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The directors of BlueScope Steel Limited ("BlueScope Steel") present their report on the consolidated entity ("BlueScope Steel Group") consisting of BlueScope Steel Limited and its controlled entities for the financial year ended 30 June 2005.
PRINCIPAL ACTIVITIES
During the year the principal continuing activities of the BlueScope Steel Group, based principally in Australia, New Zealand, North America, China and elsewhere in Asia, were:
(a) Manufacture and distribution of flat steel products;
(b) Manufacture and distribution of metallic coated and painted steel products;
(c) Manufacture and distribution of steel building products; and
(d) Design and manufacture of pre-engineered steel buildings and building solutions.
SIGNIFICANT CHANGES IN STATE OF AFFAIRS
The following significant events occurred during the year:
a) The Company is progressing a range of growth initiatives aimed at expanding the manufacture and distribution of metallic coating and painted steel products. The following projects were approved:
Approved in 2003/2004
· Thailand: installing a second metallic coating line (capacity: 200,000 tonnes per annum) at the Map Ta Phut plant. The facility will cost approximately $80 million and is scheduled for completion in August 2005;
· Vietnam: the construction of a new metallic coating (capacity: 125,000 tonnes per annum) and painting (capacity: 50,000 tonnes per annum) facility. The facility will cost approximately $160 million and is expected to commence operation in early calendar year 2006; and
· China: a new metallic coating (capacity: 250,000 tonnes per annum) and painting (capacity: 150,000 tonnes per annum) facility. The facility will cost approximately $280 million and is expected to commence operation in mid calendar year 2006.
Approved in 2004/2005
· China: the Group's first Butler PEB/Lysaght facility. The facility will cost approximately $45 million and is expected to commence operation mid calendar year 2006;
· India: three new facilities delivering a range of Lysaght and Butler products. The facilities will cost approximately $100 million and will progressively commence operations during 2006 and 2007;
· Australia: a new painting facility (capacity: 120,000 tonnes per annum) in western Sydney. The facility will cost approximately $120 million and is expected to commence operation in early calendar year 2007; and
· Australia: an expansion of the Hot Strip Mill (capacity increase: 2.4 to 2.8 million tonnes per annum) at the Port Kembla Steelworks. The expansion will cost approximately $100 million and is expected to commence operation in the second half of calendar year 2006.
b) The Company expanded its Australian manufacturing, sales and distribution capabilities through a number of acquisitions in the BlueScope Lysaght and BlueScope Water businesses.
c) In March 2005, the Company decided to withdraw from its unprofitable export tinplate business, commencing from April 2005, resulting in the planned closure of some operating lines within two years.
d) On 1 July 2004, the Company completed a debut debt raising in the US private placement market totalling US$300 million with terms of 7 years (US$100 million) and 10 years (US$200 million).
MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR
No matters or circumstances have arisen since 30 June 2005 that have significantly affected, or may significantly affect, the BlueScope Steel Group operations, results or state of affairs in future.
DIVIDENDS
BlueScope Steel paid a fully franked dividend for the year ended 30 June 2004 of 18 cents per share and a special dividend of 10 cents per share in October 2004, and a fully franked interim dividend of 18 cents per share in April 2005 to its shareholders.
On 23 August 2005, it was announced that Directors determined to pay a final fully franked dividend of 24 cents per share, which is to be paid on 24 October 2005 (record date 5 October 2005) to shareholders. The Directors have also announced a fully franked special dividend of 20 cents payable on 24 October 2005.
REVIEW AND RESULTS OF OPERATIONS
The BlueScope Steel Group comprises five business reporting segments: Hot Rolled Products, New Zealand and Pacific Steel Products, Coated and Building Products Australia, Coated and Building Products Asia, and Coated and Building Products North America. A description of the operations comprising these segments is provided in Note 3 to the Annual Financial Report.
| SEGMENT REVENUES | SEGMENT REVENUES | SEGMENT RESULTS | SEGMENT RESULTS | |
| 2005 | 2004 | 2005 | 2004 | |
| $M
|
$M
|
$M
|
$M
|
|
| Sales Revenue | ||||
| Hot Rolled Products | 3,939.5 | 2,838.6 | 1,338.5 | 563.8 |
| New Zealand Steel and Pacific Steel Products | 756.4 | 590.2 | 182.8 | 62.1 |
| Coated and Building Products Australia | 3,190.3 | 2,883.5 | (115.7) | 192.9 |
| Coated and Building Products Asia | 1,051.3 | 698.6 | 81.8 | 104.0 |
| Coated and Building Products North America | 1,134.4 | 191.5 | (19.7) | (8.8) |
| Corporate and Group | 359.9 | 372.9 | (70.2) | (64.0) |
| Intersegment eliminations | (2,494.1) | (1,837.9) | (9.1) | (32.1) |
| Other Revenue | 43.9 | 32.2 | ||
| Operating Revenue/EBIT | 7,981.6 | 5,769.6 | 1,388.4 | 817.9 |
| Net unallocated expenses | (34.3) | (14.5) | ||
| Profit from ordinary activities before income tax | 1,354.1 | 803.4 | ||
| Income tax expense | (347.0) | (201.6) | ||
| Profit from ordinary activities after income tax expense | 1,007.1 | 601.8 | ||
| Net profit attributable to outside equity interest | (0.1) | (17.7) | ||
| Net profit attributable to members of BlueScope Steel | 1,007.0 | 584.1 | ||
| Earnings per share (cents) | 137.4 | 77.8 |
Building on the strong performance of previous years, the BlueScope Steel Group has achieved a record financial result, delivering a net profit of $1,007.0 million and earnings per share of 137.4 cents.
The Company's revenue increased $2,212.0 million to $7,981.6 million, primarily achieved through acquisitions, improved prices, and a favourable shift in the mix of despatches from export to domestic. These were partly offset by a reduction in the value of USD-denominated sales, due to the strengthening of the Australian dollar.
Net profit after tax increased $422.9 million to a record $1,007.0 million. This improvement was due primarily to higher international and domestic steel prices, improved margins from North Star BlueScope Steel, and a favourable shift in mix of despatches from export to domestic. These were partly offset by higher raw material and operating costs, higher planned repairs and maintenance to improve operating stability, higher business development costs, and the net impact of a higher AUD/USD exchange rate on USD-denominated revenues and costs.
Hot Rolled Products
The earnings contribution from the Hot Rolled Products segment increased as a result of stronger hot rolled coil and slab pricing (to export, domestic and intersegment customers), and a substantial increase in margins from North Star BlueScope Steel. These were partly offset by higher scrap, coking coal, iron ore, alloys and freight costs, together with an increase in repairs and maintenance expenditure to ensure reliability of operations, which underpins increased production capacity together with the optimisation of asset lives.
New Zealand and Pacific Steel Products
The earnings contribution from the New Zealand and Pacific Steel Products segment increased as a result of domestic and export price increases, and higher prices for vanadium slag (a steel making by-product) and continuing strong New Zealand domestic sales volumes.
Coated and Building Products Australia
The earnings contribution from the Coated and Building Products Australia segment was significantly affected by higher hot rolled coil and slab feed costs (from Hot Rolled Products), which compressed margins despite price increases in both domestic and export markets. Earnings were also affected by industrial action at the Western Port facility, an increase in repairs and maintenance and restructuring costs associated with the withdrawal from export tinplate. These were partly offset by a favourable shift in mix of despatches from export to domestic.
Coated and Building Products Asia
The earnings contribution from the Coated and Building Products Asia segment was lower primarily due to an increase in business development and pre-production costs associated with developments in Vietnam, Thailand, India and China, together with operating cost increases. These were partly offset by sales volume increases as a result of market growth initiatives and the integration of BlueScope Butler China. The segment maintained gross margins despite significant increases in steel feed and coating metal costs.
Coated and Building Products North America
Butler Manufacturing Company, a leading manufacturer of pre-engineered buildings, was acquired in April 2004 bringing a new suite of building and construction products to the Company. This new segment delivered negative earnings for the year. However, when compared with comparative period earnings normalised for discontinued operations and acquisition related costs, earnings improved $8 million. This improvement was achieved primarily through higher margins but was negatively affected by costs associated with the early closure of the Galesburg, Illinois plant and start-up costs of a replacement plant at Jackson, Tennessee.
LIKELY DEVELOPMENTS AND EXPECTED RESULTS
Demand for BlueScope Steel's products is expected to remain firm during the 2005/06 financial year.
Spot prices for commodity steel products in global markets have fallen in recent months and currently appear to have stabilised or increased in certain regions. Increases in iron ore and coal prices will raise BlueScope Steel's costs by approximately $380 million (pre-tax) compared to the 2004/05 financial year. The Company is unlikely to be able to fully recover these cost imposts and therefore upstream margins in the Hot Rolled Product segment will likely be lower. However, we expect margins in our midstream coating/painting and downstream roll forming and pre engineering building businesses will improve.
During the 2005/06 financial year, the Company will continue to work on improving those factors within its control.
BOARD COMPOSITION
The following were Directors for the full financial year: Graham John Kraehe AO (Chairman), Ronald John McNeilly (Deputy Chairman), Kirby Clarke Adams (Managing Director and Chief Executive Officer), Diane Jennifer Grady, Harry Kevin (Kevin) McCann AM, Paul John Rizzo and Tan Yam Pin. John Crabb resigned effective 28 July 2004.
Particulars of the skills, experience, expertise and special responsibilities of the Directors are set out under Information on Directors and form part of this report.
COMPANY SECRETARIES
Michael Barron Chief Legal Officer and Company Secretary, BEc, LLB, ACIS
Michael Barron is responsible for the legal affairs of BlueScope Steel and for Company secretarial matters. Prior to joining BlueScope Steel, Mr Barron held the position of group general counsel of Orica Limited where he was employed for 16 years, holding a variety of legal positions in Australia and overseas.
Lisa Nicholson, B.Sc., LLB, ACIS
Lisa Nicholson is responsible for Company secretarial matters for BlueScope Steel and its subsidiaries. Ms Nicholson has company secretarial and legal experience gained from working with Coles Myer Ltd, Lend Lease Employer Systems Ltd and DaimlerChrysler Australia/Pacific Pty Ltd.
Laurence Mandie, B.Sc. (Hons), LLB (Hons)
Laurence Mandie is a corporate counsel with BlueScope Steel and is responsible for the legal affairs of the Australian Building and Logistics Solutions businesses, and corporate functions such as finance and IT. Mr Mandie has extensive legal experience gained from working in the Mergers and Acquisitions group of Freehills, a national law firm and on secondment, as Acting General Counsel and Company Secretary of Pasminco Limited.
PARTICULARS OF DIRECTORS' INTERESTS IN SHARES AND OPTIONS OF BLUESCOPE STEEL LIMITED
Director |
Ordinary shares |
Share rights |
G J Kraehe |
109,676 |
0 |
| K C Adams* | 1,825,881 | 945,000 |
| D J Grady | 36,358 | 0 |
| H K McCann | 21,913 | 0 |
| R J McNeilly | 514,587 | 0 |
| P Rizzo | 24,702 | 0 |
| Y P Tan | 11,980 | 0 |
* Mr Adams' current holding of BlueScope Steel Limited shares includes 685,000 arising from BlueScope Steel long term incentive plan. The remaining shares have been acquired with his own funds.
MEETINGS OF DIRECTORS
The attendance of the current Directors at Board and Board Committee meetings from 1 July 2004 to 30 June 2005 is as follows:
| BOARD MEETINGS | COMMITTEE MEETINGS | |||||||||
| Audit and Risk | Remuneration and Organisation Committee |
Health, Safety & Environment |
Nomination | |||||||
| A | B | A | B | A | B | A | B | A | B | |
| G J Kraehe | 13 | 13 | - | *5 | 5 | 5 | 4 | 4 | 5 | 5 |
| K C Adams | 13 | 13 | - | *4 | - | *3 | 4 | 4 | - | *5 |
| D J Grady | 13 | 13 | - | - | 5 | 5 | 4 | 4 | 5 | 5 |
| H K McCann | 13 | 13 | 5 | 5 | - | - | 4 | 4 | 5 | 5 |
| R J McNeilly | 13 | 13 | 5 | 5 | 5 | 5 | 4 | 4 | 5 | 5 |
| P Rizzo | 13 | 13 | 5 | 5 | - | - | 4 | 4 | 5 | 5 |
| Y P Yan | 13 | 12 | - | - | 5 | 5 | 4 | 4 | 5 | 5 |
All Directors have held office for the entire 2004/05 financial year. Mr Crabb resigned as a Director of BlueScope Steel on 28 July 2004 and attended no meetings during the 2004/05 financial year.
A = number of meetings held during the period 1 July 2004 to 30 June 2005 during the time the Director was a member of the Board or the Committee as the case may be.
B = number of meetings attended by the Director from 1 July 2004 to 30 June 2005 while the Director was a member of the Board or the Committee as the case may be.
* = not a member of the relevant Committee. However, Directors who are not members of the relevant Committee often attend meetings.
There were a number of unscheduled meetings held during the year. They are as follows:
Board meetings: 2
Roc meetings: 1
The Non-Executive Directors met twice during the 2004/05 financial year without the presence of management.
REMUNERATION REPORT
To view the Remuneration Report follow this link
ENVIRONMENTAL REGULATION
BlueScope Steel's Health, Safety, Environment and Community ("HSEC") Policy provides the foundation for the way in which environment is managed at all levels of the organisation. BlueScope Steel cares for the environment and is committed to the efficient use of resources, reducing and preventing pollution and product stewardship. Product stewardship is a product-centred approach to environmental protection, focusing on all aspects of the product lifecycle.
The BlueScope Steel Group has continued to ensure its environmental management systems are robust by again achieving ISO 14001 accreditation following a series of external reviews performed during the reporting period. BlueScope Steel has also developed a customised compliance system to enable its environmental responsibilities to be appropriately managed. This provides a systematic means for line management to both understand and demonstrate compliance with their specific statutory obligations on a monthly basis. The environmental compliance system has been successfully implemented at a number of BlueScope Steel's operations, including Port Kembla, Springhill and Western Port already. It is anticipated that by the end of the 2005-2006 financial year, the compliance system will have been implemented at most of BlueScope Steel's operations.
BlueScope Steel notified relevant authorities of a number of statutory non-compliances with environmental regulations during the reporting period. Most of these were relatively minor in nature and related to the Port Kembla Steelworks in New South Wales (NSW) Australia. There were no significant environmental incidents recorded during the reporting period.
As reported in last year's Directors' Report, BlueScope Steel received a fine of $70,000 under the Protection of Environment Operations Act (NSW) 1997, in July 2004, over an incident at the Port Kembla Steelworks in March 2003 that caused air emissions resulting from a failure to maintain equipment. This is reported as the fine was handed down within the 2004-2005 financial year.
The Port Kembla Steelworks has entered into voluntary agreements with the NSW Department of Environment and Conservation ("DEC") to investigate possible land contamination of two areas within its site, the No.2 Steelworks and the recycling area. These investigations continue to take place in consultation and co-operation with the DEC.
INDEMNIFICATION AND INSURANCE OF OFFICERS
BlueScope Steel has entered into directors' and officers' insurance policies and paid an insurance premium in respect of the insurance policies, to the extent permitted by the Corporations Act 2001. The insurance policies cover former Directors of BlueScope Steel along with the current Directors of BlueScope Steel. Executive officers and employees of BlueScope Steel and its related bodies corporate are also covered.
In accordance with Rule 21 of its Constitution, BlueScope Steel, to the maximum extent permitted by law:
· must indemnify any current or former Director or Secretary; and
· may indemnify current or former executive officers, of BlueScope Steel or any of its subsidiaries, against all liabilities (and certain legal costs) incurred in those capacities to a person, including a liability incurred as a result of appointment or nomination by BlueScope Steel or its subsidiaries as a trustee or as a director, officer or employee of another corporation.
The current Directors of BlueScope Steel have each entered into an Access, Insurance and Indemnity Deed with BlueScope Steel. The Deed addresses the matters set out in Rule 21 of the Constitution and includes, among other things, provisions requiring BlueScope Steel to indemnify a Director to the extent to which they are not already indemnified as permitted under law, and to use its best endeavours to maintain an insurance policy covering a Director while they are in office and seven years after ceasing to be a Director.
The Directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of the directors' and officers' liability insurance contract, as (in accordance with normal commercial practice) such disclosure is prohibited under the terms of the contract.
Under the terms of the agreement for the acquisition of Butler Manufacturing Company, the Company undertook to assume Butler Manufacturing's commitments to indemnify, and maintain insurance in respect of, former Directors and officers of Butler Manufacturing against liabilities incurred by them as directors and officers, to the extent permitted by Delaware law. On acquisition of Butler Manufacturing Company, BlueScope Steel continued Butler's arrangements to indemnify former Directors and officers.
PROCEEDINGS ON BEHALF OF BLUESCOPE STEEL
As at the date of this report, there are no leave applications or proceedings brought on behalf of BlueScope Steel under section 237 of the Corporations Act 2001.
ROUNDING OF AMOUNTS
BlueScope Steel is a company of a kind referred to in Class Order 98/0100, issued by the Australian Securities and Investments Commission, relating to the "rounding off" of amounts in the Directors' Report. Amounts in the Directors' Report have been rounded off in accordance with that Class Order to the nearest hundred thousand dollars.
AUDITOR
Ernst & Young was appointed as auditor for BlueScope Steel at the 2002 Annual General Meeting.
AUDITOR INDEPENDENCE AND NON-AUDIT SERVICES
The auditor's independence declaration for the year ended 30 June 2005 has been received from Ernst & Young. This is set out below.
· Ernst & Young provided the following non-audit services during the year ended 30 June 2005. $497,000; international assignee employment taxation services;
· $178,000; country specific taxation compliance services and advice in New Zealand, Malaysia, Vietnam and North America;
· $139,000; specific compliance tax services in relation to the acquisition of Butler Manufacturing Company;
· $5,000; review of BlueScope Steel (Thailand) Board of Investment Report; and
· $26,000; bookkeeping and tax services for Butler Manufacturing Company's Chile subsidiary. The Directors were satisfied, on the basis of materiality, that auditor independence was not compromised. Note: Butler Manufacturing Company was previously audited by KPMG.
The Directors are satisfied that the provision of these non-audit services is compatible with the general standard of independence for auditors in accordance with the Corporations Act. The nature and scope of each type of non-audit service provided is considered by the Directors not to have compromised auditor independence. The Directors' belief is consistent with advice received by the Audit and Risk Committee of the Board.
This report is made in accordance with a resolution of the directors.
G J KRAEHE
CHAIRMAN
K C ADAMS
MANAGING DIRECTOR AND CEO
Melbourne
22 August 2005
Auditor's Independence Declaration to the Directors of BlueScope Steel Limited
In relation to our audit of the financial report of BlueScope Steel Limited for the year ended 30 June 2005, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct.
ERNST & YOUNG
A I BECKETT
PARTNER
Melbourne
22 August 2005
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