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Steel & Tube shares plunge 24% after company flags annual loss following restructuring

Wednesday 23rd May 2018

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Steel & Tube Holdings expects to post a loss this financial year and breach its banking covenants after a restructuring that will see it exit its plastics business and write down the value of its assets.

The Lower Hutt-based business said it expects to post a loss before earnings and tax of about $38 million in the year ending June 30, from positive ebit of $31.1 million a year earlier. It had previously forecast ebit would be consistent with the prior year, excluding non-trading costs. It said normalised ebit would be about $16 million, excluding non-trading costs and impairments of up to $54 million.

The shares, which have dropped 20 percent over the past year, plunged 24 percent to $1.51 shortly after the market opened this morning. That's the lowest they've traded since 2001. The stock was halted yesterday pending the earnings update.

Steel & Tube, which manufactures and distributes steel building supplies, has been reviewing its business under the guidance of a refreshed board and new chief executive. Today it said it will sell its plastics business which supplies piping for farm irrigation and take a write-down of up to $12 million, write down its inventory by $18 million following the introduction of a new enterprise resource planning (ERP) system, write down the value of other intangible assets by up to $10 million, and wear additional costs to rationalise its distribution and reinforcing operations.

"The impact of resolving legacy issues and resetting the company has been greater than anticipated," chief executive Mark Malpass said in a statement. "However, with the ERP system now operational and, alongside the restructuring carried out over the last six months, we are turning the corner.

"We have a well-considered change programme underway that has the customer and our supply chain performance at the heart of our initiatives. We are starting to see improvement and are confident we are on the path to rebuilding Steel & Tube as a leading provider of steel products and solutions in New Zealand.”

Malpass was appointed to the role in February this year after acting as interim CEO following the departure of  Dave Taylor in September last year. 

"The trading environment remains highly competitive, however, Steel & Tube’s pricing strategy is having a positive impact," the company said.

Steel & Tube said that as a result of its write-downs and impairments, the forecast earnings for this year are expected to result in a breach of one or more covenants in its senior debt facilities and management is seeking a waiver from its banking partners for any covenant breach.

It will make a decision on the payment of a final dividend for the 2018 financial year, in line with its policy, when the financial result is finalised. It expects to release its 2018 results on Aug. 31.

The company said it has been "significantly impacted" by issues related to the implementation of its new ERP system that went live on Oct. 2 last year and said that represents about two-thirds of the year on year change in normalised ebit.

"While the new ERP system is now operational, issues with its implementation across the group have been far greater than expected," the company said. "This has hampered business operations and resulted in lost business. The company has worked closely with its IT suppliers to rectify issues and, while the board and management are disappointed in the execution of this project, they are confident that this new platform is the right one to take the company forward."

The roll-forming and core distribution businesses, in particular, have been impacted by the ERP implementation issues but sales volumes have started to improve in the affected businesses, it said.

The board said it is confident that the change programme and restructuring undertaken will drive sustainable improvements in earnings and deliver benefits from the 2019 financial year onwards.

The company said it had undertaken a detailed review of its plastics business and decided selling the assets was the best outcome for the business, given the downturn in the irrigation market, along with a need for further capital investment.


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