Month: April 2019

Innovate, globalise: how CSL avoids earnings rut

DEPARTING chief executive of CSL Brian McNamee, whose performance in building a global company now capitalised at $20 billion could be argued to have earned him the right to offer advice to Australian companies – the majority of which are stuck in an earnings rut.
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His answer is innovate, globalise and focus on productivity – salient words from a manager with the gravitas and the track record to deliver a broader perspective.

While there are some examples, particularly among our big mining, companies of innovation and globalisation, there are plenty more that have ridden the back of operating in the Australian market as monopolies or oligopolies. There answer to productivity of late has been to cut staff or wages.

The strong Australian dollar, the weaker economic environment and structural changes caused by the digital revolution have exposed a large proportion of Australian companies that had been cushioned into inaction.

Thus it is not surprising that, with the exception of CSL, the 2012 reporting season has gotten off to a pretty poor start.

Even with continuous disclosure there are plenty of companies that have already come in below expectations.

The market has been looking for 2012 earnings to fall by about half a per cent. But this includes dominant resource companies whose profits will fall much more.

Before the reporting season started, the non-resource sector was expected to post earnings growth of about 5 per cent. But there may be equity strategists (the big picture people in investment banks) that will be wondering if even the 2012 forecasts were on the optimistic side.

The bottom line is that it is hard to find the bright spots on the horizon for companies about to deliver earnings over the next couple of weeks.

Manufacturing at large is unlikely to offer any upside surprises. The dollar in particular has decimated the growth for this group and will result in many experiencing falling profits and will push some into losses.

Retail has already heralded its many challenges – the first is consumer confidence and the second is the structural competition from the online area.

Harvey Norman is the first of the big retailers to report and its earnings reflected these factors. Its move out of consumer electronics is clear evidence of the the extent to which the internet has been responsible for price deflation.

The optimists are hoping to get some positive blip from the government’s stimulus package flowing through to retail sales.

But if history is any guide, it won’t be sustainable. Government handouts do end up in the cash registers and in the poker machines, but once used up spending patterns return to normal.

The media is likely to be an equally sad tale – particularly the traditional media – print and TV. They have been squeezed by the pincer of internet induced audience fragmentation and sluggish or falling advertising revenue.

Aviation – a sector dominated by Qantas – will be ugly as domestic competition is putting pressure on yields and Qantas’ international brand continues to bleed. Building materials shouldn’t produce much joy as construction activity, particularly in residential, has been weak.

The financial services sector while sturdy is feeling the headwinds of slow credit growth and a high cost of funding. The only major bank to report in this period is the Commonwealth Bank, but it should set the tone for the remainder, which report in three months.

There are a couple of bright spots. Healthcare is one nominated by several analysts. CSL has already produced a solid result. Cochlear, however, disappointed the market due to costs associated with a recall of a product.

But this company should also be put in the clever, innovative and global group. It now has around 65 per cent of the global market in hearing bionic implants and ploughs plenty back into research and development. Its chief executive, Chris Roberts, was particularly upbeat in his commentary on the expectations for 2013. Nonetheless, the stock was trashed in yesterday’s trading.

The resource sector, while still churning out massive amounts of cash, has already been sold-off by the market this year, with expectations that most of the established players will report profit falls thanks to weaker commodity prices.

However, the mining services sector is predicted to be a brighter spot on the earnings horizon given the already committed expansions and new projects in the mining industry pipeline.

Given that markets always focus on the future, the driver of shares should now be what kind of recovery can be made across Australian listed companies in the current 2013 year.

The investment bank experts are looking for earnings growth of around 10 to 12 per cent in this period. But it’s a fair bet these will be revised down after the current reporting period is over in a month.

This story Administrator ready to work first appeared on Nanjing Night Net.

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Fording the downturn

So far Toyota’s been the star.GLOBAL downturns are the fault lines around which our automotive industry has always reinvented itself. In theory, managers should restructure their businesses and businesses should change hands whenever it improves productivity.
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Alas human nature intervenes. Corporate dreams are dreamt and restructuring is delayed … until the alternative is collapse. Way back in 1931, as the Great Depression savaged output at a South Australian automotive body manufacturer called Holden, US giant General Motors came to the rescue. The rest, as they say, is history.

VW, Leyland, Chrysler, Nissan and Mitsubishi all withdrew from car making in Australia – VW handing over to Nissan, Chrysler to Mitsubishi – long after they’d ceased to be healthy, all during crises for their parents and/or amid global downturns.

And here we are again.

After a ritual acknowledgment of the conventional wisdom that Australia is no good at making cars, the pundits peel off into ”protectionists” (sometimes dressed up as ”innovation” buffs) – who want to keep the industry alive with additional assistance – and ”free traders” who don’t. Count me among the free traders. But I’ve never bought the line that Australia couldn’t make cars without assistance.

Yes, some low-wage countries are gearing up production and, yes, our domestic market isn’t huge. But while lower-income countries will continue to grow market share in smaller, lower-quality cars, the bulk of production continues to be in high-income countries, particularly for larger, better cars. And though our market is small, so is Sweden’s. But Sweden has provided a volume base on which unique products have been built, which have then acquired export niches.

Toyota and Holden’s Australian operations have tapped into their parents’ global brands and marketing networks permitting rapid export growth. Rather than slaving away for decades building one’s presence in foreign markets, subsidiaries of global giants can win contracts with head office to supply specific market niches.

So far Toyota’s been the star, focusing all Australian production on one car line – the Camry/Aurion – manufacturing up to 150,000 units annually (right now it’s below 100,000) and consistently exporting more than half its production. Yet the Camry car line is produced in Japan and the US and if it comes to be produced in lower-cost locations, they could become preferred suppliers, first to our export markets, and ultimately to Australia.

Holden seems better placed because it manufactures unique vehicles around which more durable export niches might be able to be built. Our high exchange rate and the termination of the Pontiac brand have cruelled Holden’s exports recently, though it retains a monopoly on producing large rear wheel drive cars within GM’s network.

And then there’s Ford. Since the embarrassment of exporting the small, leaky, poorly finished convertible Capri to the US in the early 1990s, Ford US has shown scant interest in its Australian subsidiary’s entreaties to get serious about export from Australia. To utilise its assembly capacity it did some fine re-engineering of its Falcon car line to also produce the Ford Territory. But with flagging domestic Falcon sales and no serious exports, total volume is now around a third of Toyotas and Holdens which is hopelessly unviable. In fact Ford Australia still has great automotive assets, but they are not – and cannot be – strategically important for its current parent. Nevertheless they could be really valuable to up-and-coming Chinese or Indian car makers.

And while new Asian car makers gear up to export millions of small and medium-size cars, they’ll have little interest in making large cars like Falcons and Fairlanes. If they owned Ford’s Australian assets they’d get a foothold in our market and, more importantly, a large, sturdy, luxurious, rear-wheel drive car to badge with their own global marque. Would it be good public policy to subsidise such a transfer? Probably not. But since the current plan is to keep throwing good money after bad, let’s make that assistance conditional on a new owner or at least major equity partner and a global sourcing plan.

This idea was high-risk politics for as long as Ford was muddling through. But now the writing’s pretty much on the wall, the indignity of begging Ford to do us the favour of taking our money to hang around a little longer looks politically riskier still.

Nicholas Gruen is CEO of Lateral Economics and a speaker at the Victoria at the Crossroads? conference on August 23-24. vu.edu.au/events/conference-victoria-at-the-crossroads.

This story Administrator ready to work first appeared on Nanjing Night Net.

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Down-to-earth look at rural land ownership

Illustration: John Spooner.I HAVE surveyed the foreign investment ”debate” and it’s a curious one. Everybody is making sense. ANZ boss Mike Smith is saying we can’t turn our backs on overseas capital when we have trillions of dollars of growth to fund. He’s right, but we have always been open to foreign investment.
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Opposition Leader Tony Abbott is out there with the Nationals behind him saying we need to more closely monitor agricultural and rural land acquisitions in part by lowering the dollar hurdle for reviews, and he’s right, too.

Agriculture is being swept up in the same boom that has lifted our miners, for the same reason – burgeoning Asian demand. It is a strategic industry on the cusp of a sustained period of high growth, and a point of natural advantage for this economy, like mining.

Australia has enough leverage to argue terms, and enough skin in the global game to want to monitor acquisition trends closely: it’s no accident that Labor is also considering establishing a national register of foreign-owned agricultural land.

Abbott was also right when he said in Beijing last month that it would ”rarely be in Australia’s national interest to allow a foreign government or its agencies to control an Australian business”.

He could have made the point more clearly, but Treasurer Wayne Swan has responded to the same concern by requiring that foreign investment from state-owned enterprises be tested to ensure that it is arm’s length.

The new chairman of the Foreign Investment Review Board, Brian Wilson, said it best this week when he told the Dow Jones news wire that Australian businesses should be run on a commercial basis, ”and not as an extension of the policy, political or economic agenda of a foreign government”.

That’s a fairly simple proposition. No developed country would disagree with it, and it does not mean that state-owned or state-linked Chinese companies cannot invest in this country as part of a broader national plan to secure crucial commodity supplies. A partial template for such investment in fact already exists, in the direct equity stakes that Japanese groups took in Australian resources projects here in the 1970s and ’80s. They shared the development risk, and received their returns not only as investors, but as customers.

Last year’s foreign investment rejection of the partly government-owned Singapore Exchange’s $8 billion attempt to take over the Australian Securities Exchange was only the second time a major acquisition had been sunk by a national interest veto since 2001, when the Howard government blocked Shell’s takeover of Woodside.

There were 42 other deals rejected in 2010-11, all of them in real estate, and FIRB approved more than 10,000 investments worth $176.7 billion, compared with $139.5 billion in 2009-10: not exactly a lockout.

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T’S said that in troubled times investors look for companies that are safe as a bank, but in these troubled times banks don’t necessarily fit the bill. But companies that own and operate toll roads that charge on a CPI-plus formula are very close to the defensive sweet-spot, as Transurban demonstrated yesterday.

The group’s official result for the year to June 30 was marred by a $138 million write-down of the Pocahontas Parkway, a US toll road that Transurban acquired in 2006. It leads to empty fields that in 2006 were expected to become suburbs: America’s property crash intervened.

Total toll revenue for the group rose as usual, however, by 5.7 per cent to $765 million. Traffic growth was actually quite subdued, at 1.9 per cent on the CityLink tollway in Melbourne that accounts for 41 per cent of group revenue, for example – but Transurban’s toll pricing formulas allow it to raise prices by at least the rate of inflation.

The group’s lucrative sideline as a tollway constructor delivered another $286 million of revenue, a 30 per cent increase over the year to June 2011, total revenue rose by 11.4 per cent to $1.15 billion, and underlying earnings before interest, tax, depreciation and amortisation (EBITDA) were 9.1 per cent higher at $784 million – but there’s some other numbers that reveal what sort of beast Transurban is.

One is the ratio of EBITDA to revenue: at 45 per cent it’s outstanding. Another is the free cash flow the group throws off, and the relationship it has to Transurban’s investor payouts. At least 95 per cent of the uncommitted cash flow is distributed to investors.

Free cash rose by 11 per cent to $433 million – or 29.8¢ a share – in the year, and Transurban lifted its distribution by 9.3 per cent to 29.5¢.

Traffic volumes are still being affected by tollway renovations and subdued economic conditions but Transurban is predicting a distribution of 31¢ in 21012-13, and you can see how it is going to happen.

Former BHP chief financial officer Chris Lynch took over as chief executive of Transurban in April 2008 and by the time he handed the reins to former Lend Lease chief operating officer Scott Charlton last month, he had pulled Transurban’s gearing down to 45 per cent, cut costs and turned on Transurban’s inflation-protected cash flow machine.

Charlton can and is expanding the group’s toll road franchise. His main job is to keep the cash flow machine revving, however, and it’s very doable.

[email protected]南京夜网.au

This story Administrator ready to work first appeared on Nanjing Night Net.

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ANZ could be winner in US fallout

HOT on the heels of HSBC’s admission of money laundering, Asian-focused Standard Chartered has become the latest lender to fall foul of tough US sanctions.
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The string of revelations against the two banks plays into the hands of ANZ, the Australian lender attempting to grow aggressively through Asia.

The New York State Department of Financial Services alleged overnight that for almost a decade London-based Standard Chartered ”schemed” with the government of Iran and hid from regulators about 60,000 transactions involving at least $US250 billion.

The claim argues that Standard Chartered reaped hundreds of millions of dollars in fees from the transactions.

A 27-page filing by the New York regulator is tied to an order for Standard Chartered executives to appear at a US hearing next Wednesday.

”[Standard Chartered’s] actions left the US financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes,” the filing said.

Standard Chartered risks having its New York licence revoked – essentially preventing it doing business in the US. It could also be required to submit to ”independent, on-premises monitoring” of client transactions by an organisation nominated by the New York regulator – and it may incur a big fine, to boot.

Under US law, transactions with Iranian banks are strictly monitored and subject to sanctions because of government concerns about possible financing of Iran’s nuclear programs and allied terrorist organisations.

As an emerging rival in the Asian region, ANZ arguably stands to benefit from any loss to the reputation – and operations – of Standard Chartered.

For its part, Standard Chartered issued a statement that it ”strongly rejects the position or the portrayal of facts as set out” in the Department of Financial Services claim.

”The group does not believe the order issued by the DFS presents a full and accurate picture of the facts,” the statement said.

All this, including the prospect of strict US monitoring, is something that could represent a major turnoff for Standard Chartered’s Asian-based clients.

Bigger rival HSBC is also likely to be distracted for the medium term after its apology last week for ”shameful” systems breakdowns that failed to stop it laundering money for terrorists and drug barons. Most of the affair relates to HSBC’s Mexican operations, and Europe’s biggest bank has set aside $US700 million for potential fines in the US.

HSBC will also spend $US400 million beefing up compliance around the world, something that could again put emerging market customers offside.

While HSBC and Standard Chartered have substantially bigger franchises through Asia, ANZ has been targeting business and trade clients of both banks as part of efforts to expand its balance sheet through emerging markets, particularly in east Asia.

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Cochlear profit hit by recall

Heard the news? Cochlear’s results didn’t thrill the market.THE headline 68 per cent slump in profit was a blaring advertisement of how challenging the year had been for Cochlear.
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Not surprisingly, the $3.59 billion hearing implant maker was keen to focus on the future, rather than the surprise recall of a key implant that resulted in a 5 per cent loss of market share and a $101.3 million write-down.

”I think that where I’m upbeat – and the result is a disappointing result, because you don’t want to do $56 million [profit] – but where the result is a very, very good result is what it says about the future,” chief executive Chris Roberts, who received a pay cut, said yesterday.

”And life’s all about the future. What this result says is that we were able to maintain our strategy, investing in this market, investing in research and development et cetera. We didn’t have to go back and shut down projects and lay people off.

”We don’t want to have problems like this, but I think we’ve dealt with it in a credible way.”

The result did not meet analysts’ expectations, leading to a $3.40 (5.1 per cent) decline in Cochlear’s share price. The shares closed at $63. Revenue for the year to June 30 was down 4 per cent to $779 million and implant unit sales fell 6 per cent on 23,087, although there was a marked improvement in the second half.

Goldman Sachs described the announcement as ”OK overall – noting too exciting”.

After a long dispute with the Australian Manufacturing Workers’ Union, Dr Roberts lashed the Fair Work Act, saying Labor’s industrial relations laws were ”never about” improving productivity. Instead, he said they were a reward for the union movement’s successful campaign against the Howard government’s WorkChoices legislation.

”The problem for me is that … reregulating the labour market was put in the context of collective bargaining driving productivity, and that is intellectually dishonest to suggest that. I think it would have been far more honest to say, look, providing a workplace that’s much more pro-union is about the political arm of the party paying back the industrial arm of the party for getting them elected.”

Fair Work Australia recently found Cochlear had not engaged in a ”course of conduct which offends the good faith bargaining requirements”, but erred in not allowing the union access to the company’s lunchroom. The parties are now in talks.

”The company has fought hard and has taken every procedural point. However, unfortunately, that appears to be a reflection of the adversarial nature of the relationship between the parties,” the industrial umpire said.

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