soft volumes and resultant pressure on margins
A number of initiatives to maintain profitability have been taken. These include freezing
management salaries and directors’ fees, changing incentive programmes, reviewing human
resource requirements, reducing working capital usage, lowering of capital expenditure,
relocating businesses and introducing targeted product growth programmes.
Although there is a large degree of uncertainty as to the timing, there is some prospect of an
improvement in 2010, if as economic forecasters predict the country emerges from recession
and demand picks up”.
For further information, please contact Mr Tony Candy, Acting Chief Executive Officer, Steel
& Tube Holdings Limited on (04) 570-5001.