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View Annual Report Annual Report 2015/2016 XXX-XXX-XXXXX CHAIRMAN’S MESSAGE DEAR SHAREHOLDER BlueScope’s performance continued to strengthen in the 2016 financial year, demonstrating that the Company is well and truly delivering on its strategic priorities. I thank our loyal shareholders who have followed our journey of rebuilding the Company, in the face of continuing over-supply and volatility in the global steel sector. BlueScope’s earnings performance has been delivered through a laser-like focus on cost competitiveness, investment in innovation, and strong balance sheet management. This is my first letter to you as Chairman, so let me state at the THE BLUESCOPE RESPONSE outset, that under my watch, BlueScope will continue to always This cliffhanger debate, Plan A (continue steelmaking) versus behave in a safe and responsible manner, that reflects the values Plan B (cease steelmaking) took place in full public glare. Great we have outlined in Our Bond – a document defining our commitments from a range of stakeholders (including employees, relationships with our shareholders, our customers, our unions, and the NSW government) were required to give your employees and our communities. Board the confidence to decide on Plan A; steelmaking could BlueScope will always be prepared and confident in our ability to continue in the Illawarra. address whatever challenges the global steel sector poses. And it It was a 50-50 decision and a very tense time. The Plan A decision will commit to achieving superior performance and returns for our saved up to 4,500 jobs in the Illawarra. shareholders through the business cycle. Now, less than 12 months later, because of the operating cost GLOBAL STEEL SECTOR reductions made at Port Kembla, and also the positive earnings performance by BlueScope’s businesses across our international The context for this year’s annual report to shareholders is a global portfolio - the Company has delivered outstanding full year results, steel sector that has rarely been more volatile. Steel spreads (the culminating in a net profit after tax of $353.8 million for the year. margin between steel prices and raw material input costs) have hit record lows per tonne, and global capacity utilisation has been While some might expect pause for celebration, it’s not the time as low as mid-60 per cent (ie 35 per cent overcapacity) during this to be complacent. The Board is well aware of the reality, that in financial year. early 1H FY2017, global steel remains in massive oversupply. This will cause volatility in all our markets. BlueScope has proved over On the one hand, multilateral and bilateral free trade agreements the past few years that it has the mettle to compete. We now abound, while on the other, protectionist trade barriers are being need to prove ourselves again, by building on the FY2016 result, erected. It’s a complex and ever-changing world economy. and by continuing to reinvent ourselves as one of world’s most BlueScope operates in 17 countries around the world, and so we innovative and internationally competitive steel companies. must constantly monitor and adapt our businesses to these market forces – within the context of our overall strategy, and with a Across all our businesses, we need to embed the lessons of long-term, prudent mindset. survival from the last 12 months at Port Kembla. BlueScope must become a synonym for “a flexible, nimble, low cost, high value In the early part of FY2016 in Australia, these difficult market forces steel company”. combined. The Company’s Illawarra operations faced a critical challenge – to continue or to cease steelmaking at Port Kembla. FY2016 FINANCIAL HIGHLIGHTS AND OUTLOOK • Our current focus is to further grow our business particularly BlueScope delivered a $353.8 million reported net profit after in Asia, implementing our growth strategy in coated and tax (NPAT) for FY2016 – a $217.5 million increase on FY2015. painted products. The BlueScope Board has given in-principle Underlying NPAT of $293.1 million was 119 per cent higher approval, subject to finalisation of contracts and NS BlueScope than FY2015. joint venture board approval, for a third metal coating line in Thailand; the new line will deliver added capacity to meet The Company lifted underlying earnings before interest and tax demand in the growing retail/SME building market. Rigorous (EBIT) by 89 per cent to $570.5 million through a combination of cost management remains essential and ongoing, particularly sales growth, cost reductions and the benefit of the North Star for more mature markets like Australia and New Zealand. acquisition in the US. In BlueScope Buildings: Net debt at 30 June 2016 was $778.0 million, reduced by $595.4 million from 31 December 2015 through strong operating • We are delivering continued growth in North American earnings; cash flow. Leverage of 0.8 times EBITDA (EBIT, Depreciation & in FY2016 underlying EBIT was $40 million, up $8 million on Amortisation) was 50 per cent less than the first-half position FY2015. We are commencing a sizeable productivity and at 31 December 2015 of 1.6 times EBITDA. Our intention is to cost-out project to drive further earnings growth whilst further reduce leverage to be sustainably below 1.0 times net introducing new innovative products into the market. debt to EBITDA. • Earnings in China turned the corner in FY2016, with reduced The Board approved payment of a fully franked full year dividend losses at our buildings business. Our focus is to continue to of 3.0 cents per share, in line with our FY2015 final dividend. improve our market and customer engagement in China. Looking forward, the Company expects 1H FY2017 underlying EBIT For North Star, in FY2016 we made very good progress in to be around 50 per cent higher than 2H FY2016 underlying EBIT, maximising the value of this structurally advantaged steel which was $340.4 million. 1H FY2017 underlying net finance costs making business: are expected to be lower than 2H FY2016 due to lower average • In October 2015 the Company acquired Cargill’s 50 per cent borrowings, underlying tax rate to be slightly higher and profit of North Star, to bring BlueScope to full ownership. attributable to non-controlling interests similar to 2H FY2016. Expectations are subject to spread, FX and market conditions. • With steel spreads rising approximately 60 per cent since the acquisition, North Star had an excellent financial finish to FY2016 and is well positioned at the start of FY2017 to benefit DELIVERY ON OUR STRATEGIC PRIORITIES from higher steel spreads. Across our global portfolio our people achieved these outstanding results while also continuing our safety journey to zero harm. • The business continues to deliver low-cost incremental volume Despite this improved performance, we maintain our relentless growth initiatives. focus on cost competitiveness in the face of volatile commodity In Australian and New Zealand steelmaking, progress on cost steel prices and raw material costs, and exchange rate fluctuations. savings has provided the basis to continue to make steel for now. We are making good progress across each of our strategic themes. In the Illawarra, the constructive engagement by employees, the management team, union leaders, the Fair Work Commission and In Coated & Painted Products: the New South Wales government was essential and outstanding • We have delivered 31 per cent compound annual underlying – seeing 4,500 jobs saved, large restructuring costs avoided and EBIT growth in our Building Products segment over the last four positive exposure to the benefit of higher steel prices preserved. years. Our home appliance steels, in partnership with NSSMC, Our pursuit of productivity improvements continues. We need to are now in production in Thailand and are gaining customer deliver returns necessary to support a decision in 10 to 15 years, acceptance in line with our expectations. In Australia, we saw to reline the blast furnace at Port Kembla. What we have achieved 9 per cent growth in coated and painted sales volume during in the last year are essential steps toward being the competitive the year. and profitable producer needed to support this future reinvestment opportunity. In New Zealand, there is a long way to go on costs. We operate a In Australia, where there is a newly elected Parliament and new small, fully integrated steelworks that has to compete on the global agenda, we are working with all sides of politics to ensure there stage. It faces unique challenges to be cost competitive. The are no unintended consequences from proposed public policy reform. Company will seek to collaborate with all key stakeholders, to make our New Zealand Steel operations at Glenbrook BOARD RENEWAL internationally competitive and profitable. During the FY2016 financial year the latest step in the Board renewal program conducted over recent years was completed SAFETY when Graham Kraehe, AO, stepped down as Chairman at last BlueScope people remain focussed on our goal of Zero Harm. In year’s Annual General Meeting in November. the 2016 financial year, the Lost Time Injury Frequency Rate was Graham had a successful and distinguished career in executive 0.6 per million hours worked, matching the performance of the and non-executive roles with a number of Australian companies. previous year. The Medical Treated Injury Frequency Rate was At BlueScope, Graham made an outstanding contribution to the 5.1 per million hours worked, compared to 4.6 the previous year. development of the Company. He provided early insight and drive The LTIFR and MTIFR have been below 1.0 and 7.0 respectively in the Company’s growth into Asia, and steered the Board and for more than 10 years. management through the most significant changes the world steel industry has ever seen. One of the privileges of being a member of BlueScope’s Board is the opportunity to see employees at work at the Company’s sites It is an honour and privilege to take over from Graham as Chairman around the globe, and I am always struck by their dedication to of BlueScope.
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