Bhp Steel Starts By Paying Top Dollars For Its Directors
Sydney Morning Herald
Saturday May 18, 2002
These are big fees for a smokestack firm with many prices in decline, writes Brian Robins.
BHP Steel is the biggest new listing of the year, and it clearly thinks it is part of the corporate elite in pitching its directors' fees near the top of the field.
But until its new directors get some runs on the board, the temptation will be strong to dub them the ``wannabes".
Its non-executive directors are to receive an impressive $100,000 a year in fees, in line with the $110,000 a year paid by BHP Billiton, which is more than 10 times larger and a much more complex corporate animal to boot.
At mid-sized companies such as Orica and James Hardie, non-executive directors receive around $65,000. Big corporates such as ANZ Bank pay $95,000. Directors typically also receive a small additional superannuation payment.
But BHP Steel's largesse does not stop there, with directors lined up for tidy one-off payments to cover being taught how to be directors a handy signing-on fee, if you like even though all but one of its non-executive directors (Paul Rizzo, the former Telstra finance head) are already on boards of several public companies.
And naturally the chairman, former Southcorp head Graham Kraehe, is to receive more ($280,000), as will deputy chairman Ron McNeilly ($140,000), a longstanding BHP figure.
An additional stipend is paid if a non-executive director chairs a committee.
With average weekly earnings running at around $40,000 a year, BHP Steel shareholders will be looking for impressive outperformance from directors to justify their retainers, especially since it is a smokestack company with most of its product prices trapped in long-term decline.
It may be one of the most efficient steel makers in the world, but profits remain erratic and, to some extent, outside of its control.
As well, it is up against north American and European competitors with ready access to government funds, while many Asian competitors are happy to run up colossal losses year in, year out, with scant regard for their shareholders.
The Steel Industry Plan of 1984, and its subsequent transmogrifications, fostered massive capital spending at the Port Kembla works, coupled with labour concessions and widespread job losses, which helped what is left of BHP Steel to revive.
Newcastle was shuttered and OneSteel, with the orphan assets of a steel mill in South Australia and rolling mill in Newcastle, spun off.
From a peak of more than 23,000 people employed at the Port Kembla steelworks in the late 1970s, that figure has dwindled to less than 6000 as productivity rose more than five-fold. That, coupled with a decisive shift into the coated steel market, primarily with Zincalume, is credited with much of the company's survival. Access to this technology let BHP roll out a series of processing mills, primarily throughout Asia, as it moved further up the value-added chain.
But beyond that, a lot of work needs to be done to ensure BHP Steel's future, despite generosity towards its own directors.
Operationally, BHP Steel may be humming, but spending in areas critical to its future, such as research and development, has been run down. When outgoing BHP Billiton head Paul Anderson wielded the axe on costs in mid-1999, one of the first and easiest targets was R&D spending.
Now, a mid-ranked public company like James Hardie easily outspends BHP Billiton, including BHP Steel.
In the year to March 2001, Hardie's R&D spending ran at $US16 million, in line with BHP Billiton's total spend of $35 million. This financial year, Hardie's spend is budgeted to rise to $US21 million ($38 million), around 3 per cent of revenues in an industry where the rule of thumb is closer to 1 per cent. Hardie can justify its higher R&D spend as it has now emerged as a global major in its chosen industry, fibre cement, and has its sights set on Europe. Access to the global market gives it a broader operating base to justify the high level of spending here.
BHP Steel has not disclosed R&D spending on its own account, but it is significantly less than others, such as Hardie.
Much of BHP Steel's strength resides with its galvanising sheet, especially Zincalume, for which it was the first licensee.
Rolling mills throughout the Asia-Pacific, coupled with tighter management, have resulted in the Asian coated-products division emerging as the fastest growing profit centre of the group, along with the best margins, although it has some way to go before matching earnings of the Australian coated products division.
And there is still plenty of scope to expand throughput at the Asian mills, most of which are operating at little better than half capacity.
BHP Steel's other big technology play is thin casting steel which, if successful, will open the door to new applications. After heavy investment, this is on the verge of achieving a return.
It is being incorporated into a plant in North America operated by Nucor, one of the steel industry majors in the US, which is its first real test.
But beyond that, there doesn't seem to be much in the bag, at least about which BHP Steel is talking just yet.
When it hits the sharemarket lists mid-year, BHP Steel will be well-positioned to grow by acquisition, since it is almost undergeared, with a debt to equity ratio of only around 20 per cent.
It will be the largest new listing this year and rank for inclusion in the main sharemarket indices, ensuring institutional investor support from the outset.
By comparison, in October 2000 when BHP Billiton spun off OneSteel, it filled it to the gills with debt, which it has yet to whittle down to a manageable level, leaving its share price hobbled.
A big expansion move early in its life will make it much easier to justify the big fees BHP Steel is paying its directors for meeting probably around a dozen times a year.
With super paid on top of the $100,000, non-executive directors will be bagging around $10,000 per board meeting.
One prospective acquisition is BHP Billiton's Illawarra coalmines.
First right of refusals are in place over these assets, and BHP Steel is budgeting for a 14 per cent rise in coking coal prices in the year to June 2003, the first full year of separation from BHP Billiton.
Each $US1 rise in the coking coal price slices $7 million off earnings before interest and taxes. With the prospective $US6 a tonne rise in the coking coal price flagged by BHP Steel, this signals a $42 million hit to the EBIT (earnings before interest and taxes) line in its first full year of independence.
Iron ore, which is also to be sourced from BHP Billiton, is expected to have only a flat price in the new financial year.
With the global steel industry awash with surplus capacity, the best news for BHP Steel is the lack of capacity in China, signalling that it will be a net importer for some time and, more importantly, will not have the product to dump into world markets as it is doing in many metals markets.
But for many shareholders, an issue over the next few years is that they will not be holding shares in BHP Steel at all.
Under the separation agreement with BHP Billiton, BHP Steel has to adopt a new moniker by 2004.
Changing a name is an expensive proposition, since it gives the new-age bent of the board full flight in lobbing another unsightly acronym on to the market.
© 2002 Sydney Morning Herald