Can Perreault withstand a CSL withdrawal?

Yesterday's upwardly revised guidance will see Brian McNamee leave CSL on a high. His successor, Paul Perreault has large shoes to fill as he tries to replicate such success.

Brian McNamee didn’t need any additional lustre to see out his final year of his remarkable 23-year tenure as chief executive of CSL and leave the group he built into a global bio-pharmaceutical company as arguably the most successful Australian chief executive of the past several decades.

With annualised total shareholder returns of more than 25 per cent over his period as chief executive – easily the best of any large-cap chief executive – McNamee was always going to hand over CSL to his successor, Paul Perreault, in solid shape.

It would now appear that both he and the market under-estimated just how strongly CSL would perform over his final year and that Perreault will inherit a company operating with considerable momentum.

When CSL reported its first $US1 billion profit in August it provided guidance for this financial year of a 12 per cent, or $US123 million, increase in earnings. CSL has announced that from this financial year it will report its results in US dollars, the currency in which the bulk of its sales and earnings are generated and a better guide to its underlying performance than the currency-distorted Australian dollar-results it has reported in the past.

On Tuesday, CSL issued revised guidance. It now expects after-tax earnings to grow by about 20 per cent in constant currency terms, or by about $US205 million to about $US1.23 billion. Not surprisingly, its share price leaped 7.5 per cent and above $50 a share on the news.

McNamee cited the performance of the CSL Behring plasma business and a higher than expected level of sales, a better sales mix and improved supply chain efficiency for the uplift in earnings guidance. He said stronger than expected royalty income from CSL’s Gardasil HPV vaccine had also contributed.

Earnings growth of 20 per cent in the current global economic environment would represent a very strong performance. In CSL’s case, in the midst of its latest $900 million share buyback, it will translate into leveraged growth in its financial performance statistics, in particular its earnings per share.

That latest buyback will bring to $4.5 billion the amount of capital CSL has bought back in recent years in a near-continuous program of capital management. If CSL meets the new guidance McNamee may well be able to end his tenure, and Perreault begin his, with yet another buyback.

The scale of the capital management program has already created a novelty within CSL’s accounts – it has more than wiped out its ordinary share contributed equity and has had to be quite creative in its accounting to overcome the wiping out of its capital base. It has created a share buyback reserve.

The buybacks, with the top and bottom-line growth CSL has been generating and the 20 per cent annual compound growth in research and development spending through McNamee’s tenure, are a testimony to CSL’s disciplined growth and its ability to reconcile strong levels of re-investment in the business with a focus on shareholder returns.

Barring something unforeseen, Perreault will inherit a group in near-pristine condition and a set of very, very high expectations to live up to.


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