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Steel & Tube returns to the black but says margins are squeezed

Friday 23rd August 2019

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Steel & Tube turned back into the black in financial year 2019 but says positive gains were offset by lower-than-expected gross margins due to the market contracting for some high-value categories and due to the highly competitive market.

Net profit in the year ended June was $10.4 million, a turnaround from the previous year’s $32.1 million net loss with revenue flat at $498.1 million.

The company says excluding write-offs in the previous year, earnings before interest and tax were up 22 percent to $16 million from $13.1 million and that normalized net profit was up 74 percent to $9.9 million. 

The result is in the middle of the company’s latest guidance provided at the end of July but the company downgraded its guidance twice in the year from an original ebit forecast of $25 million.

The year-earlier ebit has been restated from the $16.5 million it reported a year ago and reported ebit for the 2017 financial year was $31.1 million.

The company says it “made good progress on its business turnaround program” during the year and its “Project Strive” program delivered a $10 million benefit in the latest year, contributing a 5 percent improvement in normalised revenue and a 4 percent reduction in costs.

“A new operating structure has been established, including a strengthened leadership team,” the company says in its results announcement.

It says cost efficiencies and revenue growth were not enough to below-expected gross margins.

“Price competition was significant throughout the second-half of full-year 2019, business confidence has softened and some higher value sectors have contracted – stainless market particularly,” it says.

The impact was mainly on its distribution business.

Steel & Tube’s competitors have also reported torrid results for their second half years.

Fletcher Building’s steel division’s annual ebit fell 33 percent after a 9 percent fall in the first half while BlueScope Steel’s New Zealand business reported a 28 percent drop in annual ebit after a 75 percent increase in the first half.

Steel & Tube says a disciplined approach to managing working capital resulted in improved inventory availability across the business while it reduced inventory holdings and improved debt collection rates.

Net cash flow from operations improved to $21.3 million from just $1.3 million the previous year.

Net debt fell from $104 million to $15 million, reflecting the $78.8 million net proceeds from last year’s rights issue and placement as well as the improved cash flow, tighter working capital management and “prudent” capital expenditure – the latter was $7.2 million, slightly below depreciation and amortisation.

Steel & Tube will pay a final fully-imputed dividend of 1.5 cents per share, taking the annual payout to 5 cents. The dividend will be paid to those on the register on Sept. 13 on Sept. 27.

The company didn’t pay a final dividend last year but did pay an interim dividend of 7 cents per share.

“Steel & Tube has a number of strengths, including our national network providing a metropolitan and regional presence, a broad product range, technical capability, operational integrity and high standards of safety and quality,” says chief executive Mark Malpass in the announcement.

“Our pursuit of customer excellence will help to ensure we remain a relevant and attractive option for customers,” Malpass said.

“Margin performance has been challenging and, while there are external factors that are difficult to influence, the initiatives being undertaken are expected to deliver an improvement in both business divisions,” he said.

“We are very focused on building a business that is fit for the future and, while this is taking longer than originally anticipated, we remain confident in our long-term prospects.”

The distribution division’s ebit rose 9 percent to $2.9 million while the infrastructure division’s ebit rose 5 percent to $11.9 million.

The company expects tighter market conditions and the competitive landscape to continue in the current year and says it is adapting “to ensure the business model is fit for purpose.”

Steel & Tube shares closed yesterday at 96 cents and are down 20 percent from a year ago. The current price compares to last year’s $1.15 per share placement price and $1.05 rights issue price but is above last month’s low at 87 cents.


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