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[Luyện nghe giọng Australia] transcript, BSL Full Year Results 2008 - Mr Paul O'Malley, MD and CEO

[Luyện nghe giọng Australia] transcript, BSL Full Year Results 2008 - Mr Paul O'Malley, MD and CEO

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MONDAY, AUGUST 18, 2008, 10:00 AM.

BSL Good morning everyone and thanks for coming along to BlueScope Steel’s Full Year Results presentation. To those of you who have had access to the

10 Internet, we have published our results this morning obviously and did an ASX release. There are copies in the room of both the presentation and also the ASX release.

Just to introduce the team that is here today, we have got Charlie Elias up on

15 the podium, our Chief Financial Officer, and most of the management team of BlueScope Steel in the front here as well. So during the Q&A, I will be trying to flick as many questions to the team as possible.

In terms of an introduction, we have had a very strong year in fiscal year

20 2008. Basically off the back of good steel demand both in export markets and in our domestic markets, and I will talk about that in a little bit more detail. Just to give a sense, we are entering fiscal year 2009 in a similar manner to the one we came out of fiscal year 2008, so still strong demand and continued good performance.


We always focus on safety at BlueScope Steel and the charts continue to demonstrate that that focus on safety is improving our safety performance. During the last 12 months though, we had a contractor fatality at Port Kembla Steelworks. That was a very challenging time for the family of the contractor

30 killed, but also for all of the employees and contractors at the Steelworks. We had stopped for safety across all of our sites globally. We continue to try and focus so we continue to focus on being as safe as possible with our goal of Zero Harm continuing to be what we are driving towards.

35 We had a number of acquisitions during the year, two major acquisitions and a smaller one. That has changed the mix of sites that we now have in the business. In the chart, you have got up here on the slide, you can see that -- if you look at the BlueScope Steel performance of the incumbent businesses, about 0.6 LTIFR and 4 for MTIFR, the acquired businesses coming to the

40 portfolio with a very different safety record, and that is not uncommon given our very strong performance. When we buy businesses, they come with a very different perspective on safety. So one of the first things we do is we put a significant investment in the form of safety professionals, experienced operators and investments into those sites to bring down those safety -- well

45 basically to improve the safety performance.

We have increased our employees by 25%, we are up to 21,000 employees, and we increased dramatically the number of sites. We have people now who are interacting with steel a lot more in the distribution business but in also the downstream businesses that we acquired in the United States. As a company, we will continue to focus on Zero Harm. It is our number one priority.

5 Sustainability is very important for us as a company. It is obviously very important for Australia. It is a real focus in Australia. It is a focus in Asia and a focus in our US operations as well.

Water conservation is very important, freshwater, with the drought in

10 Australia. We have halved our freshwater usage in our operations at Port Kembla. We have got a project underway to reduce dramatically our freshwater usage at Western Port in Victoria. There is a lot more information on that in the supporting information. We have talked about this in the past.

15 Greenhouse gas emissions are fundamentally important. Back in 1995, we put a cogeneration facility into the steelworks in New Zealand and that reduced by half the amount of external electricity we needed to support that facility. We are looking at a significant project in Port Kembla Steelworks, the steam cogeneration project I will talk about in a moment. But just to

20 summarize where we are at with BlueScope Steel in greenhouse gases, we produced about 12.5 million tonnes of CO2 or CO2 equivalents a year. Eighty percent of those emissions come from the steel-making process, and it does not matter whether you make that steel in Australia or overseas. Those CO2 emissions will be released into the atmosphere. We are as efficient or as

25 good as any steelmaker in the world in producing steel and minimizing our CO2 equivalent emissions.

So ultimately a policy coming out, the Green Paper for greenhouse gas emissions and what is now the carbon pollution reduction scheme, we believe

30 needs to address emissions intensive, which is BlueScope, and trade exposed, which is BlueScope. We have certainly been put in that category in the Green Paper which has a good outcome. What is important though is that post-2020 that the emissions-intensive trade exposed-perspective continues and that it is not assumed that everything will be all right come 2020, which is

35 one of the issues in the Green Paper at the moment.

Of that 12.5 million tonnes of CO2 emissions, if you took the Green Paper, about 90% of those would be allocated free permits. We do not know what the trajectory is yet, but we are working closely within the government

40 processes to ensure that the government has all of the information they need to make an informed decision when it comes to BlueScope as an emissions-intensive trade-exposed business.

To the group results, the headlines, revenue up 18%, basically very strong

45 demand, but also the acquisitions. EBITDA on an underlying basis up 19%. We have all of the reported numbers in here as well and Charlie will work through a reconciliation of reported to underlying, but that is all very clearly spelled out in the ASX release. EBIT is up 20%. Net profit after tax on an underlying basis up 27%. EPS up 23%. It has been a very good year. Very pleasingly, gearing is down to 30.4% so just a bit of a track record there. After the IMSA acquisition in February, we touched 40% in gearing. Since February, we have taken 10 percentage points out of that gearing, a very strong focus on cash management. Of that 18% increase in revenue, we

5 have actually released working capital. So our working capital efficiency has improved dramatically. The Board made a decision to increase the final dividend by 1 cent, so in total, our year-on-year dividends are up 2 cents.

Where we are focused going forward is on three aspects of our business,

10 what is the underlying cash generation and part of that will be a very continued, very strong focus on working capital. The second one is the capital program. Reinvestment in the business and growth. The third one is maintaining the integrity of our balance sheet, which is something that we intend to continue a very robust focus on.


The cash flow slide, and Charlie will talk to cash in a little bit more detail, but what I like about this slide is the fact that we had the substantial increase in revenues and we have had a net working capital release. There are not too many organizations who can talk to that. The management team, our

20 employees at steelworks in particular and our Australian operations have really focused on key working capital metrics. We are not where we wanted to be over the next couple of years, but we are certainly well down the path on improving those key metrics. We have made the comment in November of last year that we were going to improve our working capital by $200 million.

25 We used a set of metrics internally to measure that. If you look at a working capital release on a big increase in revenues, we have more than done that, but what we are basically saying from the scorecard perspective is that we have delivered half of the $200 million of working capital reductions. We have got 100 million to go. We are ahead of schedule and we expect that we will

30 nail that target.

Basically, to summarize the major headlines, very strong domestic and export demand. That certainly was the case through the second half of last fiscal year and it is the case as we stand here today. The way the business is

35 operating at the moment, whether it be in Australia in our export markets or in the United States, is that we still have very strong demand. The markets that were strong or the areas of domestic industry or US industry for that matter that we have been selling into that have been strong for the last six months continue to be strong today. Spreads, one of the things we have faced is

40 increased cost, and we are seeing increased costs into this year as well particularly around raw materials. Export pricing in particular has been able to cover those cost increases. When you have strong demand, something that you absolutely need to focus on is production. We have had record production across many or most of our facilities. Basically, the team at

45 BlueScope has been doing everything it can to meet that market demand, and I will talk to that in a moment. In our Asian businesses, across the board, we have had improvements. We have had better yields. We have had better productivity. We have had better styles. We have had improvements in our tier 1 sales. So the Asian performance, and particularly by the three key businesses there, Thailand, Malaysia and Indonesia, is going well. China, we are continuing to turn around the business in China. We are starting to see some benefit from that. Notwithstanding all of the doom and gloom in the United States, our businesses in the US are doing well. So we have been

5 particularly pleased by the acquisitions that we have made in the United States.

I will talk to the dividends. You understand that our Board and our management team continue to be very focused on getting cash back to the

10 shareholders and that is the focus that will continue. Despatches are up over 8 million tonnes from 7.5 million two years ago. Obviously, the distribution/acquisition in Australia has increased our flowthrough of product. But basically, as I probably said this five times already, demand has been good.


In terms of the segments in Australia that we are selling into, the building and construction, which is the green parts of the chart, are up to 62% of our despatches from 59%. We are still seeing increased demand particularly in the industrial, commercial and mining space. Residential demand is still flat,

20 but it has been flat for some time. We think that there is probably a million dwelling units in Australia that need to be built over the next five years. We are not seeing them being built at the moment. But at BlueScope Steel at the moment, we have record production, we have got record demand and we have got that flattest housing environment we have had on the east coast

25 ever. So if you look at our portfolio of opportunity, if there was to be an increase in residential demand, and I am not forecasting it at any time soon, but I am telling you that it is needed, then we will get some benefit through that at the moment but that is not reflected in our results.

30 On the manufacturing sector, a point to note there is that if you look at our pre-existing BlueScope business before the Smorgon distribution/acquisition, our manufacturing percentage of our despatches was about 14%. It remains at 14%. The increase in 5 percentage points to 19% is a result of the broader product mix that we get through the BlueScope distribution business. So

35 again, things continue to be robust in the domestic marketplace.

I will talk to the Blueprint in a moment.

Just to focus on the acquisitions, in 2004, we bought the Butler business. It is

40 performing way beyond our expectations today. In the last 12 months, we bought the IMSA business in the United States. Steelscape, in particular, our business that produced only 5 million bucks of EBIT in the six months before we bought it, has increased its EBIT by over $30 million in the past five months, over that 5 million, half of it as a result of market conditions, half of it

45 is as a result of decisions we made on where to move products in the US market that have not been made before our ownership. So there has already been a better than expected outcome there and we see some significant opportunities in cost reductions and efficiency improvement as we bring the Varco Pruden and Butler Buildings businesses together.

I will talk to the global steel industry in a moment, but I think it is good news as I talk to that.

5 In terms of the blueprint, I think you have seen this slide before. Basically, the metrics that we are managing our business at the moment are very clean and clear within the business. We are compensating our people around those metrics. I would tell you as we started measuring the metrics and backdating them about 12 months ago to where we are today, just in metric

10 improvement, there is about a 60 million EBIT improvement as we focused on those metrics. Some of that you would have already expected in the results. But we are seeing some better granularity of management within the business as a result of that very clear and concise focus on metrics and as a result of the fact that our bonuses are being tied to performance against those

15 metrics. There is information here about what we are doing within the blueprint and the rigor around the project management office, and I have mentioned that we have already delivered $100 million of the working capital reductions.

20 So moving forward, it is all about continued focus on the core value drivers of the business, whether that be in Australia, the United States or our Asian businesses. Where we go to next with the blueprint is the focus on the growth and how to be more specific about our growth opportunities. So we will talk to you about that over the coming months.


On the 12th of May, we gave you a very detailed briefing on the market. To put the results in context today, we have probably done a little bit better than we expected in May, and that is because demand was perhaps a bit stronger than we expected and the export pricing was probably a little bit more robust

30 than we expected as well. So I think we have kept you, the market, pretty well informed of our performance, probably done a little bit better than we expected.

Just to break the results up, the fiscal year 2007 EBIT at 1 billion and 57

35 million. The coated and industrial products market segment, which is the old hot rolled products, Australia, an awesome business, has performed better year-on-year. The distribution and solutions business has done well. New Zealand steel is a bit flat. I will talk to that in a moment, but basically slightly softer residential demand in New Zealand, much stronger agricultural

40 demand with the strong agricultural segment over there. Basically, with exports in New Zealand, we can sell everything that we can make and it is a pity we do not have some more capacity there. The Australian business, as I mentioned, every single segment, every single business in Australia is improving year-on-year, which is good. North American hot rolled products, it

45 is all about the spread coming out of (inaudible) (0:14:57) and electricity prices. So the spread came down in fiscal year 2008 relative to fiscal year 2007, but we are seeing pretty strong spreads at the moment in North America. The coated and building products business in North America, that is an outstanding performance from the Butler business. It is also the IMSA acquisition. The corporate and group results, my colleagues gave me a hard time with that corporate cost, but it is actually around the inventory that we sell at our Port Kembla Steelworks to Steelscape in the United States. Before we acquired Steelscape, we booked the profit at the moment -- we basically

5 realized the profit when the product was dispatched from Port Kembla to head to North America. Now that we own the Steelscape business and we have increased the sales to our Steelscape business, the profit can actually be booked until the despatches leave Steelscape. So there is a period of a one-off adjustment basically in product that now stays within our business

10 longer as with any more product to Steelscape, and up to 1.2 billion in terms of EBIT.

If we actually deconstruct that performance and understand what sits behind the improvement, if you look at the spread for our businesses, it has improved

15 by about $350 million. Three components to spread: Export pricing up by $450 million. BlueScope Steel is an outstanding exporter. We can sell, as I mentioned, all of the products that we can make. We are driving record production and our export customers in particular are screaming for more product. We cannot meet their demand at the moment, but we will do

20 everything we can to improve production. Domestic prices only up a little bit year-on-year. Raw material costs have increased. As you can see, 2007 to 2008, iron ore costs went up. Coal costs actually came down. Scrap and alloy costs were on the increase. As we move from 2008 to 2009, our raw material costs, specifically coal and iron ore, will go up by about $1.2 billion. Our total

25 raw material costs, when you take alloys and scrap into account, will increase by about $1.6 billion. The pricing environment in the global steel market at the moment is offsetting those cost increases.

So in essence, if I were to summarize it, there is very strong steel demand

30 globally that is driving a very strong demand for raw materials, so both of the prices are going up. In the export market, you are basically offsetting each other. A little bit more challenging in the domestic market, but the export market has been very good. In terms of North Star BlueScope, as I mentioned, that is the spread. Cost escalation is a challenge across the entire

35 business. Labour costs are going up. Electricity costs are going up, not just in Australia but globally, so we continue to work on cost reductions, but productivity improvement is a really important part of our business as well. Freight is a big cost increase at the moment. Exchange rates, we went from an exchange rate in the 70 cents to high 80 cents from 2008 to 2009, up to 98

40 cents not so long ago, back down to the 80-cent range at the moment. Charlie will talk to the sensitivity to the exchange rates, but we will get some benefit by the drop in exchange rate over the past couple of weeks.

So basically, in summary, the engine room of the business is doing well. We

45 have got to manage our costs. We see demand continuing to be quite robust.

Specifically, if I just highlight some of the segment performance, I mentioned the production records at Port Kembla Steelworks, slab, hot rolled coil, plate, metal coating, all working well. I need to thank the team for their wonderful performance.

The domestic demand, the mix of our products has improved over the past 12

5 months as well. As part of the blueprint, we wanted to focus on our customers, we wanted to meet their demands, we wanted to be responsive to their requirements. What we have seen over the past 12 months is a bit of a structural shift that you would have seen two slides earlier. The mix of sales has moved more to the value added, which is a good thing for our business.

10 So metal coated product in particular but also very strong demand for plate.

Just on the cogeneration project that I mentioned earlier, we have given you our previous view that the cost of that project would be between $700 million and $1 billion. It has been in feasibility for some time. It is pretty much a

15 completed feasibility, but we have a big question mark as to what the scope of that project should be. We will not know how to scope that project until we have certainty around the carbon pollution reduction scheme. The way to think about that now is we have actually deconstructed it from a single project, in essence, to a number of subcomponents. There is a component of

20 that project that is absolutely about replacing equipment that needs to be replaced, the boilers and the like. There is a part about adding a cogen facility which would make BlueScope Steel energy or electricity self-sufficient within our Australian facilities. There is a third part which is about capturing all of the CO2 equivalent emissions and using that in the cogeneration facility. As we

25 look at the scope of that project today relative to the guidance we have previously given you on cost, it is now over $1 billion because of cost increases but also scope changes. What we are basically going to say though is that the Board is not going to approve that project until we have certainty around the carbon pollution reduction scheme. We will do the project within

30 our ordinary capital expenditure profile over the next five years. But we have committed to some long lead-time items, particularly around boilers, and we will be making some financial commitments this year. But basically, what you need to put in your model is the cost of around $1 billion if not a little bit higher, but I cannot give you definitive view or scope until we understand how

35 the CPRS is going to operate.

Some information on this slide on raw material cost increases. It tracks fines, coking coal and semi-soft coal prices. You can see the unit price increases, and in the supporting information, we have given you details of our actual

40 volumes of consumption. So you can work out all of the maps on specific costs for our company.

The Australian distribution and solutions business, we had a really tough first half, we had a better second half. As I mentioned, it has certainly helped us

45 get better insight into the market, having that business. We see some cost reduction opportunities which we have been working through around our sheet and coil processing, particularly in South Australia at this stage, but I think a very good finish to the year in that business.

In New Zealand, as I mentioned, the residential market is a little bit soft. The industrial and agriculture segments are doing fine. Exports are good. We did put out a release to the market in July. We had a technical problem with the melter in the front-end of that business. We lost about 20,000 tonnes of

5 production. The details are at the bottom left of the slide. But that is basically going to take about $15 million of EBIT out of the New Zealand results for this year. As you look at the last two years’ results, 2007 and 2008, 90 million in 2007 and 85 million in 2008, basically our coal cost increases have knocked us on the head there a bit. At the moment, we are in the process of

10 renegotiating our arrangements with our coal suppliers. Cost escalation in mining is actually going to flow through to our coal cost in 2009.

In terms of Asia, an EBIT of $76 million. It is an improvement on last year, our second half. It is a good improvement on the first half. The Thailand business

15 is going well as are all of them. But basically, it is around stronger demand and better quality product request by our customers. So if I look to Thailand, the stability in the politics there with the elected government, they have actually been able to spark some infrastructure improvement. Our Lysaght business has been able to sell plating into some new rail stations on some rail

20 lines that are being built. Politics in Thailand is always fluid, so there are still some ups and downs there at the moment, but the business is doing well. Indonesia, we are selling about 170,000 to 180,000 tonnes of products there out of our Indonesian business that has a nameplate capacity of 100,000 tonnes and is producing at 110,000 tonnes. We are bringing products from

25 our Vietnam business to help meet our market demand in Indonesia. So the MCL2 expansion is an investment decision, I think, that will pay dividends. The Indonesian business, like Indonesia, is still growing and demand is strong. The Malaysian business is performing well. Vietnam is an interesting one. We are actually making profits out of Vietnam. We made the impairment

30 on Vietnam. We made the impairment at the metal coated facility in China. The performance of the business at the moment is at expectation, so there is no risk of any further impairment there. Inflation is very strong in Vietnam, but we are still seeing foreign direct business investment coming in. We are still selling some product into that, which is good. In China, the PEB business is

35 plugging along, still challenging in the coated business. The Lysaght business, which we did a good job a year-and-a-half ago or two years ago of running into the ground, we are still working on turning that around. That will pay off over the next year or two, but it is going to take a little bit of time to rebuild customer relationships there. China is tracking on record. India is still

40 very strong downstream demand. The metal coating line is still being under construction, probably taking a little bit longer than we expected. I think that is the nature of JV sometimes. But the demand for steel in India is very strong. It is an interesting market though at the moment, with government price caps. It is making it hard. Basically, India should be a net importer of steel at the

45 moment because they cannot meet their own internal demand. The government has put restrictions on exports, but they have also put price caps on domestic sales, which is making it hard for exporters to send products to India at the moment. So I am not sure how that is going to play out, but we still see strong demand, just an interesting one as to what is happening in the Indian market at the moment.

Hot rolled products in North America, I have spoken to that. That is basically

5 about spreads. I would mention at the Castrip business, Nucor is into development of its second line and its first Castrip line is producing products and selling it at a profit. So we are looking at the Castrip joint venture as something that we really need to turn up the heat in terms of commercialising that technology.


The coated and building product business in North America. Just to highlight, the Butler business was a good acquisition. I think the IMSA business is going to turn out to be a very good acquisition as well. The products that we are selling into the market still have strong demand. The cost base gives us

15 opportunity to rationalize, and we are actually learning from the integration as we speak. So there are some opportunities that we have seen coming out of the businesses in North America as we put them together that we are actually going to move across to Asia as well, so a very exciting opportunity.

20 We are the biggest PEB provider or steel pre-engineered buildings provider globally at the moment. Just to put the US market in perspective, we probably got about a 30% share of the metal buildings market in the United States. But the metal buildings market is really not a market. The metal building sales is around $3 billion to $4 billion a year. But metal buildings compete against tilt-

25 up concrete and other structures in a market of $16 billion to $20 billion a year. So we are a very small component of the big market and we see an opportunity to take share as we lower our cost base, improve our product as we take it to market, leveraging off the capabilities of both Butler and Varco Pruden. We see a real opportunity there and we expect that we will absolutely

30 deliver on the synergies that we have committed to.

In terms of the global steel industry, I know there are concerns in the market at the moment about China, whether it is for Olympics or whether it is more structural. There were some strong exports out of China in July. We basically

35 see there may well be some slower growth in China, but the demand for steel still continues to be very, very strong. The demand for steel in India, Russia, and Brazil is actually increasing. The way that demand has been met over the last three or four years has been by new production capacity coming on in China. The increase in production capacity in China is slowing and demand

40 for steel continues to be very, very strong. So we (inaudible) (0:28:16) the demand-supply dynamic as remaining quite tight. There may well be some short-term changes in supply-demand, but I think if one looks through the next 6 or 12 months and the next three to five years, there is absolutely no reason why the steel demand will not stay strong given the growth of the

45 BRIC economies. So any concern about the July gross exports I think is a hiccup rather than a trend.

In terms of the importance of the developing economies, just to kind of reinforce that point, what this slide basically highlights between 1995 and 2005 is that GDP has increased from 34,000 billion to 45,000 billion and the developing economies have moved from 41% of that 34,000 billion pie to 47% of a bigger pie, and in 2015 expected to be over 55% of an even bigger pie. Understanding the demand in the developing world for steel is core in

5 determining what is going to happen to steel prices. China has been the swing producer to meet that increasing demand. Bringing on steel plants in Brazil, Russia and India is much slower than China. With the production slowdown or the increase in production capacity in China, that is fundamentally why I think that the tightness will stay in place. To the extent

10 that there is a post-Olympic effect in China, which is something that one worries about, it has certainly happened in Sydney, it happened in Seoul in South Korea, you still got Brazil, Russia, and India going flat out, so just to put that in perspective.

15 I would now like to hand over to Charlie just to take you through the financial results.

BSL Thanks, Paul, and welcome, all. Paul has gone through the results on a segment-by-segment basis and we (inaudible) (0:30:14) full update on May

20 12th and include it in the pack as well, some facts on the key highlights and some of the drivers of the earnings. BlueScope has a history of solid earnings performance and the earnings are leveraged to steel price spreads. Underlying net profit after tax is up 27% on 2007 delivering an earnings per share of just under $1.10. The revenues in 2008 are up 19% or just under

25 $1.6 billion, a result of three factors predominantly, increased prices for our exports, the acquisitions of IMSA, BlueScope distribution and HCI and increased volumes across all our regions. Pleasingly, our second half performance in 2008 is up 60% on the first half providing a momentum into the first half of 2009.


Turning to a reconciliation of reported to underlying EBIT, the second significant reconciling items include asset impairments of 251 million, the majority of which we reported at the half year and again on May 12th. These impairments relate predominantly to the China or Vietnam coating lines and

35 Lysaght Australia, 128 million on the profit on sale of Smorgon distribution shares, restructuring and redundancy costs of (inaudible) (0:31:32) of 32 million and 62 million relating to the integration costs and the elimination of profit in stock of IMSA and BlueScope distribution. Full details of the reconciling items are included in today’s ASX earnings release and again in

40 the supporting information attached. Further details are actually on this next slide, with respect to both net profit after tax and earnings per share.

BlueScope generates strong operating cash flows as Paul indicated, and historically, operating cash flows have been either reinvested into the

45 business and applied to maintaining a target capital structure. 2008 has been no exception. A very strong operations results have seen operating cash flow increase by 16% to 1.65 billion with over 1 billion generated in the second half alone. Further, working capital has reduced, notwithstanding a 1.6 billion increase in revenue, consolidation of the acquisitions and the challenges of rising steel prices and raw material costs. Pleasingly, year-end gearing is up only 2% on fiscal year 2007, although 2 billion was reinvested in the acquisition growth and capital expenditure of the 2 billion, 1.6 billion related to M&A growth.


The balance sheet is extremely strong and capital management continues to be a solid focus of BlueScope. Gearing is 30%. It is at the low end of our target range of 30% to 35%, notwithstanding the M&A acquisition growth. Gearing started the year at 28% and rose to 40% post the IMSA acquisition in

10 February 2008. Gearing has reduced 10 percentage points on the back of strong operating cash flows and working capital management in the last five months.

BlueScope generated positive working capital despite the addition of the

15 acquisitions, the higher steel prices and rising raw material costs. We remained focused on driving working capital improvement but driving efficiency in the physical supply chain, increasing efficiency in the financial supply chain by focusing on the key KPIs of days outstanding, the receivables, payables and inventory, and monetising surplus assets,

20 particularly surplus property.

Today, as part of the blueprint initiatives, we have released over $100 million in working capital out of a target improvement of 200 million, 12 months ahead of plan.


Paul highlighted a number of our potential capital expenditure programs, including the steam cogeneration plant. We have actually further highlighted these in the Appendix in the attached supporting information. We will manage our total capital expenditure going forward, including the steam cogeneration

30 plant within the continued focus of maintaining a strong balance sheet and solid capital structure. A strong balance sheet is not only vital in the current credit market environment, but gives BlueScope the financial flexibility to be opportunistic with respect to acquisitions should they arise.

35 Specifically turning to our debt position and refinancing. During the year, we successfully extended our debt maturity profile with the 650 million extension of the one- and three-year Loan Note Facility, a US$325 million private placement issue with maturity profile of 7 to 12 years. As you can see from the graph from the top right-hand corner, we have a significant refinancing

40 task in 2008. We not only were able to refinance the debt but extended the maturity profile, and as per the graphic in the bottom left half of the slide, significantly reduced future refinancing risk. Pleasingly, liquidity is extremely strong at year-end, standing at over 1.2 billion, and the underlying EBITDA interest coverage ratio is over 12 times, again a positive in the uncertain

45 credit environment.

EBIT remains sensitive to realized hot rolled coil prices, raw materials and the exchange rate. As we have done historically, we again provide an update as to the estimated EBIT impact of key assumptions. From the graph attached, you will note the following changes. In 2009, a US$25 per tonne movement in the average realized hot rolled coil prices has a $65 million potential impact on EBIT or about $20 million less than the 2008 number. The reduced sensitivity is due to the No. 5 Blast Furnace reline project that Paul mentioned

5 in the second half of 2009, which results in reduced export slab and hot rolled coil export sales. The 1-cent movement in these exchange rates changes the sensitivity to 5 million EBIT from 14 million in 2008. Again, lower US dollar export sales are forecasted in 2009 as a result of reline. A $10 per tonne movement in iron ore costs due to low iron ore purchases in the second half

10 changes the sensitivity to 74 million from the 90 million in 2008. Full details of the impact of the reline in the second half 2009 were discussed with the analysts at the Port Kembla site visit earlier this year and the full details included on our web site and the supporting information attached to the presentation.


I will now hand it back to Paul to summarize and provide an outlook for fiscal year 2009.

BSL Thanks very much, Charlie. I did not talk a lot about blast furnace reline. It is

20 a big factor in the second half. The team had done all of the planning that one could ask of them. They continue to monitor the operations at the blast furnace. But it will impact our despatches in the second half.

So just to summarize fiscal year 2008, a very strong financial performance,

25 excellent operation performance, record output across many facilities, very strong demand for our product in both domestic and export markets, continued tightness of supply and demand in steel, gearing at the bottom end of our optimal range, the acquisition is on track, and blueprint projects very much a focus of where we are going to go in the business.


In terms of the outlook for fiscal year 2009, or first half in particular, we have started the first half probably better than we finished the fourth quarter of last year. We expect that the margins in the first quarter will be slightly up on the fourth quarter of last year, predominantly because the inventory benefit of

35 having product of low raw material costs but also the pricing environment, our realized prices in the first quarter, given the way to price increases in the export markets in particular worked in fiscal year 2008. The realized prices in the first quarter of this year will be slightly higher than the last quarter of last year. We actually see demand remaining strong in all of the markets. We

40 have had strong demand over the past six months or the next six months. It is a bit hard to see beyond six months, but the business is looking quite strong - well actually the business is looking strong at the moment.

We have got to manage the No. 5 reline and all plant upgrade project in the

45 second half, two major capital projects, and we have got to deliver on the synergies, and that work is well and truly underway.

So on that note, I would like to thank you all for coming. I would like to thank everyone within BlueScope for delivering a very good year, acknowledging that we did have a fatality which, when it comes to Zero Harm, that is about the worst thing that could happen and it has been a tough time for everyone at the steelworks. But we look forward to a safer 2009 and also a good performance into 2009 as well.


So I will hand it over now to all of you out there to ask questions.

Q Mike Harrowell, Merrill Lynch. Three questions. One, could you tell us what Australian dollar currency those sensitivity metrics were calculated on? The

10 second is, what would you attribute as the driver behind the easing of steel prices currently given your statements about demand and talking about the Asian regions particularly? Thirdly…

BSL Sorry, Mike. Could just say that one again?

15 Q Yes, sorry, the easing of steel prices currently, given your statements about demand being strong, how would you reconcile the statement about demand with the easing of steel prices? The third one is just a turnaround in the Australian solutions distribution business relative to the first half which would have included the Smorgon’s business., if you could just sort of take us

20 through why that business turned around so quickly.

BSL Sure. I will get Charlie to answer the currency one in a moment. In terms of steel prices currently, as you look at all the indexes today, they might be a bit softer this week, last week, the previous week. But as you look at our businesses, we set prices to the three months ahead or a month ahead so

25 the prices we are seeing in our business at the moment reflect the prices that were locked in two, three or four months ago. But that kind of is not the full answer. The full answer is that the prices are at pretty solid levels. They go up a bit and they have come off a little bit, but they are still at records and certainly substantially higher than where they were 12 months ago. What is

30 driving that? Still very strong demand, certainly higher input cost. So the cost to making steel is certainly going up, but I think it is basically the changes around the margin mark. It is the way I see it at the moment.

In terms of the solutions business, when the Smorgon Distribution came into

35 our business, we experienced a fair bit of margin squeeze in that business. We have been able to get in the second half back to probably not quite what a more normal margin, but certainly a much better performance to get back to what one would expect out of the distribution business. The other business that is part of that segment is the Lysaght business. They do see some

40 softness in the residential segment and that has been ongoing for some time. There are plenty of infrastructure projects out there at the moment, but the Lysaght business is facing some pretty strong competition. In terms of the currency…

BSL Mike, in terms of the exchange rate, the sensitivity actually only slides first to

45 the Australian dollar-US dollar exchange rate which is the predominant exposure in our business.

BSL I think it is US $25 at that time.

BSL Ninety-two cents, Mike.

BSL Ninety cents or so.

Q Good day. Mark Greenwood here. I just want to see if you could extend on your ability to pass through high fees of cost to customers in what was known as the former Coated Products Australia business. I noticed you had quite a strong half, and if you break that into a third quarter versus a fourth quarter

5 based on your guidance that you gave in May, a pretty strong fourth quarter as well. I wonder if you can give us an update on the challenge of passing through those high costs.

BSL I might get Paul O’Keefe to talk to that in a moment, but I will have a crack to start with. So there are two broad segments indicated in the old coated

10 business, I guess. If you look at the back of the presentation, we provided waterfalls as well (inaudible) (0:43:04) so there is detail there. Still very strong demand in the market place for the products coming through that business, what tended to be hot rolled coil, metal and metallic coated and painted. The commodity products, there has been very strong demand for those products.

15 International competitive prices have risen to reflect the higher cost structure. It also is in line with our higher cost structure coming through raw materials, but basically alloy cost and scrap and the like that flows through in the hot rolled coil. Fundamentally, it is hot rolled coil cost going into that business. In terms of the inter-material competitions, still unable to pass through all of

20 those costs so there is absolutely margin squeeze in that part of the business.

Q Are you pushing through price rises in that business?

BSL We are trying to be competitive with the market at the moment. We are seeing price increases in most of their markets, and given our cost increases,

25 one of the things one has to try and do is to cover those cost increases. In some areas, it is easier than others and one has to be very sensitive to customers. We are about trying to have long-term relationships with our customers and work with them through the cycle. So for those customers who have been loyal to us, we are certainly trying to do our best to meet their

30 requirements and be sensitive to price. But our cost structure is increasing dramatically and we would not be doing our job right if we were not trying to recover those costs. Paul, do you have anything to add?

BSL Thanks, Paul. Mike, the only thing I would really add to that is that in terms of the increases in the brand of products, later on the year we will have price

35 increases in single digits for Colorbond and Truecore. But as Paul indicated, we will not be in the position to recover the raw material cost as far as our brand is concerned. In terms of the commodity type, for the old coated business, roughly 50% commodity, 50% branded. For the commodity-type products, we see either meeting or exceeding the raw material increases that

40 we have had.

BSL Just while we are waiting for the next question, I should have done it while I was standing up earlier, but Brian Kruger is up the front. He has been with the company for 25 years in one form or another and he will be heading off this

45 week. Many of you will have worked with Brian while he was CFO and then President at Australian Manufacturing Markets and running North America. He has done a fantastic job for that company. We are going to miss him a lot. I think we have got a very good management team so I am sure we will get by, but he gives us plenty of advice and we will probably take that. If you get a chance to say goodbye to him on the way out of the door, he is certainly going to miss me amongst us and we are going to miss him. I just thought I would throw that in.

5 Q It is Emily Behncke from Deutsche Bank. Just a couple of quick questions. Firstly, I think, following on from the question earlier on distribution. There is a comment in the presentation saying tight (inaudible) (0:46:22) market share. I am just wondering if you can give us some indication as to whether or not that predominately relates to import. Secondly, in terms of the Asian business,

10 obviously there has been a turnaround in the China business, but I think in the second half you are still sort of in a loss making position. I am just wondering if you think fiscal year 2009 is the year that you might be breaking even at the EBIT level. And just maybe a question for Charlie. In terms of given that you have refinanced a lot of your debt, I am just wondering if you

15 can give us an update in terms of the sort of interest cost that you are expecting.

BSL Thanks, Emily. In terms of distribution, the market share is -- in relation the imports. I think that is basically our primary competition, imports. We were very strong in the first half, not quite so strong in the second half, and I think

20 we have been very much focused about being price relevant to our competition. In terms of China, the PEB business is doing well. The Lysaght business is struggling to regain our customers, but I think we have got the right management team to focus on that. The Suzhou facility is cash flow positive. That was one of the key things that we focused on over the past six

25 months. Notwithstanding the impairment even with the depreciation and amortization, I think from the accounting perspective, it is going to be losses for a bit longer yet. So, I do not think there is going to be a remarkable turnaround in that business. I think there is still too much capacity in the metallic coated space in China. Even with the devastation caused by the

30 earthquakes up there, we have been able to sell some of our pre-engineered steel buildings into that area, very small steel building structures to be used for schools and the like. People are very concerned about living in concrete structures now because so many of them fall over. Even some steel structures that were put in there that were (inaudible) (0:48:28), I would say,

35 immediately after the earthquake came down and a few of the aftershocks. I think people are starting to see the need for quality in some of those areas. Whether that flows directly to our business or whether that actually just helps steel and quality steel improve its market, I am not sure. Basically, I think you will still see losses coming out of Suzhou, but it will be cash flow positive. I

40 think you will see the PEB business continue to improve and Lysaght will certainly come up.

BSL Emily, in relation to the interest cost, we did face increased margins that you would expect in this environment. I mean, we refinanced predominately consistently with our previous terms and conditions and covenants.

45 Essentially, cost or basis point was up about 40 to 50 basis points. If you take the 50 basis point-spread sensitivity, you are looking at a $4 million impact on NPAT.

BSL I think we have got a question on the line.

Operator Next question if from Michael Slifirski of Credit Suisse. Please go ahead, Michael.

5 Q Thank you. I do not want to focus too much on distribution, but I am just trying to understand what the domestic steel industry restructuring over the last, I guess almost 12 months, how much of the additional tonnage in distribution is because of that restructuring? Perhaps you would now put in product for your distribution that worked previously would have been important. So how much

10 of that is a permanent change versus how much is just the constraint, tight global steel market? And what would you say, expect, perhaps longer term, that you might give up if steel availability improves?

BSL Michael, I am going to ask the President of our North American business, Mark Vassella, to answer that question.

15 BSL Thanks, Paul, and thanks, Michael. I think it is fair to say that the first half when we talked to you of the results was heavily impacted by the amount of imported steelworks coming to the country. We have seen that fundamentally change, and on the back of that, we have been able to pass through the cost increases. So, there is no doubt there has been a change in terms of the

20 position relative to imports. I think it is fair to say also there has been a permanent change in terms of us shifting more of our BlueScope product through the distribution network. That is not material in terms of the overall volumes, but that is certainly a permanent change and the current market conditions have meant that we have seen imports dry up and we have been

25 able to take that as increased share through distribution.

Q Okay. Thank you. My second question, if I may, the working capital outlook, you have talked about releasing another $100 million, but what will the net working capital look like next year? Will it be a net consumer of cash with

30 highest yield prices on average, or higher raw material cost on average?

BSL Michael, this is Charlie. I am going to take this one. In relation to working capital, the single biggest impact during fiscal year 2009, we expect, will be on raw materials and inventory. Our focus on receivables and in appropriate level of days payable should hold us really well. At this point, the raw

35 material’s impact on inventory is likely to see the working capital go up.

Q How would we estimate that impact, Charlie?

BSL Michael, I think what I will do on that is, we will look at getting back to you with an answer later.

40 Q Thank you.

Operator Thank you. The next question is from Andrew Gibson from Goldman Sachs JBWere. Please go ahead, Andrew.

45 Q Hi, guys. Just again on that working capital question. I think previously your guidance was 200 million cash benefit from working cap and asset sales so you are guiding towards 100 million additional working cap benefit in 2009. Is it cash from asset sales that come out in addition to that? That is question number one. Question number two, how much coke sales were achieved in the second half or the full year and what you are expecting 2009 on top of those two things?

BSL Thanks, Andrew. In terms of the working capital improvement, what we said was that we are going to focus on a whole raft of initiatives, key business

5 metrics as well as asset sales. So those asset sales or land sales are still options. We expect we are getting another 100 million out of them, but I think in relation to Michael’s earlier question, our raw material cost, working capital, probably I am going to say a number and we will clarify if I have got it wrong, probably in the $200 million or $300 million range. We will increase our

10 working capital on the raw materials. We have got some Q&As on coke which I think (inaudible) (0:53:15) is having a quick look at, but most of the coke sales were in the second half of 2008. We do not expect too many coke sales in the first half of 2009. The coke sales will come back in the second half of 2009 as we have spare capacity coming out of the blast furnace reline. I

15 guess in 2008, there were 264,000 tonnes of coke sales. Did you have another question on coke sales, Andrew?

Q No. Just if you could provide any guidance as to what we should expect in 2009.

20 BSL It is opportunistic. We will have spare capacity in the second half, but in terms of the actual commitment, it is a bit hard to say because, notwithstanding indexes and the like, it is really a shipment by shipment negotiation and it really will be opportunistic.

25 Q Okay. Just on pricing in Australia at the moment, I mean this is probably more through the distribution business -- I mean, you have seen some softness I guess in Asia, (inaudible) (0:54:15) has not really impacted the Australian market yet, just given the Australian dollars has also come off, is that what you are seeing? Also, do you think the exporters (inaudible) (0:54:27) market

30 took advantage of the monopoly in Australia over the last six months’ period?

BSL I am not quite sure what the last question was specifically asking, but let me have a crack at it. There is very strong demand for steel products all through Asia and in Australia. There is a lot of competition to supply that demand and we operate in a very competitive market. You have only got to look through

35 our business performance over the last two or three years to see that. In terms of products, if you look at our building materials products, there is a lot of competition against inter-materials and that competition has not changed. If you look at the commodity products, the competition is still very robust. Cost structures have increased, and given strong demand, that has enabled prices

40 to increase to offset those costs, but it is still driven by a very competitive market. So I think there are some people out there who might comment on not being able to get supply. We are manufacturing at record levels. We are trying to meet customer demand. Those customers who show us loyalty are definitely getting access to the product that we can make. Those customers

45 who have relied on other supplies to the extent that those supplies are not supplying them, we will try if we have got extra capacity, but if we do not have extra capacity, we are not in a position to supply them. I think it is a very competitive market. Some supplies are less reliable than others. I would say that we are a very reliable supplier, but it is a competitive market.

Q Okay. Just finally, to confirm an earlier point, your comment on non-res, were you saying that you think the outlook for the next six months is still pretty robust, non-res specifically?

BSL Yes. If you think about non-res and you think about mining, industrial, shops,

5 increasing steel, but also in the entertainment sector, there has been an increase in sales or demand for product into the entertainment sector which is an interesting one. So, residential is absolutely flat, but the broad-based demand outside residential is still pretty strong.

Q Thank you.


Operator Thank you. There are no further questions from the phone lines at this time.

Q Thanks very much. Craig Campbell, Morgan Stanley. A couple of questions for you. Firstly, for the current year, are you able to give us guidance for the

15 total CAPEX budget? We have heard about the reline. I am just wondering if we can get that number. Secondly, the Butler order book in the US, I am just wondering how far forward you have got visibility on that order book and how deep it is. Is that a six-month order book or is it 12 months? I am just wondering how far in advance your orders are going there. Then, finally, in

20 Asia, in the result, with the rise of the steel prices through the half, when you cut the books off at the end of June, was there a positive impact from inventory adjustment from that? And if so, how much?

BSL To answer your last question, yes, there has been a positive inventory impact across distribution businesses generally. In terms of how much, it is hard to

25 quantify and so I will not, but it has been positive. In terms of the capital for fiscal year 2009, as I mentioned before, we are managing our cash flows with our balance sheet, with our capital. So the capital is probably going to be in the 700 million to 750 million range assuming the business performance where we expect it to. In the Butler order book, it tends to be about three to

30 four months out and it is still reasonably strong.

BSL Just in relation to capital expenditure, there is actually more details in the supporting information we have provided on about Page 134.

BSL You might not have gotten to that page yet, Craig.

Q Just short.


Q Good day. Mark Greenwood here again, JP Morgan. I just want to clarify your guidance. You have indicated that margins are going to be up slightly in the first quarter 2009 from fourth quarter 2008, and based on your guidance that you got back in May on what you earned the first quarter, am I right that you

40 must have earned about $300 million plus in the fourth quarter of 2008? Is that correct?

BSL We have given you half year results. Perhaps if I just stepped back in and talk about the guidance and our philosophy. We are trying to provide as much detailed information in that business as we can. We did additional investor

45 breakings in November and again in May and we expect to give a trading update again in November. So, in terms of breaking up the quarters, I am actually not going to go there. I think that there is a fair bit of information in the market already. I have talked about the fact that if I was to talk directionally, the fourth quarter is better than the third quarter and so that is fine and I think we will have a pretty strong first quarter. We expect that we will have a strong first half. As you know, with the business, we gave guidance a few years ago. It did not work. I think the best thing for us to do is to give you as much information on all the factors as possible. But demand

5 remains strong. Pricing is strong, cost is going up. The prices at the moment are covering cost particularly as a result of the strong export.

Q Okay. You are in the process at the moment of negotiating the semi-quarter pricing, is that right?

10 BSL Yes. Over the next four to six weeks, we will have the semi-quarter pricing locked up and it still remains reasonably strong or strong.

Q Okay.

BSL I would like to be bit a conservative.

Q Thank you.


BSL I think there is a question on the phone line?

Operator Thank you. The next question is from Andrew Gibson of Goldman Sachs JBWere. Please go ahead, Andrew.


Q Sorry, guys. Just a couple of others. Could you just talk your thinking at the moment around CAPEX opportunities versus capital management flow? Are you thinking you will keep your paddle dry for a little while or could you potentially move in capital management if like acquisition opportunities popup

25 in the short tern? Then, just finally tax. Can you give us a feel for the effective tax rate into 2009?

BSL I will get Charlie to talk to the effective tax rate. Look, the Company, when it came out of BHP through the demerger process, had I think it was 5% gearing, and share buybacks were used to get us into the target gearing

30 range of 30% to 35%. So we are at 30.4% today. We will reinvest in our business to make sure that we maintain our competitive advantage out of the Port Kembla Steelworks in particular. It is a world-class asset, but it does require reinvestment. It is the engine room of our business so we will continue to reinvest in that business. Where we focus our other CAPEX, it is basically

35 to maintain or improve operations and I think we have done that. We see some opportunities for growth in the future. There is also a lot of uncertainty out there. You see it in the equities market so I think it is a very prudent time to have a strong balance sheet and so I want to make sure we have got a strong balance sheet, but also, I think that some buying opportunities will

40 come out of that. So in terms of capital management, we have increased the dividend. Our focus is to continue to get cash back to shareholders, but we also see some opportunities to grow the company and we think it is a very good time to have a strong balance sheet. So I think, Andrew, that is probably the best way that I can answer that question and I will ask Charlie to talk

45 about the tax rate.

Q Thanks, Paul.

BSL So, Andrew, in relation to the tax rate, you will note in our earnings release that our effective tax rate was actually up in 2008 to about 34%. But if you take the underlying, and that is because the impairment is being sort of permanent difference if you will for tax purposes, if you reverse that back out, we would back down to an effective tax rate of just over 30% or thereabouts.

Q (Inaudible) (1:02:41) similar in 2009.

5 BSL Yes. It will come back to the mix of earnings. The tax rates in the US are a bit higher and the tax rates in Asia is a bit lower, so it has been to the mix of those.

Q Are there funky things we need to think about?

10 BSL No. We try to keep funky out of it, Andrew.

Q That is good. Thanks.

Operator Thank you. There are no further questions from the phone line at this time.

15 Q Hi, (Inaudible) (1:03:06) still from UBS. Just a quick question on the growth. I mean, where do you see the growth from the company? Is it upstream, downstream, is it domestically, internationally and maybe what regions are you possibly focusing on?

BSL Thanks, Mark. It is pretty important. We have got a really good set of assets

20 in Australia so we need to continue to invest in those assets and try and increase the ability for us to place steel in the domestic Australian market. So, number one, to the extent that we can grow our product range, displace into material products, increase the ranges of steel uses. Particularly, we think in sustainable buildings, we believe that there are some products that have steel

25 in them that can actually lower the energy use in buildings and that is an area where we see real opportunity. Now, we are investing research dollars in that, but we have also got some businesses like Metl-Span which we bought out of IMSA that has insulated steel panels, so we see a focus on those types of products as being pretty important. So in upstream, if you look at Australia

30 and New Zealand in particular, but also Delta, incrementally increasing the production out of those assets every year is a key part of the business. Some of the capital that we spend is about reducing bottlenecks, going after one bottleneck to the other so that we can incrementally increase production. Out of the blast furnace reline, we expect to get some improved efficiency as the

35 aging No. 5 furnace is relined.

In terms of other areas of focus, there are some real concerns one reads about the North American market, but just to put it in perspective from BlueScope’s viewpoint, we have got 50% of an outstanding electric arc

40 furnace in Delta, Ohio. Thirty million short tonnes is our share there. We have got the pre-engineered steel building’s business in Butler and Varco Pruden, and we have got a position on the West Coast of the United States which is able to leverage out of our hot rolled products coming out of Australia and New Zealand which has a competitive advantage to other sources of steel on

45 the West Coast. So, if you think about the Unites States, we are 1 million plus producer and consumer of steel in a market that is about 120 million to 130 million tonnes. So we are not going to be (inaudible) (1:05:33) in that market, but even if demand was to slow down in the United States, given where their exchange rate is, import is slowing down more quickly than demand is slowing down, and import is slowing down more quickly than both demand and also when you throw exports into the mix, you are actually still seeing a very robust steel price environment in the United States.

5 But if you step back from even steel production and you look at the product mix and the capabilities we have got in sustainable building solutions and pre-engineered steel buildings, we are a minnow and we have the opportunity to improve dramatically our scale in that market. We have also demonstrated, I think, that we can operate very effectively in that market. So, I am pretty

10 bullish in any type of economic situation in the US that we can build a really scalable business there.

We are the world’s number one PEB provider when you span China, Asia and the United States. As we come out of the Varco Pruden/Butler integration, I

15 think we can see some real opportunities to leverage them some improved capabilities. I think as we look at markets, we will probably look a little bit more expansively as to where those types of buildings can be used. So, infrastructure assets, steel buildings for infrastructure assets in some of the more developing economies, building up the base in India. Basically, it is

20 really simple. It is about improving our capability, lowering our cost and being more competitive and looking at some more regions in which to do that. It tends to be a low capital investment opportunity so there is less risk associated with it. So it is pretty much depending on the product type. It is broader regions. I think a much stronger focus on sustainability and increase

25 in Australian production. I do not think you will see us stepping out and building a new Port Kembla Steelworks anytime soon. But if there are opportunities and we have talked about (inaudible) (1:07:25) steel and the like, if there are opportunities where it makes sense and it is part of our value chain and we know the market and we can work with customers, then we will

30 certainly look at participating in those opportunities.

I think we have got another question on the phone line.

Operator Next question is from Michael Slifirski of Credit Suisse. Please go ahead,

35 Michael.

Q Thank you. I guess in the past where we have talked about the fact that you are happy to take the profit upstream during times where steel prices are high, happy to take the profit upstream and forgo a little bit downstream

40 because of the tonnage pull-through. I guess if you look at a lot of your major competitors, they are going one step further. They are taking the profit upstream in raw materials. What are the implications at a longer term if they start being happy to take profit up there? Does that compromise what then becomes for them the midstream and your upstream?

45 BSL I guess you are talking about the profit result that will come after the market closes today, Michael.

Q Yes.

BSL If you look at our business in New Zealand for instance, we are entirely self-sufficient in iron units through the iron sense and there is no doubt that that has been beneficial to the New Zealand steel business. I have also talked about the fact that higher coal costs in New Zealand are affecting that business. So, in a time of increased raw material cost, you will always look back and say it would have been nice to have lower cost there. But what we

5 have also said is that most of our competitors if not all of our competitors in the Asia Pacific region -- and that is the market in which we compete -- buy their raw materials from third parties. So, we have got a competitive advantage because a lot of that raw material comes from Australia. We have a freight advantage. So, our task number one is to maintain the existing

10 competitive advantage that we have when all of our competitors or most if not all also buy their raw materials from third parties. So you have seen a trend on some skilled producers to buy into raw material resources. The age-old question is that they are buying at the top of the market or is the market just going to continue up, up and away. I think the percentage of integration of

15 raw materials into the steelmakers that we compete is still incredibly low. If you went to a stage where all steelmakers were entirely vertically integrated, you would not want to be the exception, but I think we are a long, long, long way from that being the case. So we continue to look at raw material opportunities. We are interested in raw material opportunities at the right

20 price. It is pretty hard to find anything at the right price at the moment. We have got a process in place to ensure that we maintain security of supply for raw materials for our businesses, that we maintain a quality that we need and that we maintain our competitive price advantage. So, there are three things that we are focused on. I think we are focused on quite well.

25 Opportunistically, if there is something out there, it would have to stand on its own two feet. They would have to meet our return on invested capital targets. It would be hard to see something like that at the moment, but one never knows.

30 Q Thank you. Then, secondly, back to Asia, when you finished, did you organize -- you have got your capacity up and your capacity utilization up and got margins to where you think you can get them. What sort of EBIT can Asia generate do you think?

BSL That is a good question, Michael. I think we have perhaps got ahead of

35 ourselves in the past by being too specific about that. At this stage, I think that we need to focus on year-on-year improvement and that is not always easy if the market changes, so I prefer not to give you a forecast of that at the moment, but we will just continue to improve those businesses as best we can. What we will look at though is if there are ways to structurally improving,

40 or to put it in another way, reducing the risk in our asset portfolio in Asia. We are spending a fair bit of time focusing on that at the moment. So, if there are opportunities to incrementally increase the scope of our business such that the risk goes down because we have got a bit of value chain, we will do that, but I think it is more watch the space rather than swing any big targets out

45 there.

Q Thank you.

BSL I think that might be it in terms of questions. So I would like to thank you -- unless there are any more -- I would like to thank you all for your time and if you have any follow-up questions feel free to give (inaudible) (1:11:52) a call. He says he is fine with it. Thank you very much.







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