MANAGING DIRECTOR AND CEO’S REPORT
FROM PAUL O’MALLEY
Blueprint is about reinvigorating our Australia and New Zealand businesses, continuing to improve our North America and Asia businesses, and building on our distinct competitive advantage through growth and acquisition.
For BlueScope Steel, the 2007/08 financial year was characterised by strong global demand and outstanding production performance. Our Asia and North America businesses also improved their performance, while coated, distribution and solutions businesses in Australia achieved stronger sales in the second half.
Export prices more than offset raw material and other cost increases and led to a margin expansion in our export business. This demonstrates the importance of BlueScope Steel’s global portfolio. Once again, across our footprint, our results were underpinned by world-class steelmaking operations.
Due to the hard work and initiative of our people, many production records were set during the year, allowing us to capitalise on the high demand for steel. Consequently, I am proud to announce an excellent overall performance in my first annual report to shareholders.
Performance
BlueScope Steel dealt with the challenges of higher input costs and a strong Australian dollar to deliver very good overall performance.
The two businesses acquired during the year, Smorgon Steel Distribution and IMSA Steel Corp North America, both made better than expected contributions to earnings.
Reported net profit after tax (NPAT) was $596 million, $90 million lower than 2006/07. This was mainly due to write-downs of our China and Vietnam metal coating facilities, which totalled $225 million. The stay in business, or underlying NPAT, rose 27 per cent to $816 million delivering underlying earnings per share of $1.10. A final ordinary dividend, fully franked, of 27 cents per share was declared, bringing the total dividend for the year to 49 cents per share, an increase of four per cent on the previous year.
Total revenue increased by nearly $1.6 billion to a record $10.5 billion. The key factor here was the improvement in realised export steel prices. In addition we had stronger sales volumes across all regions.
BlueScope Steel again demonstrated the strength of its operating cash flow, generating $1.65 billion, up 23 per cent on the previous year. This improved as a result of overall business performance but also through active management intervention to reduce working capital.
There continues to be a strong focus on our balance sheet. At the start of the financial year, our Company’s gearing was 28 per cent, peaking at 40 per cent in February, the point where we had invested more than $1.5 billion in the Smorgon Steel Distribution and IMSA acquisitions. By the end of the financial year, we had reduced gearing to a very creditable 30.4 per cent (the lower end of our target range), notwithstanding our investment in these major acquisitions.
I am also pleased to advise that we refinanced a number of our debt facilities during the year to establish a more prudent debt maturity schedule over the next 10 years.
Safety
The importance of Zero Harm was re-emphasised by a tragedy that occurred at Port Kembla in May, when a contractor was fatally injured while operating high-pressure water jet equipment. Following this event, Stop for Safety sessions were held across the entire organisation.
It is our firm belief that we can create a workplace in which no one is injured in the course of their job. But we can only do this through the continued focus and effort of every person in our Company. Zero Harm must remain our number one priority.
In continuing our drive for Zero Harm, we must acknowledge the safety achievements across our Company during the year. Many of our operations received safety awards and recognition in their local markets or communities. The Company's injury levels remain at world best standards with the Lost Time Injury Frequency Rate (LTIFR) remaining below one incident per million hours worked for the fourth consecutive year. The Medically Treated Injury Frequency Rate (MTIFR) also finished at a record low level.
Blueprint
In November we launched the BlueScope Blueprint, a renewed strategy and direction for the Company. The Blueprint, with a particular focus on our customers, provides direction for all our employees to ensure we uniformly focus on the real performance drivers. Blueprint covers a range of business improvement initiatives, largely within our control and deliverable over the next three years. It focuses on reinvigorating our Australia and New Zealand domestic businesses, continuing the improvement process across our Asia and North America businesses, and growing or acquiring new businesses that build on BlueScope Steel's distinct competitive advantage.
Blueprint capitalises on our outstanding heritage and capabilities. With a stronger customer emphasis, we are concentrating on growing the use of steel in our domestic markets. We are driving manufacturing excellence, optimising procurement strategies, enhancing our supply chain and improving our capital planning. These efforts will increase shareholder value. Innovation and sustainability are being given greater priority. In particular, we are working to reduce our carbon emissions and, through our products and solutions, assisting our customers to do likewise.
During the year, a Program Management Office was established to track, report, and ensure the successful delivery of Blueprint initiatives. More than 200 initiatives were identified and by the close of the financial year, 120 active initiatives aimed at financial performance and working capital improvements were underway. In accordance with Blueprint we have delivered $100 million in working capital reductions, 12 months in advance of schedule, with another $100 million to be delivered in 2008/09.
Across our facilities in Australia, New Zealand, Asia AND North America, our operational performance was outstanding. It is testAMENT to the quality of our people.
Above right: The Illawarra Fly, New South Wales. Around 40 tonnes of XLERPLATE® steel was used in the construction of this tourist facility, which features a 500 metre treetop walk, and 45 metre high viewing tower.
Environment
BlueScope Steel is committed to reducing the environmental effect of our businesses. In 2007/08, our Company developed a suite of principles that recognise our environmental responsibilities. Clear expectations sit behind these principles to guide the performance we expect from our sites, managers and employees.
Our Company supports efforts to reduce global greenhouse gas emissions. We also support a carbon pollution trading scheme to the extent it acknowledges and addresses the challenges faced by emissions-intensive, trade exposed industries such as ours. During the year, we continued our analysis of the impact of the proposed emissions trading schemes in Australia and New Zealand. We are working with governments in both countries to ensure a sustainable future for our Company and for local iron and steelmaking industries.
Following the close of the financial year, the Australian Government released a Green Paper on carbon pollution reduction. This is a positive step forward, but also signals a new phase for our industry.
Our philosophy is ‘where we can, we do.’ Our goal is to ensure the design of a carbon pollution reduction scheme that maintains the long-term competitiveness of steel manufacturing in Australia. We plan to invest in new technologies and equipment ahead of the expected launch of the Carbon Pollution Reduction Scheme in 2010.
We further improved our water efficiency, with a number of projects underway. Port Kembla Steelworks again increased the amount of recycled water used on site, while work continued on a major water saving project at Western Port, to be jointly funded by BlueScope Steel, South East Water and the Victorian Government. This project will deliver a 60 per cent reduction in fresh water use and a 75 per cent reduction in waste water discharge by our Western Port operations.
Business performance overview
A standout result for BlueScope Steel was excellent operational performance at all our facilities across Australia, New Zealand, Asia and North America. This led to a number of new production records being set and is testament
to the quality of our people.
Coated and Industrial Products Australia delivered another very strong result. Stronger product demand and higher steel prices were supported by record or near record production levels. A key influence on the second half performance of our mid and down stream businesses was reduced import competition. In New Zealand, reduced margin affected earnings, while the steelmaking business has shown a significant improvement in operational performance.
In Asia, our businesses delivered a much-improved performance. We capitalised on more stable political and market conditions in Thailand, continued our strong performance in Indonesia and Malaysia and improved sales volumes in China and Vietnam. BlueScope Butler China had a better year, while operational and safety performance across the region was excellent. Major midstream projects in Indonesia and India are on schedule for completion in the 2009 and 2010 calendar years, respectively.
In North America, our Butler Buildings business continued to exceed expectations in the non- residential building market, while margin contraction affected earnings from our North Star BlueScope Steel joint venture.
The performance of our two new acquisitions exceeded expectations. BlueScope Distribution (formerly Smorgon Steel Distribution) improved its earnings in the second half, with higher sales volumes and more favourable pricing. The IMSA acquisition in North America made a strong earnings contribution, largely due to higher sales volumes and improvement in margins and productivity. The integration of the IMSA group of steel businesses is proceeding as planned.
Looking ahead
As the financial year came to a close, global steel prices remained strong. We expect a good first half in the 2008/09 year. Volumes will be reduced in the second half due to the No 5 blast furnace reline at Port Kembla Steelworks. At a cost of $370 million, the reline is scheduled to start in March 2009, and is expected to take 105 days to complete. During this period, we will also upgrade our Port Kembla sinter plant at a cost of $135 million. While both projects will affect earnings in the second half, they will deliver longer term productivity and cost benefits.
The high cost of key raw materials will have a significant impact on our Australian businesses. In the coming year, our Company must deal with year-on-year raw material cost increases of approximately $1.6 billion. Demand for our products remains solid in our Australian markets but the residential segment, in particular, continues to be soft.
Our Asia businesses are producing consistent results, although unfortunately the economic sentiment in Thailand has again deteriorated with a return to political uncertainty. Our North American Coated and Building Products businesses continue to perform at solid levels, despite the uncertainty within the US economy. The ongoing crisis in the financial markets may affect funding of commercial and industrial projects, dampening demand, although the weaker US dollar has provided some boost to manufacturing exports from the US. We are excited by the opportunities resulting from the IMSA Steel Corp acquisition and we are now the leading global steel pre-engineered buildings manufacturer supplying predominantly to commercial and industrial markets.
People
During 2007/08, our Company underwent a number of senior management changes.
In April, Kathryn Fagg, President Asia, left BlueScope Steel, and Brian Kruger, President BlueScope North America and Corporate Strategy and Innovation, announced his intention to leave. We thank both these senior executives for their contribution to BlueScope Steel and wish them the very best in their future careers.
Mark Vassella was appointed President BlueScope North America, to replace Brian, while as a result of a restructure, our Asia business leaders report directly to the CEO.
In November, the appointment of Charlie Elias as Chief Financial Officer was announced and Paul O’Keefe became Chief Executive, Australian Coated and Industrial Markets. Noel Cornish, as Chief Executive, Australian and New Zealand Steel Manufacturing Businesses, has been given responsibility for all major manufacturing assets in Australia. Noel is also accountable for New Zealand Steel. We welcome the depth of experience and talent that all our senior managers bring.
The 2007/08 year was an exciting one. BlueScope Steel consolidated its market presence and demonstrated financial and operational excellence across our geographic footprint. Due to the efforts of our 21,000 employees, our Company was able to deliver an excellent result for shareholders, in a challenging year. I thank our customers for their continuing support and our people for their fine work.
Paul O’Malley,
MANAGING DIRECTOR & CEO
