2001 Annual Report - OneSteel

Managing Director’s Review (continued)InitiativeEmail Metals acquisitionthe addition of Email inventories in the months ofMay and June) of $144.8 million or 22.4% fromthe peak in December 2000. This reduction wasinstrumental in OneSteel achieving its cashgeneration target of $170 million during the year.Rationalise low margin products. A program hasbeen implemented within OneSteel called“Managing Complexity for Profit” aimed atlessening the complexity of the range of productsoffered by OneSteel and providing unit costproduction savings and improving margins.Systems are being developed to determine productprofitability throughout the production anddistribution process. Those products that aremaking either zero or low margins are beingidentified with associated prices adjusted toincrease returns. In some cases, if prices cannot beadjusted, OneSteel will examine alternate cheaperways of manufacturing the product or contemplateceasing production of that product altogether.At the Whyalla Steelworks, the companyproduces 106 billet grade/sections. Over the next12 months, 25% to 30% of these grade/sectionswill be reduced.This process will streamline the number of productsthe company manufactures, providing unit costproduction benefits while maintaining the sameoffering to the market. This initiative, along withother revenue enhancing programs, delivered$15.2 million in positive contribution during 2000/01.Appropriate reward structure. The rewardstructure has been significantly realigned to reflectthe performance of OneSteel as a corporationrather than being based on the success ofindividual businesses, as was the case in the past.The new structure concentrates on elements suchas profitability, funds employed, cash generation,cost containment and safety across the company.This ensures that decisions taken will be made onthe basis of maximising the benefits across theorganisation rather than just one business.Figure Five – Benefits of Industry Rationalisation InitiativesBenefits• Provides greater leverage for the distributionof steel and steel products to the market fromAustralian manufacturers.• Increases the production pull through forOneSteel’s manufacturing.• Improves OneSteel’s geographic footprint andproduct offering to the market.This incentive structure will develop behavioursacross the businesses centred around integrationbenefits as a way of generating value rather thanmaximising divisional profit which can destroyvalue in other parts of the business.Industry Rationalisation. The “spin-out” ofOneSteel in itself has been a major move towardindustry rationalisation. As outlined in theChairman’s Review (refer to pages 6 to 7),OneSteel undertook two significant strategicmoves during the year to further rationalise theindustry - the acquisition of Email Metals in a jointbid with Smorgon Steel, and the announcedclosure of OneSteel’s Brisbane Bar Mill. Theperceived benefits of these initiatives and theOneSteel “spin-out” are outlined in Figure Five.OneSteel will continue to examine opportunitiesfor further rationalisation of the steel industry tobuild on its critical mass as a domestic nicheplayer within the Australian market.THE YEAR AHEADClearly, the underlying performance of OneSteelin the years ahead has to improve. This will onlyhappen by continued delivery of benefits throughthe business restructuring process. While thetrading conditions experienced over the last12 months masked some of the benefits achievedfrom implementing the OneSteel change program,I am confident the benefits will provide increasedreturns and value for shareholders over themedium term.OneSteel will continue to focus on its key strategyareas outlined above in the year ahead. Ourpriority is to continue to improve the underlyingperformance of the businesses while completingthe integration of the Email Metals’ businesses.Trading activity in the first six months of the2001/02 financial year is expected to remainsubdued with some exceptions such as residentialhousing and rural sector activity.The second six months should see an increase inactivity, particularly for OneSteel stemming fromrail production for the Alice Springs to Darwinrailway, and an expected slight pick up inconstruction sector activity later in thefinancial year.From an operational viewpoint, OneSteel willcontinue to consolidate its current market position,optimise production capability, generate solidcash flow and repay debt to provide balancesheet flexibility. It will be through this disciplinethat OneSteel will be in a position to examinefurther growth opportunities.Brisbane Bar Mill closure • Reduces OneSteel’s annual production capacityby 170,000 tonnes.• Increases the capacity utilisation of OneSteel’sother Bar Mills.10Bob EveryManaging Director &Chief Executive Officer