csl to rebound, page-16

Qantas and CSL: a study in contrasts
MALCOLM MAIDEN
August 20, 2009

TWO Australian icons reported their June-year results yesterday. The best known, Qantas, posted a result that was at least as bad as expected, and left investors up in the air by declining to say where it was headed. The lesser known, CSL, announced a 45 per profit jump to $1 billion, and gave guidance that was positive, and well grounded.

The former Commonwealth Serum Laboratories was privatised for the equivalent of 75¢ a share in 1994, and is worth 44 times more today after building a global plasma production machine that is the source of higher-margin product. It had a setback earlier this year when a big US takeover was blocked on competition grounds, but it is in control of its destiny in a way Qantas cannot be.

That's not to say that Qantas is not a very well run company. Although it posted an 87 per cent slide in net profit from $970 million to $123 million and a slump in pre-tax earnings from $1.41 billion to $181 million that included a second-half loss of $107 million, it did very little wrong. It moved early to cut routes, defer aircraft orders and crunch its payroll bill (mainly by culling management positions), and its shares rose by 3.5 per cent yesterday despite the profit slump after chief executive Alan Joyce said he aimed to cut costs by another $1.5 billion over three years, including $500 million in the current year.

Qantas is built about as well as an airline can be to survive the global downturn, with international routes that feed into a nation-wide domestic network, and a two-tiered travel offer, through the flagship Qantas stable, and the Jetstar budget airline brand, which rates as the best budget start-up by an established airline.

Its profit for the full year was paltry, and it cancelled its final dividend, saying it only earned enough to cover the interim payout of 6¢ a share. But, as Joyce remarked, it was an achievement for Qantas to make money at all in a year when the industry was expected to rack up losses of $US9 billion ($A10.9 billion), after a $US10.4 billion loss last year.

The bottom line, however, is that external events dictate the fortunes of airlines. Airline travel is to a great extent a discretionary purchase, as the sharp downturn in passenger volumes that accompanied the global downturn showed. Airlines are also capital intensive, and are sensitive to currency fluctuations and fuel price movements. They hedge both, but at a cost, and Joyce says there is simply too much happening beyond Qantas' control to make a profit forecast for 2009-10.

Industry body the International Air Transport Association reported at the end of June that passenger numbers had stopped plummeting and Joyce said yesterday that that was combining with capacity cuts to shore up yields - which reflect the number of paying bums on seats, basically.

But when pressed to say more, Joyce ducked, saying there were ''huge amounts of volatility … volatility in terms of fuel price, volatility and uncertainty about how the economy and the recovery is going to take place''.

The pharma world in which CSL competes is no cakewalk, either. When he presented CSL's results yesterday, chief executive Brian McNamee observed that the global pharma giants faced challenges as big revenue-generating drugs neared the end of their patents. Generic producers will take those markets over when the drugs go off patent and so far there are not enough blockbuster discoveries to replace them.

But CSL itself is smaller, and it occupies a niche that is more manageable. The Australian company and Baxter of the US dominate the plasma market between them, and CSL's plasma division generated three-quarters of the 32 per cent higher group revenue of $5 billion in the June year.

Its gross profit margin rose from 30¢ in the dollar to 33¢ as it contained costs and boosted plasma margins by putting on the market liquid plasma products and a growing range of plasma-sourced specialist treatments, including clotting agents and treatments for respiratory problems.

Vaccines including Gardasil, which prevents cervical cancer and other problems caused by human papillomavirus, are another important income generator and contributed 5 per cent higher revenue of $502 million in the June year.

But the plasma division is the heart of the business, and it is giving McNamee a degree of control over CSL's future. While Qantas was avoiding guidance yesterday, CSL was telling its shareholders that it expected earnings to rise again in the current year, by between 14 per cent and 24 per cent to between $1.16 billion and $1.26 billion.

There was one misstep during the year, when the US Federal Trade Commission sank CSL's planned $US3.1 billion takeover of Talecris, a US-based plasma processor, but even that had a silver lining.

CSL announced the takeover in mid-August last year, raised $1.9 billion from its shareholders to underpin the deal, and quickly bought $US1.5 billion at an exchange rate of about US87¢, keeping most of it in US-dollar accounts with the big four Australian banks to minimise its exposure to the the banking crisis.

By early June it was clear that the FTC opposed the deal, and McNamee pulled the plug. CSL paid Talecris a break fee of $US75 million. But it also switched its $US1.5 billion back into Australian dollars at a rate of about US80¢, capturing a $157 million gross profit and a net gain of $79 million in the process: not as good as the deal itself, but a tidy second prize.