BlueScope’s net profit declines by 70 percent in the first half of fiscal 2020

BlueScope Steel Ltd., headquartered in Melbourne, Australia, has reported a net profit after tax (NPAT) of AU$185.8 million ($122 million) for the first half of its 2020 fiscal year. This is a 70 percent decline compared with the company’s NPAT in the first half of its 2019 fiscal year.

In a news release announcing the company’s half-year results, BlueScope Managing Director and CEO Mark Vassella says underlying earnings before interest and taxes (EBIT) for the half were AU$302.4 million ($198.6 million), a decline from fiscal 2019’s performance. He attributes that to “the decline in commodity steel spreads, which we flagged in August last year.”

Vasella adds, “However, with improving conditions at the tail-end of the half, we finished 1H FY2020 slightly stronger than our guidance.

“The $302 million underlying EBIT showcases yet again that BlueScope’s turnaround and transformation is real. The result is more than creditable in light of the weaker cyclical spreads and is a tribute to our strong team of 14,000 employees across 18 countries. Importantly, it confirms BlueScope is now a resilient, global company with a strong balance sheet and high-quality assets.”

The company’s board has approved a 6-cents per share interim dividend and the extension of the on-market buy-back of up to AU$100 million ($66 million) during the second half of the company’s fiscal year, Vassella says. “In the context of current macroeconomic conditions, including uncertainty in key markets due to impacts of coronavirus, or COVID-19, we feel this reflects the right balance of returning funds to shareholders and investing for the future in key projects such as the North Star expansion.”

He is referring to the company’s minimill in Delta, Ohio, which the company first alluded to in March of last year.

North Star expansion

BlueScope is expanding its North Star minimill to produce an additional 850,000 metric tons annually.  The mill currently produces 2.1 million metric tons of steel per year.

“We are very pleased with progress,” Vassella says. “Work is on schedule, site works are progressing well and major OEM (original equipment manufacturer) equipment orders have been placed.”

In the company’s webcast to review its half-year results, Vassella said, “We are aware of some impacts on our equipment supply chains due to COVID-19, which are being managed.

He added that new employee hiring is underway and that site works continue, including those for the melt shop building foundations and erection, the tunnel furnace shuttle car foundations and the construction of the new administration building and consumables warehouse, which he added are nearly completed.

“This expansion project is a perfect fit for our strategy, offering long-term sustainable earnings growth from a high-quality asset. And it’s a credit to the team, having worked through the winter … and alongside our ongoing business to see the project progressing so well.”

China COVID-19 update

“COVID-19 is obviously a very topical issue at the moment,” Vassella said during the Feb. 24 webcast. He then provided an update on BlueScope’s operations in China, noting that no cases of the virus have been reported among BlueScope China team members.

The company has four major operating sites (two across greater Shanghai, one in Tianjin and one in Xi’an), as well as a number of sales offices across China, including one in the Hubei province, he said, which is where the virus originated. With the exception of the Hubei sales office, all sites have reopened.

Vassella said following the implementation of return to work safety guidelines across BlueScope China, the Group’s China businesses are all now operational, with the exception of the Hubei sales office. Most employees have now returned to work safely, and no cases of COVID-19 have been reported within BlueScope China.

In the webcast, the company noted that operational throughput in its Chinese operations remains limited at because of reduced staffing as a significant number of employees are in self-quarantine following Lunar New Year travel, limited logistics movements in and out of the company’s facilities and reduced demand as customers progressively return to operations during February.

Vassella said February and likely March performance of BlueScope’s businesses in China will be heavily affected by the virus. “Beyond this, rate of recovery in demand and activity remains unclear at this point.”

Outside of China, the company says is aware of some impacts to its supply chains, which to date have been mitigated.

Executive leadership team change

After more than 12 years with the company, BlueScope Building Products Asia and North America Chief Executive Charlie Elias will leave BlueScope in early July. He joined BlueScope as chief financial officer in 2008, remaining in this role for 10 years before his appointment to Chief Executive North Star BlueScope. He is currently responsible for the company’s building products businesses across ASEAN, India, North America and China and sits as Chairman of the company's joint venture with Tata in India.

According to the company, Elias has been a highly valued member of its executive leadership team and a key contributor to the turnaround and transformation of the company in the decade following the global financial crisis. “His leadership and guidance were critical in restoring a strong balance sheet, establishing and growing our key strategic partnerships with Nippon Steel and Tata, and in the acquisition of North Star in 2015,” the company states.

Segment results

North Star delivered underlying EBIT of AU$114.5 million ($75.2 million), down 72 percent compared with the first half of its 2019 fiscal year and by 53 percent on second half of its 2019 fiscal year, which was driven by lower spreads, according to BlueScope.

The business continues to operate at full capacity with stable demand, with the company adding that sales volume in this first half of the current fiscal year declining from the second half of the 2019 fiscal year because of “normal seasonality.”

Its Australian Steel Products business delivered underlying EBIT of AU$127.9 million ($84 million), down 60 percent compared with the first half of the 2019 fiscal year and 41 percent compared with the second half of that year.

BlueScope says steel spreads were compressed, driven by weaker regional steel prices and higher raw material costs.

Domestic sales improved for the better in the first half of this fiscal year on stronger underlying demand compared to the second half of the previous fiscal year, the company says, with premium painted product volumes recovering in line with broader sales.

Building Products Asia and North America’s underlying EBIT was AU$80.2 million ($52.7 million), up 2 percent from the first half of the previous year and 45 percent compared with the second half.

Performance in ASEAN improved, driven by better margins and continued benefits from the cost reduction and manufacturing improvement program, BlueScope says.

Similar to the second half of the last fiscal year, the segment’s North American operations saw softer results compared with the first half of the last fiscal year because of margin compression in the coating operations related to falling steel prices combined with a weaker manufacturing performance impacting costs.

The New Zealand and Pacific Steel segment delivered underlying EBIT of AU$12.9 million ($84.8 million), down 82 percent from the first half of the 2019 fiscal year because of lower regional steel prices, lower vanadium byproduct contribution and higher raw material and electricity costs, the company says.

Demand in the residential construction sector remained robust, however infrastructure market demand softened.

Performance improved marginally compared with the second half of the last year driven by lower raw material costs, offset in part by a lower vanadium byproduct contribution.

The company’s Buildings North America delivered underlying EBIT of AU$24.4 million ($16 million), an increase of 10 percent compared with the first half of the previous year because of stronger margins and an improved contribution from BlueScope Properties Group, in part offset by lower volumes.

The result was down 22 percent compared with the second half of the 2019 fiscal year, mainly because of a lower contribution from BlueScope Properties Group and investment in capacity to improve customer lead times, partly offset by higher volumes.

The company adds that customer demand in the light manufacturing and warehousing sector, especially e-commerce, remains strong.

Outlook for the second half

“Underlying demand across our major markets is generally stable, however, the economic impact of COVID-19 has created uncertainty for our Asian businesses and Asian steel spreads in the near term. The impact to U.S. Midwest spreads, if any, is unclear. We are aware of some impacts to our supply chains which, to date, have been mitigated; we continue to monitor the situation,” Vassella says.

“On this basis, the company expects 2H FY2020 underlying EBIT similar to 1H FY2020. Expectations are subject to spread, foreign exchange and market conditions, including potential impacts from COVID-19,” he adds.