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Steel & Tube turnaround continues with 49% jump in first-half net profit

Monday 18th February 2019

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Steel & Tube Holdings believes it is on the road to recovery, reporting a 48.7 percent jump in first-half net profit and delivering operating profit in line with previous guidance.

It will resume paying dividends, reflecting a “solid improvement in cash flows to $11.1 million.” That compares with a negative $16.4 million cash outflow in the six months ended June 2018.

Nevertheless, the company still has some way to go to fully convince investors - and regulators - it has put its past behind it.

The steel products distributor reported a $5.6 million profit for the six months ended December, up from $3.8 million in the same six months a year earlier.

The result is also a significant turn-around from the $35.9 million net loss it reported in the second half of last year.

The company had previously said earnings before interest and tax would be about 40 percent of its full-year earnings target and first-half ebit came in at $9.8 million, up from $7.5 million the previous year.

In today’s statement, the company reaffirmed its guidance that ebit for the full year will be $25 million, up from normalised ebit of $16.5 million the previous year.

That will still be below the $31.2 million ebit it reported for the year ended June 2017.

The company says the turn-around reflects both increased sales and reduced operating costs.

Revenue rose to $258.2 million in the latest six months, from $227.9 million in the second-half of last year, but was still down from $267.9 million in the previous December half-year.

Steel & Tube says the result also “reflects building momentum with benefits from Project Strive business transformation initiatives being realised.”

Net debt fell to $16 million from $104.4 million at June 30, reflecting the $81 million capital raising last year, improved operating cash flows, tighter working capital management and prudent capital spending, the company says.

Steel & Tube will pay a first-half dividend of 3.5 cents per share, down from 7 cents a year earlier. The company didn’t pay a final dividend last year.

In the four years ended June 2017, Steel & Tube had spent about $80 million on acquisitions, as well as another $32 million upgrading its operations, and yet profits were falling.

The company was fined a record $1.89 million last year for false and misleading representations in relation to steel mesh, a fine Steel & Tube has said is excessive, but the Commerce Commission is also appealing the fine, saying the fine was too low.

The charges covered 482 batches and about 480,000 sheets of steel mesh which Steel & Tube sold for about $24 million.

The company says that, excluding the S&T Plastics business that it announced last year it was quitting, and non-trading adjustments, ebit was up 116 percent. The business is also recovering from the trading issues caused by the new enterprise resource planning – ERP – system that went live in October 2017.

“The execution of business transformation initiatives is having a positive impact. Sales and volumes have continued the upwards trajectory seen in the last 12 months on the back of a strong focus on customer needs, improved product availability and delivery performance,” it says.

“The market remains very competitive, keeping pressure on gross margins which have also been dampened by a shift in sales mix in some businesses.”

The company says costs fell 3 percent as a function of sales compared to the second half last year. The business has also absorbed inflationary and wage and salary cost increases without increasing overall operating spending.

Steel & Tube is still working on getting value for money from the ERP IT platform, and restructuring and strengthening of its leadership team.

“We have made good progress across most areas of the business,” chief executive Mark Malpass says, adding that the transformation strategy, which included optimising the company’s property footprint, contributed about $5 million to first-half ebit.

“While a combination of competitive pressures and product mix has impacted gross margins in the half-year period, we are now seeing a turnaround in our business performance,” Malpass says.

The economic outlook remains positive and product pricing remains firm and the company’s staff morale is strong, he says.

“There remains work to be done, but we are confident we are on the right track.”

The company referred to last year’s failed takeover attempt by Fletcher Building only in passing.

Steel & Tube shares ended last week at $1.22 - down on Fletcher’s non-binding $1.90 a share offer but above the rights issue price of $1.05 and the placement price of $1.15.


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