Corporate Strategy 3

An annual report is a compressive report on a company’s activities over a given year. It is prepared for the purpose of providing the performance of the business to the investors, potential investors and stakeholders. The report should be clear and precise so that the public can understand. The directors are given responsibility for preparing the report and the contents must be in accordance to the applicable laws of national and international financial reporting and accounting standards, (Deere, 2006). The major components of an annual report is the financial statements which are to be prepared by the director selecting appropriate policies that needs to consistently be followed. In this study, an annual report for BlueScope will be prepared by studying its financial statements for the year 2014/2015. An analysis of the how the company uses its strategic management in achieving its objectives will be studied. A guide on whether the potential investors are to worth investing their money into the company will be determined.

Company description

BlueScope is a steel industry that traces its history from 1915 whose future lies in the sale of innovative, and technologically based steel components (BlueScope, 2016). The success of the company depends on customers and suppliers preferring their products due to the value it has placed on the involvement of the two parties. BlueScope has established its operations in 17 countries and point of sales around the world. The company has strength in engineering steel buildings and constructing markets for its products in North America and China. The company is financially strong as it has focused on support of value for investors. The company values its earnings from quality production, returns on the capital that is invested, values credible growth plans and power of the balance sheet.

Company products and progress

The company produces a range of building and construction products, automotive, white goods and manufacturing applications. The company has a variety of brands; examples of brands are LYSAGHT® for steel products and BlueScope Zacs®. The company supply building materials to industrial and commercial markets with the leading brands being Butler® and Varco Pruden® from Asia and North America. The plant located in Australian as a distributor has been an important part is expected to be restructured so as to increase its sales to $20 million per annum by 2017. This is in order to serve customer’s needs in the best possible manner. The management has agreed to sell 28% of its shares in McDonalds Lime Limited to Graymont Limited at NZ $41 million, (Bluescope, 2016).

Sustainability of the business

The company is governed by a bond statement that is committed to customers, employees, shareholders and communities. Every individual undertaking activities on behalf of the company is to practice honesty and integrity. The guide to business conduct is set upon how individuals are to behave. The company obtains unused materials such as mining and fabrications for extraction. It then designs and construct customer materials that are to be transported to consumer, wholesalers and retailers. The product is then utilized as intended and issues of reuse, recycling or disposal to landfill is administered. The company has been engaged with initiatives that may probably lead to reductions of the raw materials costs, manufacturing, logistics, supply chains and achieve revenue growth. On the issue of safety, the company focuses on zero harm to all its employees and consumers. In accordance to 2015 financial year, the rate of frequency in injuries among the employees reduced to 0.6 from 0.9 in 2014, (Bluescope, 2016).

Company Strategies and Oversights

BlueScope is a premium leader in painted steel products and the company has its own brand. Although the company’s strengths are regional, its diverse portfolio in the industry offer added advantages that emanate from markets and technological advancements. The company has a strong competitive advantage in the global market in engineering and selling steel products. The company’s outstanding brand since 2002 has made it a leader in steel building technologies. With the efforts that come with valued benchmarking actions, BlueScope is now the third largest steel manufacturing, painting and coating company in the globe (Bluescope, 2016). The company is a leading steel technology building and construction company. Through a strategic joint venture, the company is operates one the leading steel plant in North America region.

BlueScope is also keeping an eye on the industry’s progress. The company’s corporate report reveals that globally, the steel industry has been going through extensive changes in recent years. For example, China’s steel export has doubled over a 15 year period. This suggest the steel industry continues to grow on a practical note contrary to a theoretical perspective that steel material are definite and can be depleted. Through review of the market trends and progress, BlueScope continuously review its strategic growth to ensure that it has the best quality assets and is continuously focusing on developing high quality premium branded products and business cross its strategic locations in the world. Also, the company is keen on improving its cost competitiveness across its strategic locations. BlueScope is working on game changing strategic plan. The company has tested both profits and losses and therefore could rather invest on profit promising activities as compared to profit diminishing activities. For example, the Australia and New Zealand strategic locations are not fit for manufacturing. Therefore, to realize profits in these locations, the company is aims at outsourcing its steel substrates. Outsourcing strategy will improve the costs of product production hence improving associate profit margins. The company has underway processes to reduce raw material costs throughout the supply chain. Also, the company aim to strategically reducing overheads in order to achieve revenue growth.

The business intends to drive growth of its products in Asia. The company will do so by delivering competitive commodities in all local markets so as to maximize value of North Star. BlueScope plan to focus on expansion of the business to be a high quality premium branded business within the world. The company also plans to improve its cost competitiveness with other steel industries in Australia and New Zealand. On this, the company is strategizing on improving approaches to cost so as to be able to maintain most of its stations by employing a larger number of employees.

Payment of dividends

The board of directors approved payment of 3% dividends which was the final dividend requiring payments. There are specific dates for the payment of dividends that remained in 2015 with payment of the future dividends being determined by the company’s performance. Also, this year’s dividend per share is considered to be highest, as high as 6%.

Future prospects and presumed risks

Since 2009 financial year, BlueScope experienced a lower demand for its products in North America and Australia. The low demand is attributed to lower prices of steel commodities and the mix up of global financial crisis. Recently, due to growth of Australian currency, the company has managed to restructure its operations which have contributed to profits being recorded since 2013 and more improvements in 2014 and 2015 financial years. The company is challenges by continuity of weak economic conditions which may have an adverse effect on the steel industries. Probability of permanent downtown of the industries touching BlueScope operations may negatively affect the company’s financial assumptions. The global decline in the prices of steel or increase in prices of raw materials without a correspondence on steel prices increase may also have an adverse effect on the financial prospect of the business. The issue of exchange rates fluctuations may result to Australian steel being of no value which is a strategy that the management is trying to tackle in offsetting US dollar exchanges. Competition from materials and producers that may potentially reduce market price for BlueScope products is a risk that the company is unable to maintain and control. The company is also facing an issue of being unable to cost base relative to its competitors such as maintenance of their own raw materials. Inability to control assets especially when the market is weakening is a threat to the company.

The 2014/2015 operating and financial review

BlueScope is composed of five segments that will be evaluated as a whole. These segments include the New Zealand and Pacific Steel (NZPac), Australian Steel Products (ASP), Global Building Solutions (GBS), North America and India (BP), Building Products ASEAN, and Hot Rolled Products North America (HRPNA). The 2014/2015 financial report comply with Australian accounting standards (AAS) which is further a compliant with international financing standards. The 2015 financial year shows a $2.3 million arising from building solutions Australian business with a foreign exchange loss of $0.5 million arising from Taiwan business which later closed. This was an increase from 2014 financial year that recorded $49.6 Million pre-tax that was composed of $26.7 million fixed assets and intangible write off with a loss of $0.3 million pre-tax. In 2015, the transactions that involved integration costs in Australian businesses reflected a cost retailing at $6.4 million while the corporate business advancement costs were at $2.5 million before tax. Accounting adjustments were made after the closure of Australian defined benefits which led to annual profits at $23.8 million and of the corporate at $34.4 million. After the closure of the funds, there was a difference in the accounting obligation to that of the member’s actual benefits requiring some amount of the money to be credited to profit and loss accounts as required by AAS. There was an increase in the number of staff redundancy and restructuring cost amounting to $30 million before tax. There was profit in sale of land and buildings at North American building amounting to $9.4 million before tax and a net loss of $2.7 million, (Bluescope, 2016). This was not the case for in 2014 there was a low gain from the sale of equipment. The utilization of impaired deferred tax on the assets from Australia arose from a favorable aspect in timing the difference that was more than tax losses which were initially generated in 2015.

BlueScope’s overall financial performance description

From the Chairman of the company, the 2015 financial year was the best financial performance year for BlueScope, (Kraehe, 2016). This year, the company performed better than the previous four years since the last global recession. The positive performance indicates that the company is returning from losses to profits. However, the rate of positive performance is still low considering that since the Company has reported losses consecutively since 2011. In a 10-year financial history, the company has reported loss in five years and profit in five years. More of the losses were realized in the later years than earlier years. The company admits that a lot of work needs to be done in order to continue realizing positive performance that was registered in the last fiscal year.

This company’s underlying financial performance included an increase of 9% (from $218.7 to $136.3) of net profit. The company’s underlying EBIT was $301.8 million considered a 14% increase from the previous fiscal year. Also, from the Chairman’s desk, the net debt for the company was the $275.2 million. Through strong cash earnings and proper timing of the working capital, the company achieved reliable cash flow in the latter half of the last financial year, (Kraehe, 2016). For funding, BlueScope’s financial liquidity was $1,591.0 million in 2015 up from $1,072.5 million from 2014.

The company’s management note’s that the risk of financial losses or risk of unprecedented liability continues to reduce. For example, ensuring employee safety is a major aspect of keeping unexpected risks low. BlueScope has tried to invest on safety net and aim at achieving zero harm or zero injury in the workplace. Continued efforts of reducing employee injury have been reduced from 0.9 per million hours worked in 2014 to 0.6 per million hours worked in 2015. On the same note, the company’s Medical Treated Injury Frequency Rate remained at 4.6 per million work hours in 2015 as compared to 5.3 per million in the year 2014. The low injury and medical treatment due to workplace injury remain low because of collaborated efforts from employees and the company, (Kraehe, 2016). Employees are committed to improving workplace safety, are ready and willing to bring to attention any danger that can cause injury and harm. They also have personal efforts to refuse or avoid working in dangerous workplace environment. Chairman has indicated that BlueScope employees are willing to maintain a world class working environment that is 100% safe. The company believes that achieving a 99.999% workplace safety will assist the company reduce unprecedented risks that are costly to the company.

Financial performance of ASP

a) Vertical analysis

Also, a comprehensive vertical analysis of the company’s income statement continue to reveal that there was an 8% increase ($8.2 million) in the number of sales which is said to have originated from business activities held in 2014. There were higher levels of exports than what was estimated with more dispatches being made in North America. The writing off of unamortized borrowing that was incurred in 2014 was refinanced which brought out the increase. Business activities held outside Australia led to a net tax expense amounting to $46.8 million which was attributed to favorable movements that exceed tax losses in 2015. Net assets increased from $282.4 million to $4, 739.1 million in June 2015 from $4,456.7 million in June 2014. The increase may be attributed to lowering of Australian currency when compared to US dollars. additionally, increases in assets observed in $217.3 million increase in equipment, property and plant materials, $105.1million decrease in provisions, $45.1 million increase in net tax assets, $5.9 million increase in equity investments and 430.7 million increase in intangible assets. However, decrease in net assets was $57.3 increase in payables, $55.3 increase in benefits associated to retirements and $10.6 million decrease in inventories, (Bluescope, 2016).

Vertical analysis of BlueScope’s financial statement continues to reveal that the company achieved a profit before income tax of 222.2 million in 2015. However after income tax, the profits were 177.1 million. At least the company achieved profits in 2015, from a loss in the previous year.

Financial ratios based on vertical analysis of the income statement

1) Gross Margin

BlueScope realized a gross margin profit of 43.2% in the year 2015. This profit margin is considered high enough because the company’s sales are sufficient to cover up business costs. Also, the higher percentage of gross profit also shows that the company has significant inventory that can be converted into cash that can be used to pay for acquired products. Large inventory will convert each unit into much larger cash.

2) Profit Margin

This company’s profit margin is 1.6%. This profit margin calculation reveals that the company is capable of making profits. Despite very low profit margin, the company is did not make a loss at least for the 2015 financial year.

3) Earnings per Share

BlueScope’s earning per share was 0.24 dollars in the fiscal year 2015. At least, the company reported positive earnings per share meaning that the company made profit in this year as compared to previous three years.

4) Return on Assets Ratio

BlueScope’s asset performance can be measured by return on assets ratio (ROA). The ROA for this company for the year 2015 is 1.8%. The 1.8% ROA implies that the company’s assets have deficits in management.

Financial ratios explanation

The net income in a business refers to the positive result in terms of gains and revenues with expenses and losses removed. The net income details are reported in the business’s income statement. In US, the regular business income includes the income tax expense which refers to the items reported in the income statement, (McMullen et al., 2013). A business income causes an increase in the retained earnings account resulting in an increase in stockholder’s equity while a loss causes a decrease. In business, marketing is an aspect of identifying, anticipating and satisfying customer requirements with an idea of making profit within the business. Hence, marketing a business products or services will affect the net income of a business in the sense that the channel used for marketing will dictate the reaching of information to the customer in the intended manner. For instance, marketing of goods using legal advice to the consumers gives an assumption that more of the consumers will be given a chance to test the product, and this will attract more consumes which will later increase the net income of a business. O the other hand, when marketing of good or services involves use of channels like newspapers, the products are likely not to be reached by the a lot of consumers especially due to advancement in technology where everything seems to be digitized, thus most individuals are depended on social media for information. This will cause the net income of the business to decrease at the expense of using expensive channels that do not attract a lot of consumes, making the business to incur expenses.

In any business, the management performance is evaluated on the basis of profits and cost control. Unethical management practices might be chosen in meeting the objectives in ways that are not beneficial to the long-term viability of the business. For instance, cutting costs through the elimination of wasteful spending benefits the business in both short-term and long-term profits, thus increasing the net income of a business, while cutting costs in buying inferior-quality supplies only benefits the company in short-term and causes losses in the long-term basis. This will have an effect on the net-income of the business at the end of all transactions. The cash sales may get trapped due to inappropriate accounting either in the balance sheet or in the ledger accounts. This may be attributed to customer delays in payments resulting into build-up of receivables making the inventories to rise since the products are not being returned. In such a case, the errors in the balance sheet may cause over or under-estimations in the net income of a business. The accounting errors can further give provisional profitability of the business income while in real sense; the original income will be a net-loss. Additionally, manipulation of income can be used in increasing the sales of the company as a way of causing income increase for the business. The organizational behavior refers to the measurement of group or individual performances and activity within an organization. Thus, if the employees are focused in improving the production and sale of products or services, the organization will be recording higher sales at the expense of their hard work. Additionally, if the employees are motivated at work place, they tend to perfect their work and thus, they become more productive which will be reflected in the net sales and income for the company. On the other hand, if the employees care less about their tasks and productivity at the work place, there will be less output which will be portrayed in the recording of losses, thus a decrease in net income will be identified.

The issue of debts in a business results to money being allocated for their payment in a manner that all the finances will be used for the settlement of the debts. Thus, financial crises will only consider the payment of the debts. The creditors are not interested on the effects the debt have on the business as their concern is in payment. Such a scenario causes a decrease in net income for the business. A business operation such as engaging in activities that causes an increase in expense and a decrease in sales results in to net income decrease while the vice versa results in net income increase. At the same time, it is possible to lose money on sales but still make profits which are dependent on the source of income for the business. The business need to track the manufacturing and overhead expenses so as to have increases in the net income.

The quantitative factors such as net profits, sales earnings and the cost of the merchandise have effects on the net income, for instance the inventory numbers of the items sold or bought; net revenues and cost of goods sold are the major effects on the net income. The accountants may wrongly record the inventories as assets on the balance sheet which in the long line will result in to a decrease in the net income because such sales should be recorded as sales revenue only when the transaction has actually taken place. The devalued inventory affects the profit margin hence when the accountants get rid of the inventory through increased sales, there will be an increase in the profit margin that will show an increase net income for the business. Additionally, the effect if underrated variables resulting from the payment of taxes which most of the times the business is not able to control causes a decrease in net income, thus the accountants’ needs to be paying the taxes on regular basis so as to avoid incurring a higher loss in the net income.

b) Horizontal analysis

Horizontal analysis of the BlueScope income statement for four consecutive years reveals that the company’s revenue has been dynamic. In 2013, the company reported low income revenue as compared to other 3 years. However, in 2015 it registered the highest income as compared to the previous years, see figure 1 below.

Figure 1: BlueScope revenue for four consecutive years.

The Trailing Twelve Months (TTM) signifies that the company has improved in terms of revenue income. The current TTM revenue is close to the latest reported year, which is 2015. The TTM will boost the company’s image because investors are likely to use the last twelve months to make investment choices. For example, even though 2013 is a recent year and the income was below 7.5 billion and way below the year 2012 and 2013, potential investors will prefer using making investment choices based on TTM. Therefore, the TTM revenue value is better than even the last fiscal year’s results. With this information, the likelihood of the revenue growing to above 9 billion in 2016 is high.

Horizontal analysis of BlueScope’s financial balance sheet reveals that the total cash: cash and cash equivalents as well as short-term investments have gone up over the years. The figures were 172 million U.S. dollars in 2011, but were 520 in 2015. The percentage change within a four year period of total cash was 202%. The change is expected due to increased investment and increased cash acquisitions through sells and investors equity. Also, the increase in cash is attributed to increasing cash revenue generated through accounts receivable and inventories. Nevertheless, the amount of total current assets calculated under current asset was lower in 2015, (3,186 million) as compared to that of 2011, (3,222) as shown in figure 2 below. The percentage change for amount of current assets is 1.1%. This change seems not significant as compared to the changes that were experienced with cash and cash equivalents. The company seemed to grow its current asset investment at a 1% rate. Even though such a small percentage change was not expected, it shows that the company has some kind of stability. The company is not relying on short term investment perhaps due to the nature of its industry.

Figure 2: BlueScope’s total asset in five years from 2011 to 2012.

Environmental Analysis

Environmental analysis becomes part of the company’s comprehensive analysis because investors need to know the requirements that exist and that are critical to the current organizational changes. The importance of including a financial analysis in comprehensive analysis is to show the public that the company does not have legal environmental issues to deal with. A firm with its activities that pollute the environment can have many incidents that will attract penalty with relevant authoritative bodies. For example, BlueScope is subject to significant environmental regulation wherever it has operations. Therefore, it may have more than one regulation (local and international) is a particular location. In Australia, the company reported 15 incidents of violating environmental laws and received minor penalties. The 15 incidents of minor violations will not affect the company’s financial income revenue. Therefore, investors are likely to look at the company environmental relationship before trying to invest in BlueScope. However, if the company has large violations, investors will avoid the company because it may be required to use large amount of investor’s funds as fines for environmental violations. As it is of now, BlueScope has little environmental liability and that is a promising trend in a restricted environment, which sometimes have double restrictive laws.

Possible strategic alternatives that BlueScope should follow

According to the annual financial report, BlueScope has a slow positive performance. The company’s performance is not promising if the current trend remains so. Therefore, the company should re-evaluate its strategic plan, create a cost-effective plan and develop a plan that aims at restoring the company profitability. BlueScope should develop a strategic alternative in the following ways:

a) Focusing on innovation

All industries today are in the innovation age. Therefore, BlueScope should focus on developing innovative products and services in order to remain on the competitive age. Innovations at BlueScope should aim at embedding a culture of innovation throughout the organization where those innovators with exceptional and profitable projects should be recognized and rewarded accordingly. The company should develop a toolbox of ideas that should be developed and implemented throughout the organization’s locations in the world. Companies that have won customers by producing and selling their innovative products that are two years ahead of their competitors have won with large profit margins. Even though innovation can take long to bring a product that can be sold to the company’s line of product, the long-term development strategy through research and development is considered from the perspective of the long-term company’s investment.

On the array of innovation, BlueScope should not only rely on its internal employees for innovating new products and processes. The company should attract or outsource innovative ideas from individuals, startups and structural engineering research institution. Also, BlueScope can develop its center of excellence where the company can create an incubation program for developing new innovative products from individuals. The company should be flexible in terms of diversity. The company has resources and products that are always on demand across the world hence can use this opportunity to venture into new strategic products and services such as real estate development.

b) New approach to doing business

New approaches to doing business come from innovations. Response to innovation at BlueScope is a right way to creating and taking advantage of new opportunities. For example, this company introduced a new SlimFlor system with a potential of reshaping steel frame and formwork constructions. The SlimFlor system was developed using the Fielders CF210 protocol. The new SlimFlor is a product of multi-storey building applications that has a reduced floor thickness to 290mm. The SlimFlor success is an innovation aiming at reducing the constructions costs of the multistory building. Before, SlimFlor appeared, the standard size of the multi-storey floor thickness was 658mm. This thickness turned away real estate developers, but the new SlimFlor system is becoming attractive to developers. With the potential success of SlimFlor, BlueScope should look into marketing and improving this product that presents innovative pioneer success.

c) Research and development

BlueScope started in 2002. In its latest annual report, the company has not highlighted its scope of research and development. The company should benchmark R&D from similar companies in the industry. Research and development is a long-term investment aimed at bringing new products and services or improving current products within the market.

d) Strategic alliances

BlueScope has business units in five locations in the globe. Throughout its history, the company has not indicated whether or not it has tried to acquire existing or startup firms. This firm is missing an opportunity here because acquisition or strategic alliances are part of growing business when done in the most appropriate way. In addition to acquiring already existing customers and process, strategic alliances of acquisitions may reduce operating costs associated with fresh startups. BlueScope should develop risk sharing strategies that are critical especially when entering a new market.

Potential Investors guide on BlueScope’s investment

BlueScope Steel Limited began in 2002. The company is in the construction industry that is promising in terms of growth and stability. The construction industry is stable. Potential investors are likely to look at this industry fact to invest their money in the company. However, historical analysis of the company’s financial performance reveal that BlueScope is has made losses. It could be critical to make decisions on the financial trend analysis of the company. If investors use trend analysis, the chances of investing in the company are likely to below. Nevertheless, the company has potential to grow. Coupled with the stability of the industry, the company has demonstrated potential for growth. The latest annual report and financial performance can be used as the standard investment decision-making document. The company seems to have realized the areas that require improvement.

Based on financial ratios, BlueScope has a positive performance even though from a lower margin. The profit margin, the gross margin and the return on asset ratio all have positive performance suggesting that the company made profits in the last fiscal year. The earnings per share was very low at 0.24 dollars. Even though it was such low, shareholders still made profit on their shares and this should encourage investors to invest their money on the company. Also, BlueScope has attracted diverse investors. Approximately 20 corporate organizations own more than 80% shares of the company. The remaining 20% is owned by thousands of individual shareholders. With this number of shareholders, the company seems to have diversified its risks appropriately and this should encourage new investors.

The bottom line of investing in BlueScope is that, the company has not found its hook in the market as well as in the industry. The company is considered being in the development stage according to its financial performance. Investors who will stick by the trend analysis may choose not to put their money in the company for at least the next five years to see if the company’s financial performance is going to improve.

Conclusion

This report highlights a comprehensive annual report for BlueScope using its financial statements for the year 2014/2015. Analysis of how the company uses its strategic management in achieving its objectives was outlined. According to vertical and horizontal analysis of BlueScope’s balance sheet and income statement, the company has had dynamic results over the past ten years. In the past ten years, the company reported a negative financial performance for five years. Its financial performance has been up and down perhaps due to being a new comer in the industry, which is considered stable. 2015 fiscal year presented a positive financial performance. Investors who will use a vertical financial analysis to make decisions on whether to invest on BlueScope will choose to invest their money on the company. On the other hand, investors who will use horizontal financial analysis will choose to wait for at least five years to evaluate the business trend before investing their money on the same.

References