DIRECTORS' REPORT
DIRECTORS' REPORT FOR THE YEAR ENDED 30 JUNE 2006
The directors of BlueScope Steel Limited ("BlueScope Steel") present their report on the consolidated entity ("BlueScope Steel Group") consisting of BlueScope Steel and its controlled entities for the financial year ended 30 June 2006.
PRINCIPAL ACTIVITIES
During the year the principal continuing activities of the BlueScope Steel Group, based primarily in Australia, New Zealand, North America, China and elsewhere in Asia, were:
- Manufacture and distribution of flat steel products;
- Manufacture and distribution of metallic coated and painted steel products;
- Manufacture and distribution of steel building products; and
- Design and manufacture of pre-engineered steel buildings and building solutions.
SIGNIFICANT CHANGES IN STATE OF AFFAIRS
The following significant events occurred during the year:
- The Company is progressing a range of growth initiatives aimed at expanding the manufacture and distribution of metallic coated and painted steel products. The status of these projects is:
- Thailand: the second metallic coating line (capacity: 200,000 tonnes per annum) at the Map Ta Phut plant commenced operation in November 2005;
- Vietnam: the new metallic coating facility (capacity: 125,000 tonnes per annum) and painting facility (capacity: 50,000 tonnes per annum) commenced operation in November 2005;
- China: the new painting facility (capacity: 150,000 tonnes per annum) commenced operation in January 2006. The facility is part of the Suzhou metallic coating and painting facility which is under construction.
- China: the BlueScope Steel Group's first Butler PEB/Lysaght facility commenced operation in June 2006;
- India: the new Butler PEB/Lysaght facility at Pune commenced operation in April 2006; and
- Australia: the expansion of the Hot Strip Mill (capacity increase: 2.4 to 2.8 million tonnes per annum) at the Port Kembla Steelworks commenced operation in July 2006.
- China: the new metallic coating (capacity: 250,000 tonnes per annum) facility remains on schedule to commence metallic coating during September 2006;
- India: the new Lysaght facilities at Chennai and Bhiwadi are scheduled for completion during the last quarter of calendar year 2006; and
- Australia: the new painting facility (capacity: 120,000 tonnes per annum) in western Sydney is scheduled for completion mid calendar year 2007.
- India: a new metallic coating facility (capacity: 250,000 tonnes per annum) and painting facility (capacity: 150,000 tonnes per annum). The project start up date is currently under review; and
- Indonesia: a second metallic coating (capacity: 170,000 tonnes per annum) and painting (capacity: 55,000 tonnes per annum) facility at Chilegon, which was announced during the year, has been put on hold.
- In June 2006, as part of a range of restructuring initiatives, the Company announced its intention to close the loss-making tin mill at Port Kembla, close its operations in Taiwan and eliminate approximately 250 management and staff jobs across all operations.
Commenced operation
Under construction
Projects approved during the year
The Butler PEB, Lysaght and metallic coating and painting facilities in India all form part of a 50/50 joint venture with Tata Steel which was finalised in May 2006.
MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR
On 17 August 2006, BlueScope Steel announced it has acquired approximately 19.9% of the shares in Smorgon Steel. The intention of acquiring this strategic stake is to ensure that the proposed OneSteel/Smorgon Steel merger does not proceed in its current form. The total cost of this purchase was $319 million.
The Company has noted the concerns identified by the ACCC in its initial review of the proposed merger and has no intention to acquire further Smorgon Steel shares, but reserves the right to do so in different circumstances.
DIVIDENDS
BlueScope Steel paid a fully franked dividend for the year ended 30 June 2005 of 24 cents per share and a special dividend of 20 cents per share in October 2005, and a fully franked interim dividend of 20 cents per share in April 2006 to its shareholders.
On 21 August 2006, it was announced that the Directors determined to pay a final fully franked dividend of 24 cents per share, which is to be paid to shareholders on 24 October 2006 (record date 4 October 2006).
REVIEW AND RESULTS OF OPERATIONS
The BlueScope Steel Group comprises six business reporting segments: Hot Rolled Products Australia, Coated and Building Products Australia, New Zealand and Pacific Steel Products, Coated and Building Products Asia, Hot Rolled Products North America and Coated and Building Products North America.
The Hot Rolled Products Australia and North America segments were previously reported as a single segment. A description of the operations comprising these segments is provided in Note 5 to the Annual Financial Report.
| SEGMENT REVENUES 2006 $M |
SEGMENT REVENUES 2005 $M |
SEGMENT RESULTS 2006 $M |
SEGMENT RESULTS 2005 $M |
|
|---|---|---|---|---|
| Sales revenue | ||||
| Hot Rolled Products Australia | 3,471.9 | 3,731.2 | 456.4 | 1,149.3 |
| Coated and Building Products Australia | 3,064.4 | 3,190.3 | (198.1) | (182.7) |
| New Zealand and Pacific Steel Products | 708.9 | 745.4 | 104.6 | 189.3 |
| Coated and Building Products Asia | 1,075.0 | 1,024.0 | (0.8) | 82.6 |
| Hot Rolled Products North America |
500.4 | 376.6 | 187.6 | 199.4 |
| Coated and Building Products North America |
1,213.2 | 1,134.4 | 27.1 | (18.0) |
| Corporate and Group |
420.4 | 364.1 | (77.5) | (53.2) |
| Inter-segment eliminations |
(2,441.6) | (2,625.3) | 56.4 | (9.1) |
| Other revenue |
18.9 | 24.6 | ||
| Operating revenue/EBIT |
8,031.5 | 7,965.3 | 555.7 | 1,357.6 |
| Net unallocated expenses |
(87.1) | (41.3) | ||
| Profit from ordinary activities before income tax |
468.6 | 1,316.3 | ||
| Income tax expense |
(125.8) | (334.3) | ||
| Profit from ordinary activities after income tax expense |
342.8 | 982.0 | ||
| Net profit attributable to outside equity interest |
(5.2) | (0.1) | ||
| Net profit attributable to members of BlueScope Steel |
337.6 | 981.9 | ||
| Earnings per share (cents) | 47.9 | 134.0 |
The Company's revenue increased $66.2 million to $8,031.5 million, primarily through record production volumes at the Port Kembla Steelworks, higher Australian domestic prices, the commencement of new facilities in Vietnam and Thailand, and sales growth in Coated and Building Products North America. These were largely offset by lower international steel prices and lower Australian domestic demand in the pipe and tube, packaging manufacturing and distribution markets.
Net profit after tax decreased $644.3 million from last year's record, to $337.6 million.
This reduction included a net $80 million of unusual and one-off items associated with asset impairments (Packaging Products), restructuring costs (staff and other internal restructuring), business development and pre-operating costs mainly associated with growth activities in Asia, major operating disruptions (Western Port fire in 2005 and industrial disputes in 2005) and losses from business to be closed (Packaging Products and Lysaght Taiwan).
The underlying operational results were $564 million lower, mainly due to lower international steel prices, together with higher iron ore, coal and coating metal costs.
Hot Rolled Products Australia
The earnings contribution from the Hot Rolled Products segment decreased significantly, primarily as a result of lower export and inter-segment prices for Coated and Building Products Australia, combined with higher iron ore and coking coal costs.
These were partly offset by record production volumes and lower average unit costs.
New Zealand and Pacific Steel Products
The earnings contribution from the New Zealand and Pacific Steel Products segment decreased primarily as a result of softer residential market conditions, lower export prices and higher electricity costs arising from a prolonged dry period and power station maintenance outages.
Coated and Building Products Australia
The earnings contribution from the Coated and Building Products Australia segment was marginally lower than the previous year's loss. However, the company has taken steps to improve performance by announcing it intends to close its loss-making tin mill operations. The current year results include operating losses from this business unit, together with impairment write-downs and closure provisions. Underlying operational EBIT improved as a result of higher domestic prices, lower steel feed costs from Hot Rolled Products Australia and earnings from the Lysaght and BlueScope Water businesses. These were partly offset by significantly higher zinc and aluminium costs, lower export prices and lower domestic demand.
Coated and Building Products Asia
The earnings contribution from the Coated and Building Products Asia segment was significantly lower primarily due to construction contract losses and closure costs in Taiwan, higher unit costs mainly as a result of commissioning and ramp-up of production volumes at the new Vietnam and Thailand coating lines, higher zinc and aluminium costs, and lower prices. These were partly offset by lower steel feed costs.
Hot Rolled Products North America
The earnings contribution from the Hot Rolled Products North America segment was lower, primarily due to hot rolled coil prices in North America declining more than the cost of scrap feed at North Star BlueScope Steel.
Coated and Building Products North America
The earnings contribution from the Coated and Building Products North America segment improved significantly, primarily due to improved volumes, gross margins and business improvement initiatives undertaken since the business was acquired in April 2004.
LIKELY DEVELOPMENTS AND EXPECTED RESULTS
The Company's long-term view of the global steel industry remains positive. In the short-term, high raw material costs will continue to put pressure on margins. However, the Company has taken decisive actions to reduce costs and close poorly performing businesses to ensure the Company meets its longer-term corporate and financial targets.
BOARD COMPOSITION
The following were Directors for the full financial year: Graham John Kraehe AO (Chairman), Ronald John McNeilly (Deputy Chairman), Kirby Clarke Adams (Managing Director and Chief Executive Officer), Diane Jennifer Grady, Harry Kevin (Kevin) McCann AM, Paul John Rizzo and Tan Yam Pin.
Particulars of the skills, experience, expertise and special responsibilities of the Directors are set out on the Information on Directors page and form part of this report.
COMPANY SECRETARIES
Michael Barron Chief Legal Officer and Company Secretary, BEc, LLB, ACIS
Michael Barron is responsible for the legal affairs of BlueScope Steel and for Company secretarial matters.
Lisa Nicholson BSc, LLB, ACIS
Lisa Nicholson is the Assistant Company Secretary with BlueScope Steel.
Laurence Mandie BSc (Hons), LLB (Hons)
Laurence Mandie is a corporate counsel with BlueScope Steel.
PARTICULARS OF DIRECTORS’ INTERESTS IN SHARES
AND OPTIONS OF BLUESCOPE STEEL LIMITED
| Director | Ordinary shares | Share rights |
|---|---|---|
| G J Kraehe |
125,004 | 0 |
| K C Adams* | 2,346,381 | 618,400 |
| D J Grady |
50,685 | 0 |
| H K McCann |
31,185 | 0 |
| R J McNeilly |
541,887 | 0 |
| P Rizzo |
32,024 | 0 |
| Y P Tan | 24,017 | 0 |
* Mr Adams' current holding of BlueScope Steel Limited shares includes 1,175,500 arising from the BlueScope Steel Long Term Incentive Plan. The remaining shares have been acquired with his own funds.
Meetings of Directors
The attendance of the current Directors at Board and Board Committee meetings from 1 July 2005 to 30 June 2006 is as follows:
| BOARD MEETINGS | COMMITTEE MEETINGS | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Audit and Risk Committee |
Remuneration and Organisation Committee |
Health, Safety and Environment Committee |
Nomination Committee |
|||||||
| A | B | A | B | A | B | A | B | A | B | |
| G J Kraehe | 13 | 13 | 5 | 41 | 6 | 6 | 4 | 4 | 3 | 3 |
| K C Adams | 13 | 13 | 5 | 52 | 6 | 52 | 4 | 4 | - | - |
| D J Grady | 13 | 12 | - | - | 6 | 6 | 4 | 4 | 3 | 3 |
| H K McCann | 13 | 11 | 5 | 4 | - | - | 4 | 4 | 3 | 3 |
| R J McNeilly | 13 | 13 | 5 | 5 | 6 | 6 | 4 | 4 | 3 | 3 |
| P Rizzo | 13 | 13 | 5 | 5 | - | - | 4 | 4 | 3 | 3 |
| Y P Tan | 13 | 11 | - | - | 6 | 5 | 4 | 4 | 3 | 3 |
All Directors have held office for the entire 2005/06 financial year.
A = number of meetings held during the period 1 July 2005 to 30 June 2006 during the time the Director was a member of the Board or the Committee as the case may be.
B = number of meetings attended by the Director from 1 July 2005 to 30 June 2006 while the Director was a member of the Board or the Committee as the case may be.
1. The Chairman of the Board attends as part of his duties as Chairman.
2. The Chief Executive Officer attends by invitation as required.
There were a number of unscheduled meetings held during the year. They are as follows:
Board meetings: 5
Remuneration and Organisation Committee meetings: 2
The Non-Executive Directors met twice during the 2005/06 financial year without the presence of management.
