Boral bulldozer joins a downsizing wave
Job cuts at Boral are part of a larger wave of necessary 'housekeeping' set to hit all sectors. Excessive overheads have been tolerable in the past, but those times are over and there's worse ahead.
The Boral announcement wasn’t unexpected. New chief executive Mike Kane, who took up the position last October, made it clear from Day One that he would conduct a strategic review with the priority to reduce costs.
Analysts have been adamant for some time that the company superstructure was too big, expensive and unproductive. Kane has come to the same conclusion.
He has yet to unveil his broader strategy, which presumably will be revealed with Boral’s interim earnings, but today’s announcement, like the BlueScope initiative, is more good house-keeping on a large scale (albeit quite unpleasant for those concerned) than a longer term business strategy.
It’s a top-to-bottom streamlining of management and support functions that is expected to generate $90 million a year of benefits, $37 million of them this financial year, at a cost of $60 million. Kane also said there were a further $15 million a year of expected gains from ‘’operational rationalisation initiatives".
With today’s announcement Boral expects that it will end this financial year with 1000 fewer employees than it had at 30 June last year in its continuing operations. The sale of non-core businesses in Asia and Australia has shrunk its workforce by a further 1400 people.
As a result of the restructuring, two divisional managing directors – Mike Beardsell (cement) and Bryan Tisher (building products) will leave the company, as will Robin Town (director human resources).
The common theme of the senior management changes is that they reflect some downsizing of the businesses through restructuring and asset sales and the consolidation of some management functions.
Kane referred to "excessive overhead costs" and said that while this might have been less obvious during the "good times" it became critically exposed when times were tough.
For Boral, and indeed most sectors of the Australian economy, times are already tough and getting tougher.
The non-resource side of the economy has been weak and weakening for some time while the resource sector is just starting to attack its own bloated costs after the slump in commodity prices last year. The mining investment pipeline that had sustained the economy in recent years will peak and start to fall away later this year.
The strength of the Australian dollar has exacerbated the impact of weak demand from defensive businesses and consumers and cost-cutting and reduced investment are the obvious responses from companies facing a lacklustre at best outlook that they have to assume will be the best they can hope for in the immediate future. From industrial companies to banks to miners there is a lot of 'house-keeping' going on.
Boral’s fortunes hinge on the condition of the Australian and US housing markets. In Australia house prices and activity has been sliding despite more than two years of declining interest rates. The US housing market is showing signs of recovery but off a very weak base. The currency relativities don’t help.
Like a lot of other businesses, Boral can’t manage its businesses in anticipation of a recovery. It has to assume that today’s settings will persist or even deteriorate and lower its fixed cost base, obsess about its cash flows and be very disciplined in how it deploys its capital.
With more than $1.5 billion of net debt and earnings that nearly halved last year Kane needed to hit the ground running to protect Boral’s stability. He has.