BlueScope Steel Limited (BSL) Earnings Call Transcript & Summary

Good morning, and welcome to the BlueScope First Half FY '23 Financial Results Presentation. My name is Mark Vassella, and with me today for the first time in the capacity of acting CFO is Mark Scicluna. This morning, I'll take you through the highlights of the last 6 months, and then Mark will address segment and balance sheet performance. Before we wrap up, we'll have plenty of time for your questions. We're joining you today from Melbourne part of the Eastern Koolan nation, and I'd like to acknowledge the traditional custodians of this land, the [ Baradar ] peoples. We pay our respects to elders past, present and emerging and to all First Nations people joining us today. Turning to the highlights for the half year. BlueScope delivered robust financial performance in the first half of FY '23 with underlying EBIT of $851 million. While not at the historically high levels of last year, this was nonetheless a very solid outcome and highlights the resilience of our portfolio. Pleasingly, for our shareholders, the Board has announced a $0.25 per share interim dividend and with the resumption of tax payments in the Australian group, we're now able to fully frank the dividend for the first time since 2017. We will also continue buyback activities with the Board announcing an extension through to February next year. The U.S. continues to be an exciting growth area for BlueScope. Following a year of major achievement and progress for us in FY '22, this half, we saw the first coils rollout from the North Star expansion with the ramp-up ahead of plan. We continued progressing the business plans for BlueScope recycling and BlueScope coated products, and I'm thrilled with the platform for future growth that we now have in the U.S. BlueScope continues to transform, grow and deliver. In line with that, we've refreshed our senior management lineup and the lead team to bolster delivery on our strategy. Tania Archibald has been appointed as our new Chief Executive, Australian Steel Products. Tania was appointed CFO in 2018, having joined ELT 2 years earlier leading our strategy function. With a deep knowledge of the business, Tania will drive ASPs success, focusing on markets and customers, technology and the opportunities and challenges that arise from climate change. John Nowlan has taken on an advisory role to the executive team as he transitions towards retirement. John has given BlueScope 47 years of dedicated service, including the last 5 years as Chief Executive of ASP. His experience is invaluable and his advisory capacity, he will work with me to provide the advice and leadership necessary to ensure our capital development pipeline is set up for success. He'll work with our new leaders as they transition to their roles, and we'll continue to focus on health, safety, environment and manufacturing excellence. Kristie Keast been appointed Chief Executive North America. Kristie joined our executive team in 2019 as Chief People Officer before taking on additional responsibility for North American development, where she's built a solid understanding of our U.S. business in addition to her extensive experience across Australia, New Zealand, the U.S. and in corporate functions. This month, Pat [ Finan ] retires as BlueScope Chief Executive North America, and he'll take on an executive advisory role. Pat's been with BlueScope for 18 years and is a highly respected industry leader in the North American steel market. Pat's overseen the successful expansion of our steelmaking facilities at North Star, the acquisition of our new BlueScope Recycling & Materials and BlueScope coated products businesses. We're all grateful to Pat for his leadership over the years and I'm delighted he has agreed to continue to work with us on that advisory basis. And replacing Kristie as Chief People Officer is Peta Renkin, who steps up from her role as General Manager building components in Australian Steel Products. Peta's career includes both people and operational roles across BlueScope in Australia and the U.S. And more recently, she's played a key role in delivering strong growth and performance in the ASP Building Components business. There's no doubt, this is one of the most exciting times in our 20-year history as an ASX-listed company. I'm confident these leaders will drive our future success, and I'm excited about the opportunities ahead. The ASP business is continuing its significant feasibility study into the comprehensive reline and upgrade of the #6 blast furnace at Port Kembla. We have an over 100 strong expert team working hard on the engineering development, scoping and tendering of approximately 600 work packages that together deliver the project. A key focus of the work undertaken during the feasibility phase has been on the tendering and negotiation of contracts for long lead time precommitment items. A number of these long lead time items have been ordered in alignment with the project's critical path, and we'll provide further updates as the project continues to progress. On climate action, we're working hard to deliver on our 2030 targets and our 2015 net zero goal and are progressing a range of projects and collaborations to get there. In addition to the investment in growth we've made in the U.S. in the past couple of years, we're continuing to progress our broader growth and transformation initiatives with the continued rollout of our digital program and further progression of key projects. As always, I'll start with safety. For a few years now, you've heard us talk about our integrated health, safety and environment strategy and how we've embraced a people-centered approach and embedded a culture of learning in how we manage risk in terms of health and safety as well as environmental risks. Part of this are our risk control projects, which build capacity in the management of material risks, so we can reduce the likelihood of both potential and actual incidents. The broader team have identified 250 HSE risk control improvement projects for FY '23 and are well underway in progressing these. In addition, we've completed 14 environmental improvement projects during the half, which resulted in a reduction of approximately 9,000 tonnes of carbon dioxide equivalent, a saving of around 85,000 kiloliters of freshwater and $2.6 million in cost savings. More information on these outcomes can be found in the appendix slides to this presentation. We're also making solid progress in increasing the capability of our people through business tailored HSC, risk management leadership and learning workshops. As at 31 December 22, more than 1,400 of our leaders have now participated in the global HSE risk management program with a number of BlueScope supply chain and industry partners also participating through the half. In addition, over 750 of our people were involved in business-led HSE learning programs in the half as the lead metric shifts from leaders to incorporate broader workforce participation and learning. Our lagging safety metrics showed an improvement from FY '22. TRIFR was 6.7% in the first half of FY '23, within the long-term range of 5% to 7%. Our injury profile during the half continues to be lower severity injuries, sprains and lacerations, with one of those injuries having had the potential to be a fatal incident and another resulting in a permanent in capacity. Through our financial highlights. Underlying EBIT in the first half of FY '23 was $851 million in the middle of our guidance range and reported NPAT was $615 million, a solid performance with weaker steel spread conditions compared to last year. Return on capital over the past 12 months was a healthy 23.4%. With free cash flow after CapEx of $751 million, the balance sheet remains strong with a net cash of $606 million. These results are a credit to all of the BlueScope team, and I thank them all for their ongoing dedication and contribution to our success. Mark will take you through the segment detail in a moment. However, an overarching thematic was that of stronger performance in our downstream businesses, but with weaker steel spreads impacting our mills based businesses performance. In North America, our Engineered Building Solutions business made a record contribution with a solid order book and the benefit of lower steel feed costs compared to its generally longer-dated sales. The JV coated business on the West Coast also made another very strong contribution of over $100 million, with particularly strong margins in the downstream businesses. Coming off a couple of outstanding half year contributions in FY '22, North Star made a solid contribution on significantly weaker benchmark steel spreads. The Australian and New Zealand businesses also delivered robust earnings in the half despite weaker steel spreads, reduced purchases by distribution customers as they lowered inventories and weather impacts in the Building and Construction segment. Whilst we're talking about our New Zealand business, we're all very aware of the awful impact of Cyclone Gabriel across the country. It's caused the loss of life and property and caused an asset disruption. My thoughts are with all our people in New Zealand and indeed, all those across the Tasman who are in a difficult time. In Asia, while the performance of the ASEAN business was disappointing in a challenging market, China was a bright spot, having a record earnings half. The team in China drove stronger sales volumes with a particularly strong performance in the Engineered Buildings business, underpinned by projects for electric vehicle production facilities. We continue to embed sustainability in all that we do. On climate, during the first half of FY '23, we continue to progress a range of decarbonization projects to both optimize existing assets as well as investigate and prepare for emerging and breakthrough technology. In Australia, work continues on a number of initiatives, including the progression of the concept study for a pilot DRI melter plant as part of the collaboration agreement we have with Rio Tinto. On the electrolyzer project, we haven't made the progress to date that I would have liked, and we're having to rethink about what the right model is for us going forward. At our Glenbrook plant in New Zealand, the team are considering the installation of a scrap melting or electric arc furnace process to supplement or replace the existing steelmaking processes at the Glenbrook plant. Further, a number of projects across our non-steelmaking sites are delivering emissions intensity reductions through energy efficiency improvements, including multiple solar projects and projects to reuse waste heat and gases in our coating and painting lines. Earlier last month, the Australian government released a position paper on reforms to the greenhouse gas safeguard mechanism calling for submissions this week. We're supportive of the government's objective to accelerate industrial decarbonization in Australia. BlueScope is also committed to climate action with its own 2030 and 2050 targets, a commitment to invest $300 million to $400 million by 2030 to cut emissions intensity and a track record that has seen the Port Campbell Steelworks ranking the lowest quartile for emissions intensity worldwide. The facility has also reduced its absolute emissions by 39% in 2011 compared to 2005 levels, when a blast furnace was closed, delivering the largest absolute cut in emissions from covered facilities. The current draft of the safeguard mechanism reforms, if enacted, may have a material impact on large industrial facilities, including the ASP business. We're engaging with and will shortly make a submission to the government on the proposed settings with final safeguard reforms expected to be announced in the second half of FY '23. Until they're announced, it's too early to state with any certainty to potential implications of such reforms on ASP and the feasibility study of the #6 blast furnace reline and upgrade. On inclusion and diversity, female representation continued to grow in pursuit of our 40-40-20 target, with the total percentage of women in the BlueScope workforce reaching 24% in the first half of FY '23. Recruitment and retention continued to be a challenge due to low unemployment and high job vacancies, particularly in the U.S. Beyond gender strategies are continuing to emerge across the business units designed to suit local community needs, such as a focus on ethnicity in the U.S. On sustainable supply chain, more than 100 assessments were completed during the half, being a mix of new supplier assessments, reassessments and shared assessments. A significant focus has been on completing supplier on-site audits for key suppliers identified as being high risk. 5 of those audits were completed in the half, and our team are working with the audited suppliers on the improvement opportunities identified through these audits. On 9 December 2022, in a proceeding initiated by the ACCC, alleging contraventions of the Australian competition law cartel provisions, just as a Brian of the Federal Court found against BlueScope and a former employee. A Remedy's hearing is scheduled for 12 and 13 April 2023. And in due course, BlueScope will have the opportunity to determine whether there are grounds for appeal. Our purpose and our strategy continue to focus and guide us. Our purpose continues to bring direction and motivation to the BlueScope team as we work to support each other, our customers and our communities. Our strategy guides us in the delivery of our purpose. The transformation element of our strategy speaks to how we're striving for a digital future in manufacturing and seeking to delight our customers. It also positions sustainability at the heart of all we do. On growth, we have an incredible footprint from which to deliver value for shareholders. Our Asian network has tremendous upside potential. We're striving to deliver on that promise of earlier investments with an equal focus on growth and sustainable returns. In the U.S., we'll focus on delivering value from our recycling assets and the recently acquired BlueScope Coated Products business. And in Australia and New Zealand, our intermaterial growth strategies will continue to be driven by our comprehensive sales and marketing programs, backed up by ongoing product and service innovation and differentiation. As always, being a capital-intensive and cyclical organization, we remain acutely focused on the need to deliver strong returns and robust cash flows and above all, keeping our people safe. We remain excited by and well positioned for a number of continuing trends across our industry and end-use segments, trends which we've been speaking to you about for quite some time now. This includes the favorable demand outlook for steel in general as well as our products and solutions across the green energy infrastructure build-out. The trends towards lower density and regional housing, the need for e-commerce and logistics infrastructure and the solid pipeline of commercial and industrial projects. Steel is critical to the achievement of these trends, and we're well placed to take advantage of them. More broadly, capacity consolidation and rationalization has transformed the U.S. steel industry and China's efforts to reduce exports and limit over production and emissions are also major structural positives. The importance of domestic supply chains and sovereign manufacturing capability have also been demonstrated in the last few years, all trends that align perfectly to BlueScope's footprint and multi-domestic strategy. Delivering on our U.S. growth strategy is a key focus for BlueScope. As I mentioned earlier, in December, Kristie was appointed as our new Chief Executive, North America, commencing this month. Over the past 12 months, Kristie's worked closely with Pat and the North American team to build our capability there, and we now have a great opportunity in North America to provide a high-value integrated steel offering to our customers. In terms of progress, on North Star, we're pleased with the expansion ramp-up thus far. The team are having good success in sequencing the steel flows from the new equipment into the existing operations. We continue to expect full ramp-up over an 18-month period from August 22. BlueScope recycling has continued to gather momentum through a range of low capital capacity projects and the acquisition of the Mansfield Ohio site in August. The business supplied 30% of North Star's total scrap requirements in the first half of '23, well on the way to the targeted 40% self-sufficiency we're looking at the full expansion run rate. The first half of '23 was our first 6 months of ownership of the core coatings business, now known as BlueScope coated products. This business will provide us with a range of near-term synergies and medium- to long-term growth potential through process and technology upgrades, product development and the introduction of branded and packaged products. The team are busy with the integration and execution of the business case, and we're pleased with our progress to date. We continue to see the U.S. as a great place to make and sell flat steel products. Our confidence is supported by both the recent consolidation amongst industry participants and by ongoing growth in demand for steel in this large market. particularly with the need over the coming decade for large-scale infrastructure requirements, development of steel-intensive renewable energy systems and the build-out of e-commerce infrastructure. I'll now hand over to Mark, who will take you through the more detailed financial data.

Thanks, Mark. The Australian business delivered underlying EBIT of $274 million in 1 half '23 and a return on invested capital of 24%. Whilst end-use demand remains solid, sales volumes were lower in the half. This was largely due to distribution customers, lowering inventories in a falling price environment during the half and following the arrival of delayed imports. Further, unfavorable weather and labor constraints impacted building and construction activity, which in turn impacted volumes into this sector. Although overall volumes fell, it was pleasing to see that the sales of COLORBOND product increased slightly compared to 2 half '22, supported by ongoing sales and marketing initiatives focused on the Sydney and Melbourne Metro areas. Realized spreads softened in the half, reflecting benchmark spread movements, while conversion costs were higher given the inflationary pressures. A lower export coke sales contribution also impacted earnings during the half on softer global coke demand and spreads. The one half '23 results included the impact of a noncash cost of $30 million from the unfavorable revaluation of the Finley solar farm power purchase agreement, which is treated as a financial derivative and was due to a decrease in projected future spot electricity prices. This was the converse to 2 half '22 where again was recognized. Ongoing P&L volatility is expected from this arrangement in line with future wholesale electricity prices. Looking at the specific and new segments for ASP. Across the board, we saw lower dispatches in 1 half '23 relative to 2 half '22, which, as mentioned, was largely due to distribution customers managing down their inventories in the falling price environment. The broader Australian building and construction industry was also unfavorably impacted by a number of weather events, reducing the number of build days in the half, predominantly in Victoria and New South Wales. Looking ahead to the macro indicators of the Australian building and construction industry, we continue to see a robust pipeline of activity. Whilst the patch house approvals are pulled back from recent record hires, this settled towards the middle of the historical band of 90,000 to 130,000 units, demonstrating that underlying demand for detached housing remains solid. Whilst rising rates are impacting new sales, ongoing labor and supply chain constraints, along with weather-related delays to projects may provide a buffer as they elongate the pipeline of work. In addition, we see a continued trend towards regional areas and lower density living, which are traditionally areas where our flat steel products are particularly popular. Alterations and additions approvals have stabilized at around double the level seen pre-pandemic with consumers continuing to direct discretionary funds towards renovation activity. In the nonresidential space, approvals remain at very good levels. The government's focus on fiscal support in health, education and defense projects, along with a solid pipeline of projects in the commercial and industrial sector is likely to underpin demand in the medium term. The North Star business delivered 1 half 23 underlying EBIT of $202 million and a return on invested capital of 27%. Steel spreads softened in the half as steel prices continued their retreat from record levels seen in FY '22. Demand for North Star's product remained robust in the half as the business again operated at full capacity, including an incremental 60,000 tonnes from the initial phase of the ramp-up of the expansion project. Activity levels in the auto segment remains stable, albeit subdued compared to history due to ongoing supply chain constraints. The integration of BlueScope recycling continues to progress well, including the third site in Montefield, Ohio acquired in August 22. Now to take a quick look at activity levels across North Stars and new segments. In auto, following the extended period of low vehicle inventories post pandemic, a solid background of demand for vehicles has supported activity levels despite rising interest rates and declining affordability. Sales continued to be hampered by low inventories and supply chain constraints. Nonresidential construction has recovered beyond pre-pandemic levels, supported by government stimulus programs, such as the Infrastructure Investment and Jobs Act. However, the Architecture Billing Index has softened in recent months, reflecting softer demand for new projects. Demand in the manufacturing sector showed a softening trend through the half following a period of strength as the economy adjusts to high interest rate environment impacting consumer confidence. Buildings and Coated Products North America segment, which delivered an outstanding result in the half, the segment produced underlying EBIT of $173 million in 1 half '23 and a return on invested capital of over 23% over the last 12 months. Building upon a similar trend in 2 half '22, the core Engineered Buildings business saw an improvement in margins on stronger selling prices and lower steel input costs. Underlying demand and order intake are at healthy levels on solid activity in logistics and warehousing and new segments, albeit slightly softer than 2 half '22. As flagged, the Properties Group delivered a negligible contribution in 1 half '23, with no projects realized during the half. The build-out of the Properties Group pipeline of projects remains on track as we seek to generate a more consistent earnings profile from this business. And I'll note later in the outlook, we are expecting a project to close late in the second half. Finally, the integration of the BlueScope Coated Products business progressed through the half following its acquisition in June 2022. Building Products Asia and North America delivered a half year underlying EBIT of $165 million and a return on invested capital of 19%. The North American business again delivered an excellent result, mainly driven by stronger margins from the downstream businesses. The China business delivered a record half year result driven by strong dispatch volumes, particularly in the engineered buildings business and favorable seasonality. Disappointingly, the Southeast Asia business delivered a moderate loss in the half as the business faced difficult trading conditions, reflecting weaker regional demand in a falling price environment and strong import competition. And finally, the India business continues to perform well. The New Zealand and Pacific Islands business delivered underlying EBIT of $86 million in 1 half '23 and a return on invested capital of over 40%. Similar to the ASP business, domestic end-use demand remained strong in the half. However, dispatch volumes were impacted as customers lowered inventories during the half in a falling price environment and following the arrival of delayed imports. Weather events also impacted dispatches into the Building and Construction segment. Stronger realized domestic pricing during the half offset the impact of higher coal costs in line with global benchmark prices. Turning to the group underlying EBIT walk forwards. The primary driver of the decrease in one half 23 earnings was the significant reduction in realized spreads, both in Asia and the U.S. Conversion costs were also higher across the group on lower volumes and inflationary pressures, particularly in consumables, labor and freight. And finally, lower dispatch volumes impacted the results, particularly at ASP and New Zealand. Turning now to the financial framework and key financial indicators and settings. The financial framework remains unchanged and is integral to our success in managing the business through the peaks and troughs of the cycle. By way of recap, we have 3 key focus areas: firstly, in delivering great returns greater than our cost of capital and maximizing free cash flow generation through the cycle. Secondly, we continue to maintain a strong balance sheet and credit metrics giving the ability to weather cycles and providing the capacity to deliver on value-accretive opportunities. And finally, we remain disciplined in our capital allocation, balancing shareholder returns with investing for long-term sustainable growth. The group delivered a solid return on invested capital of just over 23% over the last 12 months with robust contributions across the portfolio. In 1 half FY '23, strong profit was particularly generated in our downstream businesses, highlighting the benefit of our vertically diversified portfolio of assets. Cash flow remained robust during 1 half '23, with the benefit of a working capital release and lower capital and investing expenditure compared to recent halves. I'd also like to flag that we've now returned to paying tax in the Australian group with tax losses exhausted. The level of working capital in the business has started to reduce in line with moderating steel and raw material prices and improved supply chain conditions. Specifically on debtors, we have seen a moderation in balances in line with lower selling prices and volumes, and the book remains in a very healthy state. Turning to the capital structure. The balance sheet remains strong with $606 million of net cash at 31 December. We have ample liquidity of over $3 billion, including the net impact of recent funding transactions to repay our USD 300 million medium-term notes and replace this liquidity by an equivalent increase and extension of our core bilateral loan facilities. We have maintained our investment-grade credit ratings with Moody's and S&P. In fact, Moody's upgraded us by 1 notch to BAA 2 late last year. As we flagged previously, we are focused on using our financial strength to invest for long-term sustainable growth and to reposition the business for a low carbon future. So in the short to medium term, we will be retaining balance sheet capacity to fund these priority investments. But in the longer term, we will continue to target around $400 million of net debt. On capital expenditure. For one half '23, sustaining and foundational growth spend was broadly in line with our normal operating range. The acquisition of the third recycling site in the U.S. also featuring in the half. In the current half, there remains a small tale of capital on the North Star expansion projects. The expected 1 half '23 growth spend of approximately $100 million relates to a range of activities across the group, including feasibility work on the new Australian metal coating line and the new heavy structural pipe and shot mill at Port Kembla. And as Mark mentioned earlier, we're continuing to make good progress on the feasibility and long lead time items associated with the #6 blast furnace reline and upgrade project. In terms of future investment priorities, we have a solid pipeline of projects we're working on. We have invested around $2.2 billion on major strategic priorities in the U.S., which strongly complements our current operations, markets and expertise. We have a further $1.9 billion of investment projects under evaluation, all of which we have flagged previously. It's an exciting pipeline of work with 6 identified projects at different states of review and progression. Turning to shareholder returns. Our approach is to seek to distribute at least 50% of free cash flow to shareholders in the form of consistent dividends and on-market buybacks. A reminder that in August 2021, the Board approved a new target of $0.50 per share per annum of ordinary dividends, which we expect we can sustain through the cycle under most scenarios. Although naturally, the Board reserves the right to change this approach. In alignment with this approach, the Board today approved a $0.25 per share interim dividend. Australian tax losses have been exhausted and tax payments have resumed accommodating full franking of the interim dividend. Buybacks will continue to be an important component of our capital management approach, given their flexibility in managing capital and the EPS enhancement they deliver. $120 million of stock was bought back through the program during 1 half '23. The Board has today approved an extension of the program tenor to allow the remaining capacity of up to $380 million to be bought back over the next 12 months. Finally, I'll run through the outlook across the individual segments before handing back to Mark. For Australian Steel Products, we expect a result around 1/3 lower than 1 half '23, with lower benchmark spreads combined with weaker realized pricing. We're expecting similar domestic volumes as well as a lower contribution from the downstream businesses. And we currently expect a nonrepeat of the $30 million noncash charge in 1 half '23 from the solar PPA derivative. However, this remains subject to the electricity price outlook. For North Star, we expect a result of around half of 1 half 23 due to lower benchmark spreads and unfavorable realized pricing. We're also expecting an increasing contribution from expansion volumes as the ramp-up continues. For the Buildings and Code Products North America segment, we expect the results similar to 1 half '23. We're expecting a modestly lower result in the Engineered Buildings business on easy margins and a moderate contribution from the properties group with a project sale expected late in the half. For the Building Products Asia and North America segment, we expect the result significantly lower than 1 half '23, primarily due to North America, where we expect to result below half that of 1 half 23 as the business returns to more historical margin levels. The China business will also be lower on typical seasonality. I -- for New Zealand and Pacific Islands, we expect to result modestly lower than 1 half '23. And finally, for intersegment corporate and group will see a result over double that of 1 half with a nonrepeat of the $34 million favorable profit in stock elimination and favorable FX gains realized in 1 half '23. With that, I'll hand back to Mark.

Thanks, Mark. And turning to the group outlook. Underlying EBIT in the second half of FY '23 is expected to be in the range of $480 million to $550 million. This is lower than the first half FY '23, mainly due to softer Asian and Midwest steel spreads, but will be a strong result in a historical context, setting aside the historically high period over the last couple of years. Of course, our expectations are subject to spread, foreign exchange and market conditions. In summary, we got is a very different type of steel company, one that's uniquely positioned to grow and deliver across our major markets. With the ongoing dedication of our 15,500 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 the 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 growth platform in the U.S. with the expanded North Star facility ramping up, the debottlenecking project and build-out of the value chain ahead of us, the new BRM and BCP businesses as well as the medium-term expansion of the properties group. And we're working hard to transform our business in this age of steel to not only decarbonize our own business but also produce the steel products and solutions essential to everyday life that underpin the transition to a low carbon world. Thanks for your time this morning. And with that, I'll turn it over to Q&A.

Your first question comes from Paul Young from Goldman Sachs.

Mark, a bit to get through, as always, kind of start with the Australian business and just the outlook for domestic volumes. I know we're coming off at a very high level and good to see that COLORBOND volumes actually increased half-on-half, but I'm just curious to your guidance outlook for flat domestic volumes. And what gives you, I guess, the confidence on the flat outcome. Is that the fact that labor and whether you think will -- those impacts might unwind a bit?

Yes. I mean there's a bunch of stuff, Paul, that affected us in the half. We called volumes off with the inventory position. I didn't really expect some of the interruptions we had for things beyond our control like the weather. But having said that, if you look at the data that we provide in the deck, what we've really done is back into that range of detached housing starts that we've been at for a long period of time. Alterations and additions continues to surprise us on the level, and that's right in the sweet spot for our products and the nonresidential as well. I got asked on the press call late bit earlier, I worried about interest rates and its impact on demand going forward. We haven't really seen any significant impact on that yet. I mean, yes, of course, interest rates have increased from extremely low levels. But we're not seeing a cliff coming at us in any of the indicators. We're seeing still some backlog, particularly from a resi point of view. And the mitigant around inflation and interest rates is, of course, everyone's got a job. I mean it's really still very strong from an employment perspective. So that's what gives us the confidence to think about a similar volume half-on-half. And you're right, you called out COLORBOND, I think, a great recognition for the ASP team on the work they continue to do around that product in terms of the marketing effort and the innovation that goes with it, and it's continued growth from a share perspective.

And then turning to Port Kembla #6 reline and the federal government Safeguard mechanism. And I think you've got -- I mean, you've got a very compelling plan, I think, on emission reduction based on the technology available to the steel industry. And nothing could be done linear and areas in the same position with their aluminum smelters, they've got big decisions in 5, 6 years' time on switching those smelters to more green and renewable power. So I guess the question I have is that when you're putting a submission to the govern what are you actually looking for changes specific to BlueScope and similar companies with big sort of assets which have big emissions?

As you point out, I mean, you can't make something out of nothing. So if the technology is not available, simply penalizing businesses without an option to change and effectively driving the carbon offshore, carbon leakage is not an outcome that I think anybody wants particularly given the importance of sovereign capability that we've all learned about in the last few years. So look, I'm encouraged by the engagement we're having with the government. We're in a consultation phase. That's exactly what this is submissions haven't even been put in yet. They're doing on Friday coming the 24th. So we've been engaging, obviously, with government. I'm sure we're no different from other companies, as you've mentioned, to face similar challenges to us, both from a technology point of view, but also the enablers that we need around something like the blast finish line to help us on that path, renewables, raw materials, hydrogen, public policy, et cetera, as we've called out. So encouraged by the early consultation, but it's -- look, the reason we haven't been specific about it is because quite frankly, it's the great unknown at this stage, but we're working very collaboratively with the government to put our submission in.

Your next question comes from Lee Power from UBS.

Mark and Mark, just on the North Star guidance. So like spreads down 50 a tonne. You've got conversion costs improving marginally. You've got more tonnes coming through and yet EBITs having. Can you maybe talk to some of the other drivers of that? I noticed you called out unfavorable realized pricing. Is there something going on with the lags with the expansion business. Given the recovery you see in the U.S., I would have thought that maybe some of the shorter lags might actually be helping you in the back end of the second half.

Yes, I'll let Mark talk to you some talk with -- through some specifics for you, Lee. But I think just the general thing I'd say is we're really encouraged by what we're seeing with pricing and pricing announcements in very recent times. So I think the trends are good. We're yet to see it really manifest itself in results from our perspective. But certainly, the trends are very encouraging in terms of the price rises that have been signaled by the big guys, and we're very much a price taker in that market. But Mark, maybe you want to talk a little bit about some of the more specific issues.

Yes. So thanks, Lisa. I think obviously, we have seen prices really hit their trough around November, December last year, and it were kind of down the mid-600s. Really good to see that those -- from a spot basis, they're now back in the 800s, low to mid-800s in a spot basis. So as you know, our book -- the majority of it is exposed to that kind of 1-month lag on the index price, but there are longer-term pricing arrangements. So it just takes us a little a little bit longer to realize those increasing prices. And as Mark mentioned, with the majors coming out with some price increases, that's a real positive single, but we're not yet seeing that in the spot market. And obviously, futures are pointing out. They're all positive signals, but probably a bit too early to tell, lean. Okay.

And then, Mark, you touched on the Australian business and volumes a little bit. Can you just maybe give us an idea of what you're hearing through the channel in terms of backlog remaining -- because I guess we get a bunch of updates and you're still calling for effectively flat volumes there. So it would be just good to know how long you expect these conditions to last?

Yes. Well, I mean, all we can really call made is our view on the next 6 months. And what we think in the next 6 months is there's enough backlog there for us to continue to see those sorts of levels of demand that we forecast. So we're not seeing a cliff or expecting a significant drop off. There still is some buildup and some backlog in the system that's going to take a while for it to work through the weather events that occurred on the East Coast, in particular, in the last 6 months have pushed quite a bit of that work out, and that is what forms part of the backlog. So we've got that sort of visibility on the next 6 months, which is why we're okay with the volume forecast as it stands.

Okay. And then maybe just one final one, if I can. I mean we've seen China reopening again, the input costs are elevated, but ASP spreads, they just have not seemed to have got going, and they've looked like they've actually faded a little bit. Like what do you actually think is driving that? Like why are we not seeing the spread kind of come back as much as some would have probably thought they would have.

Yes. I think as you mentioned, input costs, iron ore and coal remain highly elevated at the moment, spot coal price of around 380, so really elevated. I think that's right. I think post-pandemic, we have a lot of positivity coming out of out of China and a post recovery post pandemic recovery there. I think it's just taking some time to kind of see that in the regional spreads. But obviously, spot spreads right at the moment are quite depressed as you call out. We'd suggest probably at an unsustainable level at that level. Steel mill margins are pretty soft. So we would expect to see some sort of price response to that, but probably a bit too soon, I think, Lee.

Your next question comes from Simon Thackray from Jefferies.

A couple of questions. Just in terms of Phase 2 for North Star and in the debottleneck, what's the thinking now and timing and status around that?

Thanks, Simon. The team are obviously going flat out on Phase 1 and encouragingly ahead of schedule from a volume perspective. So there -- we called out 60-odd-thousand tonnes. They've started the year well as well. This is, as we've talked before, and I know people have been worried that our 18-month plan seemed a bit conservative. This is an incredibly complex retrofit and the team are doing a really nice job of working out the scheduling and the phasing that needs to go on with the assets -- at the same time, Simon, to your question, they've actually started the work on the debottlenecking now. So Jeff Jorgen, who runs the operations there. Jeff's got a team working on what are the next bottlenecks that we would expect to find in the hot strip mill. So the team are on that. As we've pointed out in the past, it's not a onetime project. It's not one lump that you'd see and then there'd be a significant step up in that volume. This will be incremental and an iterative process as we go through and find out where the next blockages or the next bottleneck is and the next bottleneck. So that process is underway. Simon and the team are on to it and starting to identify what the sorts of issues will be and how we address them. But of course, primary focus is getting that ramp up in a way, which is what the team are doing a nice job on.

And then while we're talking about capacity, you noted the -- in your release, the proposal to supplement or replace the half in the Glenbrook with an EAF. I appreciate the CO2 emission piece, but just sort of can you talk through the words of supplement or replace.

Yes, the same... As we're addressing decarbonization opportunities across all 3 of our steelmaking facilities, the teams are obviously looking at what the opportunities are. So the New Zealand team are focusing in specifically on scrap utilization and what they could do in and around the business. So it's a piece of planning and work that's going on, Simon, that's around how do we drive down our absolute emissions but also improve our intensity from the business-as-usual steelmaking process. So there's a bunch of work going on with that in New Zealand now. We don't really have anything to announce at this stage. It's not finalized, but the team have been working as are the teams in Port Kembla and of course, at North Star as well, the terms of working on what are the sort of decarbonization opportunities that we have. Of course, in New Zealand with long products as well as flat products that lends itself to greater levels of scrap utilization, a little different from PK and from North Star. So that's also a bit unique for the New Zealand team. So look, I would expect in the next 6 months or so, we'll have an update for you guys about what the opportunities might look like in New Zealand for us to continue the decarbonization projects.

That's helpful. And then maybe one for you or for Mark. There's 6,800 people at ASP across 100 sites. So I just want to be reminded, but perhaps what the sort of employment contract structure is outside the gain share, pain share arrangement on profitability? And any exposure to broader wages inflation for ASP with that number of people?

Well, big -- as are in and done. We did the Port Kembla EA last year, a 3-year deal. So we're in year 1 on that. That was a good outcome for our employees and for us as a business and no disruption, which is an incredible credit to the team at Port Kembla, who rallied around and decided it was the right thing to do under all sorts of customer pressure. So that's a good outcome. We have -- I don't know the exact number, Simon. But I'm guessing I'd say at least 40 EAs across those 6,800 people that you talk about. So there's a range of EAs at any one point in time that are either in negotiation or about to go into negotiation or have just been done. The big one at PK, as I said, we're into it, and that's a good outcome. We've seen some pressure, Simon, but it hasn't been massive. People are busy. People get paid well at BlueScope anyway. And that's why we've always been in a position to be able to attract talent. But there's a range of negotiations across the portfolio that are underway or about to get underway or just done, as I said, but nothing that I would call out that's a material concern from a labor cost perspective.

That's great. And then one I feel very uncomfortable asking with Mark on his first CFO at…

Don't go easy…

Well, I do feel a bit uncomfortable because I just wanted to check on the progress of the permanent CFO process where we were up to... Sorry about -- that is an uncomfortable.

You 45 minutes into day 1 and you're calling crease head already. That's good. That's pretty much an accurate summary. Look, that process is well underway. And as soon as we've got something to update, obviously, let you guys know, but I've got a very capable guy sitting on my right-hand side right here who will very capably fill in whilst we're in that process. So I'll give you an update as soon as we've got anything on that.

Your next question comes from Lyndon Fagan from JPMorgan.

Look, just to press on the North Star result a bit more. So when I look at it, there's been a really big step-up in other costs, so the costs not related to scrap or pig iron. I'm just wondering what is that? And I mean, does that continue on is the question?

Yes. Thanks, Lyndon. So I think the -- we're certainly seeing some cost pressures kind of outside basically in our conversion cost area. And we've called out things around consumables, electrodes, refractory bricks labor -- it is a little bit across the board and not cost that we're not cost unique to us and costs are being felt across the industry. And that has been, I guess, as elevated cost as have been there for a few halves now. We are calling out that we're expecting kind of some moderation in that as we go into the second half. But still on a historical basis, still sitting at a relative kind of elevated level. But as I mentioned, again, not costs unique to us and cost being borne across the industry at the moment around the general inflationary type pressures.

Probably the one that is a bit unique, Lyndon, of course, is we're ramping up a brand-new facility. So there's a bunch of costs disruption, volatility, uncertainty that comes when you're trying to ramp up a facility like we are. So we're not running the business for its absolute optimum cost position right now as we try and integrate the new assets. So that in and of itself creates a cost impost that it will go away ultimately. And as we've talked about, we'll be obviously in a much better position. But that's something also that is a bit unique to where we are in this half for North Star.

Look, the other one is just to check in about the $1 billion to reline for Kembla. Is any of that kind of locked in as far as long lead items? Or are you fully exposed -- I guess we're seeing mining projects blow out by 30%, 40%. I'm just wondering, is that coming for you guys?

Yes. Look, we've locked in some, Lyndon. There's about 600 work packages across this project. So it's a very complex project. The reason we started the work now for the 2026 blowing is there are bits of that project that need 2 years or more in terms of lead time. So we've called out that we have already placed some orders. We've made some commitments. We've got a team of about 100 amazing people at Port Kembla who are working on this project, and we're locking some of those items in and placing orders as we speak because they are 2 years plus in terms of lead times. So things like the staves and the carbon blocks for the half, there are items that just take a couple of years to get into a production slot and get done and that shouldn't surprise anybody. So yes, there is work being placed, but there's a large chunk of it that's not yet locked in. we are probably expecting some inflation and some impact. I wouldn't call it at 30% or 40%. It won't be anywhere near that from our perspective. But yes, of course, there has been some pressure. And also just some disruption in terms of dealing with OEMs, the supply chain issues that we've been talking about post-coat people are busy, labor is tight. So one of the spin-offs we've actually seen is more delay rather than cost inflation in terms of responses and engineering and tendering, which has caused us to have a bit of a slowdown in the program, but not the critical path items. We're still on target for 2026.

Just a really quick one to finish off. Working capital release. Is there -- are you able to sort of give us a guide on what to expect this half?

Yes. Thanks, Lyndon. So as you would have seen, there was some working capital relief in the half as prices eased and those supply chains kind of eased up. As we look forward, we would expect some further working capital release across the current half. But a big driver at the moment really is where raw material prices go. So iron ore and coal, obviously, a big element of the inventory holdings, particularly in the Aussie business and they're remaining elevated. So that's somewhat dampening, I guess, that near-term release. But certainly, steel prices with activity levels easing off a bit. We are expecting a bit more of a release in the current half.

Your next question comes from Chen Jiang from Bank of America.

Mark, my first question, please. You mentioned the first half softened as your customer lowered inventories in a falling price environment. I'm just wondering, do you expect your customers to restock in the second half given the increase in Asia HRC prices outlook?

Yes. Clearly, with prices increasing, that dynamic of people stepping back and waiting for a bottom or minimizing the level of inventory they have in that falling price environment that takes away that dynamic. So we would expect with prices firming and future is looking stronger. But yes, that situation would reverse customers, there's no question in the first half were full of inventory that had come from overseas, particularly in Australia, but more broadly in Australia and New Zealand, well, across the portfolio, quite frankly, in that falling environment, people don't want to overcommit and have expensive steel. So yes, you do see them step back from purchases.

Right. Just a follow-up on that. So second half FY '23, you are expecting offered lower than the first half on the EBIT level. Is that mainly driven by Asia spread? Or it's something else like a case in addition to spread?

I'll take that one. I think the -- you're correct. A big driver of that step down in ASPs EBIT is driven by spreads. So we're obviously with those outlook assumptions, we are, at the moment, forecasting a spread reduction even on a lag basis in the second half. The other area we did call out is around price realization in the Aussie business. As you're aware, we quote our benchmarks are quoted around the HRC price benchmark. But on the ground here in terms of how pricing is set on the ground, that's in relation to import parity prices on coded product largely. And what we've called out over the last few halves is our price realization. So those coated prices have been elevated if compared -- as compared to the HRC indices. Now that -- those spreads over HIC. That's driven by a bunch of factors in the last few halves around supply chain constraints. Regional amount for coated product has been quite strong. And also inbound freight has been quite elevated. So what we're seeing now is some normalization in those coated spreads over those HRC indices. The other driver there, Chen, is around our downstream businesses that we called out. So our downstream businesses in the role-forming distribution and pipe businesses have been performing very strongly the last couple of halves. And just with that lower demand environment, we are expecting a lower contribution in the Downstream. So they're really the primary drivers [indiscernible] ASP outlook.

Sure, sure. Maybe last question on micro related question. What have you seen in the resi and the non-res market from Australia, the demand side? And what have you seen from U.S. auto manufacturing you've seen given your competitors from U.S. have been increasing price in the last 2 months?

Yes, Jen, that data, if you look into the ASP pack, we provide the data, which is most relevant to us detached housing starts, alterations and additions, the nonresi. So you can see the trends there, as I called out in my opening remarks, back to within long-run historical range on resi. It seems to have settled at a much higher level for alterations and additions, which is a good outcome and still quite strong from a nonresi perspective. In North America, the auto is off from its high or peak levels given some of the supply chain issues and a bit softer in non-resi and manufacturing, we don't have any exposure really at all to resi in North America. So those supporting charts in the deck will give you a good line of sight of just where we've been in the half. And of course, they play into our outlook for the second half.

Your next question comes from Megan Kirby-Lewis of Barrenjoey.

My first one is just on the price realization and just the normalization comments that Mark just made. I'm just wondering just in terms of when we're thinking about ASP and in second half '23. And just specifically, I guess, on those coated products, which really saw that benefit through Covert, would you say that in second half '23, we're sort of back to pre-close levels? And I guess the headwind from that unwind is largely complete? Or do you see that as more of a headwind that could persist into next year as well?

Yes. Thanks, Megan. So certainly -- so in terms of that headwind, certainly, we're seeing that normalize across 2 half '23. Will it settle at what the pre-pandemic levels are? I guess that's a bit of an open question at the moment. I guess, in terms of those spreads, they're not quite back to what we're seeing in 2023 and not quite back where they were pre-pandemic. But probably it's a bit early to call and a bit difficult to call right at the moment, Megan, where exactly they will settle and will depend on, I guess, how that regional kind of coded demand dynamic plays out over the next 6 or 12 months?

Okay. Got it. And then just final question for me. Just on the Coil Coatings acquisition, given we're almost 12 months into the ownership process there. I guess just what's sort of going to plan, what may not be going to plan? And how should we be thinking about the medium-term opportunities there?

Yes, 6 months -- sorry, not quite 12, but 6 months mean we're into it up to our bootstraps teams in place. We've just built out a couple of senior executives added a couple of senior executives a senior HR person, a senior sales and marketing person. We have our senior finance person in place, Robin, she came from the Buildings business; and John Kostal, who's running the business, worked with us on the acquisition and previously ran that business. So the management team is largely in place with the people that came across and some additions that we've made. The integration plan is underway. There's a whole bunch of market work that's been done around what a packaged offer might look like. We've run some trials in the U.S. product that is effectively the COLORBOND product so that the lines have run some trials. Those products are back and being studied and tested just to give us a sense of using the paints that we would normally use for COLORBOND on someone else's substrate, those sorts of issues. So there's a lot of work going on Megan in terms of what that market entry is going to look like. So the team are on it, where, as I said, only 6 months in, not 12, but 6 months in, the team are on it. And the sorts of benefits that we talked about with the acquisition, the synergies, the growth opportunity with about half of the capacity only being currently utilized on the toll processing offer that we currently have in the market still stand from my point of view. I think this is a really exciting opportunity for us. We're really enthused. There's always things you find when you get under the covers in an acquisition, but we're really enthused by the opportunity this is going to afford us over the medium to longer term. Perfect.

Your next question comes from Peter Wilson of Credit Suisse.

Mark, just a comment on the safeguard reforms. So you said that in the current form, you expect a material impact, but you're encouraged by what the consultation phase may yield. Can I ask in terms of changes that we might get in the final form, what exactly are you hopeful of getting?

Is it -- are we talking exemptions? Are we talking a different path, some sort of change to the materiality formulas. Just what changes are you hopeful of getting? Yes. The risk of standing like I'm dodging the question, Peter, it is really early. But if you think about the current structure of the proposed mechanism, which has declined rates of 2% for energy-intensive trade exposed through to 4.9% in for companies that don't fit into that category. That's where there's a potential material impact if it was to be enacted as it stands. We don't have a technology solution for steelmaking. No one does yet that's viable or economic. So clearly, what we're talking to the government about and we're considering in terms of our submission is a recognition of the position that we're in from an industry perspective, not just BlueScope, but a steel industry perspective. How that manifests itself might, what it looks like. That's the work that we're doing right now that will be part of our submission. So I'm going to sit on the fence a little bit with this one because we haven't even put the submission in yet. So it's hard to speculate what it would ultimately look like. And quite frankly, I don't want to be preempting what's an appropriate consultation process by putting out our thoughts willy-nilly before they actually go in for consideration by the government. But I'm encouraged by the reaction that we've had from the government in terms of the recognition of where we sit as an industry. So that's why I'm being a bit obtuse about this because we really are in the very early stages, having not even submitted our thoughts yet of what a cord or might look like going forward.

And then a different question, Slide 22, the EBIT waterfall. There's $138 million attributed to timing, one-off and other in conversion and other costs of negative $138 million, most of which have appeared to be ASP. Can I get a comment on what those -- what that is effectively the timing and one-off and what might be expected into half?

Thanks, Peter. Actually, the single biggest contributor to that was actually the PPA noncash movement. So as we called out, we had a $30 million hit to the P&L this half. And actually, in 2 half '22, we had a $53 million gain go through the P&L. So that swing is basically $85 million of that $138 million. So we've actually provided a bit more detail back in the back end of the pack on Slide 76 around that arrangement because it may very well drive some more P&L volatility going forward, but completely dependent on future electricity price forecast. And to be honest, the balance of the 138 was really largely around provision movements around long service leave and employee provisions and other things, so some pretty mundane items, but they were -- the PPA is certainly the biggest driver of that, Peter?

Yes. I guess when I think about that, -- there must be something else, I guess, in that bucket? Because if I go back to the second half last year, so you said that there was a negative movement for that PPA. But at a group level, second half last year, it was a positive one-off of $35 million, and now you've got a negative. So there seems to be some larger effects offsetting that PPA. Is that fair?

In terms of 2 half, because I guess, that -- like I said, that movement is the move between the 2 half. So that's -- so $85 million of the $138 million are the big drivers. I'm not quite sure what the balance you're referring to, to be honest.

Your next question comes from Peter Steyn from Macquarie.

Sorry, there's been an enormous amount of conversation about the mind outlook. But Mark, just tend to get your view on preparedness for the potential of the U.S. recession. Obviously, things are great right now, but what happens if -- and I appreciate again that I'm probably talking a little bit beyond the second half, but what your thoughts are there? And then similarly, in Australia, I think as much as we're now back to mid-cycle, the front end of the demand space together with resets and mortgage rates do suggest that things could get a little bit harrier beyond the second half. So just curious on how you're thinking about that and planning for that from a business resilience perspective.

Yes. Thanks, Pete. Well, look, I mean, from a U.S. perspective, as we called out in the earlier intro, we still see the U.S. as a really good place to continue to do business. Yes, there's lots of chatter about potential recessions. But equally, there's enormous opportunity when you think about the infrastructure spend, which is really to occur in any material form, the incredibly aggressive strategies that are being put in place to drive investment in green energy. All of those things are highly still intensive. So as beyond the next 6 months thematic, yes, there's potentially the risk of the impact of some sort of recessionary hit with interest rates rising, -- but equally, I think there's a very positive case you could put around some of those more structural issues that are all incredibly steel-intensive. So hard to call as you point out beyond the current 6 months, but just from a structural or a strategic perspective, our enthusiasm about the U.S. market and our involvement in it hasn't been dented at all, quite frankly. And having a business model, and this applies to perhaps the second part of your question for Australia as well. Having a business model that's resilient to deal with those cycles. I mean that's what we think about every day of the week. It's why we have a strong balance sheet. It's why we keep a cost focus in our business. It's why we're happy to invest at points in the cycle where people might scratch their heads a bit. We look at this as a 10, 20, 30-year perspective, from a 10, 20, 30-year perspective, not just what's going to happen in the next year or the next 18 months, if there's a recession, the North Star business in particular, through what's been some pretty spectacular recessionary periods over the last 10 years has proven itself to be able to deal with whatever gets thrown at it, and we actually think we're just improving and solidifying that in the expansions and the build-out that we're looking at in terms of contributing operating in other parts of the value chain in North America. So we think our strategy just enhances that asset, quite frankly. And then in Australia, specifically around mortgage rates, yes, well, I got asked this question by the press this morning. what's the potential impact of the 7,8,9 interest rate increases that we've seen. There's, of course, kind of a potential impact from that. We watch that quite closely. We're really only calling the next 6 months in terms of activity. We're not expecting a cliff, quite frankly. I think one of the mitigants to the whole inflation and interest rate issue is the whole full employment issue, how they offset each other, I think, is going to be interesting to see unfold. And that plays out in North America as much as it plays out here. Yes, lots of pressure on rates and inflation, but also effectively full employment and people earning good salaries. So how that balances out make. It's a bit hard to call beyond the next 6 months, but we think about that in terms of how we structure our business, what we focus on so that we can deal with the swings and roundabouts.

And then perhaps just a question on ASEAN you sort of guiding for a further sort of softening in the outlook there. Just your perspective on that business and its business model, are you still happy with where things are headed?

No, I'm not happy where things are headed, mate. So Malaysia and Indonesia were the 2 underperformers in the half. Thailand and Vietnam, okay, really strong result out of China, India are good as well. So our real challenges over the last 6 months or so have been in Indonesia and Malaysia. We've got a new group, a new team in place. We're putting a new team in place in Malaysia and really focused on our go-to-market strategy there. So more work to do there to get that business back and returning what it should from an earnings perspective. Again, if you just step back from it and think about it from a broader strategic perspective, still believe absolutely in the long-term opportunity up there, massive infrastructure developments going on. You think about Indonesia and some of the projects that are being talked about there. That's one of our businesses that struggled the most, and it's the country that probably has one of the most exciting infrastructure programs ahead of it. So rather than cutting and running or doing anything too soon or too radical, we do have an eye to that opportunity going forward, particularly in a country like Indonesia.

Your next question comes from Anderson Chow from Jarden Group Australia.

Just a couple of questions on building coal of products in America. Firstly, just looking at the increase in underlying EBIT from $79 million in second half '22 $173 million in first half how much of that could be attributed to Cornerstone acquisition? And the second question to this is we guided for modestly lower results as margin eases in second half '23. I wonder if you could comment on the trend of the processing or tolling charge for product in U.S. seeing there are quite a few acquisitions or increasing capacity by our competitors as well.

Yes. Just on the -- I'll let Mark give you a little more detail. But I think one of the things I'd just like to point out is that buildings business, so that's the Butler and the [indiscernible] Buildings business. What we're seeing here is how we play in different parts of the value chain. In a half where earnings were off from a North Star perspective, the value shifted from hot rolled coil into our downstream businesses, which Mark touched on earlier, not just in North America, but the Engineered Building Systems business is the poster child of this example. So as value shifted from the front end of the business, which a year ago, we were sitting here talking to you about how extraordinary the front end of the business was, and it was tougher for our downstream businesses. This is the exact reverse of that. So the Engineered Buildings business has longer run projects that are committed and of course, higher cost steel are priced into those projects. And what we've now seen is an expansion of those spreads. It's a bit of a unique situation. Still makes up often somewhere between 10% to 30% of the cost of a project. So it's not necessarily the absolute major cost in a project. And of course, in a market that's busy from an industrial and commercial perspective in North America. People don't want to lose their slot in a production schedule. So the engineered buildings business hours and more broadly, the industry in America right now is going through a bit of a purple patch in terms of margin performance because of that dynamic with steel prices coming off, but having been priced into projects 12 months or more before at a different level. So that's part of that resilience of the portfolio that we talk about where we see internally the value shift from the front end of the downstream businesses. And right now, in some of our downstream businesses in the U.S. specifically and in Australia, we've seen good returns as those margins have opened up. I don't know is there anything you want to add more specifically.

I think you covered it, Mark. I think just to address your -- one of your other sub questions, Anderson. I think the majority of that uplift from $79 million into $173 million in half. It's primarily in the Engineered Buildings business. So that's by far the largest driver. So the code products of the newly acquired businesses were pretty modest, I guess, in terms of the one half results and going into 2 half '23. So what we're seeing on the engineered buildings business as we go into 2 half '23, is some of those margins are starting to normalize back to more historical levels, still at a really healthy level. But that engineered buildings business is really the primary driver of those results rather than coated.

Your next question comes from Daniel Kang from CLSA.

Just a couple from me. Mark Vassella, just in terms of scrap recycling, just wondering if you can update us on how you're progressing with the development of that high-quality scrap or prime equivalent feed. _

Yes, Dan, absolutely -- going flat out, quite frankly. As you see in the 6 months, the Million or Mansfield facility was acquired and has contributed to the half -- the work continues at BRM across the road from North Star. There's been some sort of low capital adds that we put in. We've got some equipment on the way. We've got some preheaters that have been ordered for our facility, which is a giant set of jaws that you put in place before the shredder, which is another giant set of yours. But what that does is it increases again, the quality of the scrap allows another sorting step or process to go in before it goes into the main shredder and improves the efficiency of rushed. So there's a bunch of work going on down across the BRM business, and it's all about how do we improve the quality of the product, give ourselves optionality around different types of scrap sourcing for North Star. And as we called out in the earlier conversation, about 30% of North Star's scrap for the half was from our own facilities. So that's a terrific achievement for us.

And just in terms of China, record EBIT contribution is key highlights for the half. Can you just remind us of the seasonality of the business and how you would expect, I guess, China's reopening policies to impact that seasonality just in the second half and going forward as well?

The seasonality is typically 2/3 and 1/3. So you see the big chunk of the earnings in the first half, second half, of course, impacted by the holidays and Chinese New Year and winter. So typically 2/3, 1/3. Look, I think the reopening of China, Daniel, I would say, is more an impact probably on our ASEAN business than it is on our China business. The team in China are really very, very strongly focused on the segmentation and the market segments that they're targeting. We called out specifically the EV construction segment. They do a really nice job in that space. So I think the reopening of China probably wouldn't -- I expect to have a material impact on our China business per se. It's actually probably going to have more of an impact in terms of what's going to happen -- what happens in the ASEAN region with exports coming out of China. So the business itself within China, multi-domestic in China for China, very focused around segments that are growing. So I don't think there'll be a major impact on the China route. We're not, for example, exposed to the residential construction market, for example. And of course, that's one market segment that's had some pretty wild swings in China over the last few years. That's not a segment that we're exposed to at all.

Your next question comes from Paul McTaggart from Citi.

Just a quick one. So you were able to maintain 10% gross utilization rates in North America for North Star. Do you put that -- is that down to geography or product mix? I mean why is it that you're doing better than the industry?

I think there's a few things in it, Paul. I mean we're a small player in relative terms. I know North Star doesn't look small when you go there. But in relative terms, we're a small player, we're on site, and we don't have the complexity or the multitudes of sites or EAF or blast furnaces that the big guys have. The other thing you've heard us talk about in the past is we just have a super quality product and have -- it's a legacy issue of the quality of the assets that were put in when the plant was first built and we've replicated that with the expansion. So the case that we've put in place is identical to the caster that we currently have. It produces a thicker slab than you'd typically find in an EAF that results in a much higher quality product than you would typically find out of a traditional mini mill, which comes typically with a much smaller -- a much narrower slate than we produced. So we have a short a small-ish share of wallet of most of our customers. We produce a high-quality product and we're an uncomplicated facility. I think those things add up to our ability to sell out the mill almost irrespective of where we are in the cycle, Paul.

Your last question comes from Simon Thackray from Jefferies.

Just a couple of quick follow-up ones. In fact one relating to Dan Kang's question. You're on your track to get to 40% self-sufficiency for scrap. Just remind us where that journey is likely to end? Are there further acquisitions beyond mansfield?

We haven't called anything out in at this stage. We said last time as we acquired BRO as we acquired Metalex and then added the Mansfield facility that we thought about 40%, which includes some of that lower capital capacity expansion that we've signaled would be a level that we'd be comfortable with at this stage. So we're not signaling anything different from that at this stage.

No, that's perfect. And then just in terms of the property settlement expectations, maybe this is for the other mark, a modest contribution expected in the second half, but just want to talk a little bit about the timing of that? Is that sort of a current quarter or the next quarter? And is there a risk on that and maybe just the materiality of the number?

Yes. Thanks, Simon. I won't go into the particular number, but obviously, to call it out, it's got to be a reasonable size for us. It's actually currently time to close in quarter 4. And there is some risk of that slipping into 1 half '24. But that -- I guess that's part of why we've called it out. and part of what goes into consideration of the guidance range. So confident there is some risk.

That this unit, Simon, is starting to build a pipeline, which is encouraging. We want to try and get out of this volatile situation where we're in 1 half and out the next. So the last quarterly business review, we actually did with the North American team was only a week or so ago. And the prospective pipeline for that business is looking encouraging. So we want to get it to a level where there's a regular drumbeat or cadence of EBIT that comes in as part of that investment that we've made. So we're heading in that direction.

And sorry, Mark, just on that, is all the funds allocated now to get to that or that sort of steady cadence for EBIT? I mean we flagged the investment a couple of years ago to increase invested capital, we're at that level now?

No, not all the way. We're probably roughly halfway through it, Simon. So we're still a little way to go to get back to that.

One of the parameters we said around it, Simon, was to actually the mix of projects, just from a risk management perspective, we just didn't want to be completely in a position where there were projects that we just build for demand. We want to build the suit as well. So there's a mix there that we manage through the business, which probably constrains it a little in terms of the amount of orders that suits the risk profile that we put around that. All right.

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

Thanks all. No, it's a busy week. Appreciate you guys taking the time out to listen to us and talk to us and ask the questions, and we look forward to seeing you over the next few days. Cheers. Thank you.