BlueScope Steel Limited (BSL) Earnings Call Transcript & Summary

Good morning, and welcome to the BlueScope First Half FY '20 Financial results presentation. My name's Mark Vassella, and here with me today, I have Tania Archibald, our CFO. Together, we'll take you through our results and the major initiatives we have on the go, and then we'll take your questions. Starting with safety, where, frankly, the result this half is disappointing. After many years of sustained improvement in our safety performance, the indicators are now trending the wrong way. Whilst the seriousness and severity of the injuries we're seeing has improved, we are still injuring too many people across our organization. We're now intervening with a much stronger focus on implementing higher order controls for our critical risks and measuring their effectiveness. We will also continue to develop our focus on injury severity and the care taken to return our employees to meaningful work. We're continuing to evolve our approach to safety to take us to the next level of effective risk management. To the financial scorecard, we delivered an EBIT of $302 million, slightly ahead of our guidance with a stronger finish to the half. As foreshadowed, the result was considerably lower than the same period last year mainly driven by softer spreads in our key steelmaking businesses. Reflective of this, reported NPAT was $186 million and return on capital in the half, 8.4%. Net debt at 31 December came in at $47 million, up from $693 million net cash at 30 June from a combination of seasonality and working capital, a step-up in spend on the North Star expansion and with AASB 16 coming into effect, bringing just over $400 million of existing operating leases under the balance sheet as debt. Capital management continues. The Board has again declared a $0.06 per share unfranked interim dividend and confirmed the continuation of our buyback program with the intention to buy up to $100 million of shares during the half funded from cash. We think this strategy appropriately balances the desire to deliver returns to shareholders while investing for growth with an eye to the near-term outlook. At a segment level, cyclically lower benchmark steel spreads drove softer results at Australian Steel Products and North Star while we saw improvements at Buildings North America and Building Products compared to the first half FY '19. In summary around our regions. In North America, the U.S. economy remains robust, and we continue to see it as a great place to build our business with plenty of opportunities for us to grow. The U.S. steelmaking industry continues to evolve through a further shift towards EAF production with the U.S. Steel-Big River Steel merger announced in October and the idling of several blast furnaces. We continue to feel very confident about our investment in the expansion of North Star. The dip in steel prices during the half appeared to accelerate some of these furnace idlings. More recently, though, at the end of the half and into the new year, prices have regained momentum. In our buildings business, customer demand in the light manufacturing and warehousing sector remained strong. The team continue to progress initiatives to improve performance and support future growth. In Australia, we were very pleased to see a pickup in buying activity after the softer June half. In fact, our volumes largely recovered back to the levels of the same time last year with good demand arising from infrastructure projects, in the distribution channel and through better-than-expected sales to the building channel. Further, with a very -- with very good activity levels amongst builders and the strengthening in house prices, we are seeing a solid momentum at the start of the new calendar year, leading us to be quietly confident about domestic volumes through this half. In New Zealand, demand in the residential construction sector remained robust. However, infrastructure market demand softened. This business had performed well for a number of years up until calendar 2019, but like the June half, the December half again came under pressure. We have an expectation that all businesses deliver adequate returns through the cycle, and we're focused on addressing this level of underperformance. In China, the advanced end-use segments, to which our business is exposed, remained strong in the face of slowing economic growth. Order intake and backlog levels at the end of the half were robust. Whilst the underlying demand levels for our business are healthy, the impact of the coronavirus, or COVID-19 as it's become known, remains unclear in the near term. I'll talk about this more a little bit later on. The robust growth in India's economy that has been observed in recent years softened through the half, which has impacted construction activity levels. Notwithstanding, our business performed well on stronger margins despite slightly softer sales. In ASEAN, a number of economies have been going through a period of softness. Encouragingly, there are some early signs of improvement in Thailand and Indonesia. We've made meaningful improvements to what's in our control through the Ignite 5G program and are encouraged by the solid pipeline of projects across the region. We remain very comfortable with our asset footprint and portfolio, given the longer-term growth opportunities it presents. In November last year, we hosted a strategy day at Port Kembla and laid out for you how we are evolving our strategy. I don't plan to go into that detail again here today but want to point out that we are now bringing particular emphasis to how we transform our businesses through the use of digital technology and how we tackle climate change, and I'll say more about that in a moment, how we optimize and grow our businesses and ensuring that we deliver on our key goals and measures around safety, returns and balance sheet strength. Turning to sustainability. As some of you will be aware, BlueScope is proud to be a founding member of ResponsibleSteel, the steel industry's first global multi-stakeholder standard and certification initiatives dedicated to defining and promoting responsible business practices. In December, at Port Kembla, we hosted a very successful launch of the site certification standard at a major forum for industry stakeholders from around the globe. The forum was attended by global industry leaders such as ArcelorMittal, Nucor, BMW and Lendlease. During the half, we also released our 2019 sustainability report, our fourth, and a further step forward on our sustainability journey. During FY '20, we've continued to build resilience in the business. As a summary, on climate and energy, we remain very focused on our target of a 12% reduction in greenhouse gas emissions intensity by 2030 based on an equivalent 1% per annum reduction, a material improvement aspiration. This is in addition to the 30% reduction in group absolute emissions since 2005. Our North Star expansion will add new low-emissions capacity to the portfolio through the recycling of scrap steel. And we continue to align our disclosures and approach to the TCFD recommendations. On diversity and inclusion, we're maintaining our high levels of female recruitment at around 40%. In addition to retaining our focus on gender balance, we're seeking to build a more inclusive workplace and enhance overall diversity across our global footprint to deliver better outcomes for our people, our customers and our communities. On supply chain sustainability, we've undertaken a pilot program of assessments of BlueScope sites and are on track to complete assessments of 120 of our Priority 1 and 2 suppliers by the end of FY '20. We're also well advanced in preparation for the reporting requirements of the Modern Slavery Act. On conduct and culture, we have the highest expectations of personal and professional behavior. We encourage a culture of speaking up and protecting those who do. And in July 2019, to strengthen that, we issued a new Speak Up Policy and rolled out global training, support and guidance to build understanding and trust. And finally, as previously disclosed, the ACCC proceedings in relation to alleged cartel conduct in the Australian business are ongoing. Turning to the USD 700 million North Star expansion project. Six months ago, we confirmed that the project would proceed. Today, I'm pleased to report that the project is progressing to plan. Major equipment contracts have been executed, and orders placed. We are aware of some impacts on equipment supply chains due to COVID-19, which are being managed. New employee hiring is well underway. Site works continue, including the commencement of the tunnel furnace, shuttle car foundations and the erection of the melt shop building, which you can see in the photos on the screen. As we've highlighted before, this expansion project is a perfect fit for our strategy, offering long-term sustainable earnings growth from a high-quality asset. And it's a credit to the team having worked through the winter, as you can see in the photos, and alongside our ongoing business to see the project progressing so well. COVID-19 is obviously a very topical issue at present. I'll take a moment now to provide an update on the effect it's having on our China operations and discuss our initial expectations of its impact on the outlook later in the presentation. Reassuringly, at this point, we have no reported cases of COVID-19 amongst our China team. We're supporting our employees across China with return to work safety guidelines, including monitoring health status, providing face masks and temperature checks and offering access to the BlueScope employee assistance program. We have 4 major operating sites in China as well as a number of sales offices. All sites, with the exception of our Hubei sales office, have reopened. Operational throughput, however, remains restricted. Our February performance was heavily impacted, and we currently expect the same for March. Beyond this, the rate of recovery in demand and activity remains unclear at this point. So at this point, I'll hand over to Tania to take you through the segment performances, group financials and the financial framework in detail.

Thanks, Mark. Firstly, to North Star which produced an underlying EBIT of $115 million and a ROIC of 12% and we saw relatively stable demand from North Star's end market segments. Auto sales remained at historically high levels, running at 17 million units for the fifth consecutive year with demand continuing to shift towards the more steel-intensive light trucks and SUVs. Manufacturing and construction sectors also remain stable. As always, the North Star business continued to operate at 100% capacity utilization with sales volumes marginally lower than the previous half, reflecting normal seasonality trends. We did see benchmark spreads contract significantly across the half by around $90 a tonne, and that was in line with our guidance from August. Turning to the Australian business. ASP delivered an underlying EBIT of $128 million and a ROIC of 9.3% for the half. Pleasingly, we saw stronger end use demand underpin the improvement in ASP's domestic volumes in 1 half '20 with painted steel volumes, in particular, up 8% on last half. Higher iron ore prices led to lower benchmark spreads, and realized spreads were impacted unfavorably by export destination pricing and domestic pricing lags, very much in line with our guidance from August '19. Now in our guidance statement in August, we also called out that ASP's earnings in the first half would be impacted by minor instability that occurred at the Port Kembla blast furnace in July '19, which was promptly resolved, and the blast furnaces performed well since that time. The contribution from export coke sales was also softer in the half, down $27 million on 2 half '19. However, we do think that the coke market has started to improve, and Mark will touch on this in the outlook. Now the improvement in domestic volumes at ASP was seen across all segments. In the residential sector, despite a backdrop of weaker approvals, overall resi volumes improved by around 6%. We saw momentum particularly strengthened towards the end of the half and into the current half. Now that appears to have been driven by a combination of the availability of finance, strengthening house prices and our own marketing initiatives. In the nonresidential construction sector, volumes also rebounded with investment remaining strong across both the commercial and industrial and social and institutional segments, concentrated in Sydney and Melbourne. Sales into engineering construction improved driven by demand from infrastructure projects such as renewables, particularly in wind towers and also bridges. The general manufacturing segment is also faring well with hotspots in racking and road infrastructure. Sales into the mining segment improved on increased activity and timing of projects. In the agriculture segment, demand continued to be challenged by the ongoing impact of the drought in the eastern states of Australia and an earlier-than-expected bushfire season. Moving on to Building Products Asia and North America. This business delivered an underlying EBIT of $80 million and a ROIC of 10% for the half. China continued to perform strongly with typical seasonality, combining with a very strong sales performance and lower costs. And as Mark pointed out, end use demand remained robust in the segments in which BlueScope China participates. India delivered another great result despite slowing economic growth with stronger margins offsetting lower volumes. And we saw an encouraging result in Southeast Asia as margins improved, offsetting slightly lower volumes. And pleasingly, the new high-speed metal coating line is delivering cost efficiencies in Thailand. All up, the Southeast Asian business is well on track to deliver the targeted benefits from the Ignite 5G cost and productivity improvement program. In North America, underlying demand remains relatively strong with dispatch volumes higher than the prior half. However, a strong performance in the downstream ASC business was impacted by below par manufacturing performance at one of the Steelscape sites. Manufacturing performance of that site has since been rectified. Turning to New Zealand and Pacific Steel. This business delivered an underlying EBIT of $13 million and a ROIC of just under 9%. Demand continued to be relatively strong across most New Zealand construction segments. The exception was the infrastructure segment, which softened as we saw delays to the approval or commencement of major projects. While some of the cost pressures we flagged in 2 half '19 abated in 1 half '20, mainly coal, alloys and scrap, unfortunately, electricity prices remained elevated, and we saw a softer vanadium byproduct contribution. I'd like to stress that we remain very focused on addressing the underperformance in New Zealand and in developing the pathway to improve the business' productivity and cost position. Turning to Buildings North America. This business delivered an underlying EBIT of $24 million for the half and a ROIC of 8%. Sales volumes were up on typical seasonality with demand across the light manufacturing and warehousing end use sectors remaining strong. Now as we highlighted at our FY '19 results, we are continuing to invest to improve customer lead times and tangibly improve the performance of this business. The manufacturing issue we called out in our November AGM Trading Update was promptly resolved in the half. Now that issue, combined with the new investments that we're making in the business to address capacity and performance, has had a near-term impact on conversion costs. As foreshadowed in our guidance in August '19, there was a lower contribution from the BlueScope Properties Group relative to 2 half '19, and that was simply due to the timing of projects. Turning to the underlying EBIT group walk-forwards. And if you look at the left-hand chart, in terms of 1 half '20 relative to 1 half '19, what you're seeing here is the shift from high to lower spread conditions across our major markets in the U.S. and Australasia. Now this was predominantly in the U.S. where sales price falls outpaced reductions in raw materials costs and also in Asian spreads, which were impacted by higher iron ore prices. Raw materials costs at Port Kembla were also affected by a significant reduction in the export coke contribution. And in New Zealand, we saw a reduction in the contribution in vanadium byproduct sales. And that's pretty much a similar story for 1 half '20 relative to 2 half '19 on the right-hand chart. Pleasingly, you'll see from the chart that volumes and mix largely recovered in 1 half '20 from the dip in demand that we saw in the Australian market in 2 half '19. In terms of cost, whilst we're able to offset cost escalation with our cost initiatives, there were a number of factors that resulted in a net cost increase in 1 half '20. And I think it's worth calling a few of those out, firstly, the operational instability at the Port Kembla blast furnace in July '19, as we called out in our August guidance. In the half, we also saw poor manufacturing performance at one of our North American coated product sites, which has since been rectified. But we're also continuing to invest in digital capability and programs to drive further productivity and cost improvement across our manufacturing processes. And those who attended the visit to Port Kembla in November '19, you would've seen some of the work being done on automation, robotics and digital technologies, such as the digital twin, helping us to debottleneck parts of the Springhill operations. As a closing comment on this slide, I do want to stress that we remain very focused on cost and productivity and maintaining our target of offsetting escalation at a minimum. And we certainly see the ability to leverage technology as being key to achieving this. On this page, we've set out the effects of the adoption of the new lease standard AASB 16 from 1 July '19. Just to remind everyone, these are the noncash accounting impacts to reflect a change in the accounting treatment of preexisting operating leases. Now these changes had no impact on our underlying risk profile or cash flows. There is no change to our bank facilities or our Reg-S bonds, and the new approach taken by the accounting standard is consistent with that already taken by ratings agencies. The key numbers that will be of interest to you are the $401 million impact on net debt as at 31 December, the $58 million impact on EBITDA and the $11.6 million impact on EBIT in the half. In terms of cash and capital allocation, I'd now like to take a minute to run through our financial framework and how that guided our decision-making in the half. I'm sure most of you will be very familiar with this framework. Firstly, our focus remains on delivering on returns on our invested capital as we seek to maximize our free cash flow generation. Secondly, we also seek to maintain an optimal capital structure underpinned by a strong balance sheet and strong credit metrics. Now this ensures that we have the financial capacity through the cycle, whether that be to make opportunistic investments or to fund a shutdown of steelmaking, if it's not cash positive, or to fund a reinvestment in steelmaking. Now you'll note a tweak to our language here that we called out back in November at the Investor Day at Port Kembla with the introduction of that reference to reinvestment in steelmaking as we turn our focus to the reline of the Port Kembla blast furnace at the end of this decade. You should also note that we've adjusted our net debt target from around 0 to around $400 million net debt to simply recalibrate for the on-balance sheet accounting treatment of around $400 million of operating less liabilities. And then finally, we remained very disciplined in our capital allocation, running a returns-focused process with competition for capital. Ultimately, what we are seeking to achieve here is balancing shareholder returns with investing for long-term sustainable growth. And this is where we feel, in addition to the buybacks and the dividends that we have completed in recent times, that investing in the North Star opportunity strikes the right balance. In terms of ROIC performance for the half at the group level, our overall return was 8.4%, which largely reflects U.S. and Asian spread cyclicality. The North Star and Australian businesses continued to perform well with strong demand, good asset and cost performance with the lower ROIC performance in the half largely driven by cyclically lower spreads. Building Products at 10% ROIC is still weak, but we've made significant inroads to the cost and productivity of the broader business in the face of continuing weak macro conditions. Now this business is well leveraged for when macro conditions recover, and we are continuing to invest in products, channels and brands. Buildings North America and New Zealand businesses do not currently meet our expectations of performance. There is a clear program in place for buildings North America. And in New Zealand, our focus is on determining the pathway back to sustainable financial performance. Cash flow results for the half reflect the downturn from cyclical spreads in both major markets. I think the key message here is that despite weaker spreads, increased CapEx on the back of the North Star project and typical seasonality of working capital, we've still managed to achieve a near breakeven free cash flow outcome. I'd also like to note that we still have $1.4 billion of tax losses in the Australian consolidated tax group, which means there'll be no Australian income tax payments until those losses are recovered. In terms of the balance sheet, it's in a strong position, sitting at net debt of $47 million against our target of around $400 million net debt. We've highlighted on the slide the impact of the capitalization of operating leases on net debt, which shifts us from a cash position of $354 million to net debt of $47 million. And as always, we'll remain proactive and prudent in managing the balance sheet towards our net debt target. Overall, funding lines remain in very good shape. We have over $2.5 billion of liquidity at 31 December, of which $1.25 billion (sic) [ $1.27 billion ] was in cash, and the maturity profile remains well balanced and with good tenor. In terms of capital expenditure, sustaining asset spend to maintain safe and reliable operations is holding at just under $300 million across the group. We are also continuing to invest in foundation and new technologies on which we expect to spend around $40 million in FY '20. Now that includes investments in our core process and product technologies as well as our businesses and customer-facing systems. And this is a complement to some of the OpEx investments that we've been making in building capability in digital, automation and robotics. We expect to spend around $80 million on growth projects such as rolling out next-gen ZINCALUME steel technology across ASEAN and China, the second coil-plate line at Port Kembla, site rationalizations and inter-material growth opportunities in Australia. And I'd also like to call out that we now apply shadow carbon pricing to all of our capital evaluation decisions. On the North Star project, we've spent or incurred around $80 million to date, and we expect to spend -- we expect that spend to ramp up in the current half. Now those expectations on spend are still broadly in line with the capital expenditure that we initially guided to. As the project continues, we expect the spend profile will evolve, and we'll continue to provide updates as appropriate. Turning to shareholder returns. The June half buyback and interim dividend will be funded from cash. Our view is that these capital management initiatives strike a prudent balance of delivering returns to shareholders and moving towards our net debt target whilst also being circumspect in this environment have heightened macroeconomic uncertainty. And on that note, I'll hand back to Mark.

Thanks, Tania. I'll now make some summary comments and then run through the outlook. In an industry context, BlueScope remains well positioned in robust developed economies and in high-growth regions across Asia. We've got a solid and growing footprint in the United States, which is still the world's largest economy and where we see plenty of opportunities to grow. We have niche value-added positions in the very large and growing economies of China and India, and we continue to assess our growth options in those markets. We have the leading steel coating and painting operations in the ASEAN region and are, therefore, very well positioned to take advantage of the longer-term growth that we believe this region will offer. And back home in Australia and New Zealand, which both have robust population growth underpinning economic activity, we continue to pursue in the material product initiatives to grow our domestic sales over the medium to longer term. To the group outlook for the second half of FY '20. Underlying demand across our footprint is generally stable. However, the economic impact of COVID-19 has created uncertainty for our ASEAN -- or our Asian businesses, I'm sorry, and Asian steel spreads in the near term. The impact on U.S. Midwest spreads, if any, is unclear. We are aware of some impacts to our supply chains, which, to date, have been mitigated, and we will continue to monitor this situation. So overall, we're expecting second half FY '20 underlying EBIT to be similar to first half FY '20. This guidance is, of course, subject to spread, FX and market conditions. Looking at the outlook at a segment level. For North Star, we expect a similar result on comparable spreads to the first half. For Australian Steel Products, we expect a stronger result with similar benchmark spreads and robust domestic volumes, combined with the benefit of favorable realized raw material costs and selling prices and improving export coke prices. For the Building Products segment, we expect a similar result overall. The India and ASEAN businesses are expected to generate comparable results to the last half. North America is expected to improve. However, to be clear, we have assumed no contribution from our China operations this half due to the near-term disruption from COVID-19 and seasonality. For New Zealand and the Pacific Islands business, we expect a similar result on lower prices offset by better cost performance. And for Buildings North America, we expect a softer result mainly due to seasonality offset in part by improved margins and cost reductions. To summarize, our performance in the last half demonstrates, yet again, the BlueScope's recent turnaround and transformation is real. The result is more than creditable in light of cyclically lower spreads and is a tribute through our strong team of 14,000 employees across 18 countries. The result, together with our strong balance sheet that allows us to invest in a major expansion and continue to make returns to shareholders, confirms that BlueScope is now a resilient global company. Finally, I'm sure you've noticed that we've announced today that Charlie Elias' decision to leave BlueScope effective early July, after more than 12 years of service. I know many of you know Charlie well, and he's been a highly valued member of our executive leadership team and was a key contributor to the turnaround and transformation of BlueScope, particularly in the decade following the global financial crisis. I personally worked very closely with Charlie over my time at BlueScope, and we've experienced some very challenging periods prior to the company's transformation. His leadership and guidance were critical in restoring a strong balance sheet, establishing and growing our key strategic partnerships with Nippon Steel and Tata and in the acquisition of North Star in 2015. More recently, Charlie has focused on the transformation of our NS BlueScope and China businesses, positioning them for a strong and positive future for BlueScope in Asia. Charlie leaves these businesses poised for a new phase of growth as he embarks on a career sabbatical. He departs with the thanks and best wishes of the Board and the leadership team. So with that, I'll turn it over to Q&A, but I'd also like to note that this will be the first Q&A for about 18 years where Mike Slifirski won't be firing questions at us. Mike's been a stalwart and has set the standard for our industry. We'll miss him, perhaps not some of his headlines, but nonetheless, we'll miss him. We wish him well in his future endeavors, and we also look forward to working with Nick Herbert as he steps up to the lead role. I'll now hand it over to Q&A.

[Operator Instructions] Your first question comes from Owen Birrell with Goldman Sachs.

I just -- let me just start with the ASP business. The volume outlook, as you say, this half is looking pretty similar to what it was to last half. But can you give us a feel for what you're seeing for the back end of the year? I mean sound checks that I've had has suggested that a lot of customers are expecting some big rebounds in the back end of the year. I'm just wondering if you're hearing similar.

Our customers, Owen, are telling us that they're seeing good levels of demand. Of course, as we've talked about, ad nauseum, our exposure is detached and semi-detached. And also importantly, I think this is lost sometimes in that alterations and additions piece, so our building customers up and down the East Coast are all telling us that they're strong. I know that's different from some of the other building products companies that we've seen in the last week or 2. But again, we have such a smaller exposure relative to many of those guys to the high-rise segment, which I suspect is tougher. So the outlook from our perspective, we were really pleased to see that volume bounce back. We didn't think we were going into a point where volume had fallen off the cliff. And that's been supported by our customers and their outlooks. It's stronger on the East Coast, no doubt, albeit there are some very early signs that maybe we're bouncing a little bit off the bottom in the West. But generally, the outlook for us is -- the outlook from our customers' perspective is pretty good in this half.

Okay. And can I just ask a question on New Zealand as well. You talked about a pathway to improving returns in that business. Can you give us a bit of feel for, I guess, some of the strategies you expect to employ in that business to deliver those returns? And also any comments around your discussions with the government regarding the carbon offset requirements in that country?

Yes. We put in place a plan not dissimilar to the plan that we put in place at Port Kembla on when we realized that we needed to change the business model there. So the team in New Zealand, Gretta and her team, are working very hard on an improvement program. We're also very conscious of the macro and the impacts that things like government policy could well have on that business. We've made recent submissions around the free carbon bill as well as electricity pricing in New Zealand and are arguing the case very strongly for manufacturing going forward. But they are macro challenges that we need to be aware of and to be able to deal with. But there's a very detailed and lengthy list of improvement initiatives that Gretta and the team are working on to be able to turn that business around. It's off the pace, no question. This is 2 halves in a row now, and we need to get it resolved. So there's lots of attention and focus on New Zealand, mate.

Mark, can you give us a sense on the timing of when you expect to get back to sort of a more acceptable rate of return? I mean is it 12 months? Is it 3 years, 4 years?

From our perspective, we don't like the fact that we've had 2 halves that are poor. So we've got all hands to the pumps here. This is an important year for New Zealand. It's an election year. There'll be policy decisions that are made that will be really quite important from an economic perspective in that country. So we're not going to let it bounce around at those low levels for the medium term, that's for sure.

Your next question is from Nick Herbert with Credit Suisse.

And to Mike Slifirski, firstly, complete regards. He has assured me he should be listening to the call. So he might not be asking questions, but he's still taking keen interest.

Very good.

On the question side, I'd like to start with drilling a bit more into Asia [indiscernible] risk in coronavirus, and you've been very clear on China. And just wondering what would need to change, perhaps what can we look out for over the remainder of the half, if you could see a risk to the broader Asia earnings. And also, what risk is there that need to take the export volumes into Asia?

Yes. Nick, it's a good question. It's a hard one to answer. I mean I would guide you and all, we'll be looking at, quite frankly, things like the East Asian price. There's lots of discussion and speculation about the bow wave of stock that's being built up because steel mills have continued to produce, albeit, at reduced levels whilst activity has fallen away. And then I get that. I understand that. It's very difficult to contemplate that the supply chains could immediately come back to work and accelerate to a level that means that material, for example, would clear in the immediate term. One of the constraints we found coming back to our business has been simple stuff like the fact that you just can't get trucks to deliver your products. So I suspect there's going to be a backlog in the supply chain for a period of time that it is really difficult for us to forecast. I mean we've we spent a lot of time thinking about this over the last month or so as the virus has developed. All we could really do, quite frankly, and we're not pertaining to be experts here, where we've landed on this is we've just decided to tell you guys what assumptions we've made. And if we're wrong, which we're very likely to be, then we'll come back and update them at the appropriate time. But it's very hard for us to forecast with so many moving parts. Business is now coming back to work, supply chains being rebuilt, the backlog of work that hasn't been undertaken that needs to. This is a seasonally softer half anyway in China, in particular. So it's a difficult one to forecast, Nick. I'll probably sound like I'm dodging the question, but the short answer is we just don't know. So we figured we'd just lay out the assumptions that we're going to make and then -- and let it play out from there.

Yes. No, that's helpful. Understood. I'm sorry.

Maybe the only one -- sorry, Nick, I was just going to say the only real indicator that globally that you can look at is really the Southeast Asian hot-rolled coil price. And we saw that tumble quite significantly from Jan into Feb as the results or the impact of the virus started to take effect. So that's the best broader indicator that you can look to.

Yes. We watched that fall from sort $490 to $460.

$461.

So that's the key indicator that we're watching.

Okay. Great. Took a note on that. Moving over to ASP. You haven't given an update on dumping. And presumably, that means there's no real change there. I'm just wondering if that's the case and if there are any past protection measures that are due to roll off anytime soon.

No, not that I'm aware of, Nick, so I'll stand corrected if I've got that wrong. We monitor, obviously, the markets very closely. There's been some activity in a couple of segments, but we monitor that activity. We monitor import markets closely. The pricing mechanism that the ASP team have in place is cognizant of what's happening on a monthly basis around imports, particularly in our more commoditized products. So we keep a close eye on that. So nothing of any significant change in the last 6 months.

Okay. And then finally, just a bit of an extension on Owen's question. And are you able to disclose the volume assumption in ASP around domestic volumes that are embedded in your 2H guidance?

If you look at our chart, I mean, the chart that shows the 6 monthly breaks, we're basically...

Fairly consistent -- you need to assume it's flat.

Yes. We're saying about the same, mate. So you if look at the chart on Slide 14, which is the 6 monthly breaks or rest of volumes, as I said, we were pleased it's popped back up again to that about 1 million tonne net number, and we're assuming about the same for the second half.

Got it. So trend is positive, the assumption is flat.

Yes.

Your next question comes from Simon Thackray with Jefferies.

A couple of questions have already been asked, but let's just go to one on the buyback. Look, you've throttled the buyback back a little bit from what I can see. Second half, I think the assumption's $100 million. I think it was $150 million prior to that. The working capital in this half to $249 million negative working capital, just want to make sure what the -- I want to be clear what the assumptions are for the release in the second half. And given your net debt target post the IFRS is about $400 million. I'm just trying to understand the -- where net debt is expected to land on these assumptions in the second half by the end of FY '20.

Okay. Let me take a couple of those at the high level, and Tania can fill in the bits that I missed. Yes, so we went back from $250 million to $100 million for the buyback, Simon, really a reflection on just some of the uncertainty. I mean we've said from the get-go around North Star that we wanted to be in a position where we fund North Star largely out of cash flows and maintain the buybacks. So the decision the Board talk around looking forward some uncertainties around what's happening in the markets with the coronavirus and our spend profile on North Star, we just felt $100 million was the right place to land from the buyback perspective. Now we do have a build in working capital in H1, typically. We've had a hot strip mill shut at Port Kembla that we built some stock for. But Tania can talk to you a bit more about the unwind of that or the expectation of the unwind of that working capital in H2.

Yes. So maybe just on the working capital. I mean predominantly, what happened was the -- just timing of coal and iron ore shipments in ASP and also a little bit in ASEAN, along with the usual seasonality in the U.S. and China. I would note that a large portion of the $150 million outperformance that we had in June was credited. So it just reflects an element of an unwind of 1 half '20. And I think if you have a look at Page 64 of the pack, what you can actually see is that the performance in this half is actually broadly consistent with other December halves. It was really outperformance that we had back in the June half that's probably more the anomaly. In terms of the -- of how we think about it going forward. I mean it's really -- we'll make our capital management decisions depending on how we see the macro environment, where we see the balance sheet and where we're sitting, in particular, with the North Star spend. So that's what's really going to drive those decisions, which we'll look at it every 6 months. We're now working towards that target of $400 million.

Right, right. Because you've given us FY '20 expected CapEx and capital allocation. And obviously, you've got an expectation for the inventory. I just wondered whether you have a clear view based on your assumption of exactly where you think -- well, sorry, approximately where you think net debt ends up at the end of the year.

I'd say that we -- yes. So we don't give guidance on the net debt. I would say that we're going to cautiously work our way towards that target, given the current macroeconomic environment and given the commitments around the North Star project.

Got it. That's fair enough, Tania. Appreciate that. Just jumping back to ASP and only in the context of looking at the outlook for each of the divisions. So North Star, similar spreads; North America, lower result; New Zealand, similar result; North America, softer result; and then corporate cost, probably slightly higher, it looks like, on higher profit and stock elimination. So everything comes down to ASP in terms of the guidance in terms of growth year-on-year. I just want to be clear about that, half-on-half.

That's pretty much the summary. Simon, remembering that as we've called out, we've assumed nothing for China in H2. Now it's typically a softer second half in H2 in China anyway, 2/3 to 1/3. They had a cracking first half, the China team. They've done a fantastic job. So there's $15 million or $16 million if you think about the half a year ago that we've zeroed out based on uncertainty around coronavirus. So yes, that's -- they're the broad-based -- they're the broad assumptions we've made in the outlook, mate.

Your next question comes from Daniel Kang with Citigroup.

Just an extension on the ASP comments. Good to see the improvement in domestic volumes. I recall that you mentioned back in August that domestic volumes were -- had been impacted by a distribution channel destocking. Where does stock levels currently sit against historical levels? Have we seen any signs of a reversal to perhaps a restocking cycle?

Yes. We made a commitment after the last half, we'd never use the destocking word again, Daniel. So we probably created more noise than it deserved. No doubt, with price movements, we saw the channel soften a little bit in the last half. We think that's built back. I don't -- I wouldn't call out there's been any extraordinary change in stock levels or the channel is overstocked after this half in that level of performance. It really comes down to a few things. One is just the underlying performance across all segments, quite frankly. As Tania called out in her more detailed summary of ASP, apart from agriculture, which has had a terrible year, obviously, with bushfires and droughts, the segment performance across all of our major segments was stronger, which is good largely driven, we believe, by underlying demand, not by a stock build at all. And also, and we touched on this with you guys when we had you in Port Kembla in November, we're working really hard on a whole bunch of initiatives internally where we think we're getting -- we're starting to get some -- make some headway. So we've seen roofing improved, particularly in Melbourne. The initiatives around TRUECORE and the framing that we've talked about. You've seen how heavily we're promoting that material, programs like The Block where we spent a lot of time promoting that material. The TRU-SPEC material, the plate -- pre-tension plate, level plate, we've expanded further into that area as well as continuing to develop the COLORBOND pallet with Matt and some panel products. So we -- some of those projects that we talked about when we hedge it together in November, that's helping our demand levels as well. But yes, I wouldn't -- I'm not signaling to you -- we're not signaling to you that we think that level of demand in this half was caused by some sort of overstocking in the supply chain.

Appreciate the comment. Just in terms of guidance, perhaps to tender them. Just want to understand this a little bit better. And in August, you mentioned that there was a $60 million in negative swing against you from unfavorable pricing on U.S. exports against domestic prices. Given that U.S. prices have outperformed relative to Asian prices in the second half so far, I would have thought that this would now be a positive swing to your guidance. Is this captured in your guidance?

So you've got to unpack it a little bit. So the $60 million was -- represented 2 components. There was $30 million that related to export pricing, and it's purely just differences on the benchmarks and how they move. And the other $30-odd million roughly, roughly, was more to do with the unwind of favorable pricing that we had in the half prior to that. And that's generally what happens when you're in a declining price environment. Our pricing takes a little bit of time to catch up, so we had a favorable half the prior and therefore an unwind. What we're looking at in this particular half is a little bit different. So what we're seeing is perhaps a degree of favorability more so probably on the domestic pricing in a couple of the product groups. So therefore, we'll get a little bit of an expansion in the realized prices versus the pure benchmark movements. So a bit on the cost side as well. But again, in the context of $5-odd billion, we're not talking a big variance here. It's just minor variations around the edges just to help you out with the guidance a little bit. So they are quite separate matters that we're looking at.

Your next question comes from Peter Steyn with Macquarie Bank.

Just, Sorry, ASP has been beaten to death, but just very keen to get a bit of a sense of how you're thinking about average selling prices in the business. Given a very strong first half painted sales, one would assume that, that will continue to be well supported, and coated will probably do reasonably well in the context of all the value-added products you guys are pushing, as you mentioned, Mark. Is there a fairly significant underlying benefit that you're seeing in terms of sales mix rolling into the second half?

Not a material change in sales mix, Peter. We had announced a COLORBOND price increase to signal to the market, a COLORBOND price increase pre-Christmas. To be fair -- well, that was signaled out to take effect in July. As you'd be aware, many of our building customers have locked in pricing position. So we like to give the market plenty of notice of what's happening. So we -- that will have no impact in this half. But we would expect it to obviously start and flow through into the new financial year. And of course, just on prices, as we saw prices strengthen in the back half of the year, that flows through, as I said earlier, into our more commoditized products where the team watch import price levels, think about import parity, add the domestic premiums that we add for the service that we provide, and that flows through into the market. So obviously, stronger underlying activity is better for a price -- from a pricing point of view than weaker underlying activity. But we're not signaling anything unusual or untoward in terms of our mix or pricing in the second half.

Okay. Perfect. And then I was interested to just explore the bookends of scenarios around North Star and the COVID-19 impact on the expansion. Presumably, this should be a relatively temporary effect and -- to be able to solve for it. But could you give us a sense of how much of the content is China-orientated or exposed to COVID-19 disruption and then sort of what the high-road and low-road scenarios could be?

Yes, sure. So look, I don't have an absolute percentage number for you. What I would say to you, though, is it's a very small percentage. Of course, the issue is it can be a very small percentage and still hold up the project, but it is a very small percentage. There's literally -- for one of the pieces of original equipment that we have contracted, some parts that are being produced in foundries in Tianjin. This is how connected our world is now. We find this out a connection or a supply chain potential issue out of Tianjin to Delta, Ohio. The team are on it, and they're working with the original equipment manufacturers. They're working on alternative sources of supply. There's no impact at this stage from a critical path point of view. So look, we're managing it very closely, and all we really wanted to do was just signal that we don't want you guys thinking we're asleep at the wheel and not thinking about those things. The team are working very hard to make sure that the supply chains, whether it's into Delta, we've had some supply chain signals around some of our consumables, paints and other things that have occurred over the last month or so as well as the virus has taken effect in supply chains in China and other places have been impacted. So we're managing those and shipping products around or finding other suppliers. But again, what we're not signaling to you is any material change or material impact. We're on it and managing it. And if there is any change to that, we'll let you know. But there's no -- there's nothing that we're signaling today that's going to cause any sort of significant impact to the time line for Delta.

The next question comes from Lee Power with CLSA.

I'm just going to continue on with Pete with a couple more questions on ASP. So if you take into account the different exposures you have in your segment, is it -- do you think it's the total end market improving? Or you continuing to take share, do you think?