BlueScope Steel Limited (BSL) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. My name is Chen Jiang, and I'm working in Australia Metals and Mining team based in Sydney, Australia. I am very pleased to introduce our next company, BlueScope Limited. And presenting for BlueScope, we have Chief Financial Officer, Tania Archibald. Tania was appointed CFO of BlueScope in March 2018. And she held various senior management roles since joining the company back in 1996. We will have a fireside chat discussion following Tania's presentation. Tania, I'm looking forward to your presentation. Thank you.

Thank you very much, Chen. Very kind of you. Thank you, everyone, for joining us here today. This is the first time that we've presented at this conference. And as we've been quite active in the U.S. recently, we're really happy to come and have a chat and share with you some of the things that we've been doing, particularly in the U.S. But before I start, I'd like to give a little bit of background around BlueScope. So firstly, as to why we exist. We have a very clear perspective on the critical role that still plays in everyday life. And whether it's part of BHP Steel or BlueScope Steel more recently, for over 100 years, we've striven to provide great quality steel products and solutions that people can rely upon. Now a few years back, we set about defining our purpose, which is very simply to create and inspire smart steel solutions in steel to strengthen our communities for the future. And never has this felt more real than in recent years, where our communities have battled wildfires, floods, pandemics and supply chain challenges. And what it's reinforced to us is the fundamental importance of the products and solutions that we provide and the necessity to produce these in the most sustainable way. And we also see the critical role that steel will play in the transition to a low-carbon world. So you think wind tail, solar farms, transmission infrastructure, all of it made from steel. So our purpose goes to the fact that we exist to do far more than provide returns to shareholders, as important as that is. We recognize that we've got an important role to play in responsibly sourcing and producing our steel products and solutions to meet the needs of our communities now and into the future. Now for those of you who are less familiar with BlueScope, we're recognized as one of the global leaders in metal coating and painting for steel building and construction applications. We manufacture and market a wide range of branded steel products, including the iconic COLORBOND steel brand. More broadly, we have a diverse exposure to end-use segments, including building and construction, manufacturing, automotive, mining and agriculture, and our focus is on high-quality, differentiated products and services. Across our footprint, we put very considerable effort into research, development, innovation, marketing and branding. And that makes us a little bit different in the steel industry, and it's an approach that served us well. We have a great quality portfolio, very high-quality assets. We operate in 18 countries. And that's across 3 broad geographical regions: Australia, New Zealand, Asia and North America. And today, over half of our revenues come from outside of Australia. In Australia, we operate an end-to-end steelmaking and downstream business to produce a broad range of flat steel products. In Asia, we have an unparalleled footprint in the high-growth regions around Indonesia, Malaysia, Thailand, Vietnam, India and China. And here in the U.S., one of the world's major steel markets, we have a substantial footprint, the cornerstone of which is the North Star mini-mill, which is one of the most productive and profitable mini-mills in North America. Now before I dive a little more deeply into our U.S. activities, I'd like to touch on the key elements of our strategy around transform, grow and deliver. The transformation element speaks to how we're striving for a digital future in manufacturing. As a large-scale manufacturer investments in robotics, automation, digital technologies more broadly, they are now core to our manufacturing excellence and customer programs. Transformation also speaks to our approach on climate change and sustainability more broadly, where we sought to embed sustainability at the heart of what we do. On growth, we have an incredible footprint across Asia and the U.S. with numerous opportunities to extend our reach and end-use markets while staying sensibly close to our core capabilities, and execution of this growth strategy is reflected in our growing position here in the U.S. And the final element around delivery, as a capital-intensive organization, we are acutely focused on the need to deliver strong returns on invested capital and robust cash flows. Now I'll just touch a little bit more on sustainability. Our key sustainability focus areas around safety, communities, responsible supply chains and climate change, that inherently reflects our position as a large-scale manufacturer with long-lived assets in regional communities. So in short, caring for our people, our environment and our communities, that sits at the heart of what we do. Focusing more closely on our growth agenda in the U.S. for a moment. This is the key growth region for BlueScope, and we now have USD 3.5 billion invested here with over 4,000 employees. In steelmaking, we have the North Star mini-mill, which, as I mentioned, is one of the strongest performing assets in the U.S. steel industry, and we're currently in the final stages of completing the expansion of that asset. We have an excellent position in metal coating and painting in the West Coast with Steelscape and ASC, and this will shortly be complemented with the recently announced acquisition of the Coil Coatings business from Cornerstone Building Brands. Further downstream, we have the preengineered buildings businesses of Butler and Varco Pruden. And then back upstream, we have recently established BlueScope Recycling through the acquisition of MetalX's ferrous scrap business. Now collectively, these assets, they form the backbone of our U.S. value chain, and we're very excited about the growth potential that this provides into the future. Now in terms of North Star, the expansion project there is going very well. It's now in the final stages of construction and commissioning, with the first coil expected mid this calendar year following -- and following that, there will be an 18-month ramp up. Now the project involves the addition of a third EAF shuttle furnace and the second caster. The EAF has actually been operational since about August last year, and that gives us far greater operational flexibility in adapting to the changing raw material dynamics that's been going on recently. The installation of the caster and the shuttle furnace, they're now nearing completion. Once ramped up, North Star will then have melt capacity of around 3.5 million tonnes, and I'm quoting metric tonnes here, not short tons. That will lead into the hot strip mill, which becomes then the new bottleneck, which will have a practical current capacity of around 3 million tonnes. Now a subsequent phase debottlenecking project, we'll then target that 500,000 tonnes of latent mill capacity. More broadly, our expansion decisions at North Star, they've been based on a long-term through-cycle perspective. We continue to see the U.S. as a highly attractive location to making and selling flat products with positive structural changes occurring on the supply side and positive long-term demand indicators. Now recently, we've moved upstream into raw materials by acquiring the ferrous scrap processing business of MetalX in December. This acquisition helps underpin NorthStar's supply chain and its great competitive position. It's now known as BlueScope Recycling, and it's North Star's largest scrap supplier, currently supplying around 20% of the scrap requirements. The acquisition brings us a strong presence and expertise in both prime and post-consumers scrap processing. And it also brings with it the opportunity to increasingly leverage technology in scrap processing activities. And that gives us the ability to improve the quality of the obsolete scrap that we consume and reduce our overall reliance on prime scrap. Our intent is to grow this business over time, albeit primarily for the purposes of supplying the North Star mini-mill. And then finally, just over a month ago, we were very, very pleased to announce the acquisition of the Coil Coatings business from Cornerstone Building Brands, giving us a significant footprint -- mining footprint in the U.S. Coil Coatings is the second largest metal painter in the U.S. with around 900,000 metric tonnes of annual painting capacity. It's a 570 strong team. They operate 7 sites, painting a range of finishes on steel and aluminum substrates for a wide range of applications with a focus on building and construction. The business has a good history of robust financial performance with the sales mix focused on U.S. and segments that are very attractive to BlueScope. In calendar year '21, there was around about 0.5 million tonnes, and that represents about 60% utilization. So that provides a great platform for future growth in volumes. And as a global leader in painted steel products for building and construction applications, this acquisition absolutely hits our sweet spot. It gives immediate access to the large and growing Eastern U.S. region. And along with the near-term synergies that the acquisition provides, we see significant potential for medium- to longer-term growth through product development and branded products consistent with the customer service and value proposition that we provide elsewhere in the BlueScope portfolio. Our footprint in the U.S. will now cover a large part of the U.S. value chain, and we now have the opportunity to link our high-performing North Star mini-mill to the downstream painting and coating businesses. And the acquisition, of course, is fully funded from cash just demonstrating the strength of the balance sheet. Now in building out the U.S. value chain, we have a strong focus on big picture steel industry trends. And the one that comes to the fore over the last 24 months or so is a very clear recognition that steel is going to play a vital role in the transition to clean energy sources globally. So again, wind hail, solar farms, all the related energy infrastructure, all of it's still intensive, together with the accelerating need for energy-efficient buildings, which is one of our key focus areas. On the supply side, consolidation has absolutely transformed the U.S. steel industry, getting much stronger supply side discipline. And China's efforts to reduce exports and limit over production and emissions are also major structural positives for the global steel industry. Combination of government stimulus and infrastructure programs is driving robust construction and infrastructure demand across our key markets. And in regions where we have a stronger residential focus, which is typically more so in Australia and New Zealand and across Asia, what we're seeing in Australia and New Zealand, in particular, we're seeing that transition to remote and hybrid working arrangements. And that's really driving a shift towards lower density and regional residential housing, which is absolutely in the sweet spot for our products, COLORBOND, TRUECORE, et cetera. And of course, the relentless transition to the digital economy, which is driving demand for e-commerce logistics infrastructure, including warehouses, distribution centers, data centers, and that creates a supportive backdrop for all of our businesses. Now before I get to our performance highlights, I do need to touch on our financial framework. Sorry, I'm the CFO, and this stuff's really important to me. This is a framework that we've had in place now for a couple of years, and it provides great clarity to debt and equity markets as to how we think about business performance, the balance sheet and shareholder returns. And it's comprised of pretty -- 3 pretty simple pillars. Firstly, we've got to focus on delivering returns greater than the cost of capital and maximizing free cash flow generation through the cycle. Now this reflects the fact that we have capital-intensive businesses, and so we need to maintain very strong disciplines around asset performance and cash flow generation. Secondly, we seek to maintain a robust capital structure, which reflects the cyclical nature of the industry in which we operate. And that gives us the ability to both weather our way through cycles and make sure that we can take advantage of value-accretive opportunities as they come along. And then finally, disciplined capital allocation. And this is where we seek to balance shareholder returns with investing for long-term sustainable growth. Now within this element of the framework, we seek to distribute at least 50% of free cash flow to shareholders in the form of consistent dividends and on-market buybacks. So this is the framework that we've been using to help guide our decision-making over many years, particularly when it comes to capital allocation, and it's helped lay the foundation for our financial strength. And one of the key messages that I really want to leave you with today is that we're now looking to deploy that financial strength simultaneously across 3 key regions. Firstly, positioning the business for a low carbon future, and there is a very large body of work that sits behind this; secondly, on investing for long-term sustainable earnings and growth, and we've got a great pipeline of projects; and then finally, increasing our returns to shareholders. I'll just briefly touch on a couple of recent performance highlights. First half '21, that was a very strong period clearly for the steel industry in terms of demand and pricing. But also for BlueScope, where for many years, transformation investment that's now allowing us to reap the benefits of those conditions. The underlying EBIT that we generated in 1 half '22 was $2.2 billion, that was the largest result in our 20-year history, along with our return on invested capital at just under 44%. Very strong balance sheet, net cash position. And on capital management, we're paying a consistent dividend of $0.25 per share per half, together with the $700 million buyback over the next 12 months. On sustainability, a major highlight for us has been the achievement by the Port Kembla Steelworks of responsible steel site certification. ResponsibleSteel, and we're one of the founding members of ResponsibleSteel. That's a global steel industry -- it's the global steel industry's first sustainability standard and certification program, giving customers and stakeholders' confidence in the responsible sourcing and manufacturing of our products. And it's a major achievement for the Port Kembla Steelworks. And on climate change, it's been an exceptionally busy 12 months. During the December half, we were very proud to release our initial climate action report, sitting at our comprehensive climate change strategy, including our expanded 2030 targets, 2050 net-zero goal, transition pathways and our approach to climate capital allocation. We're also very excited to announce collaborations with Rio Tinto to explore technical and process options for lower emissions in steelmaking. And with Shell to explore and develop renewable hydrogen projects at Port Kembla. So these projects, they're focusing on piloting industrial scale 10-megawatt hydrogen electrolyzer. And hydrogen-powered or fed-direct iron reduction and iron melter, all of it powered from renewables. We're also making good progress on gender diversity. During the half, we also commenced monitoring expanded metrics such as ethnicity, First Nations and disability as we aim to better reflect the communities in which we operate. And on sustainable supply chain, we're continuing our focus on supplier engagements and working proactively with our suppliers to close the gaps. As I mentioned earlier, our financial framework that guides our decision-making, we continue to perform well under each pillar of the framework. On the returns focus, we've had an average ROIC over the last couple of years of 23%. Balance sheet remains strong, ample liquidity. We have investment-grade ratings from Moody's and Standard & Poor's, and we continue to deliver on our shareholder returns with more than $500 million delivered to shareholders in the first half '22. In terms of our future priorities, investment priorities, we've got a very solid pipeline of work, if I include the Coal Coatings acquisition. We've now invested around $2 billion recently on major growth projects, and we have a further $1.8 billion of investment projects under evaluation. It's a pretty exciting pipeline of work. Now if I could just leave you with a couple of final thoughts on BlueScope. We see ourselves as a very different kind of steel company. As a global leader of metal coating and painting for steel building and construction applications, we're now seeking to lay the foundations for future growth for decades to come. We're a purpose-led organization with a robust balance sheet and financial disciplines. And we are focused on investing for long-term sustainable earnings and growth and delivering solid returns to our shareholders, and that includes sensibly transitioning the business to a low carbon future. We have a high-quality asset portfolio, which is well positioned to benefit from positive structural industry trends, and we're very excited about our growth program here in the U.S., including the imminent commissioning of the North Star expansion project and the completion of the Coal Coatings acquisition. And with that, I'll pause, and we'll do some Q&A.

Thank you for your presentation, Tania. We have a few minutes left for Q&A. Do we have any questions from the floor, please? Here you go. Patrick?

Patrick Mann from BofA. Something that struck me from your presentation was the focus on returns on invested capital. And maybe could you just talk a little bit more about that. Because it's not something I don't think the other steel companies place as much emphasis on. So where do you see the best returns in that chain, right, from recycling through to primary steelmaking and coating? And I mean, is it -- are you going to continue to move down the value chain and get closer to consumers? Or do you start to see returns dissipate if you do that?

Yes, that's an interesting question. Stepping back, we are very, very focused on return on [ investment based on the ] nature of the industry in which we operate. And money is not free. And so that's one of the very strong disciplines that we've been pushing, I mean, we started well before me. In terms of where we see the best returns, I mean, the reality is that the -- it's always the focus on the capital-intensive assets where you push the hardest. And yes, we do tend to generate higher returns on invested capital the further downstream you go. I think the reality is we are -- particularly in the U.S., that's where we see a major opportunity. So yes, we're very excited about the North Star asset and expansion that we have going on there. Yes, it is a capital-intensive asset. What we're now focused on is how we can look to build out that value chain, building out the value chain between the North Star asset towards the Coal Coatings acquisition. And we think it's less capital-intensive, and we think there is significant opportunity there in the medium to longer term. But we don't kid ourselves like it's going to happen overnight, but it's something that we're very, very focused on.

You have a last question?

Just a quick question on scrap, right? So you're moving into scrap. And I guess in the U.S., Lourenco Goncalves from Cliffs, he said, "look, scrap is the new precious metal." In Europe, we've got a couple of our companies that are fully vertically integrating into scrap. So what do you think is the appropriate amount of scrap coverage for your DAS?

That's a really good question. So we're obviously starting off at 20%. We don't yet have a clear view exactly how far we want to go. People should not be surprised if they see us creep it up towards the 50% mark. I suspect it needs to be higher than 50%. We're not looking to go long scrap. We're not looking to become scrap merchants. What we're looking to do is continue to underpin and reinforce that supply chain directly into North Star. What we're particularly focused on, because I think Lourenco has done some fantastic things with Cliffs. What we're particularly focused on is obsolete scrap and the beneficiation of obsolete scrap and how you can actually reduce your reliance on prime scrap and make better use of the obsolete scrap pools that are sitting here in the U.S. So we'll continue to grow that business. I think in the nearer term, a heavy focus on organic means. We'll continue to look for bolt-on M&A opportunities as they arise. But again, it needs to be basically anything that we can feed into the North Star asset.

Do we have more questions from the floor? All right. I'm just conscious of time. Please join me thanking Tania for her presentation.

Thank you.