Release Date: August 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Vulcan Steel Ltd (ASX:VSL, Financial) achieved an EBITDA of $148 million and an adjusted net profit after tax of $40 million despite challenging market conditions.
- Operating cash flow increased to $169 million, reflecting reduced inventory and lower average material costs.
- The company successfully reduced operating costs by 1.7%, demonstrating effective cost management in an inflationary environment.
- Return on capital employed pre-IFRS was 20%, indicating strong financial performance despite market downturns.
- Vulcan Steel Ltd (ASX:VSL) has a diversified geographic and market segment spread, reducing dependency on a small number of clients.
Negative Points
- Volume was down 9% year-on-year, indicating a significant decline in sales activity.
- Gross profit per tonne decreased by 7%, reflecting pricing pressures and market challenges.
- EBITDA declined by 33% year-on-year, showing a substantial impact from reduced volumes and margins.
- Net profit after tax fell by 55% year-on-year, highlighting the financial strain from the tough economic environment.
- Steel revenue fell by 21%, and EBITDA for the steel segment dropped by 37%, indicating significant challenges in this core business area.
Q & A Highlights
Q: Hi Rhys. Hi Kar. Rhys, just your outlook commentary around similar activity levels in first half '25 versus second half '24. Can you just maybe talk a little bit about what you're seeing in July, August so far?
A: Look, the last few quarters have been up and down between months. If you look at the average volumes, the last two quarters have basically been flatlined. We don't anticipate a pick-up until the new year at the earliest. The New Zealand environment is tough, and while interest rate cuts will stimulate the economy, it takes time for that to translate into actual work on the ground. In Australia, the restrictive environment persists, so we expect similar volumes in the first half of FY25 as in the second half of FY24.
Q: And then just on costs, you did a great job in the second half. You also called out potential rent adjustments and ongoing inflation. Can you give more color on that?
A: We have some unavoidable increases, such as rent, but we are also consolidating sites to reduce costs. For pre-existing businesses, excluding expansion, we anticipate offsetting those costs. We have detailed cost programs and manage them appropriately. Any uptick in volume won't increase our costs as we have plenty of scale capacity.
Q: Could you talk us through what level of leverage you are comfortable with? And have you considered working on the covenants to make them more flexible?
A: We are comfortable with our current leverage position, even though it is higher than we'd like. We believe we are near the bottom of the economic cycle, and improvements will come. We are a growth company and are positioning ourselves for future growth. We are comfortable with our current covenants.
Q: Can you comment on the recent surcharge on goods coming from China to Australia and how you see freight costs over the last month or so?
A: Yes, we have seen increases due to issues in the Red Sea and freight through Singapore. Freight costs have increased by a couple of percent and could increase further into the fourth quarter. However, it is not completely relevant to our entire business, and we are comfortable with the increases.
Q: Are we to take that Australia could be kind of backwards this year in terms of volumes comparing year-on-year, '25, and that's partially offset by an improvement in New Zealand?
A: It's hard to estimate, but Australia is lagging behind New Zealand in terms of interest rate cuts. We think the first half of FY25 will be similar to the second half of FY24. Improvement in sentiment and demand in Australia will depend on interest rate cuts.
Q: Can you give us some color on pricing on both sides of the Tasman and by product?
A: Steel distribution in Australia has been challenged due to the Whyalla disruption and imports. Aluminum margins and pricing outlook are good. Engineering steel is steady but challenging. In New Zealand, there has been erratic pricing behavior due to a slow market. Overall, our margin decline has been well managed.
Q: Just on the CapEx, the $13 million to $18 million of growth and cost initiatives. Can you give us a sense of what those are and whether that CapEx is going into hard infrastructure or more systems?
A: Approximately 30% of that relates to cost reduction, and the balance is on growth. The growth includes trucks, cranes, laser machines, and new sites.
Q: Can you give us a sense of how your competitors are acting and the degree of channel inventories in the system?
A: In New Zealand, the economic environment is tough, leading to desperation among competitors. In Australia, competitors are focused on cash generation, creating stress in the market. Overall, the competitive intensity is high, particularly in long steel products.
Q: Are you still looking at acquisitions given your net debt now at 2.6 times EBITDA?
A: Yes, we are definitely looking at more acquisitions and are working diligently on several significant ones. Our gearing position is not a cap on our growth appetite, and we believe our shareholders will support us in securing the right assets.
Q: Now that you've got six hybrids underway, are you still targeting 18 over the next couple of years?
A: Our goal is to do as many as we can, but we want to do them to a high standard. We don't want to put a timeframe on it, but we have a lot left to do.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
