Downer EDI Limited (‘Downer’ or ‘the Group’) today announced an underlying EBIT of $317.8 million for the year ended 30 June 2010, an increase of 4.3% on the previous year. Underlying NPAT was $197.3 million, up 4.2%.
Chief Executive Officer and Managing Director, Grant Fenn, said Downer had delivered a solid underlying result in difficult trading conditions.
“Downer continues to win new work and secure contract renewals with long-standing clients. Our work-in-hand is now at a record level of over $20 billion,” Mr Fenn said.
“The $260 million, pre-tax Waratah train provision and asset impairment announced on 1 June was disappointing, however the underlying performance for the year demonstrates the strength of our businesses and is a credit to the hard work and commitment of our people.” Downer’s Lost Time Injury Frequency Rate (LTIFR) for the year improved significantly, reducing by 33% to a record low of 0.94.
“This is a very pleasing result that confirms Zero Harm is embedded in Downer’s culture and fundamental to our future success,” Mr Fenn said.
The Group’s total revenue was $6.1 billion, up 1.9% on the previous year. This reflected an increase in joint venture and alliance revenue, including Downer’s share of the successful KDR Melbourne Yarra Tram joint venture with Keolis.
EBIT margin was 0.1 percentage points higher at 5.2%, reflecting a substantially-improved Mining performance offset by lower margins in the Works business.
Operating cash flow, adjusted for the net cash outflow of $172.8 million related to the NSW Waratah train project, was $377.1 million representing 119% of underlying EBIT.
Mr Fenn said Downer had maintained a strong balance sheet with gearing of 29.9% and a high level of liquidity, with over $800 million in cash and undrawn facilities as at 30 June 2010.
“I confirm again that Downer has no current intention of raising equity,” Mr Fenn said.
The Directors declared an unfranked final dividend of 16.0 cents per share (2009: 16.0 cents), payable on 1 October 2010 to shareholders on the register at 1 September 2010. The company’s Dividend Reinvestment Plan (DRP) will continue to be applied for the final dividend with a discount of 2.5%. The total dividend in respect of the year is 29.1 cents per share (2009: 29.0 cents).
Operational Highlights
Engineering
- Revenue of $1.9 billion, down $106.7 million or 5.3%
- EBIT of $112.5 million, down $4.1 million or 3.5%
- EBIT margin of 5.9%, up 0.1 percentage points (ppts)
- ROFE6 of 26.4%, up 2.1 ppts
Downer Engineering continued to win major projects during the year, securing contracts with Wesfarmers Curragh Coal, BHP Billiton Iron Ore, Woodside, TransGrid and Collgar Wind Farms.
However, the engineering market is very competitive with reduced margins. The Engineering division was also affected by delays in both public and private investment as a consequence of the Global Financial Crisis (GFC) and soft trading conditions for Consulting in Australia and New Zealand.
Downer has a leading market position in electrical engineering services and further boosted its mechanical engineering capabilities during the year with the acquisition of Western Construction Co.
“The electrical and mechanical market in Western Australia remains robust and the outlook around resources and energy is strong,” Mr Fenn said. “The East Coast of Australia continues to be competitive, resulting in tighter margins, but we have the flexibility to mobilise our workforce to take advantage of appropriate opportunities.”
Mr Fenn said the Engineering division was being strengthened under the leadership of its new CEO,Eric Kolatchew, who joined the Group in January 2010.
“Eric’s background in engineering, construction and the delivery of major industrial projects brings further depth to the Group’s leadership team,” Mr Fenn said.
Mining
- Revenue of $973.5 million, down $54.5 million or 5.3%
- EBIT of $68.2 million, up $21.6 million or 46.5%
- EBIT margin of 7.0%, up 2.5 ppts
- ROFE of 13.0%, up 2.6 ppts
Downer Mining performed strongly despite weather conditions along the eastern seaboard of Australia affecting operations between January and March this year.
“There is strong demand for contract mining services and the Downer Mining team continues to improve under the leadership of David Overall,” Mr Fenn said.
“Downer Mining is benefiting from working closely with its clients to improve productivity and fleet management. Our competitive, full-service offering and commitment to Zero Harm continues to be recognised by our clients and this contributed to a number of new wins and contract renewalsduring the year, including with BHP Billiton Iron Ore, the Cracow Mining JV and Felix Resources.”
Since 30 June 2010, Downer has announced a further $5 billion of contract wins and renewals with BHP Billiton Mitsubishi Alliance (BMA) and Fortescue Metals Group (FMG).
“These new contracts reflect Mining’s focus on developing innovative solutions with our clients that deliver improved performance,” Mr Fenn said.
Rail
- Revenue of $1,046.8 million, up $157.8 million or 17.8%
- Excluding the Waratah train project, revenue was $774.3 million,
up $148.5 million or 23.7%
- EBIT of $77.9 million, up $17.2 million or 28.2%
- EBIT margin of 7.4%, up 0.6 ppts
- Excluding the Waratah train project, EBIT margin of 9.9%,
up 0.8 ppts
- ROFE of 25.2%, down 7.6 pts, reflecting increased work-in-progress on the Waratah train
project
Mr Fenn said the Rail division, excluding the impact of the Waratah train provision7, had delivered a strong performance during the year.
“Downer Rail continues to be the market leader in whole-of-life rolling stock solutions in Australia, securing more than $400 million in new standard and narrow gauge locomotive orders during the year,” Mr Fenn said.
Downer Rail, together with joint venture partner Keolis, successfully commenced its role as the franchisee of Melbourne’s Yarra Tram network in December 2009. The contract, valued at approximately $2.8 billion, allows Downer to demonstrate its light-rail management capabilities over an initial period of eight years.
In May 2010, Downer announced it was a member of the GoldLinQ consortium, short-listed to continue in the tender process for the Gold Coast Rapid Transport Project. The Group continues to look for opportunities in the emerging outsourcing market.
“The outlook for the Rail market remains strong and Downer is well placed to service its freight clients,” Mr Fenn said. “Our clients recognise that we have a very good product for the demanding requirements of the Australian resources sector and our maintenance capability is second to none.
“Population growth and the need for greener transport solutions will continue to support demand for passenger and light-rail rolling stock.”
NSW Waratah train project
Mr Fenn said Downer is focused on delivering the NSW Waratah passenger trains as part of its Rolling Stock Design and Manufacture contract with Reliance Rail.
“We are working very hard with RailCorp to meet the target of delivering the first train set before the end of this calendar year,” he said.
In June 2010, Downer achieved practical completion of the Auburn Maintenance Centre, home tothe 30-year through-life-support contract for the Waratah train series. The facility is currently thetesting hub for the prototype and the first eight-car set of the Waratah train series. During the firstweek of August 2010, the prototype completed its initial track testing program. The first eight-car sethas been testing on the NSW metropolitan network for over a week.
Mr Fenn said the performance of the prototype had exceeded expectations, providing the Groupwith confidence in the future performance, reliability and safety of the Waratah series. Ninety-sixcarriages are now in various stages of manufacture.
Works
- Revenue of $2.1 billion, up $37.7 million or 1.8%
- EBIT of $102.9 million, down $31.8 million or 23.6%
- EBIT margin of 4.9%, down 1.7 ppts
- ROFE of 16.4%, down 6.6 ppts
Downer Works maintained its market shares during the year and secured a number of roadmaintenance contracts with government clients across Australia, New Zealand and the PacificIslands.
“Road maintenance markets were constrained as government agencies looked to rationalisediscretionary spending,” Mr Fenn said. “In addition, private investment, especially landdevelopment, was significantly lower than in previous years.
“The unseasonably wet weather across both New Zealand and the east coast of Australia duringthe third quarter also affected performance, however the business benefited from increasedspending in the rail-track maintenance market in Australia.”Downer’s innovative road surfacing and traffic control solutions led to a number of high-value maintenance contract wins, with key clients including VicRoads.The UK market continued to be difficult, resulting in further restructuring costs to the business in the fourth quarter.
“Downer expects the UK market to remain challenging in the near term,” Mr Fenn said. “We arefocusing on extracting value at the current time and are assessing our options going forward.
”Notwithstanding market conditions, Downer’s dominant market position and integrated service offering leaves t he Australasian Works businesses well placed to pursue opportunities across the road, rail maintenance and water sectors.
Board Changes
The Chairman of Downer, Peter Jollie AM, has decided not to nominate for re-election as a Director at the next Annual General Meeting (AGM) on 3 November 2010.
“My decision reflects the Board’s recognition that Board renewal is appropriate,” Mr Jollie said. “I will continue as a fully-engaged Chairman until the Annual General Meeting,” he said.
The Board intends to appoint the current Deputy Chairman, Mike Harding, as the new Chairman immediately following the AGM.
Outlook
Mr Fenn said Downer had strong underlying businesses that were well positioned in their respective markets.
He said Downer’s record work-in-hand of more than $20 billion supported the Group’s strategy and provided a solid foundation for future growth. Downer has a strong balance sheet, with gearing of 29.9% and over $800 million in cash and undrawn facilities.
“The significant contract renewals announced by Downer Mining since 30 June 2010 are encouraging, however the outlook across our businesses is variable in both the markets and geographies in which we operate.
“Overall for the 2011 financial year, we expect improvement of around 5% in EBIT and, reflecting an expected increase in effective tax rates and interest expense, NPAT in line with the underlying NPAT result in 2010.”
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Downer EDI Limited (www.downeredi.com) is an Australian top-100 company that provides comprehensive engineering and infrastructure management services to the transport, energy, infrastructure, communications and resources sectors across Australia, New Zealand, the Asia- Pacific region and the United Kingdom.