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Steel & Tube was struggling in irrigation market
Times:[ 2018-07-11 Author:admin Hit:

Steel & Tube was struggling in irrigation market

Steel News - Published on Wed, 11 Jul 2018

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Business Desk quoted Steel & Tube Holdings' new chief executive Mr Mark Malpass as saying that the company paid too much enter the irrigation sector, struggled to compete against bigger rivals and ended up writing off its investment to return focus to its core steel business.

The company has put its S&T Plastics business up for sale. It paid almost USD8 million cash for the plant, buying Aquaduct NZ out of receivership in 2015 and spent a further USD 4 million to get the machinery, which includes three extruders to turn out the large bore HDPE (High-Density Polyethylene) irrigation pipe. It won USD 27 million of business in 2017 but "the reality is we've really struggled to make money out of it. The assumptions were pretty rosy," Malpass said.

He said that S&T Plastics has about 10 percent share of the irrigation segment, where its rivals include the Belgium-owned Marley and Fletcher Building's Iplex business, which also make narrow bore pipe used by municipal authorities. Malpass says Steel & Tube would have had to invest USD 3 million to USD 4 million to expand into narrow bore pipe "and then you've got to stand back and say, is this really for us."

He said that it is in talks with some of its rivals about the sale.

Steel & Tube faced compounding problems with the plastic pipe business. Polymer and resin prices, derived from crude oil, have soared 42 percent in the past 12 months while the kiwi dollar has weakened. Added to that, HDPE pipe faces competition from fibreglass pipe that's manufactured offshore and imported and teething issues at the S&T Plastics plant resulted in higher than expected production scrap in 2017 that cut earnings before interest and tax by $2 million last year. And the plant is currently on farmland at Hororata in Canterbury, on a short-term monthly lease, protected from the elements by what amounts to an industrial-strength tent. Lease costs for a new site had looked high.

At the same time, activity in the irrigation sector was slowing, with fewer dairy conversions, rising costs for consenting and compliance and the government's decision to end state funding for irrigation projects.

Mr Malpass said that "Some people have a rosy view of the irrigation segment. We don't have the same level of confidence.”

Exiting S&T Plastics is part of a wider cleanup following a review led by Malpass and the company's refreshed board. In a profit warning issued in May, Steel & Tube said it would take up to USD 54 million in non-trading costs and impairments against its 2018 results, resulting in an ebit loss of about $38 million in the year ended June 30 from positive ebit of USD 31.1 million the previous year. As a result, the Lower Hutt-based supplier of steel building products had to get a waiver from its lenders for a breach of its lending covenants.

Malpass was confirmed as CEO in February, having been interim chief since last September, when Dave Taylor departed. The general managers of supply chain and distribution have also departed since the start of 2017 and a new chief financial officer and company secretary, Greg Smith, started at the end of last October. Malpass was also appointed to the board, now chaired by Susan Paterson after John Anderson departed. Former chair Dean Pritchard retired in November after 12 years on the board and was replaced by professional director Steve Reindler.

In the company's shareholder newsletter last week, Malpass said his first eight months as CEO had been "challenging" and required some "tough decisions." The impact of "resolving legacy issues and resetting the company has been greater than expected," he said.

The focus now was on Steel & Tube's core businesses of steel roofing, flooring systems, reinforcing steel and wire. The company "has a great footprint but had been letting itself down a bit," he said.

S&T Plastics is being advertised for sale with the price on application, according to an advertisement on Trade Me, which says it had revenue of USD 21 million in the 2018 year and earnings before interest, tax, depreciation and amortisation of $2.7 million. While that suggests an earnings margin of almost 13 percent, Malpass says the numbers are presented on a sale basis, excluding company overheads and amortisation, and for Steel & Tube the earnings generated were more like USD 500,000.

Malpass says Steel & Tube is "a peashooter" compared to Fletcher but he agrees there are some similarities between himself and Fletcher CEO Ross Taylor. Taylor was installed after his predecessor was dumped over construction losses and has since announced a decentralised model, with a reduced head office function, and the sale of non-core assets.

That's a similar strategy to Steel & Tube, which has eliminated some executive positions during its restructuring over the past six to seven months. It was still integrating businesses acquired in the past four to five years which are part of its core, which as its Composite Floor Decks unit.

The USD 54 million in writedowns for the 2018 year comprised of USD 12 million from selling S&T Plastics, USD 18 million on inventory from its new enterprise resource planning system, and USD 10 million on other intangibles. The company also took a USD 5.5 million impairment on inventory in the first half. Steel & Tube is projecting a return to profit in 2019.

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