CSR's glass still half empty
The 20-year history of the once-great diversified conglomerate CSR is littered with monumentally large and poor asset purchases. The most recent, and arguably one of the worst, was buying and pumping further money into two large glass businesses in 2007 and 2008 for about $1.2 billion.
If the chief executive responsible for those decisions still held office he would probably be packing his desk photos in cardboard boxes. But he has already walked the plank after the second write-down of the glass business Viridian (formerly Pilkington). The first $280 million hit was in 2009; the second of $250 million was made in 2010.
Another $121 million hit was made a year later. In three years the value of this business has declined to about $400 million in book value.
On Monday CSR informed the market that the glass business was still bleeding red ink and there would be yet another attempt to devalue these assets on its books.
Chief executive Rob Sindel has decided to bite the bullet, close a couple of factories, retrench about 150 workers and attempt to come out the other end with a business that makes money.
There will be an upfront cost of $34 million, which will be taken in the current year but the company believes it will deliver annual improvements to earnings of $27 million.
Sindel doesn't really have a choice. All companies need to take a hard look at what returns can be made from all of their assets. The corporate watchdog, the Australian Securities and Investments Commission, is policing this more diligently than ever.
Those running other manufacturing companies in Australia will feel Sindel's pain.
Since 2007 the Australian dollar has appreciated by 40 per cent and there has been a 30 per cent drop in the construction market. On top of this, CSR's energy and labour costs have increased by between 25 per cent and 30 per cent. The buoyant dollar has been particularly detrimental to the glass business, whose higher end value-added products market has been eaten away by competition from Asian suppliers.
It's the part of CSR's portfolio most akin to the steel market, where Australia's biggest domestic producer, BlueScope, has been similarly affected.
As such Viridian will never reach the earnings expectations the CSR board made when it was acquired. It is in structural decline.
Whether the remainder of the stable of building and construction materials can compensate for the decline in glass manufacturing depends on the timing and the shape of a cyclical recovery.
The sharemarket is clearly predicting some kind of cyclical improvement in the construction market. This is being supported by comments from the company acknowledging there has been a modest improvement in the housing construction market.
But it is coming off a very low base. CSR's building products businesses are expected to earn $75 million to $78 million in the year to March 2013 - about $10 million less than last year.
For investors the question that needs to be addressed is whether some of the building products that CSR makes are also in structural decline. For example, Sindel points to societal changes such as the fact that young adults are staying at home longer rather than moving out and investing in housing.
And there is also the fact that multi-residential buildings like apartments are becoming more popular. This means less bricks and glass, but bodes well for the products used in this type of construction such as hebel blocks and plasterboard.
Even the emergence of digital has resulted in collateral damage for the construction industry - less glass is needed to showcase products and is being replaced with glassless warehouses on slabs of concrete.
The response has to be to refine the product portfolio and cut costs from those whose earnings are under pressure.
CSR is one of those case studies highlighting the slow demise of the Australian manufacturing industry - the type that Liberal politicians latch on to to push their arguments that a carbon tax is an impost on an industry that is already suffering.
That may be true, but many of the reasons CSR is a smaller company today than it was 20 years ago are of its own making.
And while it has undertaken a slow transition to become a smaller shadow of itself, it has not been all bad news for shareholders.
The decision to buy US building materials assets in the 1980s and '90s was, in hindsight, a very good one. The decision to demerge these assets, which were ultimately sold, was a great one.
The decision to sell out of the sugar business is one that will be judged in the future. Investment markets like clean single-sector companies rather than conglomerates. They also like selling assets for decent prices, which is what CSR received when it offloaded sugar.
Sindel says not all companies need to be big to be successful. True, but most successful companies get bigger rather than smaller.