BlueScope Steeled by Turnaround Despite China Glut

BlueScope’s largest profit since 2008 follows cost-cutting to keep Australia’s biggest steelworks open

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Hot Roll Coils are formed during the manufacturing stage of production at the BlueScope Steel Port Kembla Steelworks near Sydney, Australia. PHOTO: BLOOMBERG NEWS

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RHIANNON HOYLE

Aug. 22, 2016 4:34 a.m. ET

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SYDNEY—A year ago, BlueScope Steel Ltd. worried that its Port Kembla steelworks—Australia’s biggest with more than 4,000 workers—no longer had a future.

China was flooding the global market with steel made at a fraction of the cost of material produced elsewhere. Governments from the U.S. to Australia risked a global trade war by imposing tariffs on steel imports, fearing inaction would lead to steep job losses. BlueScope’s domestic rival Arrium Ltd. became insolvent.

BlueScope Chief Executive Paul O’Malley offered Port Kembla’s labor unions a deal: support a radical cost-cutting plan that included 500 job losses, a three-year wage freeze and suspension of bonus payments, and BlueScope would keep the steelworks south of Sydney open. That bet paid off when BlueScope told investors in October an agreement had been reached.

With manufacturing operations spanning the U.S. to Southeast Asia, BlueScope has achieved a turnaround that has eluded many of its biggest rivals so far. On Monday, BlueScope reported annual net profit of 353.8 million Australian dollars (US$270.3 million)—its biggest since 2008 and a near tripling on the A$136.3-million profit in the prior financial year.

“There is nothing more satisfying than saving 4,500 jobs,” Mr. O’Malley said. “Twelve months ago we weren’t sure whether the steelworks had a future.”

In contrast, U.S. Steel Corp. continues to be loss-making despite cutting thousands of jobs and idling plants. In Europe, German conglomerateThyssenKrupp AG has held talks with Tata Steel Ltd. of India and other steel groups over a potential tie-up as those companies seek to strengthen in rocky markets. London-based Caparo Industries PLC initiated bankruptcy proceedings last year for 16 of its 20 steel businesses.

The global steel industry’s woes have become a major issue for many governments, given the jobs at risk. The U.K. government has met with Tata Steelas it weighs the future of its operations in the country, which employ 11,000 people at nine plants. The U.S. and Europe have imposed hefty tariffs on imports of certain steel products in an effort to shore up profits of local producers.

Most complaints of lawmakers and industry executives are directed at China, the world’s No. 1 steel producer, which has been churning out steel at a record daily pace. China’s first-half exports hit 57.12 million metric tons, up 9% on-year. China’s premier, Li Keqiang, recently said the steel supply glut is a global problem and “not triggered by one country.”

“I think we should plan for global oversupply occurring for some time,” Mr. O’Malley said.

He said Port Kembla will need to keep reducing costs to stay open for the long run and warrant the next big upgrade that will be required a decade down the line.

Still, he expects BlueScope’s underlying earnings to rise by 50% in the six months through December, compared with the January-June period.

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Workers oversee production at the BlueScope Steel Port Kembla Steelworks, Australia’s biggest.PHOTO: BLOOMBERG NEWS

BlueScope’s recovery has benefited from the U.S. tariffs, which sent local steel prices sharply higher. U.S. benchmark hot-rolled coil is up almost 60% this year to roughly US$596 a ton, according to The Steel Index. Prices in Europe and Asia are also sharply higher.

During the year, BlueScope bought out Cargill Inc. from their U.S. venture North Star for US$720 million.

When BlueScope bought the rest of North Star in October, management targeted net-debt-to-earnings, a key fiscal metric, of less than 1.0 times within 12 to 18 months. In late 2015, net-debt-to-earnings was recorded as 1.6 times and halved to 0.8 times by the end of June.

“They had very strong profitability despite what we agree are very weak operating conditions,” said Moody’s Investors Service analyst Matthew Moore.

BlueScope has faced painful decisions before. A strong Australian dollar, caused by a mining boom, made its products less competitive. In 2011, BlueScope abandoned its unprofitable export business that historically accounted for around half its sales.

It also snubbed the strategy pursued by Arrium, spun off from BHP Billiton Ltd.in 2000, which bought iron-ore mines to counter the rising cost of steelmaking ingredients. Arrium’s strategy unraveled as a 70% slump in iron-ore prices left it struggling to repay debts, forcing its lenders to call in insolvency specialists earlier this year.

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Paul O'Malley, chief executive officer and managing director of BlueScope Steel Ltd. Despite the company’s turnaround, he said the Port Kembla facility will need to keep reducing costs to stay open for the long run. PHOTO:BLOOMBERG NEWS

BlueScope hasn’t ruled out buying parts of Arrium’s business, although Mr. O’Malley was circumspect about a deal. “To be honest, investing in North Star at the moment is probably as good as it gets in steelmaking,” he said.

BlueScope has also kept paying dividends, including a final payout of 3 Australian cents a share, despite the global headwinds.

Sandon Capital analyst Campbell Morgan was among those who advocated closing the Port Kembla steelworks. Now, he thinks the deal reached by BlueScope and unions is a “fantastic outcome.”

When BlueScope’s share price tumbled toward A$3 a share in the middle of last year, from almost A$7 a year earlier, Sandon Capital bought up almost 700,000 shares over May and June 2015 for an average price of A$3.30 each.

“It’s always a hairy experience when you are buying commodity companies as they’re bumping along the bottom of the cycle,” said Mr. Morgan. BlueScope’s stock has more than tripled to A$8.72 since reaching a 2½-year low in late June last year.

Source : WSJ

Yahoo CEO Marissa Mayer Faces Morale Challenge

Marissa Mayer has repeatedly said reviving growth at Yahoo Inc. would take multiple years. But many insiders have lost patience, saying the embattled chief executive has no clear sense of direction and has misled investors and advertisers about the company’s progress.

In recent months, a crisis of morale has gripped Yahoo, as dozens of executives who had been instrumental to Ms. Mayer’s turnaround plan have left for jobs elsewhere.

Ms. Mayer called a meeting with senior executives in August and asked them to sign a written agreement to stay with the company for at least three more years, according to two people familiar with the meeting.

Finance chief Ken Goldman was one of the first to pledge his commitment, but some executives left the room unsure they could make such a promise, one of the people said.

In January, Ms. Mayer expects to complete the spinoff of shares in Alibaba Holding Group Ltd., putting the focus squarely on Yahoo’s core business. Sales from that business continue to shrink, from $4.5 billion in 2012 when Ms. Mayer arrived to $4.4 billion last year and even less expected for 2015.

Under Ms. Mayer, Yahoo’s forays into mobile software, online video and search have cost the company hundreds of millions of dollars but yielded no meaningful growth in total users or revenue. Ms. Mayer said last month the company would adopt another strategy to “reset” the company’s focus, without providing details.

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The CEO has hired management consultant McKinsey & Co. to look for areas of the company to cut, said a person familiar with the matter.

Forbes and Recode earlier reported aspects of Yahoo’s troubles.

The stagnation prompted activist investor Starboard Value LP last week to call on the company to halt its Alibaba spinoff and instead find a buyer for its core business. Yahoo has failed to get prior approval of its plan from the Internal Revenue Service, raising the risk that the agency could later challenge the spinoff’s tax-free status.

On an October earnings call Ms. Mayer said the company feels strongly the deal meets requirements for tax-free status.

A Yahoo spokeswoman declined to make Ms. Mayer available for an interview. She pointed to earnings calls in which Ms. Mayer has defended the progress she has made in adding new lines of revenue from mobile ads and other areas.

The company declined to comment further.

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When the Ms. Mayer is forced to deliver bad news, she employs what she calls a “jiu-jitsu move”—trying to create a diversion by producing tantalizing information, according to people who have worked closely with her.

For example, Ms. Mayer created an accounting metric called “Mavens” designed to spotlight the growing parts of Yahoo. The grouping includes revenue from mobile, video, native and social ads but excludes Yahoo’s largest portion of revenue—its shrinking business of display ads on desktop computers.  

Analysts say much of Mavens growth comes at the expense of Yahoo’s desktop business, since many advertisers are shifting their ad spend from older formats that are more expensive and considered less effective.

“The Mavens number was ridiculous because the vast majority of what they are generating was not new revenue,” said Brian Wieser, an analyst at Pivotal Research LLC.

When Yahoo announced its $1.1 billion acquisition of Tumblr Inc. in May 2013, Ms. Mayer said that adding the blogging site’s 300 million users would put Yahoo over the 1 billion mark.

That year, Ms. Mayer led an overhaul of the methodology it used to measure its audience across desktop computers and mobile devices, according to people involved in the project. The CEO weighed in on debates about different techniques, and she often leaned on the method that produced the larger number, said one of the people.

In October 2014, more than a year after Ms. Mayer’s prediction, Yahoo said it crossed 1 billion monthly users, more than half of whom were on mobile devices. That was also the first time Yahoo relied on a new methodology to track users, the people said. On a call with analysts, Ms. Mayer said Yahoo used a different metric but didn’t disclose the methodology.

As her strategy has shifted, Ms. Mayer has variously cast Yahoo as a challenger to Netflix Inc. in online video content and as a threat to Google Inc. in Web search, but has made little progress toward either goal.

Yahoo spent more than $100 million over the past two years producing original video content, excluding the cost of employees, according to people familiar with the matter.

Yahoo Screen, a portal for professional content from media partners such asWalt Disney Co.’s ABC and The Wall Street Journal as well as Yahoo-produced content, had 25 million unique video viewers, about the same number it had early 2014, according to comScore, whose data excludes mobile users. Yahoo wrote off a $42 million expense for the cost of online shows including “Community” in the third quarter.

Yahoo’s focus and investments appear to be shifting to search. An internal project called Yahoo Index aims to build a new search engine geared toward mobile phones, people familiar with the company have said.

Yahoo relies on partners to generate search queries, sell ads and to capture users.

Perhaps the most significant partner for Yahoo to secure in search, Apple Inc.,appears to be elusive. Though Ms. Mayer has stated she is open to negotiating with the iPhone maker to become the default search provider for Apple’s mobile Safari browser, no discussions have occurred, according to people familiar with the matter.

Source : WSJ

Sony CFO looks to turn company away from cuts to growth

For most of the past decade, employees of Sony sweated over where the job axe would fall next as sales declined in almost every consumer product division from television and laptops to smartphones. Former executives complained bitterly about the loss of innovative spirit at the Japanese company famous for giving birth to the Walkman music player.

Kenichiro Yoshida, chief financial officer who has a key role in the turnround strategy launched by chief executive Kazuo Hirai says it is time for the electronics and entertainment group to shed this negative legacy and start investing in the future “What this company needs is a positive mindset that is willing to grasp future opportunities. That’s the challenge for our management team,” he tells the Financial Times.

Mr Yoshida was speaking in his first media interview since becoming CFO and second in command to Mr Hirai, in April 2014.

“Until now, we rarely turned to mergers and acquisitions for our research and development, but we will be looking for those opportunities to take on new challenges,” Mr Yoshida says.

But changing the mindset of employees used to tough times will not be easy. The company racked up losses totalling more than $8.8bn in the past seven years, and in excess of 35,000 employees have been let go in the past decade. Much of that time was spent on scaling down Sony’s businesses, resulting in the sale of its Vaio PC business and the spin-offs of its TV and Walkman divisions.

It is still plugging losses from its smartphone business. Some investors are not convinced it needs to keep the unit but Mr Yoshida says the company has no plans to sell its mobile division.

Sony signalled the first signs of a shift in approach last month when it announced a plan to raise Y420bn ($3.4bn) through the sale of new shares and convertible bonds. About 84 per cent of those proceeds will be spent to strengthen its camera sensors, while the rest will be used to repay its debt.

Having relinquished its lead in portable music players and TVs, image sensors is one of the few areas in which Sony still holds sway. In terms of value, the company controls about 40 per cent of the global market for CMOS sensors which are used in Apple’s iPhone 6 and Samsung’s Galaxy S6. Its image sensor business accounted for nearly a third of its first-quarter operating profits.

As more homes and cars become connected to the internet, Sony hopes the demand for higher-quality sensors will expand further. Mr Yoshida says potential M&A targets include start-ups with skills in computer algorithms to perform image processing.

Since Mr Yoshida became CFO, share prices have nearly doubled. Investors have welcomed greater transparency he has brought to the company including the disclosure of financial targets for each business segment and an increase in investor briefings.

People who know Mr Yoshida describe him as blunt and ruthless in seeking explanations for failure to meet targets, although he rarely raises his voice. He also has a reputation for digging up embarrassing numbers that employees would rather forget — such as a poor record of 15 profit warnings in the past seven years.

“You have to face reality. I feel disclosing the bad parts will lead to accountability and transparency,” Mr Yoshida says.

Sony’s previous restructuring attempts were often hampered by former executives who continued to see the company’s future in gadgets instead of software. In April, Mr Hirai received a scathing letter from a former chief financial officer, calling for the instalment of more engineers to revive “the Sony spirit”.

“It’s very difficult to move a company with the size of Sony from one way of thinking to another. To a large extent, the current management has achieved that,” says Pelham Smithers, who runs a boutique research firm focused on Japan.

When Mr Hirai turned to Mr Yoshida to help with his turnround plan, the new CFO warned employees that he would not be able to make everyone happy. Those words quickly turned true as Sony jettisoned its PC business and announced plans to cut more than 2,000 jobs in the mobile segment.

“There is nothing that is everlasting,” Mr Yoshida says. “But we want Sony to survive in a good shape.”

Analysts say a bigger test for Mr Yoshida is to come as Sony completes its final leg of fixes to its businesses.

“Sony needs to go beyond a restructuring phase for its next stage of growth. This is only the beginning and we still do not know whether Mr Yoshida can deliver on that front,” says Eiichi Katayama, head of Japan research at Bank of America Merrill Lynch.

Mr Smithers adds that Sony’s recovery still seems cyclical. “We need to see how Sony does in a downturn to be able to demonstrate the extent of its improvement.”

Source : FT

P&G’s slow turnround frustrates analysts

Analysts expressed frustration with the slow pace of Procter & Gamble’s turnround after a collapse in fourth-quarter profit and muted outlook sent shares in the world’s largest consumer products group down nearly 4 per cent.

P&G, which has been divesting tens of billions of dollars worth of brands, reported sales down 9 per cent to $17.8bn in the three months ended June, highlighting the challenges facing incoming chief executive David Taylor.

Net income for the maker of Tide laundry products and Pampers nappies shrank 80 per cent to $521m, or 22 cents a share, dragged down by restructuring costs, currency effects, and a $2bn charge to reflect the impact of Venezuela’s currency crisis.

The company said it had become impossible to convert the volatile Venezuelan bolívar or pay dividends in the country, forcing it to stop consolidating the results of its local operations under GAAP. It will instead report dividends from its Venezuelan subsidiaries as operating income once the cash has left the country.

P&G’s fourth quarter showed productivity improvements and a 22 per cent increase in earnings excluding restructuring costs and the impact of a stronger dollar. However, in a company conference call, analysts asked why there was still no real evidence of underlying earnings growth, whether there was a “Plan B”, and whether the company should be split up.

One highlighted the fact that fiscal 2015 organic sales growth, which strips out extraordinary items and forex effects, was 1 per cent higher, but for the 10 key business segments P&G is focusing on, that growth stood at only 2 per cent.

Chairman and chief executive AG Lafley and chief financial officer Jon Moeller batted off the frustrations, promising to deliver stronger growth in the coming year. They said that if parts of the strategy were not working then they would change them, but that the company still needed time for the turnround to take effect.

“Clearly we recognise the need to grow faster and think we’re making the right choices to do that,” Mr Lafley said. “The last thing I want to do is chase volume and share that has no value. We’ve been to that movie before. We’re picking our spots, and doing it with products that consumers prefer.”

The company’s outlook remains subdued for the current year, amid currency and macroeconomic headwinds in emerging markets and Europe. P&G’s shares dropped 3.9 per cent to $77.44 by close of trading in New York.

It expects revenue to fall by “low to-mid single digits” this year. An expected EPS increase of 53-63 per cent this year from $2.44 will come as it rebounds from the Venezuelan charge.

Even when extraordinary charges and currency movements are excluded, organic sales are expected to meet forecasts of “low-single digits”.

“We do well when we focus on following the shopper and consumer,” Mr Lafley said. “One of the big questions is how fast can we do this and my view is that we are much more interested in getting it right and making changes that sustain value creation.”

P&G, like many multinationals, is suffering in the emerging market slowdown. It faces particular pressure in Russia, where P&G has dominant market share, and where sales tumbled nearly 60 per cent in June.

Having sold nearly 100 brands, the company is promising to shift to growth mode in areas such as beauty and grooming, and nappies. As part of this transition, David Taylor will replace AG Lafley as chief executive in November.

For the full-year ended June 30, sales dropped 5 per cent to $76.3bn, while EPS dropped 21 per cent to $3.06.

Source : FT

Failed Retail Brands Get New Lives on Web

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An investor group led by New York businessman Steve Russo bought Delia’s intellectual property and customer lists for $2.5 million. 

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The going-out-of-business sales had already ended at Delia’s, a teen-clothing chain. But then, this message popped up on Delia’s dormant Instagram page: “The internets have spoken! We are coming BACK!” it said, below tiled images of a model mugging at the camera in Delia’s shirts.

Entrepreneurs and investment firms are snapping up the intellectual-property rights to retailers that have fallen on hard times, taking advantage of a built-in audience to launch lower-cost small businesses online without the overhead of maintaining dozens or hundreds of locations.

But capturing enough attention with online- and catalog-only strategies can be difficult, retail analysts say, and longtime customers of a particular brand will be quick to flee if they don’t see the kinds of products they grew to love.

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As liquidators cleared Delia’s stores earlier this year, for instance, an investor group led by New York businessman Steve Russo in February bought the brand’s intellectual property and customer lists for $2.5 million. Now, he and his partner owners are preparing to relaunch Delia’s as an online- and catalog-only store as soon as the end of July.

Other brands making a comeback as smaller businesses include the now-defunct children’s clothing purveyor Naartjie Kids, which in November sold its name in bankruptcy to a South African company that has promised to reopen its U.S. online store. And the lingerie chain Frederick’s of Hollywood, which recently closed its fewer than 100 remaining stores and filed for bankruptcy, is planning to sell its e-commerce business to a company that revives and licenses brands.

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“I think this can be a viable strategy, particularly if you’re correcting what might have been a fundamental flaw in the original business model,” said Cathy Leonhardt, a managing director at Peter J. Solomon Co. and co-head of its retail group.

“Barriers to entry and execution are fairly low” with e-commerce stores, added David Peress, executive vice president at intellectual-property advisory firm Hilco Streambank.

Bradley Snyder, executive managing director at asset-valuation, advisory and liquidation firm Tiger Capital Group, said every intellectual property sale has several considerations, including, “What’s the future of the brand? Is it interesting to people? Where should it logically be?”

Last year, private-equity firm Sycamore Partners bought the intellectual property rights to Coldwater Creek, the women’s retailer that filed for bankruptcy and closed its 365 stores. Sycamore is backing a catalog and website that it says feature the same “beloved basics” and new products the retailer used to carry.

Longtime Coldwater Creek shopper and Philadelphia-area resident Karen Staub said she was surprised to find a Coldwater Creek catalog in her mailbox in March.

“I was like, hmm, where’d this come from?” Ms. Staub, 63, said recently. “Then I got another one, and I realized they were back in business.”

Sycamore, which also owns women’s clothing chain Talbots and other retailers, declined to comment on Coldwater Creek’s relaunch.

Delia’s rose to popularity in the 1990s and had 92 retail stores when it went out of business last month. But Mr. Russo believes the brand is strong enough to survive and even thrive in a leaner format, because he believes the brand still appeals to young girls and moms looking for clean, age-appropriate fashions.

A key part of the chain’s possible appeal is its social-media following. The “coming BACK” post, for instance, got more than 15,000 Instagram “likes” and comments. To spread the word about its relaunch, the business is now using the hash tag #DeliasForever and such messages as “Online only = ALWAYS OPEN!”

Mr. Russo is taking advantage of the followers Delia’s built up on social media before its bankruptcy, and he kept on an assistant in her 20s from Delia’s social-media department to manage the Instagram account.

The founder of FAB Starpoint, a youth-accessory and backpack maker that licenses Hello Kitty, Nickelodeon and other brands, Mr. Russo believes Delia’s fell into bankruptcy in December because the chain’s previous management “didn’t focus on the back-end of the business” for years. “They just bled tremendous amounts of money.” A publicly traded company until its shutdown, Delia’s brought on retail-industry veteran Tracy Gardner as chief executive in May 2013. Ms. Gardner declined to comment.

In 2008, Mr. Russo started Artisan House, a handbag and accessory wholesaler that sells to department and specialty stores. He also owns the rights to operate Hello Kitty stores in the U.S.

All told, Mr. Russo said, his businesses bring in $250 million in revenue annually and employ around 200 people.

He said he expects the new Delia’s to bring in $40 million in sales by 2017 and eventually top $75 million.

Mr. Russo is working on ways to overhaul operations, including by improving the mobile shopping site and making sure that catalogs go only to the brand’s target audience. That’s a process he undertook in 2013, he says, when he and one of his partners on the Delia’s deal bought Alloy, an online- and catalog-only women’s retailer that was owned by Delia’s.

Without a physical presence, it can be difficult for small businesses to reach potential shoppers. “The retailer has to stand for something,” said Steve Reiner, managing director at B. Riley & Co. “You can’t just close the doors and become e-commerce unless you were really a player beforehand.”

The brand’s strength on social media helped to persuade vendor Taylor Shapiro to commit to doing business with the new operation. “Quite honestly, what intrigues me about Delia’s is the fact that they have 300,000 followers on Instagram,” said Mr. Shapiro, president of Los Angeles-based wholesaler Sunrise Brand’s private-label division. “I can see an audience.”

Working with the scaled-back new Delia’s is akin to working with a retailer with just a handful of locations, something he typically wouldn’t do, he said.

Source : WSJ