BlueScope's steely resolve pays off

For the first time since it was almost overwhelmed by the financial crisis, there was a more confident and optimistic tone emanating from BlueScope Steel, echoed by the sharp spike in the group’s share price today.

As recently as last August (when it unveiled its full-year results), both BlueScope and the market were uncertain whether the worst was behind the group, after five years of trauma and massive and costly restructuring.

The positive response to the group’s interim earnings statement today probably wasn’t entirely due to the numbers. They showed showed underlying earnings of $49 million and a big increase in earnings before interest, tax, depreciation and amortisation from $181.4 million to $301.1 million.

Six months ago, the group’s directors were uncertain and cautious about the outlook for this year. Today they said (albeit with a number of qualifications) that they expected the second half result to be similar to the first half.

The group’s increased confidence has been apparent in the string of modest acquisitions it announced late last year and earlier this year. This is a clear signal of greater confidence that BlueScope has put the ordeal of the post-GFC period and the dramatic and continued restructuring it was forced to embark upon behind it.

“We have stabilised the business, laid the foundations for growth, made measured investments and achieved this while maintaining a conservative balance sheet,” BlueScope’s chief executive Paul O’Malley said.

Heading into the financial crisis, BlueScope had revenues of more than $10 billion, was generating underlying earnings of more than $800 million and had net debt approaching $2 billion.

Today, having shut down its export business and sold its ASEAN and North America coated products businesses into a joint venture with Nippon Steel, its revenue base is about 25 per cent smaller. It is heading towards an underlying profit of about $100 million, but its net debt has fallen from $499 million a year ago to $213.7 million.

The transforming joint venture with Nippon Steel produced underlying growth in earnings before interest and tax of 62 per cent in the half.

BlueScope is in a good position to benefit from any improvement in the external environment.

It is leveraged to a continuing recovery in the US economy after restructuring its North American business, and the slide in the Australian dollar has improved the $A spread between raw material costs and hot rolled coil prices in its domestic coated products business. A greater focus on dumping and the benefit of the three recent acquisitions will have a continuing positive impact. If there were to be an increasing in domestic housing and commercial construction activity, the group is well-positioned to benefit.

One of the remarkable aspects of the protracted and difficult five-year effort to create a new and more stable BlueScope is that both its chairman (Graham Kraehe) and O’Malley have survived the experience.

Kraehe has been chair of the company since it was spun out of BHP Billiton in 2002, although O’Malley had the misfortune to be appointed CEO in late 2007, just before the crisis erupted.

It’s not often that the leadership of a company can survive the kind of battering BlueScope experienced over the past five or so years. However, they did have the benefit of the market’s understanding that they were confronting circumstances they had no ability to influence.

It would now appear that they have finally brought those things that BlueScope can control under control and preserved substantial shareholder value in the process.