Managing Director and CEO's Report from Paul O'Malley
Geodesic AAMI Park Stadium set against the beauty of the Yarra River that flows through the City of Melbourne. Architects: Cox Architects.
LAST YEAR WAS A TURNAROUND YEAR FOR YOUR COMPANY. OUR PERFORMANCE STEADILY IMPROVED each quarter, DESPITE THE MARKET CHALLENGES REMAINING AFTER THE GLOBAL FINANCIAL CRISIS.
As the year progressed, we saw improved demand, better margins and the benefits of a substantially lower cost base.
The biggest turnaround was the performance of our Asia businesses which posted a record $116 million Earnings Before Interest and Taxes (EBIT). At a company-wide level, we delivered significant permanent cost savings. Our lower cost base provides us valuable operating leverage when demand and steel prices improve. We successfully maintained our conservative gearing and strong liquidity which positions us well to manage through the steel cycle and support growth initiatives.
Our New Zealand business delivered another solid result and despatch volumes for our Australian Coated and Industrial Products business rebounded. In North America, North Star BlueScope Steel, with its strong focus on production quality and customer service, also had a much improved performance. Overall, BlueScope achieved a good result given the unprecedented circumstances of the previous year and the challenging business environment.
GROUP PERFORMANCE OVERVIEW
At the start of FY2010, continued weak global demand for steel meant we operated significantly below our full steel making production capability. During the half, a strong export and domestic sales campaign, on the back of improving demand in Australia and Asia, supported returning the No 5 Blast Furnace at Port Kembla Steelworks to near full production capacity, after a successful reline. Still, we reported a small loss for the first half.
Business performance improved during the second half with the benefits of cost reductions, further demand for our products and better steel margins all contributing to deliver a full year reported Net Profit After Tax (NPAT) of $126 million, a $192 million positive turnaround from the previous year. Underlying* NPAT doubled to $113 million equating to underlying earnings per share of 6.2 cents. A final ordinary dividend, fully franked, of 5 cents per share was declared.
Total revenue was $8.6 billion, lower by 17 per cent in comparison to FY2009, reflecting lower domestic pricing across all segments of our business, the higher Australian dollar, and lower domestic sales volumes for Coated and Building Products North America.
Net operating cash flow improved significantly and at the end of FY2010, was close to half a billion dollars for the year.
The focus on maintaining the strength of the balance sheet and reducing costs continued into FY2010. We have maintained our conservative approach to gearing, held at around 11 per cent, and our strong liquidity position with $1.6 billion in undrawn debt and cash.
As an Australian and global manufacturing business, we must remain cost competitive. Anything that challenges our productivity, operating flexibility and cost base will put us at a disadvantage to our global competitors.
During the financial year, $526 million in total cost savings were delivered. By the end of FY2010, $340 million of permanent savings had been achieved over our FY2008 cost base. Continuing to lower our cost base is an ongoing priority.
*refer to page 17 in the Directors' Report regarding underlying earnings.
BUSINESS PERFORMANCE HIGHLIGHTS
ASIA
Our Asian business performance was a highlight of FY2010, with record profits in China, Indonesia, Malaysia and Vietnam. Underlying EBIT for the year was $116 million, $31 million of that from our China business, compared to a loss of $21 million in FY2009. A new leadership team with its strong market focus, along with major cost reductions, led to improved domestic sales volumes and margins.
The Indonesian domestic market strengthened during the year, particularly in the residential segment. Construction of the second coating line is on schedule to be operational by the third quarter of this financial year.
In China, the Government's economic stimulus package aided in improving demand for our coated business and we expect it will continue to positively impact the key infrastructure segment in FY2011. Our Butler pre-engineered building (PEB) business saw improved demand.
Historically, in our Buildings business many customer orders are from major international corporations. Pleasingly, half our customers in the Butler China business now come from domestic Chinese companies that see our value proposition as helping them be successful in the market. Lysaght China further grew its market share in the industrial and premium public building segments.
In Thailand, the political environment stabilised in April but customers in that market remain cautious. Our Vietnam coating and building businesses, under a new leadership team, recovered strongly with increased domestic demand, cost reductions and improved business processes.
Asia, including China, is home to the world's most populous and fastest growing economies. As they grow, demand for steel products grows. We are well placed with our business footprint in this area and plan a number of product developments to strengthen our market offer.
Over the next few years the assets we have today, and the new metal coating line which will commence operation in Indonesia next year, provide increased earnings potential in Asia.
Above: Melbourne's new headquarters for US retail giant, Costco, at Docklands displays the design diversity of pre-engineered buildings. Architect: NH Architecture.
Far Right: Ground-hugging house in the Snowy Mountains of NSW, with its curved roof of LYSAGHT CUSTOM ORB® is designed to withstand extreme weather. Architect: James Stockwell Architecture.
AUSTRALIA
In Australia, our Coated and Industrial Products Australia business ended the year positively. Underlying EBIT was $108 million for the year, $188 million in the second half.
Global steel demand continued to improve in all regions at the beginning of the fourth quarter of the year with hot rolled coil prices increasing by 20 to 25 per cent, improving margins.
Our Australian Distribution and Solutions business, which includes BlueScope Lysaght, BlueScope Buildings Australia, BlueScope Water, our service centres and emerging businesses, struggled in an extremely competitive market segment with volumes and margins flat in the second half.
NEW ZEALAND & PACIFIC ISLANDS
Our New Zealand & Pacific Steel Products business delivered another solid performance with an underlying EBIT result of $73 million, achieving $52 million in the second half of the year. Domestic sales for the year rose by 10 per cent with higher demand from the manufacturing sector and increased government infrastructure investment.
NORTH AMERICA
North Star BlueScope Steel, our 50 per cent joint venture mini mill, delivered an impressive result with earnings for our Hot Rolled Products North America segment improving to $61 million profit for the year compared to a loss of $58 million in FY2009. For the eighth consecutive year, North Star BlueScope Steel received the highest customer satisfaction rating in the Jacobson & Associates survey of 2,000 North American steel customers.
Steelscape saw increased sales with despatches up by 37 per cent but margins softer. However, even during a challenging year, it was able to increase its market share. With the continued weakness in the US non-residential construction market, the Buildings business in our Coated and Building Products segment struggled.
A good deal of hard work has been done over the past two years to rationalise the integrated Buildings businesses in the US and lower its cost base. We are confident that when market conditions turn around we will deliver improved results given our very competitive cost structure and market offer.
STRATEGY – SCOPE TO GROW
BlueScope is a leading global provider of steel building products and solutions. We are a diverse company with over 100 manufacturing plants in 17 countries. Of our 18,000 employees around the world, over 90 per cent are shareholders.
Three years ago, we released our Blueprint to guide our business performance and growth. This encompassed:
- reinvigorating our Australian and New Zealand businesses;
- continuing the turnaround and improvement process across our Asian and North American businesses; and
- growing or acquiring new businesses that build on our distinct competitive advantage.
During the global financial crisis, our focus on the Blueprint fundamentals served us well – protecting our balance sheet, building brands, improving efficiencies through significant cost reductions, and enhancing customer service.
During this time, we also reviewed our strategy to ensure we were ready for renewed growth around the world.
As a result of this review, we have broadened our strategy to include three additional core elements:
- expand participation in our existing building and construction markets, better leveraging our current product base including custom engineered buildings, insulated panels, quality coated products and light-weight steel structures
- invest into large, high growth regions leveraging our product capability, especially through our Butler and Varco Pruden brands
- evaluate raw material opportunities that reduce our raw material cost base through the cycle
At the same time, we will continue to focus on the fundamentals of running our production lines at full capacity, reducing structural costs and managing to strict financial targets.
ENVIRONMENT
Our Company has a long standing commitment to improving our environmental footprint across all our operations. This continues today with many environmental improvement initiatives underway.
One key initiative is at our Western Port plant in Victoria where a significant water saving project under construction is expected to deliver a 65 per cent reduction in fresh water use and a 75 per cent reduction in wastewater discharge. The project is similar in design to a major recycled water initiative operating at our Port Kembla Steelworks since 2006 that has saved more than 20 billion litres of fresh water.
PEOPLE
BlueScope is committed to building a diverse, global workforce that reflects the countries, communities and cultures in which we operate. We consider gender diversity, in particular, a key business priority. We are driving initiatives to attract, develop and retain women and to improve the participation of women throughout the organisation and in management positions.
A Gender Diversity Project, commissioned by the Executive Leadership Team, has led to enhancements to our existing gender diversity programs.
Recent initiatives include establishing a Diversity Council to provide visible leadership, sponsoring and monitoring of key programs, introducing diversity educational materials, and adopting diversity objectives with measures of success and targets against which the businesses will be monitored and assessed. The Board monitors progress against these initiatives.
Our goal is to create a more diverse and inclusive workplace that will attract, encourage and develop a talented and capable workforce. We know significant improvements are needed to reach our goal and we are committed to making this happen.
LOOKING AHEAD
As we move into the first half of FY2011, we have a strong balance sheet, good liquidity and financial flexibility with low gearing. Our significantly reduced cost base positions us well for an upturn in market conditions across our footprint.
We expect to see continued strong performance from our Asian businesses and the ongoing benefit of permanent cost reductions over the course of FY2011.
BlueScope Steel is poised to benefit from a global recovery in the medium to long term. Our aim is to increase the market penetration of our products, to capitalise on improving market conditions, and grow our presence in the building and construction markets.
This financial year has proven our resilience. I would like to thank all our employees and my management team for their strong commitment to Zero Harm and their outstanding contribution to achieving this profitable result in a very challenging time. I would also like to thank you, our shareholders, and also our customers, for your continued support.
