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Edited Transcript of BSL.AX earnings conference call or presentation 19-Aug-19 12:00am GMT

Full Year 2019 BlueScope Steel Ltd Earnings Presentation

Victoria Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of BlueScope Steel Ltd earnings conference call or presentation Monday, August 19, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Royce Vassella

BlueScope Steel Limited - MD, CEO & Director

* Tania J. Archibald

BlueScope Steel Limited - CFO

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Conference Call Participants

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* Daniel Kang

Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research

* Jack Gabb

BofA Merrill Lynch, Research Division - Associate

* Michael Slifirski

Crédit Suisse AG, Research Division - MD

* Owen Birrell

Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst

* Peter Steyn

Macquarie Research - Analyst

* Wei-Weng Chen

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [1]

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Good morning, everyone, and welcome to the BlueScope FY '19 Financial Results Presentation. My name is Mark Vassella, and I am here today with Tania Archibald, our CFO. Together, we will take you through our results and the major initiatives in front of us and at the end of the presentation, address your questions.

Firstly, the safety. While our performance continues to be very good, in a relative sense, we were disappointed that our key measures deteriorated during FY '19. I'd note that the increase in the lost time injury frequency rate largely related to an uptick in less severe soft tissue injuries. Mostly the result of slips, trips and falls. However, we take our performance very seriously and so we are evolving our approach to the next level of safety improvement through a greater focus on injury severity, those injuries that can impact people's lives and a more holistic approach to health and well-being opportunities across the business.

Overall, FY '19 was another outstanding year for the company with the key highlights being: $1.35 billion EBIT, our third year over $1.1 billion; an excellent return on capital of 19.5%, very close to last year's performance; reported NPAT of $1 billion, down from the $1.55 billion last year mainly due to the noncash accounting adjustments in last year's result from tax and impairment write-backs; operating cash flow after CapEx was very strong at $1.3 billion, delivering a net cash position at year end of $693 million and supporting our ongoing capital management; the Board declaring an $0.08 per share final dividend and the continuation of our buyback program, which was increased back on June '18.

At the segment level, group performance was supported by a record result for North Star and a very rock strong result again from Australian Steel Products. Together, these 2 generating nearly $1.2 billion of EBIT. In the U.S., a strong economy supported solid demand in key end-use segments including auto and building construction. We continue to be attracted to the U.S. as a place to build our business. Steel prices continued to be volatile in the back half of the year. More recently, it's pleasing to see that the price increases announced by the mills have stuck and lead times have extended out a couple of weeks. Summer auto outages are behind us and construction is in full swing.

In our Buildings business, sales of buildings to our key segments remain strong. However, the business delivered weaker earnings on lower dispatch volumes and the cycling off of the very strong result from the properties group in FY '18. The team is working hard to improve the performance moving forward.

Conditions in Australia in the back half of the year weakened through a combination of falling steel prices which drove notable distributed de-stocking, pre-election uncertainty and some softening in the residential cycle. Tania will talk to you in more detail in a moment. But overall, volumes were down moderately reflecting an orderly pullback in the market. I'll touch on it again in the outlook but in terms of the real-time feel on demand, we are cautiously optimistic about a modest pickup in volume from second half FY '19.

We've had a good start in July. This was supported by a positive vibe from builders who were still seeing decent levels of activity although they are cautious about the back end of the half. So at present, from the perspective of the customers and segments on which we focus, it certainly seems as though the combination since the election of lower interest rates, banks being more open to lending and improving auction clearance rates has helped.

Demand in the new year in the nonresidential construction space, while project-based and lumpy, has also been promising. And demand for infrastructure applications, including wind towers, roads, bridges is looking good as well.

In February, we flagged that the New Zealand business would have a tougher second half after a strong first half and that's how it panned out. Building activity and infrastructure demand, especially in roads, remains very strong and this continues to drive good volumes. However, we saw a combination of factors drag our second half performance down.

The New Zealand business has performed well over the last couple of years before this last half. We have an expectation that all businesses deliver adequate returns through the cycle and we are monitoring the business of -- the performance of this business going forward.

In ASEAN, a disappointing result overall, driven by a combination of weak macro conditions in several markets, margin compression from higher steel fleet prices and intense local and import competition in finished products. As a result of these dynamics, a comprehensive review of the ASEAN business has been undertaken with a number of actions now well advanced to drive productivity and optimize the manufacturing footprint to suit the current market conditions. Again, Tania will elaborate. However, we remain convinced of the potential of this high growth and rapidly-developing region with large and growing populations and trends towards quality, branded products.

In the short-term, we are pleased with the improving performance we've seen in the fourth quarter of FY '19 and in the start of the first half FY '20. The North American coated business performance also weakened during the second half of FY '19 due to a perfect storm of falling steel prices and high-priced inventory.

We're very excited to announce today, board approval to proceed with the North Star expansion project. We previously flagged our attraction to the large U.S. steel market and we first announced the detailed study into this project a year ago. This has been an option in the back of our minds for some time given that the mill was originally set up to be expanded in this way. The board, ELT and all involved, right through the North Star team, are very excited to be given the green light on this project. The project will cost approximately USD 700 million and will add around 850,000 metric tonnes of hot rolled coil capacity with a further 500,000 tonnes potential upside in subsequent years, subject to further plant de-bottlenecking. North Star is recognized as the best-in-class asset. Based on long-term historical spreads, this project is expected to deliver compelling returns of 15% or more once fully ramped up.

Our very experienced North American leader, Pat Finan, will move full-time to North Star in Ohio to manage the business and the expansion project. This project fits our strategy perfectly. It offers long-term, sustainable earnings growth from a high-quality asset. It's a significant tribute to the 400 employees of North Star who work hard to make it such a brilliant business. I'll go into more detail on the investment case a little later.

The company will shortly release its 2019 Sustainability Report. Our fourth and I think our best yet. The focus of this report is building resilience and it will elaborate on how we are embedding sustainability in all that we do. I've already spoken in our safety performance and I would now like to give you a short summary of our key other -- our other key areas of sustainability focus.

On climate and energy. We've developed our shadow carbon pricing approach, climate risk scenarios and greenhouse gas emissions intensity reduction targets. And in the last year, I'm pleased to say we hit our goal on emissions intensity reduction of over 1%.

On diversity and inclusion. Female recruitment reached 43%, up from just 23% 3 years ago. The result for recruitment at the operated trade level is not far behind at 40%, up from 7% 3 years ago. A remarkable turnaround in driving real cultural change in our business.

On conduct and culture. We encourage a culture of speaking up and protecting those who do, including the launch of our new speak up policy. As previously disclosed, the ACCC investigation into an alleged cartel conduct in the Australian business is ongoing.

On supply chain sustainability. We have established improved sourcing standards and due diligence capabilities and are well-advanced in our assessment and rollout of those standards. We are also well advanced in preparation for the reporting requirements of the Modern Slavery Act.

So at this point, I'll pause and hand over to Tania to take you through the segment performances, group financials and the financial framework in detail.

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Tania J. Archibald, BlueScope Steel Limited - CFO [2]

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Thanks, Mark.

Firstly to North Star. This business produced a record $655 million underlying EBIT for the year and $243 million in the second half. Benchmark spreads across the year were on average higher than the prior year primarily driven by higher prices in the first half. There was a contraction in spreads across the second half and in particular, in the last quarter where prices dropped more than USD 200 per tonne. Since the end of the fourth quarter, prices have recovered on a spot basis, around USD 80 a tonne, reflecting that part of the rapid decline in Q4 was as much driven by sentiment rather than underlying fundamentals.

As Mark noted, demand has been stable for North Star's end market segment. Whilst there has been some moderate easing in automotive sales, they remained at robust levels across the year, with demand trending towards the more steel-intensive light trucks and SUVs. The manufacturing and construction sectors remained stable.

Across the year, North Star continued to operate at 100% capacity utilization, reflecting the preference for North Star's products in the market.

Turning to the Australian business. ASP delivered an underlying EBIT of $535 million for the year and $216 million in the second half. The half 2 result reflected lower benchmark spreads reflecting escalating raw materials cost and falling prices. The lower benchmark spreads were partially offset by favorable realized raw materials cost and the favorable impact of pricing lags, as foreshadowed in our February guidance.

In the domestic market, volumes contracted through the second half and were down approximately 10% relative to the first half. Now this contraction is largely due to de-stocking activity across our sales channel along with some softening in underlying demand across the book. And I'll talk more on domestic demand on the next slide.

The contribution from export coke was down considerably in half 2. Now we had foreshadowed reduced coke margins and volumes in our February guidance. The latter part of the fourth quarter saw a sharp compression in coke margins as key end-markets, principally in Europe, dropped substantially. In the near term, softening demand has also contributed to a disconnect between realized, seaborne coke prices and the observable Chinese domestic coke index, which does make it harder to track externally. The reduced volumes in the half essentially reflect the timing of shipments with elevated volumes above the norm in the first half and somewhat lower volumes in the second half.

Now looking at our segmental sales mix in Australia. We saw a softening across our end-use segments in the second half but I'd like to point out the dispatch volumes remained at historically robust levels. As a broad estimate, we believe that more than half and perhaps 2/3 of the contraction we saw across half 2 was due to de-stocking.

In the residential sector, we saw volumes contract around 8% and this appears to be largely driven by de-stocking through the distribution channel. Direct sales in the residential segment through the role-forming channel remained relatively robust.

In the nonresidential construction sector, the reduction in volumes appears to have been driven by a combination of distributed de-stocking activity and the lumpy timing and nature of large scale projects in this segment. Now in the context of the resi and non-resi construction sectors, COLORBOND steel sales remained broadly resilient with sales down slightly less than the sector averages.

Sales into the engineering and mining sectors softened in the second half, again largely due to distributor de-stocking but also a degree of seasonality and some internal constraints in meeting customer demand. Demand in the agriculture segment was again weaker with the ongoing impact of the drought in the eastern states of Australia.

Now given the focus on the Australian domestic market, we felt it would be a timely reminder as to the nature of our exposures in this sector. ListCos 2 primary exposures are to new, detached residential housing and to alterations and additions. By contrast, the exposure to multi-residential construction is modest. Now the recent contraction in residential building approvals has been predominantly in the multi residential segment, which has seen a 30% reduction in approvals on the most recent set of data. This contrast with detached housing segment, which has moderated to around 110,000 approvals per annum, which is a 10% decline relative to the prior year. Now this is well within the long-term range of 90,000 to 130,000 approvals per annum for detached houses. And in our view, this represents an orderly market pullback. I think it's also pleasing to point out that the alterations and addition sector, which consumes around half of our residential volumes, has been broadly resilient.

Moving to Building Products Asia and North America. This business delivered an underlying EBIT of $134 million for the full year and $55 million for the second half. China and India both continued to perform strongly. The reduction in China between the first and second half is purely due to seasonality and when you look at the full year result from China, you can clearly see the step change in the performance of that business reflecting the results of our restructuring efforts over the last few years.

In Southeast Asia, as Mark noted, import competition in the region remains intense and macro conditions in key markets remained somewhat weak. But we are now starting to see an improvement in performance of the business, particularly in the fourth quarter, where the results of the cost and productivity improvement programs are becoming evident.

In North America, we saw both margin compression from rapidly falling prices against high-cost feedstock and lower volumes as customers run down their inventories in the face of falling prices. But underlying market conditions in North America remain broadly stable.

Now in the light of the headwinds that we've been seeing in Southeast Asia, we have completed a comprehensive review of this business. We remain convinced of the medium- to longer-term potential of building and construction markets in this large and growing region. But with the near term weak macro environment, we are focused on resetting the cost base to current conditions. We are well advanced in the execution of our productivity and cost improvement programs and are optimizing the manufacturing footprint to suit market conditions. We have reassessed the size of the addressable home appliances market in Thailand, which has led us to reduce our expectations of volumes and returns. So as we ramp up the new high-speed metal coating line in Thailand, which will improve our cost position to retail products, we are now planning to take offline the older metal coating line #1. A $64 million impairment charge has been taken on the Thailand plant and equipment. We're also well advanced with the integration of the acquired cold mill in Malaysia which is expected to commence operations later this half.

Turning to Buildings North America. This business delivered an underlying EBIT of $53 million for the year and $31 million for the second half. Sales of buildings to the industrial manufacturing, aviation and energy sectors remained strong. Order intake also increased during the year. We did see improved margins overall in second half, which is pleasing. However, the business delivered weaker earnings on lower dispatched volumes on seasonality and due to the cycling off of the very strong results from the properties group in 2018 and we saw a moderate contribution from properties group in the second half.

Looking further into this business, Buildings North America is effectively an engineering and design business which offers relatively stable margin-based earnings with growth potential. We are acutely aware that this has been a strong market in North America and that we could have delivered a higher level of performance if we had been less capacity constrained. We are now making an investment in the business to right-size our resources and process but it will take time to bring that capacity and capability online, probably a little longer than what we had initially anticipated.

Turning to New Zealand and Pacific Steel. This business delivered an underlying EBIT for the year of $81 million and a lower result in the second half of $9 million. The lower second half result was due to a combination of lower regional steel prices, the roll off of competitive coal pricing, higher scrap and vanadium input prices and a lower contribution from vanadium slag export sales. The net vanadium contribution was down $21 million in the half, reflecting a rapid softening of vanadium prices with greater supply coming online and demand pressures easing as end consumer sought to displace vanadium products with lower cost of substitutes.

Electricity costs in New Zealand also remained elevated in the half. Domestic sales volumes remained broadly stable on the back of strong residential and nonresidential building activity and robust infrastructure demand. Now as Mark noted, the New Zealand business has delivered solid earnings since the interventions undertaken in 2015 to 2017 and this is the first softer half after 4 very strong ones. Nonetheless, as Mark said, we remain very focused on the performance of this business going forward.

Turning to the underlying EBIT group walk forward. The full year was generally characterized by higher spreads, partially offset by higher costs and reduced volumes. However, this is really a tale of two halves, so I'll focus my comments on the second half walk forward.

There are 3 items to call out here. Firstly, the spread. We saw a rapid decline in U.S. Midwest prices in the second half, significantly compressing spreads as well as a deterioration in Southeast Asian spreads which was driven by a combination of climbing raw materials cost and softer prices.

Secondly, on net cost increases, we made very good progress in cost improvements in a number of areas, including in the Building Products segment. But this was more than offset by a number of negative cost impacts, the larger ones to call out are the reduced vanadium exports slag contribution and the impact on unit costs of slightly lower production volumes at ASP and investments we are making in the business in business development, marketing and channel development.

Overall, the focus and discipline on cost remains a key theme across the portfolio. Whilst we have been impacted by surges in specific costs in the short term, we maintain our medium- to long-term target of offsetting escalation and every business is held to account in delivering on this.

The third item is on volume and mix. Volumes were lower on seasonality in China, Southeast Asia and Buildings North America. This was partially offset by higher seasonal volumes at North Star. The lower domestic volumes at ASP were largely mitigated by higher export volumes in the half.

On this page, we've set out the estimated impact of accounting standard AASB 16 in regards to the capitalization of operating leases which come into effect in FY '20. The impact on EBIT at this point is expected to be relatively modest, noting that the impact to EBITDA will be larger as operating lease costs are largely transferred into D&A. Now I would like to point out that operating lease liabilities will form part of the net debt calculation for FY '20. The net debt targets that are highlighted in this presentation are on a prelease basis and the numbers shown here are indicative only, but we will give you an update in February.

Now I'd like to take you through our enhanced financial framework, which is an evolution of our previously stated financial principle. Our financial framework guides our decision-making and has 3 fundamental components.

Firstly on returns. We remain very focused on returns on our invested capital and seek to maximize our free cash flow generation. We also seek to maintain a strong balance sheet and credit metrics to ensure we have financial capacity through the cycle and we remain very disciplined in our capital allocation, running a return-focused process which balances shareholder returns with investing for long-term, sustainable growth.

Now looking at these elements a little more deeply. Our overall return on invested capital this year has been strong at 19.5%, with North Star the standout performer. Our focus now is on the turnaround in ASEAN and further improvement in Buildings North America and in New Zealand Steel given the performance in the second half. We are also very focused on the successful execution of the North Star expansion project which Mark will discuss shortly.

We continue to generate strong cash flows and cash flow yield, clearly an even strong performance in the last 2 years with $1.3 billion in cash flows delivered for the year. A strong result in the second half, although I would call out that we did benefit in half 2 from some timing impacts on working capital of around $150 million. I think it's also worth calling out that as of the 30th of June, we still have $1.4 billion of tax losses in the Australian tax consolidated group, which means there will be no Australian income tax payments until these losses are recovered.

With regards to the capital structure, one of our highest financial priorities is to maintain a strong balance sheet. Now since the acquisition of the other half of North Star in October 2015, we have been progressively strengthening the balance sheet. We've recently reviewed our optimal capital structure and we're now making a small change to reduce the previously stated net cash target of $200 million to $400 million to a net debt target of around 0. And I would like to note, this target capital structure of around 0 net debt is before capitalization of operating leases.

Now we will be both proactive and prudent in managing the balance sheet towards that net debt target and our considerations will take into account our capital commitments and outlook. There is no change in our focus on maintaining strong credit metrics, having just attained investment-grade status a little over 12 months ago.

In terms of liquidity. Overall, we feel our financing arrangements are in good shape with plenty of liquidity and we've got a good, prudent maturity profile. In terms of decisions around capital expenditure, we seek to strike the right balance of short-term returns and investing for long-term, sustainable growth. As always, we will invest in safe -- to maintain safe and reliable operations.

We are also investing in foundation and new technologies. Now this includes our core process and product technologies as well as our business and customer-facing systems. These investments are critical to maintaining our differentiated positions as well as providing the foundations to drive the next round of productivity and earnings improvements which is centered around technology.

In allocating our capital, we have a disciplined, return-focused process which balances capital for growth investment and shareholder returns and this is where we feel, in addition to the buybacks and dividends that we've completed in recent times, that investing in the North Star opportunity strikes the right balance.

Since 2017, we've delivered more than $1.1 billion of returns to shareholders in the form of dividends and buybacks and our commitment remains to distribute at least 50% of free cash flow to shareholders. The Board announced in June that we would be extending the buyback program by up to $250 million. And as of the 16th of August 2019, we have up to $211 million remaining in this program. The Board has also approved the payment of a final, unfranked dividend of $0.08 per share, consistent with the prior year. Upon completion of these measures, we'll have returned $1.4 billion to shareholders since the start of 2017.

And on that note, I'll hand back to Mark to provide some more commentary on the North Star expansion project.

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [3]

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Thanks, Tania. The North Star expansion will be the largest capital project undertaken by the company in its listed history. I'd like to take some time now to take you through more detail on the project.

In short, we see this as a compelling opportunity. The U.S. is an attractive market. Within that market, North Star is an advantaged, best-in-class asset which has been built for expansion. That expansion is consistent with the longer-term transitions to highly efficient EAF steel production. The project is expected to sustainably deliver returns at least in line with our target minimums and we're also fortunate enough to have a highly motivated and extremely capable team on the ground.

I'll now go through this in a little more detail. Firstly, the U.S. is an attractive market to BlueScope. It's large and stable and a geography which we are familiar operating in. Underlying demand drivers from the broader macro to the segments into which North Star's products is ultimately used, namely auto and nonresidential construction, remain broadly positive.

As we pointed out previously, North Star is an advantaged, best-in-class asset. Its margins lead both electric arc furnace peers and blast furnace peers in the U.S. And its product quality sees it run at constant, full capacity utilization, supported by absolute motivation around exceptional customer service.

North Star's location within close proximity to its customers and scrap suppliers gives it a clear freight advantage. Around 95% of our customers are within 300 miles and scrap supply is similarly well-positioned. We expect this advantage to be preserved post expansion.

North Star sells predominantly to service centers and holds a modest share of wallet with its customers. What gives us added confidence in the viability of this expansion is that supply to customers has traditionally been limited due to capacity, with many customers requesting more product the North Star is able to produce. In real terms, the expansion represents a small increase to the already modest share of wallet that we currently hold with our customer base.

North Star's outperformance is evidenced by the consistency of its earnings and cash generation across the cycle. This chart speaks for itself. Again, it is important to note, we are basing our analysis of the project on historical midcycle spreads of USD 250 to USD 300 per metric tonne. This excludes the supercharged, trade policy-driven periods of the second half FY '18 to the second half FY '19.

A fundamental advantage that we enjoyed with the expansion is that North Star was built with latent hot strip mill capacity. As a result for this brownfield expansion, all we need to add is another melter, a second caster and a connecting shuttle furnace in order to unlock an immediate capacity uplift to 3 million metric tonnes but also the potential to take output up to 3.5 million metric tonnes through further incremental de-bottlenecking.

The long-term trend in the U.S. steelmaking is towards highly efficient electric arc furnace technology. EAF share of overall U.S. production has nearly doubled to approximately 70%. In the U.S., there is a rich availability of prime and obsolete scrap to feed these operations. The trend is not as developed in flat steel production as yet and our high-quality hot rolled coil, relative to both EAF and blast furnace, affords us that opportunity.

Within North Star's region, we're seeing this trend continue to play out with 3 mills expanding, including ourselves. We've also recently seen the idling of over 2 million metric tonnes per annum of blast furnace hot rolled coil capacity. We are well aware of what's happening in the market and our competitive position.

I know there's been some headline-grabbing views put forward recently around future steelmaking capacity in the U.S. We have done detailed work on this matter, supported by external forecaster's demand estimates. We believe that over the next 5 years, national and regional hot rolled coil supply and demand will largely be in balance.

Looking at it from the perspective of hot strip mill capacity utilization, we are not making any heroic assumptions. Our modeling is that projected utilization and spread will be broadly consistent with post-GFC levels.

Turning to the key steelmaking inputs which will support the expansion. As we flagged earlier, North Star is in an exceptional location with regard to metallic supply. We have automakers up the road who are ready -- are a ready source of prime scrap. Cleaveland-Cliffs' HBI plant is under construction, only a short distance from North Star in Toledo. And obsolete scrap is also in surplus, with a large volume of material exported.

From a sustainability perspective. The expansion of North Star will lower our emissions intensity. This is a fantastic outcome for the community with the creation of nearly 700 jobs during construction and 90 permanent jobs on commissioning. To ensure our environmental footprint is minimized, we are installing best-in-class emissions controls and we're applying our global supply chain and modern slavery standards.

To conclude, the work we've done since we last spoke to you has confirmed this is a compelling, long-term investment proposition. The project is not premised on any heroic assumptions on spread or capacity utilization and it gives us further upside opportunities. As I said earlier, this is a brilliant business. We are thrilled that the project has been given the green light. Early works are well underway and we're targeting to have steel in the market in late calendar year 2021.

So now, turning to the outlook for the first half of FY '20 and some summary comments. But first, let me step back and make some comments about the state of the industry. Globally, there are some challenges. The steel industry remains in overcapacity and trade action is creating volatility. However, I believe the industry structure is improving, with capacity adjustments and the trend to EAF in China and the consolidation of capacity in India.

We believe BlueScope is well-positioned. We're operating in the United States, still the world's largest economy, and we're a small player with lots of opportunities. Our position in Australia and New Zealand is strong and both have robust population growth underpinning economic activity. We continue to pursue intermaterial product initiatives to grow our domestic sales over the medium- to long-term. In China, we operate with niche differentiated businesses. And likewise, we are well-positioned in India with a great partner, which still has low levels of steel consumption intensity. And we remain convinced that our strategy in the ASEAN region offers solid longer-term growth, where we have a leading steel coating and painting footprint well-positioned to take advantage of that.

In the near term, the outlook for our business segments is as follows: At North Star, a softer result driven by benchmark spreads of $90 a tonne lower than the second half FY '19. Volumes will be slightly lower on seasonality and we expect a modest increase in consumable costs; For ASP, a modest improvement in domestic volumes. However, a softer result due to lower Asian benchmark spreads, realized prices relative to the Southeast Asian benchmark will have a negative impact of approximately $60 million due to the combination of lower U.S. export prices and domestic price lags; a reduced contribution from export coke. As Tania flagged, this has been driven by reduced demand, particularly in Europe; and a $15 million unfavorable impact following a burden slip in the blast furnace in the first week of last month which was resolved within the week. So nothing outside of what we've considered to be a normal part of the normal operating range of the business; For the Building Products segment, a stronger result, most notably in ASEAN where we expect ongoing benefits from cost reduction and manufacturing improvement programs; For the New Zealand and Pacific Steel businesses, a better result, mainly driven by cost improvements and favorable timing of scheduled maintenance. However, vanadium slag by-product sales will contribute less; and for Buildings North America, a similar result in the Engineered Building business offset in part by a smaller contribution from the properties group.

Therefore, to the group view. Reflecting the falling commodity spreads that you've all observed in recent months, we're expecting a 45% decline in underlying EBIT in the first half of FY '20 compared to the second half of FY '19.

This is the short-term outlook and it's predominantly driven by commodity spreads. However, we are now a very resilient global company with a strong balance sheet and high-quality assets which provide the capacity to withstand and potentially take advantage of tough cyclical conditions.

We have an integrated and resilient Australian business delivering returns across the cycle. We continue to invest in the iconic industrial brand position of COLORBOND. We hold global leadership in coating and painting for the building and construction markets. Our footprint sees us operating in the world's 2 largest construction markets, China and the U.S.; and high-growth markets in ASEAN and India. We're taking advantage of the lowest cost, hot rolled coil expansion opportunity in the U.S. at North Star, which is one of the most profitable mini-mills in the country and we will continue to manage our businesses with a strong capital discipline and a returns-focused culture.

So with that, I'll turn over to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Owen Birrell with Goldman Sachs.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [2]

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Just -- I've got 3 questions. The first one, I'll just direct it to Tania.

Just looking at the cash balance at the moment, very strong cash conversion during the half. Just wondering what was -- you're $700 million cash balance now, just wondering what was driving that and how much was just working capital that is likely to revert?

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Tania J. Archibald, BlueScope Steel Limited - CFO [3]

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So I think we called out, Owen, in the December results, that we had a bit of a working capital build. We've been very focused on working capital across the last half and that's just pretty much what's played out in the numbers.

There's probably a few timing elements that also went our way. I think that's happened from time-to-time over the last couple of years from memory. So we've called out that there was probably $150 million roughly of timing benefits also part of the working capital. But it's really just a reversal of what we called out back in December.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [4]

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About $150 million was above what you would expect to redeem for...

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Tania J. Archibald, BlueScope Steel Limited - CFO [5]

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Yes, yes.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [6]

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Okay. Just a question, more specific on New Zealand.

Very big fall, $60 million fall, whether you're looking half-on-half or year-on-year. I'm just wondering if you guys can break down what was actually structural and what is temporary? What I understand is new coal-sourcing contracts and so forth?

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [7]

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Yes, Owen, as we've said in the -- as we went through the slides, I mean the -- New Zealand had quite a few things go against it. So pricing coming off, obviously; vanadium sales, which is a chunk of that value; yes, the coal contract rolled off as well. We had very high power costs which impacted it. We had a couple of R&M events that were unscheduled as well.

So it had a half where pretty much everything that went against it could go against it, did go against it. So it wasn't a great half for New Zealand as Tania pointed out in her descriptions. We've had 4 or 5 good halves out of that business now but we're watching it very closely and Gretta and the New Zealand team understand what we need to do there. I'm not sure what more detail we've got in the walk forwards or what we...

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [8]

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Yes, I just wonder, if you can break down...

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [9]

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We certainly had a few -- quite a few factors go against us in the half.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [10]

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Out of that $60 million, say, $20 million is vanadium and we can sort of have our own guesses whether that comes back or not. I think your guidance was -- said it's going to be another $5 million down.

So the remaining $40 million, just -- what was the impact of that maintenance shut down and how much is more structural from energy prices or coal prices?

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Tania J. Archibald, BlueScope Steel Limited - CFO [11]

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Yes, this is -- there was a number of timing elements in there, just from a cost perspective and then we had a major maintenance shut as well. So I mean, I would've said maybe a good chunk of it would be timing-related. We would expect a significant improvement in the cost in the next half.

Having said that, we certainly do have our challenges with regards to the energy costs and we are working pretty hard on that. And at the end of the day, we still expect this business to deliver, on average through the cycle, 15% return on invested capital. And the team is working very hard on delivering that. We've had a bit of a lower performance this half. And as Mark said, it's just everything that could go against us did go against it. But we're still reasonably confident that there's upside there in terms of what more we could do around the cost.

So I wouldn't certainly put it down to structural. I think there's quite a number of timing elements there.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [12]

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Okay. Just one other question from me. Mark, we went back couple of years ago, you often talked about this business being sort of $1 billion to $1.1 billion EBIT business through the cycle. I mean obviously, the short-term outlook is very impacted by timing lags and one-off.

I'm just wondering, looking at the current guidance at the moment suggesting that your through-the-cycle EBIT should be closer to sort of, what, $900 million. I'm just wondering what is -- what should we -- how should we be thinking about what goes through the cycle now?

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [13]

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I think what we talked about is how we've rebuilt that base but that there would be volatility from that base. I think in the chart, in the last half or the half before, we actually called out what a variation would be on spreads in both North Star and in the Asian region. So there's absolutely volatility.

From that point of view though, I mean, I think what we are really focused on here is the resilience of this business model now, notwithstanding what we've seen quite frankly in the last half, both areas, reached almost bottom of the cycle spreads to be honest. In fact, in the Asian area, even lower than that, to be really honest. So we've seen that have an impact.

But we've also seen it bounce back in the last month. I mean, this is where it's difficult for us, from a guidance point of view, up $100 a tonne in the U.S. in the last month. That seems to be sticking. We've also seen iron ore which has been unrealistically high given the disaster out of South America and other issues in China coming off rapidly. Coal coming off. So our challenges around these spreads, mate, is trying to give you a short-term outlook, which is not an easy thing to do. So I -- you guys are probably as good as us at guessing what you think that number will be based on your spread assumptions. We just tell you what we're using and that's about the best we can do for you, quite frankly.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [14]

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So is it fair to say your -- I mean your -- we do get the first half '19, you're annualizing -- what's that about, $1.7 billion EBIT?

And then your guidance for first half '20 is sort of annualizing, what, about $500 million? So draw a line down the middle?

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Tania J. Archibald, BlueScope Steel Limited - CFO [15]

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I'm not sure it's that simple.

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [16]

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Yes. (inaudible)

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [17]

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Yes, I know it's not that simple but -- yes. Okay, look, that's great.

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Operator [18]

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The next question comes from Michael Slifirski with Crédit Suisse

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [19]

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Three for me, initially.

So the Thailand appliance coating, are you continuing in that business or closing that line? Does that mean you're exiting it entirely?

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [20]

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Yes, no, we are continuing, Michael. What we have done is downgrade the expectations. The original thinking was that it was a market of, I think we've quoted numbers somewhere of 400,000 tonnes. Our expectation now is it's more like 100,000 tonnes. Market's changed, more imports from China, thinner gauge material.

The translation from original equipment manufacturers into product for us hasn't gone as we'd initially planned. So it's a much lower market. We'll continue with it. A product that's fit-for-purpose, a much lower market which is why we're idling the MCL1 line there.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [21]

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Okay. With respect to the comments about New Zealand.

I don't mean to be semantic, but sounds like you still expect 15% because that's what you demand in your businesses. But is that what you really expect the business can generate?

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [22]

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Yes, we do, Michael, and if it can't then there needs to be an alternative. We've, I think, demonstrated our ability and willingness to get in and make adjustments to businesses where we need to. So look, New Zealand had a bad half. It's not a good result. They are very well aware of that.

To Owen's question, we're less worried about the structural issues right now. But quite frankly, we're very focused on turning that business around and making sure that there aren't structural issues that would cause us to think about a bigger intervention.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [23]

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Okay. ASP, can you help us a little bit more on that?

In the term -- the commentary sort of sounds more positive than the EBIT guidance. You talk about the half completed having had the election uncertainty, significant de-stocking through the supply chain. So talked about a lot of things that were one-off that have now been resolved. But the guidance still looks weaker than what I think a few of us would have expected.

So are you expecting -- I think you talk about volumes being a modest improvement in the current half. Why only modest when there's sort of commentary around the prior half was it was fairly aggressive because of de-stocking and election uncertainty?

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [24]

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Yes. So I'm going to let -- I'll let Tania talk about the numbers.

Well, what I would say to you, and again, it goes back to my sort of half-response to Owen, it's really difficult for us. With the numbers moving around so materially and so dramatically, it's very difficult for us to give forecasts and an outlook number. All we can really tell you is that the assumptions that we are making.

What I would say though is we had a good start in July, as I mentioned. So the volumes were okay. I got asked by the media guys earlier why we were different to some of our peers. I mean, as Tania pointed out and you guys understand, we have a very different exposure than some of our building product peers. We're much more exposed to that high-rise segment. But we've started okay, and volumes seem okay. And anecdotally, our customers are saying, that still things look all right and certainly postelection, there was a bit of a fill up. There's no question about that.

So look, we made an assumption around the fact that we think we will get a modest improvement. With so much volatility, Michael, in the marketplace, we're not expecting that our big distributor customers, for example, will go wading back to the market. You know how they work. They wait and look for price signals. And if they think they've reached -- prices have reached the bottom, then they'll tend to buy up and restock.

We haven't yet seen that in terms of distributors wading back in to replace some of the de-stocking that we've witnessed in the second half. So that's my read on it anecdotally. Tania, do you want to add any more from a numbers perspective?

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Tania J. Archibald, BlueScope Steel Limited - CFO [25]

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Yes. I don't think -- there's probably the 3 other things to call out. Obviously, the blast furnace event that we had in early July. That's taken about $15 million off the outlook for the half. We just need to be able to look through that. It shouldn't be repeated.

Coke margins are definitely down in the half. I mean, the coke market -- seaborne coke market is very weak at this point, although we are starting to see some green shoots and our external forecast is pointing to the fact that would recover to a certain extent, albeit not necessarily in the half or perhaps towards the latter end of the half.

And then there was the pricing that we called out in terms of the $60 million impact and that's -- part of it's purely mathematical in terms of the destination mix to the U.S.

And then just the unwind of the favorable pricing impacts that we had in the second half '19. It's just obviously unwinding as you would naturally expect in the first half '20. So you sort of need to look through those 3 themes in order to think about the results of the Aussie business. I mean, the Aussie business is in good shape overall.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [26]

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Can you perhaps isolate or help us understand what that mix shift has done?

So less domestic volumes, less COLORBOND, more exposure to the export market. Can you isolate what that impact might be?

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Tania J. Archibald, BlueScope Steel Limited - CFO [27]

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So I think in terms of the domestic volumes, the domestic volumes were down in the half. But they were more than offset by higher export volumes and so that was part of the unwind of the working capital build from December.

In terms of domestic volumes going forward, as Mark said, we're not actually seeing the big distributors wade back into the market at this point. I don't think that level of confidence is there. So we're not seeing a huge uptick in the domestic volumes.

In terms of the $60 million if you're referring to that in terms of the split and that's just calling out the fact that when you do the benchmark calculations, a lot of people generally take it off the Southeast Asian spread benchmark. And of course when you're looking at the U.S. market, it's fallen by different rate to the Southeast Asian benchmark. So that's all that we are calling out there.

There's nothing changed fundamentally in what we are doing in terms of export and destination mix. It's just about how the relative benchmarks have moved.

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Operator [28]

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The next question comes from Peter Steyn with Macquarie Group.

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Peter Steyn, Macquarie Research - Analyst [29]

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Just briefly back on to cash flow and working capital, Tania.

Could you just elaborate on the impact of receivable securitization on working -- on the working capital numbers in the half? Is that sort of included in your $150 million comment, given that there was a $100 million change relative to a year ago on the level of securitization?

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Tania J. Archibald, BlueScope Steel Limited - CFO [30]

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No, it's not generally the securitization. I mean, the securitization program's been there for a number of years. I think there's only a modest movement in the half. So it's fairly modest.

No, it was just -- this happens from time-to-time. There's times, I think in the past, where we called out that we've had builds in working capital and this was just an unwind and part of it was a little bit tricky, in a sense that 30th of June fell on a Sunday, so you can get some unusual impacts when that happens. And we probably just outperformed in a few areas that we didn't anticipate. But it's really just timing.

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [31]

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Peter, you recall from the last half, Tania's being a bit modest. Her and the team did a fantastic job because we were -- we had a let it blown out at the last half, as you recall.

We were dealing with protected industrial action and a whole range of issues that caused the working capital to blow out. So it was a correction we had to make. The team has made the correction and made it and did a very good job of it. And then as Tania mentioned, we had a couple of things, like 30 of June falling on a Sunday. So people worked very hard to make sure they got paid on the Friday not the Sunday. And things went for us in this half.

But we did have a correction. We needed to make after the last half because working capital had blown out. So it was a good result but an appropriate correction from where we were.

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Peter Steyn, Macquarie Research - Analyst [32]

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Appreciate that. So would the intention be to continue to use those securitization facilities at their current level?

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [33]

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Yes, [they are] and it's basically pretty flat from half-to-half. We've basically been in that space for some time now. So not -- there's no material impact in the half because of securitization. There a -- as I recall, we've been in that process for some time. So there wasn't any material impact because of securitization in the half.

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Peter Steyn, Macquarie Research - Analyst [34]

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Yes, okay. And then just in relation to North Star and capital management more generally, just a quick question.

You note that about 50% to 70% of your spend will be in year 2. I assume that that'll be year 2 being FY '22 -- sorry, FY '21, rather. How does one think about the continuation of your buyback programs at this point in time, in relation to North Star?

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [35]

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Well, I'll talk at a macro level and maybe just qualify it a bit. Tania can give you some more detail.

Fair to say we're still working on the cash flow impact of the project. We've pushed the team pretty aggressively and our operational team, our engineering team are running what we call FEL 2 and FEL 3 consecutively, which is not something they would normally do. We've been pushing them hard to get into the market. We wanted to take advantage of the summer build period that we are coming into to get as much pre-work done as we can. So those final numbers in terms of the capital spend, I'm not even sure that we're absolutely certain how they're going to roll out yet, Peter.

What we are saying and have said is that we want to work on ensuring that based on the external markets that we support both the capital program and the North Star investment. Now if the world goes to hell in a handbasket, we'd have to think about that.

But this half, it was important for us to maintain both the capital management and get on with North Star. That would be our plan going forward. That, of course, will be driven by what's happening in the market. But we certainly have to be in a position where we can continue capital management and the investment in North Star.

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Tania J. Archibald, BlueScope Steel Limited - CFO [36]

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Yes, and that's fundamentally it. I mean it's -- the main consideration is looking at the strength of the balance sheet and making sure that we maintain that strong balance sheet. We'll work our way in a progressive manner towards the 0 net debt target. But we've always got an eye as what the outlook is. Clearly, a little bit lower in this half and so I think the balance of the net cash that we had at 30 June and the outlook that we have currently for the North Star CapEx, I think it all balances fairly nicely.

I mean, our overarching intent would be to maintain the ability to fund this project as well as maintain the other growth projects that we have. Whilst at the same time is delivering the appropriate returns to shareholders and we obviously do value a degree of consistency in there but it will always be making sure that we maintain that strong balance sheet.

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Operator [37]

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Our next question comes from Daniel Kang with Citigroup.

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Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [38]

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Just a couple of questions from me and probably an extension from the previous questions asked.

Just on ASP, I'm really interested in your comments on improving domestic volumes. Just wondering if you can shed some light on the market segments and products where you are currently see that strength?

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [39]

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Daniel, so I think as we went through the commentary, we talked about -- yes, we'd seen resi come off 7% or 8%. So that was the sort of level we talked about. We're seeing pretty good levels of activity in commercial and industrial and in the infrastructure space.

So I've touched on wind towers, roads, bridges, some of our new product applications. We're putting steel or competing against concrete in bridges. So there's a range of products. We've talked previously about our continued push into the material, again, with residential framing. And quite frankly, we're still confident, from a COLORBOND perspective, that there's still room for us to continue to grow in the base roofing market. And the new products and product development we put in that space.

So look, it's broadly based. We did see the de-stocking that we talked about and hopefully, there will be some benefit from that. The supply chain can't continue to de-stock, it needs to top up if the underlying demand continues.

So we're cautiously optimistic, as I think I said, that we'll get an increase in the second -- in the first half relative to the second half.

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Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [40]

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Got it. And you mentioned about the de-stocking in Australia that should start to bottom out. We've seen some restocking in the U.S. How -- where are we in that phase, in terms of restocking in the U.S? Are we close to the end of that restocking cycle at this point?

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [41]

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No, I don't think so. I mean, the anecdotal evidence we are getting from the sales and marketing team at North Star in particular is the -- that the service centers have got a couple of months of stocks. So they're in the lower end of the stock numbers. We -- Tania did a call in with our sales team there last week and the anecdotal evidence was that customers are still ringing saying, "Send me the steel now." So demand's still there which is good, but they also don't have a lot of it sitting in the shed out the back. So I think there has been such volatility in that pricing as it bottomed out at less than $500 a tonne.

It's now bounced back up again. I think people are waiting to see. Of course, we are coming into the winter period as well. So typically, distributors don't want to have a huge amount of stocks in their sheds. So I don't think the restocking is complete but I think the volatility is such that people are still cautious and not placing large bets in terms of restocking, would be my call on the U.S.

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Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [42]

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Maybe just one for Tania in terms of your -- you called out $16 million in unfavorable realized pricing from domestic lags and export pricing.

That surprised me a little bit. But if we had seen that a recent bounce back in pricing and spreads holds, should we expect this to reverse in the second half, the $16 million?

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Tania J. Archibald, BlueScope Steel Limited - CFO [43]

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There's a degree of normalization, so yes, what you said is broadly correct.

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Operator [44]

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The next question comes from Wei-Weng Chen with JPMorgan.

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Wei-Weng Chen, JP Morgan Chase & Co, Research Division - Research Analyst [45]

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Just a couple of questions from myself.

If we start with Australia, I was just wondering, what strategies BlueScope have in place to minimize the impact of iron ore prices and availability?

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [46]

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We don't have any strategies, mate, other than we -- I mean, we buy globally on global base prices. So we don't really have any strategies locally that we can put into play.

We're obviously always looking at adjusting our mix. So we'll bring different blends of materials in or different sources of material and they have both quality and cost impacts. So we play that game, depending on where we are from a volume perspective. That obviously has an impact on the blast furnace but we don't have any absolute strategies per se in terms of what we can do to drive a price differential.

From what we've seen, of course, obviously, we'd assume prices run up and they're now coming off pretty rapidly, quite frankly. So we get the benefit of that as we go through our bids.

But we don't have any specific strategies other than looking at different sources of material or different suppliers.

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Wei-Weng Chen, JP Morgan Chase & Co, Research Division - Research Analyst [47]

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Yes, okay. And then in the U.S., for -- we've seen a couple of blast furnaces idled.

Where are we now in terms of that? What -- are you guys expecting any further exits?

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [48]

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Look, the way we think about it, quite frankly, is our cost position and the competitive advantage, the freight advantage that our mill has, we think ultimately, will hold that business in good stead irrespective of what's happening to the cycle, quite frankly, which is why we're confident to go ahead with that investment.

The trend that we pointed out in the charts -- and I know there's a lot of information there, we skipped through it quite quickly. But we wanted to put it in to give you guys some more information and we can chat about it at your leisure. But the trend towards EAF is unmistakable, up to almost 70% now. That's a reflection of both the cost positions, cost position of EAFs relative to blast furnaces but also the improving quality.

One of the things that really stands North Star aside from even its EAF competitor and this a little technical, but we have a thicker slab at North Star than you typically do in an EAF and that manifests itself in a much higher-quality product, which is why our product is so sought after.

Interestingly, STI's latest proposal for investment in the southwest of the U.S. is going to be a slab not dissimilar in thickness to the slab that we put in when we built North Star in the mid '90s.

So we're in a pretty unique position with the quality of our product and product quality is something that we are very focused on in terms of the expansion. So we're comfortable, very comfortable with our cost position and we think our product quality stands us apart. Now what that means for ultimate capacity and what stays open and what shuts, we look pretty closely to our region and we feel comfortable with our position in that region.

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Wei-Weng Chen, JP Morgan Chase & Co, Research Division - Research Analyst [49]

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And then just the last question was on -- just the guidance of first half '20 in particular, the Australian business.

So you talk about lower -- You talked about it kind of in order, lower Asian spreads and then separate to that, you've got a $60 million unfavorable impact of realized pricing. Now just wondering what the actual dynamic was here? And then does this kind of unwind for second half?

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Tania J. Archibald, BlueScope Steel Limited - CFO [50]

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Yes, that's broadly correct. So more than half of it simply relates to the fact that the destination mix of -- the chunk of the volume goes to the U.S. The U.S. has fallen by further than the Southeast Asian benchmark, which is how most of the calculations are done. So you just got a movement there between the 2 benchmarks and that would change if the benchmarks move. That's more than half of it. And then the rest of it, the balance of it is simply the unwind of the favorable impact that we had in half 2 '19 on the domestic prices.

I think we've been describing for some time that we have a range of offers out in the market and what can happen if that -- as spot prices move higher over time. We take some time to catch up on that because of the huge variety that we have in the offers out there and that when prices come down, it then goes into reverse.

So on average over time, we follow the benchmark, but you just get some movements outside of the benchmark, moving from time to time and that's really what that is.

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Operator [51]

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The next question comes from Owen Birrell with Goldman Sachs.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [52]

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I just wanted to have a few follow-up questions. Firstly, starting with North Star.

You've obviously approved the project. I'm just wondering, if you can give us a sort of a better feel for a couple of details around that? Firstly, just should we be assuming commitments -- commencement of this project from August of '22?

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [53]

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No. We're commenced now. So the $50 million we talked to you about at the last half is well underway. So construction is actually underway on some of the facilities.

Our expectation is that we will have product in the market in late calendar '21. So we'll be -- have finished product in the market in late calendar '21, Owen.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [54]

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Okay. Excellent. And what's sort of ramp-up profile are you sort of assuming on that?

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [55]

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Yes. So look, the ramp-up profile is being worked on right now. We've assumed about 18 months to ramp it up to full capacity, the 850 that we talked about.

And we're working with the equipment suppliers and the team at North Star around that. Obviously, we want to ramp it up as quickly as we can. But at this stage, what's built into the model is about an 18-month ramp up, mate.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [56]

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Okay. And you're talking about equipment suppliers. Just wondering about the new caster.

How different will the new caster be to the original? I assume it's the only caster you've got running?

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [57]

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Yes, that's a good question. The caster's going to be identical to the original caster that we built. We want to continue to operate on the same levels. So it's a 3.5-meter caster as opposed to other casters that can be up to 5 meters. We wanted to keep it identical as much as we could in terms of not changing the layout of the caster floor, sharing of spares, all those sorts of things. So we're trying to keep it as close to the original. Of course, also just operating experience. Our guys know how to operate the caster that's there and operate it really well. So we're trying to keep it as identical as we can.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [58]

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Are you having [Sumitomo] rebuild that one or is it someone else rebuilding it?

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [59]

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No, it's someone else. So the Japanese connection that we had when we built the first one back in the '90s, that's now an engineering house largely that's based out of Japan. They didn't have the capacity to give us what we needed. So we've -- we're splitting the technology between SMS, Danielli and Downstream. In fact, the original downstream supplier of the tunnel furnace.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [60]

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Okay. And just finally, in terms of the economics of the expansion, are you able to give us a feel for what the fixed cost base will increase by? I noticed you mentioned 90 new permanent jobs but in terms of, I don't know, splits or dollar value, if you can just give a feel for how the fixed cost base of the business changes?

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [61]

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I mean the beautiful thing about this business, mate, is we have a very low fixed cost base and then largely, what we're putting on is just as I said, 90 people. So really no other major fixed cost in terms of overhead, management, sales because we are going to continue to sell this to our existing customer base.

There's no significant increase in fixed cost at all. And in fact, obviously, what it does is it drives down the overall cost per tonne. So that very reason, one of the attractions of a brownfield expansion.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [62]

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Sure. And just finally on the ASEAN business. Just questioning the decision to take MCL1 offline. Is that just to highlight -- I think that the demand environment across broader Asia is just not strong enough to support the portfolio based strategy that you previously talked about?

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [63]

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Well, I'd highlight 2 things about Thailand because we sell in-market. So it highlights the fact that the original thinking around putting the new MCL3 into support, the home appliance market was over-egged, as we now understand.

So literally, 200,000 to 300,000 tonnes of appliance volume that we expected when we built MCL3, we don't believe is achievable at this stage. And yes, a softened market in Thailand. We don't really export out of Thailand into other markets. So it's not the right conclusion to draw a decision that were taken around MCL1 in Thailand reflects other markets in Asia.

But it certainly reflects the fact that we've got it wrong on home appliance within Thailand and the fact that the Thai market is still not as buoyant as we would like it to be. So that's really what it reflects, mate.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [64]

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Now I'll just follow-up on that business.

Just wondering if you can give us an update on how the cost out strategy is going there?

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [65]

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Cost out's on track. But I think as I said on the way through, we've seen in quarter 4 the run rate start to kick in from a cost perspective. And certainly, the July results have vindicated our thinking around the cost out plan as well.

Charlie and the team are on it. A bunch of people have left the business. So it's -- we can see it, it's real and the run rate numbers that we've seen in the back end of Q4 and into July are encouraging for us.

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Operator [66]

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The next question comes from Jack Gabb with Merrill Lynch.

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Jack Gabb, BofA Merrill Lynch, Research Division - Associate [67]

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I mean, just one quick question for me.

Your first half outlook guidance, I guess, has an East Asian HRC price of 510. That's obviously a little bit above spot we, which you called out 490. Just wondering how conservative you think that is, just given we're likely going to a seasonally weaker pricing period towards the end of this year. So 510 might be a bit optimistic.

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Tania J. Archibald, BlueScope Steel Limited - CFO [68]

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Yes, that's exactly -- thanks for that.

There's probably a few moving parts there. Whilst it might be slightly on the optimistic side, we've probably got some variations as well on iron ore and coal.

At the moment, what we do is we tend to look at the -- we've aligned our external forecast when we pulled together that forecast, it's clearly been moving quite a bit. I think it's only recent weeks that it sort of the hot rolled coil prices moved down, but as has the iron ore quite rapidly and the coal.

So I think, when you think about the lags through our business, we would see, potentially, if spot were to stay where it currently is, you would start to see some impact towards the back end of the half. Clearly, it's mitigated because of the lags in terms of what would see. But we would be cautiously optimistic, I'd say, around the outlook.

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Operator [69]

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Thank you. There are no further questions at this time. I'll now hand back to Mark for closing remarks.

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Mark Royce Vassella, BlueScope Steel Limited - MD, CEO & Director [70]

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Thank you, thanks, everybody. We understand it's a busy week in the reporting calendar, so we are grateful for your time and we will see you over the next few days. Thanks a lot.