McNamee flicks the keys to his CSL Ferrari

Today's earnings report indicates that CSL will be in a typically fine-tuned condition when its ultra-successful and long-standing chief signs off next year.

When Paul Perreault inherits the chief executive role from Brian McNamee next year he will face the same exquisite dilemma McNamee himself has had to deal with over the past five years: what should he do with all that cash?

CSL today achieved a landmark that may explain the timing of McNamee’s foreshadowed departure next July, posting a record $US1.02 billion profit. Given that was on sales of $US4.6 billion it is by itself a remarkable performance.

Even more remarkable is that CSL enters this financial year with essentially no net debt – it has cash of $A1.2 billion and borrowings of $1.27 billion even though it is 77 per cent of the way through its latest $900 million share buyback.

While the entire history of McNamee’s tenure as chief executive of what was once a small government-owned and near-worthless business and its transformation into a global specialised bio-pharmaceutical company with a sharemarket value of $21 billion is remarkable, the past five years have been particularly extraordinary.

CSL has generated compound annual earnings growth of 19 per cent and earnings per share growth of 21 per cent over that period despite a 20 per cent compound annual growth rate in research and development spending – and $3.6 billion in share buyback programs. Today it foreshadowed yet another $900 million buyback.

With operating cash flows of about $1.2 billion and McNamee extremely disciplined in the acquisitions he is prepared to make, capital management has been the key theme of the last phase of his leadership.

That has made CSL an almost unique company within this market. It is a growth company with an extraordinary long-term record of consistent growth and, during his tenure, a market-leading record for generating shareholder value with a total shareholder return over that period of more than 25 per cent. But it is also a cash cow, consistently generating $1 billion of cashflow in recent years.

That is the dilemma Perreault will confront. There are very few chief executives who, awash with cash, can avoid the temptation of spending some of it via acquisitions.

McNamee has made some acquisitions, including the two big company-transforming acquisitions of ZLB and Aventis Behring, but resisted doing anything that involved over-paying or that strayed from the relatively narrow confines of a very disciplined strategy.

CSL could have used its excess cash flow to diversify but instead has effectively handed it back to shareholders. It has grown its dividends – the latest increase from 80 cents to 83 cents a share means it is now paying a dividend 80 per cent greater than it was five years ago – but the reality that the overwhelming majority of its earnings are generated offshore has made buybacks the most tax-effective way of generating shareholder value.

In an era where income and yield-hungry investors, particularly resource company shareholders, are increasingly complaining that companies are getting the trade-off between investing and shareholder rewards wrong, CSL is a stand-out in terms of its ability to balance the funding of its big R&D program and the capital expenditure requirements of its big and sophisticated plants while also delivering superior shareholder returns.

In effect McNamee has managed CSL in recent years as much from a shareholders’ perspective as a business builder, while still building the business aggressively.

The consistency and longevity of the McNamee approach will build an expectation that Perreault, an internal appointment with a strong track record in senior roles, will maintain the formula and do more of the same.

He will inherit a business with continuing momentum when he takes up his new role next July. CSL’s guidance, expressed in constant currency terms, is for revenue growth of about 10 per cent and earnings growth of about 12 per cent this year, after a 15 per cent increase in R&D spending. The tail-end of the current buyback and the inevitable launch of the new will leverage the earnings per share growth that generates.

If CSL does deliver on that guidance McNamee will end a 24-year tenure on a very appropriate note and give Perreault a near-perfect platform to start his task of meeting expectations that corporate history generally would suggest are extraordinarily challenging.

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