Caution reigned over Australia’s business sector this year, with an uncertain economic outlook at home and abroad putting a dampener on business confidence and investment.
Oil’s plunging fortunes and the decline in the price of iron ore presented challenges for energy producers and miners, while a tough budget weighed on household spending, intensifying the pressures on an already beleaguered retail sector.
But there were a few bright spots. The ‘big four’ banks bucked the gloominess by posting healthy profits, although the release of the Murray inquiry’s final report will no doubt ruffle some feathers. And there was the hotly anticipated float of Medibank Private, which dazzled on debut and sparked a frenzy among investors.
The $5.7bn float, the third biggest listing the world this year, left the government and mum-and-dad investors with a tidy profit. But many are wondering whether the insurer is merely riding a wave of hype, or if it can maintain momentum.
After snaring impressive gains in the past few years, chief executive George Savvides believes there is still more potential for profitability. He told the KGB:
“The continuous improvement opportunities in health in Australia are significant. The 87c in every dollar of premium that we collect that we pay out as claims, that 87c has opportunity within it to purchase better, have less waste, have more consistent quality and that’s such a large part of our bill of materials that 87c in every dollar that the market leader leveraging its scale around quality and economics of size to do a better job on that 87c is the opportunity in front of us. It’s a very large opportunity.”
Savvides also elaborated on the company’s plans to create more savings by concierging chronic patients at the doctor level.
“The Medibank business has a very significant tele-health capability: 800 nurses and docs doing 24/7 to run all of the health direct nurse on-call and healthline services in Australia and New Zealand. We’ve used some of that capability to create a concierge.
We facilitate a concierge link with the general practitioner of these high-needs patients. We do the very best we can to encourage them through the primary care system: make the bookings, turn up with the transport, get them there on time.
We’re doing some trials now in Victoria and in Western Australia to prove the point that if you do significantly invest in this coordination of primary care, you will lower unnecessary acute care.”
This recommendation will have come as little surprise to NAB’s new chief executive Andrew Thorburn. He told the KGB in October that:
“What we have said is that our position today where we’ve got 8.63 per cent common equity Tier 1 and our commitment is to get to a ratio or a range of 8.75 to 9.25 by 1 January. We can see a way through to that and obviously we’ve got some tools to help us do that, not just capital generation, core capital generation, but potential, you know, sales of assets, but also the DRP (dividend reinvestment plan) that we’ve committed to.”
Still, it hasn’t been all rosy for NAB. Its UK exposures continued to weigh heavily on its performance, and locally it was fighting an uphill battle in business lending in the SME sector. As he explains to Robert Gottliebsen:
“Bob, you’re right. If you look at that graph, we are holding market share in a couple of important segments, but we’re under a lot of pressure and we have been losing share in others. However, if you also look at where two thirds of our revenue is, in what you might call SME, then we are seeing growth in that. This half we’re seeing revenue growth of 2.8 per cent compared with to the previous half. Where we’re really under pressure on revenue is in corporate and property and institutional lending where margins are really under pressure and you can see the revenue growth there is negative.”
For miners, the pressure is more acute, especially for junior and high-cost producers. Nev Power, the chief executive of Fortescue, explained the shifting structural dynamic to the KGB.
“What we’re seeing is all of the capacity that’s been invested in over the last couple of years coming into the market in a very short space of time. In our own case, we’ve brought on over 100 million tonnes of new capacity in the market in the past couple of years and what we’re seeing is a muted supply response to that new iron ore supply.”
Power also outlined how the company embarked on its strategy to drive greater efficiencies, which resulted in costs being reduced by 23 per cent.
“That 23 per cent has come from bringing the low-cost Solomon mine, so Firetail and Kings are very low-strip ratio efficient mines. They’re bulk ore bodies and they’re conventionally mined and their strip ratios are less than 1.5 to one and we’re using those ores to blend with the Chichester ores, which are higher cost, higher-strip ratio, but very low impurities to produce product that suits the market. So, that big cost reduction from us has come from the expansion of our mines and the implementation of our development strategy.”
A revolution of sorts is also under way at Rio Tinto, with CEO Sam Walsh leading the transformation in the company’s management culture, which is already achieving results.
He told the KGB:
“I have made some changes in the way we look at the business.
For example, we now forecast monthly. We used to forecast quarterly. I believe you need to see how the business is travelling. For the accountants of this world, it’s lovely to look backwards and it’s lovely to look for trends or what have you in what happened last month. I can’t do anything about last month -- it’s gone. It’s over. I can do something about this month and next month and the month after. So I’ve got the organisation looking forwards instead of looking back.”
In addition, Rio has also embraced technology and innovation to drive increased effiencies. The company, Walsh says, has the largest fleet of automated trucks, with 53 in the Pilbara alone.
"We’re automating our trains in the Pilbara. We have a remote operation centre -- absolutely stunning. If you’ve not seen it, you need to go and have a look at it. We’re automating our drill rigs. We’re looking at dry ore sorting; big data. Five years ago people had no idea what big data was about. Today we’re actually using it to analyse the data from our process plants all round the world. We’re comparing plant to plant, we’re comparing the same plant against what previous performance was. We’re looking for aberrations, we’re looking for issues where efficiency has dropped.
The other day we picked up that a pump had actually been switched off in Mongolia. We picked it up from the centre in Brisbane and those guys told the people in Mongolia, hey, you just lost a pump. You better go and have a look at what’s gone on. Now, you could say that’s a small issue. We improved our cash generation -- $80m last year -- through the operating of that centre."
Meanwhile, BHP Billiton was doing its part to transform into a simpler and stronger company by spinning off its non-core assets, such as silver, aluminium, coal, nickel and manganese, into a new entity, South32. Chief executive Andrew Mackenzie explains how the demerger would allow the company to be more resilient to market shocks.
“It does two things for us which we have to have from diversification. One is it helps smooth the cash flows, so that we can plan for the long term and we can do things through the cycle without having to sort of continually change direction in response to market shocks. Secondly, it allows us to think even longer term.
If the world continues to progress in the way we think about it where steelmaking may become less important, but still strong and growing and a lot of opportunity for us and consumption or high rising living standards, particularly with a growing population in Asia, becomes more critical, then that’s going to give the increased demand for energy.”
It was a busy year for Wesfarmers CEO Richard Goyder, who also chaired the meeting of the B20 earlier this year. He told the KGB:
“Business is a big part of driving economic growth and I think everyone agrees the world hasn’t got enough growth. There aren’t enough jobs. There’s something like more than 200 million people around the world unemployed at the moment and around 300 million youth either not in jobs or not studying. So, there is a significant issue.
So, business is part of a solution and it’s appropriate that business works closely with the G20 and, in our case, with the Australian government to formulate policies.”
He also gave the KGB some insight into Wesfarmers’ future intentions, fuelling further speculation about a potential acquisition:
“We’ve got a balance sheet that has the capacity to do things. We’ve got we think the human resource capacity which is a really important part of our ability to bring businesses into the group and create value. So, certainly we’ve got the capacity.”
Alison Watkins had a challenge on her hands when she became chief executive of Coca-Cola Amatil. While the alcohol division of the company recorded strong gains, the beverage maker faced tough trading conditions in the domestic market, with falling grocery volumes taking a hefty toll. She told the KGB:
“A lot of our volume of course does come from sparkling categories, but we also have very important roles to play in the non-sparkling categories -- like sports drink with Powerade, for example; energy with Mother; Mount Franklin in water -- so we do have a lot of volume outside sparkling.
Sparkling is tremendously important to us and we’ve been I think very successful in driving the no-calorie option, so obviously Zero has been tremendously successful, Diet Coke plays a really important role and our flavours, Fanta and Sprite, are also very important for us. We need to make sure that we continue to invest in the sparkling category. And Brand Coke is clearly an absolutely outstanding product for us to have in our portfolio. We need to make sure that we continue to respond to the changes that consumers are looking for around more options, lower-calorie options, smaller pack sizes -- and we’re doing all that, and I’m really actually very confident that Brand Coke and sparkling will continue to be the engine of Coca-Cola Amatil.”