Anybody wondering where Steel & Tube Holdings’ cost savings are coming from need look no further than the site rationalisation project currently underway.

Savings from this rationalisation and other measures dubbed ‘Project Strive’ are expected to contribute $5.6 million in the second half to the $25 million in annual earnings before interest and tax that Steel & Tube is forecasting.

The steel products distributor updated investors on the projects as it announced its first-half results this morning. The company says it is on the road to recovery, reporting a 48.7 percent jump in first-half net profit, and operating profit which was in line with previous guidance.

It will resume paying dividends, reflecting a “solid improvement in cash flows to $11.1 million” for the six months ended Dec. 31, 2018. That compares with a negative $16.4 million cash outflow in the previous six months.

The steel products company had 48 sites nationwide in January 2018 and has already cut that down to 40 sites. It plans to reduce them further to 28.

Chief executive Mark Malpass says he doesn’t want to put a timeframe on the rationalisation but estimates it will be completed by the end of the 2020 financial year.

He says the situation in Christchurch is an example of how and why the rationalisation is happening.

The company has already cut the number of Christchurch sites from 11 to eight and eventually it will be down to two.

Malpass says the company has opened two new, much larger sites in Christchurch, one for its infrastructure division and the other for its distribution division. It will gradually close the others.

“A lot of it is happening as we speak and we will have made some significant progress by the time of the full-year result,” he says.

Some of the rationalisation is part of integrating previous acquisitions – for example, the purchase in 2015 of MSL, one of the largest fastening companies in New Zealand, and the integration of the Tata Steel business with other stainless operations.

Malpass says some sites will be closed as their leases wind up and much of the consolidation process is already underway.

“It takes ages. We’ve been at this for 12 months,” he says.

An added benefit on top of managing fewer sites and generally reducing costs is that the consolidation will lead to much better inventory, improving the company’s efficiency and reducing the amount of stock on hand, Malpass says.

The company has also brought third party warehousing in-house, with forecast benefits of $1.7 million in the year ending June.

One of the factors that led to Malpass taking over as chief executive in September 2017 – he was previously on the board – was that in the four years ended June 2017, Steel & Tube had spent about $80 million on acquisitions, as well as another $32 million on upgrading its operations, and yet profits were falling.

Understandably, that has made shareholders leery of further acquisitions, something Malpass acknowledges.

“The last thing the shareholders would want is for us spending that money [from last year’s $81 million capital raising] on further M&A without getting our house in order first.”

Steel & Tube receives information memorandums of businesses for sale all the time but will continue to ignore them for the next six to 12 months, he says.

A core part of strategy general manager Claire Radley’s appointment from January is to oversee the Strive projects. But once those projects have been completed, she is tasked with looking for organic and merger and acquisitions opportunities, Malpass says. Radley joined Steel & Tube from giant consulting firm McKinsey & Co. 

In addition to her experience, Malpass cites his own history of working for ExxonMobil for 19 years. “Their disciplines around M&A were incredible.”

Malpass didn’t mention his experience at Fletcher Building where he headed the infrastructure products division for three years. Fletcher’s track record on acquisitions has been significantly worse even than Steel & Tube’s.

He says a number of board members also have significant experience in managing acquisitions. “I think we have the skills around the table”, he says, adding that the company has a clear cash flow model with which to determine what purchases would bring growth and which would not.

The management team’s focus on optimising Steel & Tube’s performance is aided by the fact that most of the acquisitions the previous management team made, with the major exception of the plastics business divested last year, were good purchases, Malpass says.

“We haven’t bought stuff out of private equity,” he says, referring to the fact that private equity firms have a reputation for stripping value out of companies and selling assets at very full prices. One of Fletcher Building’s largest and worst acquisitions was buying Formica for nearly $1 billion in 2007 from private equity owners. Fletcher announced Formica’s sale in December for US$840 million, or NZ$1.226 billion, giving it little to show for more than 11 years of ownership.

Fletcher, itself still focused on its own turnaround, tried unsuccessfully last year to take advantage of Steel & Tube’s weakened state with an opportunistic takeover bid.

Today’s results will give investors some confidence Steel & Tube can put its chequered past behind it.

The company 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.

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

Steel & Tube shares gained 1 cent to $1.23 compared, well below Fletcher’s non-binding offer of $1.90 per share, but above the rights issue price of $1.05 and the placement price of $1.15.

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