RNS Number:5192G
CSR Ld
23 January 2003
CSR Limited
ABN 90 000 001 276
Results summary for the half year ended 30 September 2002
Company overview
Operating profit after tax (PAT) for the half year ended 30 September 2002 was
A$319.4 million, up 15.3% on the previous corresponding period. Earnings per
share rose 17.2% to 34.1 cents.
Earnings before interest and tax (EBIT) was up 5.3% to A$541 million. Trading
revenue was down 2.0% to A$3,638 million. EBIT/sales margins rose from 13.8% to
14.9%. Excluding the impact of a higher Australian dollar on US$ earnings, EBIT
was up 10.5% and revenue was up 2.6%.
Other half year highlights included:
* Earnings before interest, tax, depreciation and amortisation (EBITDA) rose
3% to A$761 million
* EBITDA/sales rose from 19.9% to 20.9%
* Net operating cash flow rose 2% to A$554 million
* Free cash flow* rose 33% to A$479 million
* Return on funds employed (ROFE)** # rose from 14.5% to 17%
* Return on equity (ROE) # rose from 12.7% to 14.3%
Shareholder value added was again positive and up significantly on the previous
year.
This result reflects the strength of the group's market positions and the work
done on improving base businesses. Rinker's position in Florida, and in high
growth southern US states, helped offset the impact of a weak non-residential
sector which hit the concrete pipe and products business particularly hard. In
Australia, improvements in Construction Materials, bricks and roofing, and the
downstream sugar businesses, also contributed strongly.
The heavy building materials businesses performed well, contributing 70% of CSR
group EBIT. The US subsidiary, Rinker Materials Corporation ("Rinker")
delivered another solid result, with EBIT up 3% to US$176 million, although the
stronger Australian dollar meant A$ EBIT fell 5% to A$320 million. Despite a
tougher economic environment, all the major Rinker segments lifted US$ EBIT,
apart from Concrete Pipe & Products. Construction Materials (Australia & Asia)
delivered a very strong 81% increase EBIT, to A$59 million, due to improved
margin management and operational improvement cost savings.
Building Products (Australia, NZ & Asia) EBIT was up 32% to A$63 million, helped
by strong domestic housing activity. Aluminium EBIT rose 11% to A$61 million
due mainly to lower costs. Sugar EBIT fell 25% on lower world prices, which
impacted the milling business - although EBIT from the downstream businesses -
mainly sugar refining and ethanol - rose 28%.
* EBITDA after deducting tax and net interest paid, operating capital and
change in working capital
** Excluding acquisition of Kiewit Materials Company, acquired 26 September 2002
# on a 12 month basis
Financial position
The group's balance sheet remained very strong with net debt at end September of
A$2,311 million, following the acquisition of Kiewit Materials Company, up from
A$2,130 million a year earlier. Gearing (net debt / net debt plus equity) was
35.2% from 34.0%. Interest cover was 11.8 times, up from 8.0 times.
Directors declared an unchanged interim dividend of 11 cents per share, payable
on 16 December. Franking increased to 70%, from 40% for the previous interim
dividend.
Overview
Rinker's US acquisitions are performing well overall - in line with expectations
and ahead of the weighted average cost of capital. Integration of the
Arizona-based Kiewit, acquired in late September, is proceeding to schedule and
earnings expectations have been affirmed. Operational improvement measures are
well underway as part of the post-acquisition management plan.
In Australia, internal initiatives to improve margin management and customer
service in Construction Materials significantly lifted profit. The business is
improving but it is still not earning its cost of capital. Further price
increases were implemented in October.
Building Products benefited from the lift in residential housing in Australia.
The lag effect seen earlier this year, attributed to issues with the
availability of home warranty insurance, has largely been resolved. Bricks and
roofing introduced several initiatives to lift profits, including lower
production costs and price increases.
Sugar was impacted by the decline in world prices, but this was partly offset by
the improvement in refining. The ethanol business is poised to benefit from any
moves to encourage the use of environmentally-friendly motor fuels. CSR
Distilleries is supplying BP's successful ethanol trial in Brisbane, where
motorists have responded very favourably to the 10% ethanol fuel blend. The
prospects in this area look optimistic. The sugar industry meanwhile is working
together on a major restructuring and efficiency program to help restore
Australia's productivity advantages over other sugar producers.
Business Performance
* Rinker sales rose 4% to US$1,119 million. EBITDA was up 4% to US$256
million. US$ EBITDA/sales margins increased slightly to 22.9%. US$ ROFE for
the 12 months to September was 16.9% from 15.6%. Comparable $US sales (adjusted
for acquisitions and divestments in the year to September) rose 3% and EBIT rose
1%.
Price increases ranged from marginal to 5.0%. Volumes rose in all major
businesses except Concrete Pipe & Products:
* Aggregates EBIT US$56 million, up 24%. Volumes up 19%.
* Concrete, Block & Asphalt EBIT US$37 million, up 5%. Concrete volumes
up 8%.
* Cement EBIT US$42 million, up 11%. Volumes up 2%.
* Concrete Pipe & Products EBIT US$41 million, down 24%. Volumes down
8%. The business was impacted by the substantial fall in non-residential
building.
Gypsum Supply profit increased 9% on increased volumes. The small Polypipe and
Prestress businesses also continued to suffer from the non-residential
construction downturn. Prestress EBIT was breakeven. The pipeline
rehabilitation business was sold during the half.
* Construction Materials EBIT rose 81% on an 8% lift in sales. ROFE (12
month basis) was 11.1% from 4.7%. EBITDA/sales margin was 15.9%, up from 11.9%.
The Tianjin Readymix quarry and concrete business in China continued to
improve.
* Building Products EBIT was up 32% on a 17% lift in sales. ROFE (12
months basis) was 19.5%. EBITDA/sales margin was 17.3% from 16.2%. Installation
of the SAP computer system was completed in plasterboard and insulation.
Production started at the new roof tile plant at Rosehill, Sydney.
* Aluminium EBIT was A$61 million, up 11%. Aluminium prices were 7%
lower on average and the A$ was stronger but profits were underpinned by hedging
and lower alumina costs.
* Sugar EBIT fell 25% to A$59 million. Average raw sugar prices were
down 27%. Harvested cane volumes were up 10%. Distilleries EBIT was down due
to lower fertiliser sales as a result of the drought but export sales were
stronger. Refining EBIT was A$12 million, up from A$7 million.
Strategy & demerger proposal
Almost three quarters of CSR group EBIT now comes from heavy building materials
(primarily aggregates, premix concrete, cement and concrete pipe & products).
Group strategy since 1998 has been to grow internationally in this sector,
whilst concurrently working to separate the remaining assets, in a way that has
delivered value for shareholders.
The logical next step in the strategy is to complete the separation of the heavy
building materials assets through a demerger.
For some time now CSR has been carefully examining the various separation
options. The company expects that a demerger will be the best option for
shareholders. The new demerger legislation means that this can be done without
shareholders incurring substantial tax penalties. Accordingly CSR is moving
forward with a demerger proposal which would involve splitting the group into
two listed Australian companies. CSR's due diligence process is continuing,
with the aim of putting a demerger proposal to shareholders, which would take
effect in the first half of next year.
The demerger would mean the formation of a focused, heavy building materials
group - Rinker Group Ltd ("Rinker Group"). It would be spun off from CSR
Limited and would comprise US subsidiary Rinker Materials Corporation and the
Readymix and Humes businesses (Australia & Asia).
Based on historical performance, both Rinker Group and CSR would have
substantial free cash flows. Both companies are expected to receive investment
grade credit ratings and to be listed in the ASX Top 50 and Top 100 stocks
respectively.
Rinker Group would be one of the top 10 heavy building materials stocks in the
world and a disciplined, top quartile performer in its sector. Rinker Group is
expected to be a growth stock - able to participate more effectively in the
global consolidation of the industry. With around 85% of earnings from Rinker
Materials in the US, over time we would expect it to be re-rated by investors,
more in line with its US peers.
CSR Limited would return to its roots as a diversified, Australian company,
holding some of the strongest and best-known household brands in the country.
It will be comprised of three businesses - CSR Building Products, Aluminium and
CSR Sugar, each of which is a leader in its industry. Both Building Products
and Sugar have long term performance records which rank them leaders in their
respective Australian industries, while Aluminium has delivered returns well
above its cost of capital for many years.
A demerger will allow these businesses to focus more effectively on their
respective strengths and to pursue value-adding, low risk growth options which
have previously ranked as a lesser priority for the CSR group.
CSR Limited is expected to be a highly franked stock appealing to yield driven
investors. It has been a strong generator of cash and of shareholder value -
that is, earning above its cost of capital.
A demerger will facilitate choice for the different types of shareholders - that
is, those who prefer Rinker Group's growth characteristics and those who prefer
CSR's higher, franked yields. It is expected that both companies will be
well-regarded and prove attractive to these respective shareholders.
Managing director Peter Kirby will lead the company through the demerger
process. Upon completion of the demerger, he will hand over his role to David
Clarke, current chief executive of Rinker Materials and Alec Brennan, currently
CSR group deputy managing director, who will become chief executive of Rinker
Group and CSR Limited respectively.
CSR group chairman John Morschel said Mr Kirby would then remain with the group
for up to four months as an advisor, to assist in the critical phase of demerger
implementation.
Since joining the company in January 1998, Mr Kirby has played the key role in
transforming the CSR group from a poorly-regarded Australian conglomerate into a
respected international building materials group.
In that time, EPS growth has averaged 22% p.a. compound, EBIT has doubled and
return on equity has risen from 6.1% in 1997 to the current rate of 14.3%.
All current CSR group non-executive directors are expected to join the boards of
one or other of the two companies. Mr Morschel will become chairman of Rinker
Group. Ian Blackburne, currently a CSR non-executive director and former CEO
and managing director of Caltex Australia , will become CSR chairman.
Subject to the necessary approvals as outlined above, the demerger should be
concluded prior to the middle of next year.
Outlook for the second half
There are indications that the US economy is bottoming. However, the short term
outlook is for a further softening. Overall, US construction activity for
calendar 2003 is forecast to be down about 1.1%, according to the US economic
forecaster McGraw Hill Construction-Dodge.
Rinker is expecting an improved second half, compared with the previous year,
due to the addition of Kiewit. The base business is expected to be relatively
flat. The exposure to the high growth southern states and strong road spending
under the federal TEA-21 program should help offset declining non-residential
activity. Price increases for aggregate and concrete are forecast to be
slightly ahead of inflation. Rinker's short-term focus is on bedding down the
important Kiewit acquisition.
In Australia, BIS Shrapnel forecasts a 2% increase in total construction during
the year to March 2003. Commercial activity is expected to improve, with housing
declining in the second half in line with lower approvals. Housing starts over
the year are expected to be around 142,000, from 152,000 last year.
The developing boom in Australian engineering construction is expected to
benefit Construction Materials. Major projects are currently being tendered,
although commencement is not generally expected during the current year.
Further price increases are being implemented.
Around 74% of Building Products' sales are related to housing but the business
should also benefit from any uplift in commercial activity, which represents 21%
of sales. The result should be ahead of the last financial year.
Aluminium profit should be slightly above last year, due to hedging of both the
currency and the metal price.
Sugar prices are now at a 14-month high, but with much of the current season's
crop already priced at lower levels, it will have a limited impact on current
year results. Crop volumes are up over 15% on the last financial year. These
factors are expected to at least offset the usual small loss in the second half
due to seasonal factors. Low cost growth initiatives are also underway to
improve the overall stability of returns.
The CSR group has lifted its forecasts for the current year's trading profit.
There is now a small improvement expected over last year's underlying earnings -
that is, excluding demerger costs and the A$41 million one-off tax refund
benefit. Kiewit is not expected to contribute to after-tax profit this year
after goodwill charges, but it is contributing as expected to EBIT. However CSR
is cautiously optimistic that the improvement in Construction Materials, ongoing
work to lift the base business performance across the group and further
operational improvement cost savings will offset the effects of a higher A$, low
sugar prices, and the expected softening in US construction.
The group's priority will be the successful implementation of the demerger, to
further improve the performance of the base business and to pursue value-adding,
bolt-on growth opportunities as they arise. The commitment remains to further
deliver value for shareholders, and it is expected that the group will continue
to so in the year ahead.
Operations summary
Rinker Materials Corporation
United States of America
Performance summary
* Trading revenue A$2,030 million, down 4% (US$1,119 million, up 4%).
Results in $A adversely impacted by exchange rate movements.
* Earnings before interest and tax (EBIT) A$320 million, down 5% (US$176
million, up 3%).
* Earnings before interest, tax, depreciation and amortisation (EBITDA)
A$464 million, down 4% (US$256 million, up 4%).
* Profit margin (EBIT/trading revenue) 15.7%, down from 15.8%.
Features
* Federal infrastructure spending and residential construction increased,
largely offsetting a significant downturn in commercial construction.
* Rinker successfully completed the US$540 million acquisition of Kiewit
Materials Company, a major integrated aggregate, concrete and asphalt company
which has the leading market position in Arizona and excellent opportunities for
further growth.
* Costs were reduced through ongoing operational improvements, although
insurance, health and pension costs increased.
* The commissioning of Rinker's third new highly-automated large scale
concrete pipe plant - in Houston, Texas - reduced costs, replacing less
efficient operations.
Business strategy
* To be a leading supplier of materials for the building and construction
industry in North America with a particular focus on heavy building materials,
growing in selected geographic markets.
* Key objectives
* Growth, by improving the underlying businesses and through acquisition
* Being number 1 or 2 in all our regional markets
* Overall cost leadership
* Aggressive downturn management
* Finding and keeping talented people, with a high performance ethic
* Providing a safe and environmentally sound workplace.
Progress against priorities
* Grow through bolt-on acquisitions and, if opportunities present, major
acquisitions; investigate new geographic markets: In September, Rinker acquired
Kiewit Materials Company.
* Reduce costs through operational improvement: Operational cost savings
totalled A$33 million.
* Improve safety and environment performance: Lost time injury and
medical treatment injury frequency rates, and environmental incidents, fell.
Construction Materials
Australia and Asia
Performance summary
* Trading revenue A$512 million, up 8%.
* EBIT A$59 million, up 81%.
* EBITDA A$82 million, up 44%.
* Profit margin 11.4%, up from 6.8%.
Features
* Activity levels improved in the housing, commercial and civil
construction sectors.
* Price increases introduced earlier this year helped to lift profit
margins.
* Improved operational efficiencies reduced costs across the
business.
Business strategy
* To ensure that the business is earning above its cost of capital
at all stages of the construction cycle.
* To improve customer service, logistics, production capacity, and
to be the supplier of choice.
* To develop incremental, value-adding growth opportunities in
Australia and China.
Progress against priorities
* Restore profit levels above the cost of capital. More disciplined
management of profit margins. Lift prices: Price increases in concrete and
quarries helped lift profit levels. The business is improving but is still not
earning its cost of capital.
* Localise the businesses, focusing on customers: We have localised the
business by reorganising it into 62 cells or business units. Cell managers are
now much more accountable for results in their businesses.
* Improve safety and environment performance: The lost time injury
frequency rate increased, although medical treatment injury frequency rates
decreased. Environmental incidents fell.
Building Products
Australia, New Zealand and Asia
Performance summary
* Trading revenue A$462 million, up 17%.
* EBIT A$63 million, up 32%.
* EBITDA A$80 million, up 25%.
* Profit margin 13.7%, up from 12.1%.
Features
* Returns improved in line with stronger activity in the new homes,
alterations and commercial construction sectors.
* Competitive conditions continued, although there are some signs of
prices in our markets increasing.
* SAP computer systems are being installed across all businesses.
* We are investing in e-commerce to enable customers to efficiently
access product and accounts data.
* Business renamed from Building Materials to better reflect its market
focus.
Business strategy
* Provide high quality, price competitive products to the building
industry, utilising our customer-focused channels of distribution.
* Improve efficiencies and output to meet growth in market demand, while
introducing innovative new products in all businesses.
* Search for value-adding growth opportunities in Australia and Asia.
Progress against priorities
* Increase effectiveness of our sales force and servicing of our
customers: Each business has focused on sales planning and margin analysis. They
are also identifying opportunities to cross sell products to customers.
* Closely manage pricing, while maintaining market share: Each business
has implemented pricing strategies, very closely monitored by the management
team.
* Tightly control operating capital: Operating capital continued to be
controlled tightly.
* Improve safety and environment performance: The lost time injury
frequency rate increased, although medical treatment injury frequency rates
fell. Environmental incidents remain at low levels.
Sugar
Australia and New Zealand
Performance summary
* Trading revenue A$420 million, down 17%.
* EBIT A$59 million, down 25%.
* EBITDA A$ 77 million, down 21%.
* Profit margin 14.1%, down from 15.7%.
Features
* Returns declined with a significant decrease in world sugar prices,
relative to the previous corresponding period. This impacts on expected
Queensland Sugar Limited pool prices.
* CSR milled 9.6 million tonnes of sugar cane (up 10%), producing 1.4
million tonnes of sugar (up 9%).
* The refined sugar business (50% CSR) improved, due to higher sales
volumes and profit margins. Ethanol returns fell slightly, due to higher
molasses prices and lower fertiliser volumes.
* CSR is actively monitoring the current debate on ethanol as a fuel
extender. We are well placed to take advantage of opportunities that may arise,
depending on the outcome of the current government review.
Business strategy
To create value for all stakeholders by reshaping the Australian sugar industry,
which will be achieved through:
* creating a high performance way of doing things across the industry
structure in our mill regions (including effective regional industry boards)
* driving a sugarcane productivity initiative that will deliver a 20%
sustainable improvement in sugar yield, involving working with growers,
harvesters and others to optimise harvesting and sugarcane transport systems
* pursuing growth opportunities - particularly in green energy such as
increased electricity cogeneration and the use of ethanol as a fuel extender.
Progress against priorities
* Obtain commitment and cooperation from others in the Australian sugar
industry for productivity initiatives: Regional industry boards have been
established. The productivity initiative is being implemented.
* Get renewable energy projects under way: Progress is being made on
various opportunities for energy initiatives. Potential ethanol projects require
regulatory clarification.
* Improve safety and environment performance: Lost time injury and
medical treatment injury frequency rates decreased. Environmental incidents also
fell.
Aluminium
Australia
Performance summary
* Trading revenue was A$215 million, down 3%.
* EBIT A$61 million, up 11%.
* EBITDA A$72 million, up 9%.
* Profit margin 28.5%, up from 24.9%.
Features
* Value added billet and slab sales increased by 15% over the
corresponding period last year.
* Demand for aluminium increased in line with slow growth in the global
economy, but continuing production surplus weighed on the world price.
* The world price of aluminium averaged US$1,353 a tonne over the half
year, down 7% on the previous corresponding period.
* A project to expand production capacity of the Tomago smelter by 15%
commenced. Gove Aluminium Finance (GAF; CSR 70%) has an option to participate in
this project, which has a low investment cost per tonne of additional annual
capacity.
Business strategy
* Focus on operational improvements aimed at productivity, cost
reduction and revenue enhancement.
* Continue to sell all of GAF's share of production from the Tomago
smelter, principally to long term customers in Japan and other Asian countries.
* Continue to hedge to reduce GAF's exposures to movements in the world
aluminium price and to movements in the US$:A$ exchange rate.
Progress against priorities
* Continue to manage CSR's aluminium investment to achieve the best
outcome for shareholders: The business has performed well in a period of low
world aluminium prices.
* Continue to hedge the world market aluminium price and US$ revenue:
Hedging continues to provide a base level of profitability and to reduce
volatility of earnings.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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