Understanding financial drivers

Understanding financial drivers

Ever since he began his career two decades ago turning insolvent companies around, the CFO of BlueScope Steel has ridden myriad economic highs and lows.

Charlie Elias is no stranger to tough jobs. The formative years of his career, when he was in his 20s, included spending four years working for Deloitte’s receivership practice during the 1990s recession. “My days spent in the receivership area provided a fantastic business grounding,” he says. As for all companies in recent years, the focus in a turnaround was always cash first. “When the receiver I worked for called me up, he’d ask how the cash balance was going,” Elias says. “There was no discussion about earnings – [it was]: ‘Have you paid your suppliers?’; ‘Have you collected your cash from your customers?’ 

Elias moved on to Deloitte’s M&A practice from 1994, and in some ways this was quite similar given the new owners would be forensically examining the way the target made money and how to extract more.

“For me, even in my CFO gigs, whenever I pick up a set of numbers, I am always doing a manual calculation in my head: how does it translate to value?” he says. “That cash-and-value focus was really shaped in my early years in the receivership and M&A space.”

Don’t over-emphasise

Cash returned to centrestage during the recent downturn as debt became hard to get and then earnings fell, but throughout any economic cycle, the important thing is not to over-emphasise either, Elias says.

“That is one of the delicate balancing acts a CFO and other executives need to manage,” he says. “Earnings are ultimately what we derive profits and pay dividends from, but if you think about the interplay between earnings and cash and the impact that has on valuations — if you aren’t fundamentally focused on driving earnings and growth, then you aren’t driving cash either.”

Elias’ first role as CFO was in 2002 at gas and electricity supplier TXU Australia—then owned by Texas-based TXU Corp—whom he worked for as an adviser when it entered the local market.

He joined TXU in 1999 as head of strategy. “We had many memorable transactions to grow that business from zero to ultimately in 2004, when I led the sale of that business,” he says.

When Enron went bankrupt in late 2001, the whole energy sector suffered and high debt loads, racked up to fund rapid growth, again became hard to maintain. “That year [2002] was an interesting one because the energy industry was going through significant change,” he recalls. “You had the fall of Enron and the like and there were significant challenges not only within TXU, but a lot of other energy companies globally.”

Many challenges

That year the parent faced many challenges as a result of the European business failure, including reassessing its global operations and asset sales. “So that clearly meant there was a fair bit of restructuring,” Elias says.

The Australian operations of TXU were sold to Singapore Power. After that, Elias took a year off before taking up the role of finance chief at Linfox.

After two years at Linfox, Elias moved to BlueScope. Linfox is a private company, so although it is run like a public company and the shareholders “give pretty direct feedback”, he says, the chief difference he sees now has been dealing with the much bigger investor relations role. BlueScope is also much bigger. It has 20,000 employees and businesses in 17 countries.

Elias says he was quickly impressed with the depth of talent at BlueScope and employees’ understanding of important financial drivers. “When I first joined, one of our investors from London was on an analysts’ site visit and he was blown away after engaging in a cost-of-capital and return-on-capital discussion with one of the guys in the Port Kembla manufacturing facility.”

He says instilling that kind of culture in the company is half the job of a CFO and that helped the organisation deal with the downturn as everyone in the business needed to help manage increasing funding costs and falling demand. Up until 2008, revenue had risen steadily, but profits were volatile. These doubled in 2005 and 2007, but in the intervening years dropped sharply.

Last year the company reported a net loss after tax of A$66 million (US$58 million), and followed with a further loss in the first half of this year due to still low prices for its products, high commodity prices and a rapid rise in the Australian dollar.

Capital restructure

With debt markets seized, BlueScope — which has a manufacturing and marketing footprint spanning Australia, New Zealand, Asia and North America — undertook a capital restructure a year ago, raising in total A$1.4 billion (US$1.2 billion) on equity markets, and spread out debt maturities over the next decade. It also repaid a significant amount of debt, with net debt down to A$734 million (US$643 million) from A$2.64 billion (US$2.31 billion) for the first half of this financial year.

Elias says the effort involved in the past year or so was not just his but involved the whole company and its stakeholders. “This included the board, executives, employees, shareholders, customers and suppliers,” he says.

“It also involved my team, from treasury to investor relations—you can’t do that in isolation.” The company has forecast a small profit for the 2010 financial year, but steel manufacturing will remain a volatile and challenging industry.

Although steel prices have been rising again, so have prices for raw materials, and energy prices and the business is a significant emitter of greenhouse gases.While BlueScope prides itself on hundreds of millions in investments, it has made to reduce emissions and potable water usage, Elias says delaying the emissions trading scheme has been important to give more time for other governments to place a charge on carbon emissions for BlueScope’s competitors.

Cost management is a constant focus, but it has been even more so in the past year with A$132 million (US$115 million) permanently cut in the 2008-09 year.

“Our focus is to continually be at the left-hand side of the cost curve,” Elias says. “I always have a mantra that capital is scarce, so we always have to get more out of the capital we have deployed. Secondly, any new capital investment that we put in, we make sure we get the biggest bang for our buck.”

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Tags CIO roleeconomic crisiscio and cfo

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