BlueScope Steel Limited (BSL) Earnings Call Transcript & Summary

Good morning, and welcome to the BlueScope First Half FY '22 Financial Results Presentation. My name is Mark Vassella, and I'm speaking to you from our Kansas City head office for the Buildings North American business. 6 months ago, I presented to you a very solid set of results. And today, I've got the pleasure of taking you through an even stronger set, a record for any 6-month period for our company. It's been an extraordinary period for the steel industry in terms of demand and pricing and also for BlueScope, where the many years of portfolio transformation and investment are now allowing us to reap the benefits of those conditions. Fundamentally, our record performance is a credit to the 14,000 strong BlueScope team, who put in an exceptional effort to maintain safe operations and retain a strong focus on our customers and communities in the face of unprecedented challenges. Speaking of customers, the sheer level of demand in many of our regions has meant that we've not always been able to live up to our own high expectations of timely delivery and customer service. I'm aware that supply chain issues, shipping resources and freight costs are common areas of concern across the economy. Rest assured, our customers remain at the heart of our focus, and we'll continue to invest to improve their customer experience while working within the supply chain and labor constraints that are prevailing at present. Whilst BlueScope is not alone here, we're doing everything we can to meet the needs of our customers and improve our performance. As always, safety comes first at BlueScope. In the last 6 months, we've continued to focus on evolving our overall approach and organization-wide safety culture as we seek to take our performance to the next level. On climate action, we've taken large strides. During the half, we were proud to release our initial Climate Action Report, setting out our comprehensive climate change strategy, including an expanded 2030 targets, our 2050 net zero goal, transition pathways and our approach to climate capital allocation. We were also excited to announce collaborations with Rio Tinto and Shell to support our work to develop future low-emissions steelmaking technology. Today, we're announcing that we'll move to the formal feasibility assessment phase of the Port Kembla blast furnace reline project. The feasibility study will examine a comprehensive upgrade of the blast furnace facility with a sharp focus on how best to deliver greenhouse gas abatement and incorporate new environmental management technologies. Critically, the project ensures the supply of steel for Australia from 2026 while providing a bridge to transition to low or zero carbon technologies once proven at scale and commercially viable for the Port Kembla Steelworks. And in the U.S. in December, we were very pleased to complete the acquisition of MetalX' ferrous scrap business, establishing BlueScope recycling. This business, which will look to grow in the medium term, will help underpin North Star's supply chain and its great competitiveness, particularly at a time when we're on the cusp of commissioning the 850,000 tonne expansion. The expansion project is progressing well, and we expect to roll the first call through the end-to-end process around the middle of the calendar year. Upon completion, BlueScope will have an annual production capacity of 3 million tonnes at North Star, equivalent to approximately 5% of the U.S. domestic flat steel production. To elaborate on safety, we remain fully committed to our people-centered approach that's focused on engagement and learning as we seek to take our safety performance to the next level. Core to this approach is the acknowledgment that humans make mistakes and that designing and strengthening the right risk-based controls will give us greater capacity to recover when things go wrong. To illustrate our progress, we have 250 risk control improvement projects identified across the business. And over the last 6 months, our teams have completed 55 of them. At 31 December, we've had more than 1,100 employees participate in the continued rollout of our HSE risk management program, including the Board, the ELT and a number of external supply chain partners. At 7.0, our first half FY '22 TRIFR remains at the top end of the long-term range of 5 to 7, with the majority of the injury profile continuing to be lower severity injuries: sprains, strains and lacerations. As I've said over the last year, we're continuing to evolve our approach to safety by focusing on reducing the severity of actual and potential incidents so that when an incident does occur, its outcome, especially to our people, is minor. As such, we've included severity measures to complement and add context to our traditional lagging indicator of TRIFR. Each half will convey the number of injuries we observed in the period that resulted in a permanent incapacity and the number and rate of injuries that have the potential to be fatal incidents. In the first half of 2022, there were no injuries resulting in a permanent incapacity, and the rate of injuries that had the potential to be fatal incidents remains low at less than 3%. Against the challenging backdrop of strong demand, pandemic-related disruptions and labor constraints across our businesses, our people have shown a great determination in maintaining their focus on the risks in front of them while, at the same time, looking for safety improvements in the way we make and handle our products. We remain committed to improving our performance and caring for our people by engaging with and empowering them and by focusing on resources -- our resources on significant risks. As I mentioned earlier, I'm pleased with the progress we're making with our safety evolution and look forward to seeing the benefits of this cultural shift over the coming years. If I step back and take a holistic view for a moment. Over the last 5 years, BlueScope has delivered an average return on capital of over 18%. We have a resilient portfolio of businesses that are well positioned to participate in an exciting long-term outlook for steel, supported by favorable industry and end-use trends. Steel is and will continue to grow as a vital input to support the transition to clean energy sources, such as wind and solar, together with energy transmission. On the supply side, consolidation has transformed the U.S. steel industry, supporting enhanced supply-side discipline. China's efforts to reduce exports and limit overproduction and emissions are also major structural positives. The combination of government stimulus and infrastructure programs and recovery in consumer sentiment is driving robust construction and infrastructure demand across our key markets. The U.S. Build Back Better stimulus program is one such example. And the move towards remote and hybrid working arrangements is accelerating a shift towards lower density and regional residential housing, which is a sweet spot for BlueScope's products such as COLORBOND and TRUECORE. This trend is giving us the confidence to explore options to increase metal coating capacity in Australia. And finally, the digital economy and its need for supporting logistics infrastructure continues to grow, creating demand for warehouses, distribution centers and data centers, creating a supportive backdrop for all of our businesses. To our financial highlights. Underlying EBIT in the first half of FY '22 was $2.2 billion, being nearly double that of the last half and over 4x that of the first half in FY '21. Return on invested capital was nearly 44%, up from 11% last year. And reported NPAT was up $1.3 billion to $1.6 billion. Free cash flow after CapEx of $688 million reflected our strong earnings performance but was partly offset by both CapEx on major projects such as North Star and increased net working capital due to higher steel prices and activity levels. Net cash was $696 million at 31 December, slightly down from 6 months ago, reflecting working capital growth, the acquisition of the MetalX assets and increased shareholder returns. And the Board has approved an interim unfranked dividend of $0.25 per share. Additionally, with $285 million bought since August '21, our buyback program is being increased to allow up to a further $700 million to be bought back over the next 12 months. These results are a credit to the entire BlueScope team, who've made a remarkable contribution in the midst of the pandemic and extraordinary customer demand. As I look around our footprint, BlueScope delivered an underlying EBIT of $1.2 billion, driven mainly by record Midwest hot rolled coil spreads. The team continued to do a remarkable job to dispatch every tonne possible while working alongside the expansion project. Australian Steel Products shipped slightly better domestic volumes in the last half, with strong demand across all end-use segments, particularly from building and construction applications. Strong steel prices and spreads also contributed to the performance. The Asia and North American Building Products segment was led by an extraordinary contribution from the coated North America business, with strong market conditions and cyclically lower cost steel feed given their supply chain structure. The China and Thailand businesses made solid contributions, whilst Indonesia, Malaysia and Vietnam were all impacted by pandemic-related disruptions to demand, operations and supply chains to some degree. Similar to Australia, the New Zealand and Pacific Islands segment benefited from strong demand. And Buildings North America saw strong demand but a reduced performance from the core engineered building solutions business due to high steel feed costs and margin compression. The segment benefited from the performance of the Properties Group. We continue to embed sustainability in all that we do. Significantly today, we're very pleased to confirm that BlueScope's Port Kembla Steelworks and steel processing sites have been awarded ResponsibleSteel site certification. ResponsibleSteel is the global steel industry's first sustainability standard and certification program, which was designed by business, civil society, suppliers and consumers. The independent third-party certification process has taken almost 2 years, involving multiple teams across our business. And certification followed a rigorous audit of the 12 sustainability criteria which cover environmental, social and governance issues. On gender diversity, we've continued to make improvements, with our female workforce participation rising to 23%. On supply chain sustainability, we've completed our Engage and Assess process of 250 of our suppliers, 46 of which were completed in the first half. And on climate change, it's been a very busy 6 months with the release of our initial Climate Action Report and the initiation of 2 important collaboration initiatives. We've signed memoranda of understanding with Rio Tinto to explore technology and process options for low-emissions steelmaking and with Shell to explore and develop renewable hydrogen projects at Port Kembla. The projects will focus on piloting an industrial scale 10-megawatt hydrogen electrolyzer, a hydrogen direct iron reduction furnace and iron melter, all powered by renewable electricity. Working with Shell, BlueScope will also collaborate with governments, private enterprise and research institutions to develop our hydrogen hub in the Illawarra. Our increased commitment to this critical area was just demonstrated by the full-time appointment of Gretta Stephens to the expanded role of Chief Executive Climate Change and Sustainability. Turning to the Port Kembla blast furnace reline project. As I mentioned, this project is designed to build a bridge to a low-carbon future. In September, we laid out our decarbonization strategy, our net zero 2050 goal and decarbonization pathways. We believe this is an exciting time for the steel industry as new technologies emerge to address the fundamental challenge of decarbonizing the steelmaking process. The reline of the #6 blast furnace will secure BlueScope's domestic iron-making needs from 2026. The campaign life of the furnace of up to 20 years aligns with our decarbonization strategy, our 2050 net zero goal and provides a challenging but credible time frame for the development, scaling and commercialization of new low-emissions technologies. To be clear, the reline does not lock us in blast furnace steelmaking for the full 20 years of the campaign life if new technologies emerge, and this is due to the strong earnings and cash flow of the Australian Steel Products business. However, achieving this will be dependent on several enablers, including access to low-cost green hydrogen, firmed and affordable renewable energy, the development of suitable raw material supply chains and appropriate policy settings. The scope of this project is far broader than either a mid-campaign reline or even a typical end-of-life reline in that it encompasses modernization and upgrading of the blast furnace facility and its related infrastructure. It also includes comprehensive environmental and technology upgrades, including options that will enable greenhouse gas emissions reduction over the medium to longer term. These opportunities are part of a broader suite of climate-related projects at Port Kembla that have the potential to reduce greenhouse gas emissions intensity by up to 20%. Collaborations with governments, technology vendors, supply chain partners, such as Rio Tinto and Shell, and industry bodies will be crucial to making sure we're ready to implement the best available technologies when they are available. Following completion of the prefeasibility study, the preliminary indicative cost estimate of the reline is now around $1 billion, up from the initial indicative range of $700 million to $800 million. This is due to a broadening of scope and the expanded environmental measures. Turning the focus to our growth projects. We expect to commission the North Star expansion later in this half. The first coil is expected to roll off the line around the middle of this calendar year, slightly later than our previous expectations given the complexity of the project and managing around the pandemic. We expect the ramp-up to full run rate will take around 18 months, and we now expect the total cost of the project to be around 10% above the USD 700 million initial estimate, which reflects the work done to achieve commissioning as soon as possible and some inflationary pressures seen across the U.S. economy. Again, it's a credit to the entire project team that they've managed to progress this work, all the while managing the pandemic and brownfield expansion risks. More broadly for BlueScope, our decisions are based on a long-term perspective that we continue to see the U.S. as a great place to make and sell flat steel products. Recent industry consolidation brings a step change in supply side discipline relative to the previous decade. The U.S. remains a net importer of steel, and demand is expected to grow over the coming decade in line with large-scale infrastructure requirements, the development of steel-intensive renewable energy systems and the build-out of e-commerce infrastructure. It was with that backdrop that we had the confidence to acquire the ferrous scrap processing business of MetalX in December. Our name BlueScope recycling, MetalX is North Star's largest scrap supplier, supplying around 20% of their scrap requirements. This acquisition helps underpin North Star's supply chain and its great competitiveness, bringing us a crucial presence and expertise in both prime and post-consumer scrap processing. This page sets out very high-level estimates around an indicative $1.9 billion of investment projects that we're contemplating. It's an exciting pipeline of work with all of these projects at different states of analysis and progression, and we'll keep you informed as we progress through the program of work. Now turning to the group outlook. We presently expect underlying EBIT in the second half of FY '22 to be in the range of $1.2 billion to $1.35 billion, which would be our second highest EBIT only to our last half and looking back over BlueScope's 20-year listed history. To conclude, BlueScope is a very different type of steel company that's uniquely positioned to grow and deliver across our major markets. We're optimistic about the future. The benefits we're seeing today with a record half year results have been underpinned by the decisions that have been made over the last decade. We're now seeking to lay the foundations for future growth and returns for decades to come. With the ongoing dedication of our 14,000 strong BlueScope team and our robust balance sheet and financial disciplines, we're completely focused on investing for long-term sustainable earnings and growth, carbon-proofing our business and delivering solid returns to our shareholders. We have a high-quality asset portfolio positioned to capitalize on favorable industry and end-use trends such as structural changes in the U.S. and China, trends towards lower density and regional housing and the need for e-commerce logistics and green energy infrastructure. We're particularly excited about our multifaceted growth program in the U.S. with the imminent commissioning of the North Star expansion and the debottlenecking project thereafter, our exploration of coil plating options in the Eastern part of the country and the medium-term expansion of our Properties Group. And we're also highly focused on the task of transitioning our business to a low-carbon future as demonstrated by the plans and commitments we've laid out during the last half and the collaboration and concept studies we're progressing. Well, I'll finish there, and I'm happy to take any questions.

[Operator Instructions] Your first question comes from John Durie with The Australian.

Congratulations on a great result. If I could just focus on one particular area, could you tell me how much steel you have imported over the last 12 months from your Vietnam plant to supply the Australian market? And what level of dumping subsidies you've had to pay on those imports, please?

Yes. Sure, John. I don't know the exact number, John. I can get back to you on that. I'm sorry, I just don't have that number at hand. But yes, we have imported some from Vietnam. It's a reflection of just how strong the domestic demand is. One of the advantages we have of having our network of steelmaking or steel processing assets in other countries is we can help each other out. So we've imported some steel. Vietnam was subject to an antidumping measure. We've never imported steel from Vietnam before. So when we did, we've had to pay some amount of duties. Again, I don't have that exact number for you, John, but we're paying those duties. And quite frankly, John, what that seems to me is we've got an antidumping system that works. You need to be transparent about what you're importing and what price you're importing for, and we're taking advantage of the fact that we've got a network that allows us to do that to try and help out some of our customers, where demand is particularly strong at the moment.

Is this the first time you've had to pay duty on one of your own claims?

Yes.

Your next question comes from Murray Griffin with Footprint News.

BlueScope's already committed to net zero. Aspirationally, you've already engaged in the SBT process. What's the key benefit -- extra benefit you get out of responsible steel certification? Is it about demonstrating credentials to customers or to investors? Or is it about reassuring people that the blast furnace reline fits with the climate and sustainability agenda? And also, how hard was it to get that certification and what was the greatest challenge?

Yes. Thanks, Murray. It's a good question. Look, we're really quite proud of our involvement in responsible steel. In fact, we were a founding member of that body. A long-serving employee was incredibly passionate about it. And sadly, very sadly, he passed away a few years ago, but we're a founding member of that group. It measures across 12 categories that are everything from environmental, social, governance. So it goes to things like labor rates and use of labor, Murray. So it's a very comprehensive program. It's taken us 2 years and it's audited independently, and we're the first steelmaking site in the Southern Hemisphere to be accredited. So it's something that we're looking at, at our other steel businesses as well. And quite frankly, we think it's another plank in our sustainability journey that allows us to talk to our customers and our supply chain partners about what we think is appropriate in terms of producing steel. So it's something we're quite proud of, and we have a fair -- I don't know where you are, Murray, but we have a very large flag flying across BlueScope this morning, quite proudly. The responses are still lagging on it so we're pretty chuffed with the outcome.

[Operator Instructions] Your next question comes from Simon Evans with the Australian Financial Review.

Just wanted to check, has BlueScope in its Australian business been lifting prices?

Yes, Simon. We've seen some price increases. So as you know, Simon, if you think about our suite of products, we have commodity based -- more commodity-based products that are priced on an import parity regime. We then obviously add what we hope is a justifiable premium for local supply, carrying stock service, et cetera. So as steel prices have gone up, Simon, then our import parity pricing base has increased. Now equally, when prices come off, that goes down again. And in our more premium-branded products like COLORBOND, yes, we've put price increases through. In fact, the price increase has only recently taken effect, and that's a reflection, again, of the very strong demand conditions that we're seeing in the building and construction segment in particular, Simon.

Okay. What would be the rough percentage rise on products like COLORBOND?

So that number, I can find out for you. I'm sorry, I just don't have it at my fingertips, but it's a number I'll get to you before we finish this conversation, I'm sure. And then in the commodity products, Simon, there's been some significant increases as we've seen hot rolled coil prices. And you'll be aware that the U.S. benchmark pricing for hot rolled coil went up at -- went up to more than $2,000 a short ton, so extraordinary levels. We haven't seen that in the Asian area as much. But certainly, we've seen prices go up quite materially in some products. The COLORBOND I've just been handed a note. I should have known the number, I'm sorry. The COLORBOND increase was about 6% to 8% in that range, Simon.

Okay. But was that like -- was that January 1 or a particular time?

We announced it last year. Because COLORBOND goes into the construction market, we tend to give our markets well advanced notice of price increases because many of our customers lock into contracts. So it took effect February this year, but we actually announced it in the middle of last year. Quite frankly, we signaled to the market that it was coming.

Okay. And just very broadly, you mentioned those segments like e-commerce, logistics and green energy infrastructure. So are you basically saying, Mark, that over the next few years, the demand for steel should mean that we don't see the traditional peaks and troughs in the industry?

Well, there's a couple of things to unpack there. Let me -- I think we'll always see peaks and troughs in the industry. It's just the sort of industry that we are, and it's why we've set the business up to be profitable at the bottom of the cycle. But I think what we're calling out is some of those end-use trends that we're seeing regional housing, detached housing and a very strong market push into last mile logistics, Internet-based shopping. Particularly in North America, that's a very strong area for us. So what we're really calling out there is we actually don't see that trend changing or reversing. So from our perspective, that means a good pipeline of work for us in the logistics, e-commerce, digital space. So for us, that's quite encouraging. Our products suit those sorts of -- that sort of demand of warehouses, et cetera. So that's something that we're focused on. But look, Simon, there'll always be cycles. We're running at a very high level of activity right now, and I'm certain that, that will slow down at some stage. But we continue to build out our portfolio. Other products, we're trying to step into areas like import replacement. We're building out our portfolio to allow us to provide a buffer for those segments when they do soften.

Okay. One last one. So there's been some fairly big news in the energy sector over the last few days with Origin bringing forward closure announcements and then whatever happens with AGL and the bid from Mike Cannon-Brookes and co. Are you concerned about reliability and sort of long-term stability of Australia's electricity grid?

Yes, absolutely, Simon. And we've been saying this for years. I mean all we ask for is an orderly transition. None of us are deniers. We have 20% of our power at Port Kembla coming from a solar farm in Western New South Wales. So we're not deniers by any stretch of the imagination. All we ask for is that there's an orderly transition. So we're working on strategies to try and reduce our reliance on energy, obviously. It's why we've committed such a resource to it internally. But manufacturing in Australia, businesses like ours need affordable and reliable energy. And yes, I am concerned about the threat to particularly those baseload providers like coal. And I just urge people to think carefully about that because that orderly transition is what really matters to the manufacturing industry in Australia more broadly, not just BlueScope.

Your next question comes from Nick Evans with, The Australian.

Just a couple for me. First, I guess, on -- there was a brief callout in the presentation on the inflationary pressures in the U.S. I guess I just want to get a feel for how you're sort of looking at inflation and those sort of inflationary pressures, particularly around steel shortages and labor rates and that kind of thing over the sort of medium term. Do you think that these kind of levels of sort of cost pressures are likely to get locked into the system in the long term? Or do you think it's sort of post-COVID sort of trends which can kind of rid all the stimulus measures? So how are you thinking about sort of costs over the next sort of 5 years or so?

Yes. Nick, we've worked very hard on our top line, obviously, try and get as much back as you can. There's no doubt we've seen some pressure. A lot of it's about availability, of course. So it's the supply and demand situation, particularly in relation to labor. So the opening of the borders, allowing labor back into the country in Australia, I think, will help alleviate some of the pressures we've seen here. COVID is definitely having an impact. In fact, perhaps the Omicron situation was even more difficult for us to deal with than the original Delta strain because it was so -- there was so much volatility in terms of people getting it, needing to isolate. In the Delta environment, it was much more structured when you could operate when areas were shut down. The volatility in Omicron has caused us quite a deal of heartache in terms of substituting people who can't turn up to work. So look, it's -- we've seen some pressures. Obviously, you've got to try and react with your own revenue line to capture some of that back. Some of those inflationary pressures are around labor costs and the profit share plans that we have in place, and they naturally unwind as the performance of the business changes. But we're watching it closely in North America. Labor, yes. Freight, yes. There have been areas where we've seen some inflationary pressure in particular. So it's something we're watching really quite closely.

And just going back to sort of Simon's question on sort of the ongoing sort of uncertainty around sort of the grid and energy supply in Australia. I mean do you see any sign that we're actually getting close to a point at which you can sort of start to plan? I mean there's been, you've -- over the last few years, sort of the uncertainty has been the major factor in your commentary. Do you think there's any sign that you're now getting to a point where you can sort of go, okay, we know what this is going to look like in the medium term, kind of getting a little bit more comfortable around planning on that? Or is there still a real sort of fear factor around what might happen that might catch you by surprise?

Well, if you think of some of the announcements and the bringing forward of closures, there are obviously things that -- the game is changing constantly. Again, what I hope and what we're agitating for is that there is an orderly transition. I mean it's not obvious yet to me, Nick, that there's a solution that would see us through some of these closures. And yes, there might be enough power, but it's got to be affordable as well. So the impact on reliability and affordability are what matters to manufacturers and businesses like ours. So I don't know that I feel any better about being able to plan forward by what's occurred in the last few weeks. It's probably made me a bit more nervous, quite frankly. So just that transition, that orderly transition is what we need to be able to continue to be a manufacturer in Australia.

Your next question comes from Steve Rotherham with Energy News.

I'm interested in New Zealand Steel. So not that long ago, there was a cloud over its survival. And today, you're talking about securing the future of steelmaking in New Zealand. What's changed? What are you planning? And how do you intend to mitigate New Zealand's high energy costs, specifically gas and electricity?

Yes. So look, again, quite a few things to unpack there. The business was performing poorly up until a couple of years ago. The team there did a nice job of working through how they could rationalize the business. We took some hard decisions to reduce some of our capacity, cut our costs. And then, of course, the business in the last 18 months has benefited from the same tailwinds that we've seen in Australia and North America and other parts of our portfolio. So very strong demand, demand that surprised us all. Stronger pricing because supply chains have been tight. So we're the beneficiaries right now of some tailwinds in New Zealand. Look, I would say the New Zealand Steel business is heavily dependent on steel pricing. It's less of a spread business because we have more of a fixed cost base around our iron and coal. So as prices fall, what we need to be able to see is that the New Zealand business can continue to be profitable when the cycle turns. Right now in the steel industry, if you're not profitable in the last 6 months in the steel industry, you're never going to be profitable. So the conditions right now are behind us and supporting us, but there's been a lot of work done by the team there to rationalize the business. Look, energy costs have been very high. They have abated and come off a little, but they have been very high. And of course, that's an issue because you just can't necessarily get that back from your own market, and the volatility is something that's quite challenging to work through. But a lot of good work done in New Zealand by the team to take the first steps. The market condition has probably overtaken us all a bit, and we're being -- we're the beneficiaries of that, but we need to continue to make sure that when the cycle comes off, the business can still give us an appropriate return.

There are no further questions at this time. I'll now hand back to Mr. Vassella for closing remarks.

Okay. Thank you. Thank you all for dialing in and listening to us. I appreciate your time. I know it's a busy time, but thank you all, and we look forward to catching up soon. Thank you.