Welcome to day 2. Really fantastic to have you here with our Middletown facility. One of the 7 BlueScope core assets. This particular site was built in 1970. We have about 90 employees here. And later today, you'll get an opportunity to do a walk and actually see the operations. The agenda for today, we'll start off with an update from the BlueScope Buildings North America group. Susan Stark's joining us today, who heads up that business. We'll move into the Properties Group with Matthew Roth giving an overview, which is part of Sue's business. We'll have a break for Q&A, and then we'll lead into the core products business overview, and John will introduce his team that's here with us today.
A lunch break and then the site tour as I mentioned. I think the site tour, how long have we got? About 40 minutes.
About.
45 minutes.
Yeah.
Yeah. That's sort of the plan, planning for the day. Very good. I'm gonna hand directly over to Susan.
Wonderful. Thank you so much. As Christie said, I'm Sue Stark. I'm president for BlueScope Buildings North America, and really happy to be with you here this morning. Hope you guys had a great time at the baseball game last night. We're gonna share with you a little bit of what's going on with BB&A. With BB&A, we design and manufacture pre-engineered building solutions for the non-residential low-rise construction market. We have a national organization of manufacturing facilities of seven around the country that service our builders. Our competitive advantages include our ability to service a wide range of complexities in our projects, as well as our proprietary technologies, our in-house engineering capabilities, and our deep customer insights. Building North America contributes meaningfully to the U.S. strategy for BlueScope.
By focusing on maintaining our position as a leading player within our markets, we do that contribution. We work to continue to target our key markets and deliver enhanced insights, as well as expanding our product offering to expand our customer base. Our BB&A strategy is going to continue to drive us in that leading position of transform, grow, and deliver. We're looking to transform our customer experience by enhancing our innovation process as well as redefining our segmentation approach to our markets. We're maximizing our growth potential with a focus on aligning our manufacturing capabilities and capacities to target profitable growth opportunities within the markets. Delivering value to our customers through our services, solutions, and our approach to sustainability.
Our 2,000+ strong builder network is national and long-standing in nature, and we work through two premium brands, Butler and Varco Pruden. Our builders use our proprietary design software to win work and add value to the construction process, as well as our software handles complex structural designs to meet our customers' needs and requirements that others cannot. Key advantages that help our builders, like our Widespan product, provide large open spaces to maximize flexibility for our building owners, and the Butler MR-24 roof system is the gold standard in the industry. As far as end markets, we are exposed to end market segments that are well-positioned to benefit from some of the key trends that are out there. We have a solid exposure in manufacturing made up of equipment storage, warehousing and production.
We're well-positioned to capitalize on growth in the e-commerce and with our data centers, warehousing, distribution, and last-mile logistics. The increased activity in recreation and travel supports our demand for our products in those arenas as well with sports stadiums as well as other recreational centers. Product development is core for our business focus. We're looking to grow within our existing segments as well as expanding beyond PED to unlock further growth opportunities. Customer insights are key to that understanding of where that demand is trending, though. New segmentation approach and the use of this data will be key to this.
We continue to look at innovation and partnering with internal and external partners as a, an exciting way for us to reinvigorate our innovation process, as well as working with customers and specifiers to understand solutions required for their needs, including hybrid building opportunities. Just to give you an example of one of those hybrid building opportunities, we recently had a project in Oklahoma that was a great example of a success with a hybrid solution for the commercial warehousing segment. This project consists of 5 buildings of almost 170,000 square meters of building space, and it features Butler's new LogistX product. LogistX combines the efficiencies of a built-up steel member normally found in a pre-engineered building structure and tied with BB&A's proprietary Truss PurlinXT.
This provides a cost-effective alternative to conventional steel buildings. We're also continuing to drive efficiencies through our manufacturing excellence. Modernization and upgrading equipment allows us to take advantage of the digital technologies, which deliver efficiency gains and reduces labor bottlenecks. We've installed an automated weld trim cell in our Jackson facility, which has greatly reduced our labor content there, and we're upgrading our facilities across our footprint on the automated welding side to continue to improve our productivity. We continued our focus on margin and volume initiatives by focusing on our growth, our growth in the conventional market, as well as order intake optimization and overall price and margin initiatives. Lastly, a key enabler to our success has been our approach to sustainability.
Health and safety has been an ongoing focus, and we're bolstering up that focus and strength with the broader HSE program across BlueScope, including training and critical risk projects. Across inclusion and diversity, we're working to better reflect our communities. On climate action, we're working on products that enhance buildings, operation emissions, as well as within our own facilities, our own emissions through solar projects and efficiencies in our shipping and painting processes. With that, I'm gonna turn it over to Matt Roth.
Good morning, everyone. I think I met most or some of you last night. My name is Matt Roth, I lead the small team at Properties Group who are dedicated professionals in the real estate development business. The reason why we can have a small group is that we really do leverage the builder network and use them, you know, as Sue said, we go back to that map with 2,000 builders across the nation. Ultimately, construction development is a local business, and having those local partners that would have already been vetted, already a partner, trusted partner of ours is a key value to our group and a key piece of leverage for us. What do we do? We are a ground-up developer.
What that means is we take raw land, we build buildings, take it through the permitting process, build buildings. We then lease the building up, just we stabilize it, and then we sell it to institutional investors. Take that profit from that recycle and move on to the next project. We do a mix of build to suit and build to demand, which is type of project. Build to suit means we have a tenant or a lease in place prior to acquiring the land and starting the building process. When it's a build to demand, it's a speculative build, we're focused on putting the building up and then leasing that building during the construction process. Our projects range from around $10 million to 30 million U.S.
That can vary a little bit depending on location and opportunity, but it's, that's sort of the rough rule of thumb. Currently have about $170 million committed from capital and $110 of that's done. We have three projects that have been completed, and that's $110 million that's in inventory. I do wanna touch on. You can see the competitive advantages here, and I do wanna touch on, I think, three that are really important. I already spoke about the builder network. I think that is something that, you know, not only do we use them for advantage locally for going into local markets, but also we provide them with an advantage.
There are opportunities that our builders would not have to build projects without our ability to come in and step in as the, as the equity partner, as the developer. That's happened several times, and it's a sort of a two-way street. We bring deals to them. They bring deals to us, particularly with our build-to-suit model, 'cause they have, you know, clients and customers that maybe wanna use their money on, you know, machinery, on other types of capital, not necessarily warehouses. They still wanna build it for them, right? They can call us up, and we can set up a situation to where we become the landlord, the Butler builder or the Varco Pruden builder becomes the GC on the project, and then their customer is our tenant. Right now, particularly our equity position.
Right now, we fund all of our projects off of, you know, BlueScope's balance sheet, so we don't use debt, and that's a big advantage at the moment, right? In the debt markets in the U.S. right now, there's a lot of developers. There are developers that use equity as well, but there's a lot of developers that are on the sideline right now because they can't make deals pencil because of where interest rates are at right now. We are seeing deals and opportunities where people can't make the numbers work for them, where we can step in and take advantage of that situation.
I always tell my team that with our commercial due diligence and our risk management processes, we set up a very tight process for how we look at projects, what our internal hurdles are, and how we look at every deal. That's our license to operate. When we go through our projects, I think we have a very, very strict process in how we go through everything, and it's really make sure that we're making the right deals and doing the right projects at the right time. Our target customers, it's interesting. You know, I'm sure as a lot of you know, the industrial real estate market is and remains to be the darling of the sector at the moment.
There's been a lot of shift in end users where they're trying to shore up their supply chain. They're reshoring manufacturing, they're reshoring or getting their supply chain closer to their customers at their home, and so they've really started to relook. It's been. You know, we always heard the inventory just in time, and now there's been a shift of just in case, right? Folks need more warehousing space simply to make sure that what we all experienced when we couldn't get, you know, people were going out and buying lots and lots of whatever because they're worried they couldn't get it. We're now making. They have the just in case inventory, so there's a lot of demand. They're refocused on.
They realize that supply chain is more strategic than just an afterthought. There's a lot of companies that are reassessing and redoing their supply chain networks. Also the reshoring of manufacturing and all that. E-commerce, we've all heard about that. Obviously, that continues to be a big aspect of the warehouse demand. Frankly, traditional retailers as well are really starting to look at how do we, you know... They're changing the way they use their stores. You're not seeing as much inventory in stores, and they're sourcing it more in a regional sort of supply chain network. There is demand not only from, you know, the new kids on the block with the e-commerce, but also the traditional retailers.
The other thing that I think is important to note is the buildings we build are very simple, right? They're boxes. I don't want... You know, when I say if a building starts to look more and more like a letter, I start to get concerned, right? I like big, beautiful boxes because if a tenant or an end user does leave, what we wanna be able to do is say, "Anyone can step into that space and take over that space without a lot of big retrofitting." It's very much something that someone else can come in and use. That's something we always look at. We do have a... As I talked about this a bit, but our comprehensive risk management is very important.
We look at it not only at a project, as I discussed, but also portfolio level. We have a variety of tests, and things that we look at to make sure that from a portfolio level, that we are appropriately risked and that we're mitigating the risk, and that we're at the project level the same way. We're quite diligent on that. I do want to mention, we had announced that we were gonna be selling a project this fiscal year. Under the current macroeconomics and in the capital markets, we've decided not to do that. It's not an appropriate time to do that. We're not in the business of holding assets for a long period of time, but we're not just gonna sell them in a down market either.
We don't need to sell them now. It's a property that is fully leased. It's generating income or will be generating income. That will be done next year. Just, you know, the typical case study, these are relatively short projects, right? It's somewhere between 18 and 24 months is a full cycle of a project from when we start construction to when we would sell it. Call it 12 to 15 months for construction. There'll be. If it's already been leased up, then we go directly into a sale process, which is roughly a 3-month process. With that, we'll use national real estate brokers, you know, out there to help us run those processes.
If we're leasing it up, we give ourselves some time post-construction to lease it up as well and then sell once it's stabilized. That's what I have. Thank you.
Perhaps just one on the building side. Could you give us a sense of the integration across your value chain within the context of BlueScope's operations elsewhere? Commonalities either in customers or product flows or, you know, just so that we understand the natural integration between those businesses better.
In the context of the non-residential commercial market, I think we share, you know, obviously some customer base, end user base from that perspective. From a product flow-through perspective, we do buy a portion of our sister company, Steelscape, but limited other channels from that perspective.
Okay. Thank you. Maybe I'll ask another question just on the Properties Group, just the thinking about the other side of just-in-case in-inventory, do you think that this redesign that you're seeing in supply chains presents any risk of excess supply on the other side, or at least an impact from a demand point of view when all of this settles down, or do you think that e-commerce and other developments essentially step in, that you don't have any demand risks in the medium to longer term?
I don't think there's demand risk. I think there is. Even in the event that. Of all the products, we hear a lot of products being built, and if it were all. I don't have the exact stat, but the risk of being overbuilt and it all being vacant. Let's say that I think it's like 600 million sq ft of product that's under construction. If it were Right now tomorrow, it's online, it's up and but vacant. It would still be the vacancy rate within the United States would still be below 7%. Which is historically lower than what it's been. No.
I mean, there's I think in as you look in different markets, and that's why we're very careful with where we build, you look at certain markets that could be overbuilt for sure. At a macro U.S. level, I don't see that happening immediately.
Hi, Matt. Paul Young here. A question on, I guess the $300 million of committed capital, and that equates to I think 20 projects if you just do the, you know, the $15 million on average per project. Just curious about where that $300 million's come from. In a couple years ago, what were you spending? How many projects were you building? What determined the $300? Was that just that you, from a bottom-up perspective, you sought 15 or 20 sites, that's what you could take on, and where could you grow?
Yeah.
-a perspective of where that 300's from and-
Yeah. The $300 million was really based on making sure that we can provide consistent earnings and that are meaningful. To your point, you're right on. It's probably closer to 12 projects, right, when we have it full going out. What that would do is basically you're looking to sell, you know, call it 4 projects a year when this fully gets ramped up, and then you're having consistent... Cause it's not like We're not deploying the $300 million all at once. It's over a period of years, right? Like we'll have projects that are under construction from just the very beginning, where we're just taking trees out, and there's others where we're wrapping it up.
That's, if I'm answering your question, that's how we got to it. That would give us sort of a consistent sort of flow in the pipeline of projects where we'd be selling and recycling capital coming through.
Yeah. I guess maybe a question for Mark and Mark then. I mean, is that the right level? You know, do you wanna grow that further?
It's our second level, and the reason it's 300 is we increased it a year ago. What we saw, Paul, was we saw the potential of this business and the ability for us to build that pipeline, and we felt like the business was being constrained, so we increased the level. Matt's been nice. The AUD 300 million is the constraint we've put on the business. That's the level that Mark and I have said we think that's enough for us to commit in working capital at this stage, to the business and go away and prove to us that you can develop an earnings base around that. That was a step up. I think our first level was 100 and...
AUD 100.
$100 million. We started out with a $100 million dollar envelope.
Okay.
That's a decision that we drive out of the center, and then Matt and the team work on projects under those constraints.
Yeah. Okay. Thanks.
I've just got a question on buildings. When does the team get involved with actually, in specific projects? Like are they involved at the architectural stage? Do they come in afterwards? Is it like a tender process for the products? How does that sort of work?
Yeah. It's a variety, right, of our builders and their role in with the acquirer of the building, and when they come into play. In some cases, you know, we might be aware of a project that's going on where we'll bring a builder in. It's a pretty wide range of touch points and entry points for us and the builder.
Sure.
Hi. I'm just wondering who are your competitors? I guess you are small player in U.S., what's your edge over your competitors for that builders network. Is there any number, like how many projects you do every year, just annually? Thank you.
Yeah. Our competitors would vary. Like, you can go. I'd like to say we, you know, compete with every developer depending on the market, right? It could be anywhere from someone who's a national competitor, like a Prologis, to a very local competitor, right? It's, it varies on the market, I would say. You know, and they vary from, you know, every competitor will have different sort of avenues that they look at, right? Some will hold land longer. Others will be looking to hold the buildings and not sell them. They look at deals slightly differently. I would say from our competitive advantage, I mean, I do think that having our builders is a strong advantage for us, right?
I mean, a really good example is, I hand on heart, I was not looking in Laredo, Texas, to do a project, right? I mean, I wasn't doing that. We had a builder who gave us a call and said, "I have a customer. He needs a building. I'm not gonna be able to do it 'cause he's gonna go to another developer. Can you come down here and help?" We did it. We got down there the next week. Our builder never would have done the deal. We never would've known about the deal without them, right? I think there is that advantage, that we can come in. Another advantage is I walk in, I go, "I don't have to go get bank debt. I don't have to go get an equity partner.
We do this in-house, right? Particularly in today's environment where making a decision on debt or an equity partner is incredibly difficult, people know that BlueScope can come in and move relatively quickly. From a number of projects we like to do, look, I think, Right now we're wrapping up 3 projects. We've got 2 other that have just started to build-to-suit. We've got a couple more that we'll be getting going. Ultimately, with the 300, it would be somewhere between, call it-Depending on size, right? 10 tp 15, 10 to 12 projects a year.
Mark, another sizable market opportunity in the properties group, what determines the amount of capital you're willing to allocate to that business at any point in time? Can it grow disproportionately to the rest of the U.S.?
So what's gonna determine the amount of capital is the return we get. I think Paul asked the question yesterday, you know, we've got that 15% hurdle that we set internally. This is a business where we actually should do better than that. David, if we got to a point where we felt like AUD 300 wasn't enough, and we were constrained, and there was an opportunity out there, we would consider expanding the envelope. It's not. This is a bit of a walk before we run process, the way we've approached it. We've. It's been very ad hoc in the past.
I think you've heard Tanya say before, probably the mistake we made as we went into core, because we were so uncertain about what the outcome of core was going to be, we pulled constraints on all of our businesses from a capital point of view. With the benefit of hindsight.
Better than everyone else.
Correct. With the benefit of hindsight, this is one we wouldn't have pulled the lever as hard because we effectively emptied out Matthew Roth's pipeline for a period of time. As I look back, I'd do that differently. We're taking a cautious approach to this. We actually think the advantages that Matthew Roth's talked about, being able to leverage the builder network, the capability that we bring, we believe there's a business unit here that we can build to make a regular and good return. What's the absolute level? I don't know the answer to that right now. At the moment, we feel like $300 million gives the guys and the team enough flexibility and optionality to deal with the opportunities that are emerging.
Yeah.
Morning.
Hi.
Paul McTaggart again. I have been listening, so, I'm just kinda struggling.
Yes.
I mean, what's the end game here, Mark? Right? You're basically saying, if this thing can make a return, we're gonna grow it, and it's a whole new business. Where does that fit in with a steel company? What's the 10-year vision? Might be beyond my timeframe, but what's the 10-year vision for this business? Do we ultimately sell it, spin it out? How do we think about that?
Well, I don't know that we've come to an answer on that yet, Paul. I mean, this is a steel building products company, you're looking at right here. You were at a steel company yesterday. This is a different company. This is a building products company.
Yeah.
And that's where we think there's an adjacency and leverage here. The builder network brings that to us. If we didn't have the builder network, to your question yesterday about why do you need to do it? If we didn't have the builder network, I'm not sure we'd probably be in this space. The fundamental advantage that we believe we have are those 2,000 customers who are, in fact, our sales force. We've got a zero-cost sales force that's operating for us across the U.S. Those 2,000 builders bring those opportunities, and we felt like it made sense for us to play in that market, given our current position in Sue's business with BBNA.
I'm not sure what the 10-year vision is, quite frankly. Maybe I shouldn't say that or maybe I should have one. As I said, we're walking before we run here with this. We think there's an opportunity for us to make a really healthy return out of this, given the association and the adjacency we have with the builders.
Yeah.
Brian.
Matt, good morning. I'm interested in how much the percentage of your projects are pre-committed versus speculative, because obviously that will change your risk profile.
Yeah.
Secondly, based on history, what have been the returns on your projects to date?
On the split at the moment, right now we're right about 60% they're build-to-suit. Then 30% it's build-to-demand. That's a point in time. It can go to probably flip that, right? 30% build-to-suit, 60% build-to-demand. Right now that's where it's at, is the crux of that. With returns, basically, we've achieved over 20% on all our projects.
Thank you.
Sue.
Yeah.
Paul Jackson. I think from memory, you've got a fairly strong market share, I think in the Butler business and that, and you've had that for sort of like 20 years. Could you comment a little bit on that? I also think in your buildings business, you've got a bit of proprietary type thing in this type of product in terms of the structural product and stuff like that you're doing within that business. Perhaps talk about your competitive position.
Yeah.
within your buildings business.
From a both brand positions, I think both of our brands are in that top 3 to 5 position across all of our competitors. I think what we've been seeing, we have stronger suits in some versus others, which gives us the opportunity as we start segmenting the business to hone in on where some of those market opportunities might be more available to us. Manufacturing, as I showed you, we have a strong position there, and we look to hold that. That's where some of those advantages and the proprietariness of our software and design really comes into play. We can really play a strong role with our builders and the end user, in designing that product and maintaining that and pushing it as far as we can go.
some of the opportunities, though, is to take some of theseLike I showed you the hybrid solution, and really start growing that commercial market and expanding that and taking full advantage of some of the market conditions that Matt was kind of talking about. I think we are a strong player in these markets, but we have opportunities to really start dissecting a little bit stronger and going after utilizing some of our proprietaries.
Your market share was sort of in the 20s.
Yeah.
Yeah. The big, the big three, Nucor, NCI. What's it called? It's Cornerstone, sorry. I should remember that, shouldn't I? Cornerstone and ourselves, all in the sort of 20 to 30% market share range.
Yeah. All good. No further questions. Great. Given we're running well on time, we might kick straight into John's session.
Okay. Good.
Way to go.
Thank you, everyone.
Thank you.
Hey, good morning. I'm John Kuszel. I'm the president of BlueScope Coated Products, which is the business unit that was created last year when BlueScope acquired the assets, the coil coating assets of Cornerstone. Before I get going, one, didn't have a chance to welcome everybody here. As Christie said, this plant was built in 1970. It was substantially modernized in both 2003 and also in 2012. What you'll see when you go out there will be pretty state-of-the-art, a lot of capabilities and a line that is general purpose, so it can serve all different types of customers and produce different products. The other thing I wanna do real quick is introduce your host, Daniel Bridge. He's our plant manager.
How you doing?
To speak of the, you know, flexibility of BlueScope employees, Daniel was at North Star and helped commission Aristotle before he came down here. Ryan Wesley, sitting next to him, he's our quality director. Kelli Garvin is our marketing director, Robyn Edmonds is our VP of finance, our lead engineer for the business is at the end, Youssef Darbar . I just wanted to introduce those guys to you. The business acquired by BlueScope has seven sites, there's really kind of a business within the business, which I'll get to shortly. You have two facilities that specialize in painting hot-rolled steel, five facilities that specialize in painting light-gauge metal, both steel and aluminum. The business on the light-gauge side was largely operated as a toll processor.
We'll talk a little bit more, as we get into this as to how the toll processing business model works, compared to another business model, which is the single bill business model. The plants have very robust capabilities, probably the most robust of the industry that it competes in. When I say that, I'm talking about the ability to produce coils, painted coils of both aluminum and steel, heavy thickness, light thickness or light gauge, as we call it, various paint systems, lot of customize and boutique capabilities, but at the same time, also able to produce for the high volume end users.
In the United States, you have a lot of people, you have people that have boutique capabilities, and you have people that only have the capabilities to produce the high volume products. This set of assets can actually do both, which makes it, makes it pretty appealing. The business has a history of having a strong customer service acumen, but where they were lacking was in some of the technical capabilities that BlueScope can bring to the business through BlueScope's expertise in painting coils. You know, this business, is an obvious fit to the North American strategy in that it. There's two things that it supports. The first being that it serves as an intermediate point in the value chain, so it helps to close the gaps within the overall value chain.
Secondly, it fits within the BlueScope scheme of being able to provide value-added branded products. They can bring the branded products to the United States market through this business. You know, everybody, I'm sure, is familiar with COLORBOND. That's one of the products that we have the ability to bring over to the US through this business. How does this business fit within the overall BlueScope strategy to transform, grow and deliver?
From the transformation standpoint, we have the ability to actually take this business, and we can transform it in a way where we now have the ability to not just sell product the way this business has historically sold it, but we can also add another leg, another swim lane where we can sell product through single bill means, which allows this business to ultimately broaden its competitive base. In terms of how we can contribute to the growth strategy, we have a lot of opportunity to improve the hot-rolled business, which I'll get to shortly, because BlueScope has the ability to support the supply chain for the hot-rolled business, in part through North Star and in part through being able to leverage other relationships so that we can supply the business with hot-rolled steel. That will allow the business to grow.
The previous owners were constrained that way. Because they didn't have the ability to support the supply chain necessary to grow that business, that business was in a status quo mode for many years. On the light-gauge side, we have opportunities to grow that business through branded products and through improving and transforming the business model, and also by improving and transforming the customer experience. To be able to deliver, a lot of it comes down to being able to employ best practices. BlueScope has great operating practices that can be superimposed over this business that will lead to operational improvements over time. I mentioned there's really a business within a business, and on the surface, you have 5 light-gauge plants that can coat light-gauge coils, steel and aluminum. I talked about the capabilities.
We have the ability to produce for boutique applications, small end users, specialized products. We also have capabilities to produce for large end users who run 1,000 tons a month and more. The hot-rolled business is a little bit different. It's a business that is solely to support the construction industry. They coat product that goes into secondary structural members, similar to what this photo is right here, painted purlins and girts. With the capabilities that those two facilities have, we can actually cover the entire Eastern United States market out of those two facilities, and we feel like that that's underserved right now. When you talk about the pre-painted metal market, it kinda runs hand in hand with the metal building market in terms of where the opportunities are out in the marketplace.
There's about a 4.5 million ton market in the U.S., and about 90% of that consumption is east of the Rocky Mountains. That's why, you know, we have a concentration of plants east of the Rocky Mountains. When you get down to it, the construction market is 70% of that 90%, the rest of it being things like automotive, containers, other transportation, consumer products. In our case, we have the capabilities of supporting all of those markets, but the clear focus is on construction because that's what we're good at. Those are the kinds of branded products that we can bring to the market to support. It's probably the most stable market. It's the less cyclical of the various markets that a business like this can ship into.
Over the last several years, there's just been a consistent 2% CAGR. I mentioned the business model. The business that BlueScope acquired was a toll processor. Up until about 10 years ago, the entire pre-painted coil market in the U.S., with the exception of maybe one person, was served through toll processors. The mills began to gain an interest in this. About 10 years ago, you started to see mill-based suppliers of pre-painted coil to the market. Those mill-based suppliers would sell a painted coil. What was attractive to the customer when that started to happen is they no longer had to work with a mill to get their metal. You know, customer. Here we go.
Customer buys substrate, has it delivered, and then they have to hold that working capital, and they have to manage everything until they're finally ready to receive it. As a toll processor, we kinda have it easy because the customer owns the metal, customer manages it, we go buy paint, we apply the paint, then the customer takes it. The problem is, the customer was getting wise to it, and starting about 10 years ago, customers said, "Well, no, this is way simpler. I can just show up, place an order for a painted coil, and then coil ships." As that's happening, it's starting to change how the entire market now operates. The beauty for BlueScope is that this plays right into their strengths.
The beauty of this business as they acquired it is that this business already had some experience selling single bill coils. Through its hot-rolled business. We can take the practices that we deploy in the hot-rolled business, bring them to the light-gauge side, and then the BlueScope expertise and the BlueScope capabilities to manage the supply chain will allow us to establish a single-bill channel in addition to maintaining our toll painting. You still want a toll coat for certain customers, for certain end uses, and we would never wanna walk away from that. We wanna also develop this lane because this is where the growth is going to be in the future as the market shifts more and more to a single-bill customer acquisition model.
In the end, when you get down to the value proposition, for us, it's really there's four legs to the stool, but these top two are really what we're focused on. You know, we're trying to establish differentiation with our products and with what we can offer in the way of service to the customers. To that end, we're doing a lot of work on our customer portal. You know, what we acquired needed a lot of work in that area. We've begun that work, and we really wanna ultimately end up with a best-in-class customer portal that makes it easy for customers to do business with us.
A lot of the discussions we've had with customers about what they're looking for, what their needs are, have really opened a lot of eyes as to what it would take to become best in class when it comes to how easy is it to do business with us. Synergies, largely based in the areas of supply chain, utilization, and ultimately paint supply. In supply chain area, we'll get to in a minute some challenges there. We had to rebuild the supply chain processes, to make them more functional because, again, the previous owner was in a status quo mode where they didn't wanna invest in the supply chain, and that was actually hampering their ability to grow the business.
For us to be able to grow the business, we have to have a robust supply chain, robust processes, and we've been working on that since acquisition. Utilization, another big component of the synergies, that really comes down to being able to run the lines more productively. A lot of the things that we're investing in in the facilities are gonna contribute to higher line speeds that run closer to what the equipment capabilities are rated at. Ultimately, that will allow us to bring more product through the process and be able to generate growth and volume and ultimately growth in revenue and outcome. Just to touch briefly on, you know, what the experience has been since the acquisition.
You know, there's a lot of successes, particularly when it came down to bringing employees on board, trying to establish the BlueScope culture. Some of our initiatives, COLORBOND, for example, you know, there's already work to get that developed and get that close to coming to market. I mentioned we had to rebuild our supply chain processes. We have a very robust S&OP system now that in the environment we're in with steel prices fluctuating, it's working well. Some of the challenges we had, again, came back to supply chain. It was a big task to rebuild that S&OP process. A lot of equipment reliability issues that we've had to address and we're still addressing.
You know, from the IT perspective, the IT transition has been very long and drawn out, and that was partly by design. The previous owners needed a year to be able to disconnect the business from their business because they were a highly integrated business with shared services all over the place. To disconnect those blood vessels has taken a long time. You know, the original projection was for one year, and one year will be up at the end of June. We're getting close. That has been a challenge because we still, you know, we still have infrastructure failures on the IT side that come up that are kinda related to that transition, but we're almost through that. Safety has been a big opportunity for us coming in.
BlueScope is known for, you know, having best practices in this area. We've been able to bring a lot of that into this business and achieve a lot of wins. You know, in particular, this business has a lot of forklift movement in all of its plants, more so than you would see in a normal steel mill because in the steel mill, you're dealing with much bigger equipment. In these businesses, you're dealing with a lot of stuff that's sitting on pallets. A lot of the work we had to do from the safety perspective had to do with material handling and movement and forklift movement. Sustainability.
One of the good things about being here today to see this plant is you'll see probably our largest, well, easily our largest project in this area, we're replacing the afterburners on the paint line here with a regenerative thermal oxidizer, which is gonna substantially reduce the greenhouse gases coming out of this facility. Of all of the paint lines that we acquired in this acquisition, this particular site, had by far the most greenhouse gas generation through the afterburner technology that was on this line, and we're replacing that, this year as we speak. On the tour, you'll probably be able to actually walk out and kinda see how that thing is going.
There's a, you know, there's gonna be a large stack and, there's gonna be some ductwork that actually goes over a bridge to get to the building, and it's kinda halfway constructed. By the end of this year, we'll have the whole thing up and running. You know, we're gonna take out substantial amount of greenhouse gas and create a substantial amount of savings around that. That's a win-win, where you not only can improve your environmental performance, but you're gonna improve your cost performance. Then we've got some other things that we brought to the table in the way of recycling activities and waste handling and things like that, so. Are there any questions? I'm sure there are.
Megan Kirby-Lewis from Barrenjoey. I'm just keen to get your thoughts on the pricing strategy for COLORBOND once it eventually launches and how we should think about that in the U.S. market. I guess sort of the key point of my question is whether or not you can price it at a steady price like what we see in Australia, or will it move with the underlying cold rolled price?
That's really under development at this point. It's really too early to even get to that point. We're still working on figuring out how we can run it on the lines productively and making sure that we qualify the performance of the product. We won't be to that point for a while.
Is your, is your experience, though, because to Megan's question, COLORBOND's a bit unique in Australia and it's been pitched against roof tiles, so at a residential roof, price point, and that's historically been very stable and growing? Given our initial market penetration here is gonna be more likely industrial and commercial-
Right
... it's more likely to fluctuate, Megan. I would suspect that the COLORBOND pricing situation in Australia is pretty unique, so I don't know that I'd be making the assumption that that's gonna be the model we have here in North America. As we start and think about what we can do from a residential roofing perspective, it might well be different, although who said it, Pete? You said it yesterday, horrible shingle roofs. I'm not sure what the price point of those, the volatility of those horrible shingle roofs are. I suspect it will probably be different from Australia because that is quite a unique situation.
Okay, fair enough.
Yeah.
Just on the single bill model, should we be thinking about that as more related to the hot-rolled product initially, or will you be targeting both, the light-gauge as well?
Yeah. With the single bill initiative, that's targeting light-gauge.
Right.
We already are selling hot-rolled as single bill, and what'll end up happening is a lot of the customers that we're selling hot-rolled single bill to, we'll probably be targeting them for some of the light-gauge single bill transactions. Because some of those guys actually do buy single bill light-gauge, and right now we're not able to sell them.
Okay.
We are targeting some of those guys.
Got it. Thank you.
Perhaps a couple of related and follow-on questions. Just thinking about the single bill opportunity from a return and risk perspective, could you give us a bit of a sense of all up, presumably there's gonna be inventory investments, there's probably a little bit of improved efficiencies given that you can plan better and then maybe a pricing opportunity? How does that all wash up from a return point of view? Is single bill materially better ultimately than toll processing for you?
Well, there's a fair amount of single bill that is being supplied to this market out of Australia right now. The thing that we're working on is converting that work and being able to sell that work domestically where we would potentially bring the steel over here and paint it here. In doing that model initially, we'll be able to actually expand what. Because right now, when you're selling a pre-painted coil in the US, it's limited into what you can actually sell because of the lead time. If you can sell the metal here and have the painting done here, you can actually sell more metal because you're not under the same lead time constraints as you are for the painting process.
Painting it locally, bringing the metal over, can actually work to provide a single bill opportunity here and even help grow the customer base that would be served out of there. That's part of our single bill supply strategy. The other part of it is bringing it from other domestic producers that we have relationships with and then doing it that way. I don't know if I got to the full answer to the question yet, but if I didn't, feel free to...
That's fine. We can probably chat about it afterwards a little further.
It is pretty complicated right now because, you know, we're not in the best environment when it comes to, sourcing.
Yeah.
'Cause there are some challenges domestically, so we're having to be pretty cautious about how we're aligning ourselves with domestic suppliers. And then, and then we also wanna make sure that we're embracing the customer relationships that are already here that we wanna migrate-
like I told you, with just bringing the metal in from Australia and painting it here versus painting it there.
Yeah. Then you've still got an existing relationship with Cornerstone from a supplier or customer relationship perspective that you're, I suppose, contracted to, I was gonna say, locked into for five years. Is that a positive or a negative as you think about the evolution of the strategy?
It's a positive because it gives us a platform to work off of. It's a, it's a good foundation. You know, at the point where we have branded products available, then, you know, they can potentially take advantage of that, and we can create more value through that.
Yeah.
It's a pretty entwined relationship. It's not a relationship that's, you know. It's not like it would be easy for them to go somewhere else just because.
Yeah.
The relationship is so entwined from having been part of an integrated company.
Yeah.
It's pretty strong relationship and very entwined also.
Yeah. Presumably, they've got stiffer growth intentions in private equity hands today, which is not a bad thing from your perspective.
Yeah. It's a little bit of a challenge, though, because their business model is transforming also. You know, we don't wanna necessarily be putting too many eggs in one basket. We are trying to diversify our customer mix at the same time. 'Cause their model is changing. I mean, they sold this business, and they've been buying and selling different businesses. They're restructuring their portfolio at the same time.
Thanks, Don. John, good morning. In terms of the current production capacity utilization, where are you relative to your 950,000 tons of coating capacity? I'm conscious of the fact that obviously, one of your major synergies is to grow volumes. At what point may you need to increase your coating capacity?
We're at about 60% right now of our overall capacity. We have a ways to go before we would need to look at that. We believe that there's additional capacity that we can unlock through improvements on the existing line. You know, we're at 950,000 right now. I would venture to say we wouldn't have to look at that question until we got to probably 1.1 million with the existing assets. Like I said, we're at 60% of 950,000 now, so you can do the math and figure out we've got plenty of runway.
My second question in regards to the assets is when you acquire businesses from family entities, they may not sort of keep it in as pristine condition as a BlueScope. What's the asset quality, and is there any CapEx upgrades that you require to get it into, you know, appropriate running order?
Yeah. The first part of your question is spot on. That's I could tell you that. We have had to put a fair amount of resources into it, but it's not, it's not really difficult or challenging. It's just takes a little bit of time and a little bit of money to get those things rectified. I would say the biggest area where we've had to do that is in the area of equipment reliability, and then also, being able to, for lack of a better word, fix the equipment so it can run at its rated capability. 'Cause what we found is that the previous owners were running the facilities at less than what their rated capability is.
In other words, if a line can run at 750 feet a minute, they may have been running it at 500 feet per minute. If we unlock that, those issues, fix them, get it back to that, and then unlock further opportunities through automation and other capital improvements, there's no reason why we can't take that, what we inherited, which is 950,000 tons a year capability, and push that up another 10 to 15% before we have to raise our hand and scream for help.
We build into the business case some capital. We knew there was some catch up from the DD we'd done. It was as simple as things like critical spares. We found at this facility where there weren't spare motors, and the guys are operating on a model of if a motor blew up, will you spend seven days waiting for a new motor to be delivered. That's not how we operate coating lines anywhere else in the world. There was just a bit of catch up in terms of particularly critical spares for us to build. We had an estimate of that coming in. It's probably a little more unloved than we probably estimated, but we had an estimate of that coming in. We knew there was gonna be some catch up.
Yeah, John, a question over here. Further, just a few other, points around production and utilization. Have all lines been tested to the point that you're comfortable with that 950 numbers? They've all been... You happy they're, they can all run at nameplate?
Yeah. Yeah. I had the benefit of being involved with this business back in the day. I was actually the president of this business back from 2008 to 2014. I've seen these assets run at those rates, so I can physically validate through my own experience and the records that I keep that in fact is correct.
Okay.
We didn't get sold a bill of goods on that.
Yeah. Okay, fantastic. The next question is really a question on the market. Being 4.5 million ton market, it's growing at, I think 1 to 2%, you said. You're at 600,000 tons now. You've got capacity to 950, potentially to 1.1 million tons. I mean, for you to grow, you're gonna have to displace someone, somewhere regionally and whether it be Precoat or one of your other competitors. How do you go about capturing that market share? Can you actually, in theory, run all the plants at full capacity or some plants just located in the wrong spot?
We feel like the opportunity to do that is there for a few reasons. One, because if you look at the market shift to single bill, that is going to box out certain players. We feel like we have the ability to sell in both those channels. There's opportunity. Second opportunity is that what these numbers don't take into account is residential roofing. Residential roofing in painted steel has really taken off in the last five years. You know, it used to be in the low to mid-single digits in terms of share of roofing materials in the United States. It's now sitting in the high teens, so say 17%. For every 1% growth in that particular area, that adds 100,000 tons of painted steel consumption in the U.S. per year.
If you look at just the projections in that, you're gonna add several hundred thousand tons of capability or of needed capacity in the next several years. You know, that's another reason why we should be optimistic for that.
Good. Any question?
Hi, John. Just a quick question. Your 950, are you talking short tons?
Yeah. Yeah.
Okay.
Sorry, I probably should have specified that.
Yeah. everything you've been talking about, like the 100,000, just in short tons as well?
Yes.
Okay. The second question is, how long has it been running at around 60% utilization? Is that been a trend that's been pretty static for the last couple of years?
That trend has been steady for this business since, the end of the Great Recession. I would say the last decade. They were really in a status quo mode because they were primarily trying to service their own business, and I think they were somewhat working capital challenged to be able to support anything outside of, you know, maintaining the business for their own needs.
Okay. Since the purchase, I know it hasn't been that long, but has the Cornerstone still been roughly 50% of sales?
Slightly less actually.
Okay.
Yeah. Their percentage hasn't changed significantly, but I would say it's slightly less than what it appeared to be when we acquired it.
All right. Thank you.
That could be too, because we've also added some external work. I should say work external to Cornerstone.
Sorry. This is Chen. Just a question for your single bill model. Is that something BlueScope only BlueScope is pushing in the market or any other players? Is the whole industry shifting to the single bill model? Is that other players also-
Yeah.
What's your experiences so far for what customers think of single bill? Yeah, thanks.
All of the mill-based entrants to this market, the SDIs, the Nucors, they're all pushing the single bill process. Then there's customers actually inviting them to do that. You know, there are a lot of customers that don't wanna have the working capital investment, particularly as interest rates rise. You also have the administrative expense that occurs. You know, most customers will have to have several people dedicated to managing all of their steel from the mill through the coil coater all the way to their manufacturing facility. Those are also a big driver. It's being driven really from two ways, the customer and then also these new mill entrants that wanna get into this. The last thing they wanna do is be involved with managing customer-owned inventory.
They just wanna sell their own steel.
it's a natural evolution of the-
It.
Of the industry.
Exactly right. It's an evolution. What's interesting, if you go back 50 years, there was a evolution the other way in the U.S. This plant was originally built by Armco Steel, and Armco now is Cleveland-Cliffs. This used to be a mill-based coil coating operation, and then it flipped to becoming an independent toll coater in the late 1990s. You've seen it go one way in the 1970s and 1980s, and then now you're seeing it go the other way. I think this is the way it's gonna go for good now, because working capital's king, and people are always looking for more efficiencies in their labor.
I kinda get the sense everyone's run out of juice a bit, so, a quick closeout. We are then gonna have lunch. Is that right? We're gonna have something to eat, and then we're gonna do a walk around. Look, it's been fabulous to have you guys here. I don't need to read through this stuff. From our perspective, thank you for taking the time and effort in coming all this way. It's been a pleasure to have you here.
I hope, and just from the conversations over the last 24 hours, I get a sense that, you know, hopefully it's helped you think through what we're trying to do in North America, the expansion at North Star, the relevance of the scrap business, of course our downstream businesses which we've had for some time, and then today with John, the logic and opportunity that we see in the coated business here, and certainly the opportunity for us to bring the branded and packaged model that we have in other parts of our portfolio. It's been a lot of fun and great to have you guys here, and hopefully you found it worthwhile.
We, we look forward to continuing the engagement with you guys when we get back home, and for the locals, as we continue to grow the business here. We're very excited about the opportunity in North America. This is certainly a key area of focus for us and an opportunity given some of the fundamentals that we've talked about over the last day or so in the market, what we see as the demand outlook, our opportunity to grow off the investments that we've made in the last 12 months. We think this is, a pretty exciting opportunity from a broader BlueScope perspective. Thank you guys for coming along. Thank you to Christie and her team for all the enormous amount of work that's gone on.
This is, this is two out of three weeks for the team here, so they're exhausted and sick of the sight of us. They had to manage the board first, and now they've had to manage you guys, so they're very happy to see the back of us this afternoon. Thank you, Christie and your team. It's been an enormous effort to pull all this together and great to see you guys. Let's have some lunch, and then we'll do a walk around. Any further questions over lunch, of course, feel free, or as we're walking around. John, thanks for hosting us today, guys. It's good as well. Thank you