CSR's Growth Suite

Alec Brennan, managing director of CSR, has been one of the quiet achievers of Australian corporate life: his main achievement being making a lot of CSR investors richer. In the process, he’s done very nicely as a CSR shareholder himself and has no intention of selling in the foreseeable future.

Brennan attended his last CSR annual general meeting as chief executive on Thursday July 13 (he retires next March) giving us a good excuse to catch him on video about CSR’s outlook.

Market reaction to the AGM was less than flash when guidance of 10% profit growth was confirmed for this year; punters have perhaps come to expect surprises on the upside. On Brennan’s watch, spinning-off CSR’s American building products operation, Rinker, has left the “new” CSR averaging annual total shareholder returns of 36%, while Rinker has also soared.

Yet it’s CSR’s foundation product '” sugar '” that is looking the most promising for Brennan. Our interview was too long to fit in the available video space, but the full transcript (published below) shows the company will be looking to grow its international sugar business, which inevitably means expansion into Brazil, the country Brennan is tipping will emerge this century as the world’s new agricultural powerhouse, eclipsing the United States.

Surprisingly, it is not the oil-price-driven surge in ethanol that he identifies as providing the biggest immediate lift for sugar and, more surprisingly again, Brennan doesn’t want the Federal Government to make the use of ethanol compulsory here. That’s at odds with most of the rest of the sugar industry, the Queensland Government and significant parts of the Federal National Party.

Brennan likes free markets and transparency. He also believes in a company meeting its obligations; there’s been no outcry about CSR paying compensation for asbestos damage.

And there’s another surprise. Although James Hardie seemed to have all manner of trouble accurately estimating the size of its asbestos liability, CSR has not. “We have a provision of about $360 million,” says Brennan. “And that’s a healthy provision. It’s got a substantial prudential margin on top of the central estimate and our experience is that the size of the provision really hasn’t changed for years.

“ We do a pretty thorough job in estimating it and it’s turned out to be pretty much on the money but the other side of the coin is that we have stuck around and we have met our obligations to people who’ve been injured.”

When I asked whether James Hardie’s board had ever asked for advice on how to do it properly, the CSR chief deftly side-stepped. “I’ve steered well clear of the James Hardie story,” he offers with a smile.

The interview

Michael Pascoe: Do your results show that diversity is a good thing in an industrial company '” that sticking to the single knitting of a core business isn’t such a good idea?

Alec Brennan: We never try to defend the mix of businesses we’ve got in CSR. I said yesterday at the AGM that it’s not something that was the subject of any strategic planning dictate; it’s really an accident of history. But the businesses really have served the shareholders pretty well in delivering pretty steady returns and that’s good, where we’ve said that we want to reward shareholders by paying dividends and actively managing our balance sheet.

Now a year ago each of your businesses was facing a good deal of uncertainty but you’ve come through with growth. You’re promising another 10% growth in the year ahead and there’s still more uncertainty, particularly in building products.

Yes. I think the issue with building products is more the timing of the recovery. In Australia housing markets are now weak and we expect that they’ll stay weak for another year but it is inevitable that there will be a recovery. We are already seeing rental rates in New South Wales going through the roof. We’re not building enough houses to deal with the fact that we’ve got 160,000 immigrants a year, so there will be a recovery. The issue is timing. Our view is that it will be sort of probably the end of first quarter 2007 but who knows precisely when.

Of course, the sugar price after so many bad years is doing well for CSR. Do you think that’s sustainable?

I think the fundamentals are probably the best that I’ve seen for maybe 25 years and it’s largely '¦ the biggest single thing that’s changed in the global sugar market is that Australia and Brazil won this World Trade Organization case and that’s effectively taken six million tons out of the 40-million ton global market. Six million tons of dumped sugar and that’s really opened up opportunities for the efficient free-market producers such as Brazil and Australia.

The other thing that is helping the price is that the Brazilian real is now a lot stronger than it was a few years ago and that allows us to compete with the Brazilians on much more of a level playing field than we did before and it’s underpinning better prices. I think the icing on the cake is the ethanol story in Brazil and, indeed, to a lesser extent with us in Australia where we’re an ethanol producer, of course, too.

Are you looking to increase your ethanol investment? At the moment it’s small.

It’s a modest investment at the moment but we are probably the largest supplier of ethanol in Australia at the moment. We are looking at opportunities to expand that. You can already buy blended petrol with CSR ethanol in it at 140 service stations around Australia. We’ve just done a big deal with BP. We’ve done an upgrade of our Sarina facility to supply them but we are looking at major new investments as well there. The issue in Australia is getting the right substrate CHECK. That’s the raw material.

Do you need clearer policy from government before you invest heavily in ethanol?

We don’t think that mandating ethanol is a particularly good idea. That might seem strange when you say, 'Well, it would be a great opportunity for us’. We just believe that you’ve got to be able to compete. Mandating it is not the right answer. We see a very big change in attitude to ethanol. People are a lot more positive about it today and we think it can make its own way, and mandating anything never really works well in the longer term.

I didn’t expect you to say that. It’s not what the Queensland Government or sugar cane farmers say. Are you a bit of a lone voice?

There are other people who would share the same view as us. I mean if you mandate it, what will happen inevitably it will suck in imports. It will bring people into the industry who are probably not sustainable players and ultimately might lead to a badder structure. I mean our view on these things is that a deregulated market is generally the best overall position. I mean, we’ve lived with 100 years of over-regulation in the sugar industry. We’ve just got rid of it and we think that it’s been bad for the industry on balance and that it’s better to deregulate because that gives people the flexibility to adjust.

Is the long-term future of ethanol in sugar though?

At the moment our ethanol is based on molasses. The problem that we’ve got is that molasses is highly sought-after as a stock feed and as a consequence it’s getting too expensive for ethanol. Whether that trend’s going to continue I just don’t know, but if it does '¦ I mean, we are looking at alternative raw materials other than molasses. We are also doing work on sugar cane and ways to increase the sugar content of sugar cane using modern techniques. If we can do that, that might provide some opportunities for sugar cane being used in the future.

The grasses that the Americans are researching '” could it go that way? Cellulose? (CHECK)

We’re looking at a number of other crops but at the moment certainly the most prospective would be the R&D work that we’re doing around sugar cane, which is a very well understood crop and it’s probably one of the best ways of fixing sunshine into energy in the world.

Can you imagine a future where ethanol will be a major part of CSR’s business instead of just a sideline?

Well, the limitation in Australia quite frankly is that the amount of arable land that we’ve got for growing crops like sugar is very small compared to other countries in the world. If you look at the Brazilian industry it’s a lot larger than the Australian industry. I mean, we’re producing in Australia 20 million tons of cane, or something like that, and Brazil is growing by that amount every year. Now we’re the second-largest exporter in the world but Brazil is an agricultural powerhouse that in this century will well and truly surpass the US as the major agricultural powerhouse in the world.

Is that scary?

One of the issues that it raises, I guess, is that agriculture is always subject to weather and that does focus the world’s '¦ the risk for the world in a single geographic region, which probably is an issue going forward. But that’s the way it is.

During the year you also settled with your insurers over a long-running asbestos claim. It was a commercial settlement. You got some money out of it. Weren’t you still a bit ripped off, though, by what the contracts with the insurers originally were meant to cover and what you actually got back?

We’ve had two settlements now with the insurers and we are still litigating in New Jersey against other insurers so I can’t really comment too much. I’m hopeful that we will reach a settlement with the remaining insurers but if we don’t that case will go to trial. We’ve been litigating for 10 years and we’re determined to get to the end, and we’re pretty pleased with the outcomes that we got for our shareholders '” $150 million really is a great fillip to help us meet the claims that we’ve had over the years.

What’s your expectation of total asbestos claims against CSR?

Well we have a provision of about $360 million and that’s a healthy provision. It’s got a substantial prudential margin on top of the central estimate and our experience is that the size of the provision really hasn’t changed for years. We do a pretty thorough job in estimating it and it’s turned out to be pretty much on the money. But the other side of the coin is that we have stuck around and we have met our obligations to people who’ve been injured.

Has James Hardie’s board ever asked you for advice on how to do it properly?

I’ve really steered well clear of the James Hardie story.

You’re retiring in March. That was your last AGM this week. What’s your greatest satisfaction out of your time at CSR?

Well, I’ve been a CSR shareholder for an awfully long time '” probably nearly 50 years '” and I’ve worked in the company for 37 years and I’ve been a director of the company for the last 10 years. For me, I guess the biggest satisfaction is that over the past 10 years we have, I think, created a lot of value for shareholders and I’m now a reasonably significant shareholder.

Certainly, as far as I’m concerned significant, and so that’s been good for me but I think we’ve also rewarded other shareholders from a business, which really is a bit old-world in the sense that manufacturing is not really major part of the Australian economy any more. We’ve survived as a manufacturer and prospered and I think I’m proud of the progress that we’ve made and I think the new CSR it’s in good shape and it’s got some really pretty exciting growth platforms going forward. For sugar particularly, I think.

Where does it go to?

Well, what you’ve got to do is to continue to work on what the opportunities are. At the moment the most exciting opportunity, I think, is probably growing more of a global sugar business. CSR has an excellent reputation as a global sugar player. We’re one of the largest sugar players in the world and we are looking for opportunities to grow further. That inevitably will probably take us into Brazil. We’ve also, as you know, diversified into alternative energy with renewable electricity and ethanol and we’d like to see those elements grow as well, and there are some opportunities on the back of the deregulation of the sugar industry. So all in all there’s really quite an exciting set of growth options for that sugar business, which have really only opened up over the past six to 12 months. At the moment we’re very excited about that and we’re putting a lot of energy into it.

Talking of energy, aluminium consumes a lot. How does that fit in the portfolio?

Well it’s been an excellent business for CSR shareholders and we’ve spent money on it in recent years with a further expansion at Tomago. I looked to sell this business some time ago and the conclusion that I reached at the time, having tested the market, was that the dividend stream for our shareholders was more valuable than what I could get for it and as long as that remains the case it will remain an important part of our portfolio.