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[November 2008]
Boral AGM Remarks
In his address to this year’s Boral AGM, CEO and Managing Director Rod Pearse included the following comments: “Boral’s sales revenue for the year ended 30 June 2008 was 6% higher than the prior year at $5.2 billion. The growth in sales was predominantly due to increased volumes in construction materials in Australia. Revenues also benefited from price strength in most businesses and from growth activities including the acquisition of construction materials assets in Oklahoma.
Whilst sales lifted, earnings before interest, tax, depreciation and amortisation or EBITDA of $688 million was down $74 million or 10%. In Australia, EBITDA of $657 million was 9% higher than the prior year. However, offshore EBITDA decreased by $123 million or 82% to $27 million and accounted for only 4% of Boral’s earnings for the year (compared with 20% a year earlier). This significant decline in offshore earnings reflects the dramatic reduction in US housing-related volumes as well as difficult conditions for Boral’s construction materials businesses in Indonesia and Thailand.
Managing through a "generational" downturn in the USA
In the USA in 2007/08, dwelling starts were some 45% below peak demand in 2006. Dwelling starts are likely to fall by a further 30% in this current financial year to around 40% of sustainable underlying demand. The USA has not experienced such a severe decline in housing activity for at least 25 years.
Total US housing starts were down 27% in 2007/08 to 1.13 million compared to 1.55 million starts in the prior year. Single family housing starts, which are more important than multi residential construction for our brick and roof tile businesses, were down by a significant 35%. In 2006/07, Boral's US operations delivered A$95 million of earnings before interest and tax (EBIT). A year later, in 2007/08, the situation deteriorated significantly. The US business delivered a loss of A$27 million, which included a A$37 million loss in the June 2008 half of the year. Significantly lower volumes and increased raw material costs contributed to the severe fall in US earnings. One-off costs associated with a specialty brick plant write-down (US$5 million) and costs to reconfigure our brick and roof tile plants (US$4 million) also impacted the result.
In response to the extreme market conditions, we have implemented a comprehensive program of plant shutdowns and slowdowns to match production with sales demand in an effort to avoid a build-up of inventory. In our brick business, we have mothballed 10 of our 24 brick plants. Of the remaining 14 plants, all but two are operating at slowed rates of production. Overall, our brick production is currently running around 38% of our capacity; this is down from an average of 56% in 2007/08 and 79% in the previous year. This is a similar situation for all players in the US brick business.
..…In 2007/08 156,000 new Australian dwellings were commenced. This was 15% to 20% below the required level to meet underlying demand. In New South Wales, new dwelling starts are 40% below underlying demand and are at the lowest level experienced in more than 40 years.
For Boral, this has a considerable impact on earnings, because traditionally New South Wales is Boral's largest state market and represents around 40% of our Australian revenues. Detached house construction approvals in New South Wales, Australia’s most populous state, are around half the number taking place in both Victoria and Queensland and at similar levels to Western Australia and South Australia; this is not business as usual.
Whilst activity in Victoria, Queensland and South Australia increased during the year, dwelling starts in all Australian states were below underlying demand. Further declines in New South Wales in 2007/08 together with continued weakening in the Western Australian detached housing market impacted Boral's building products and construction materials businesses during the year. We have been responding to the challenges of the protracted downturn through disciplined price management and a relentless focus on cost reduction programs. Pleasingly, despite volume pressures, EBIT from Building Products was up 15% to $114 million in 2007/08.
.....Whilst there is considerable uncertainty and assuming that the US dollar exchange rate averages around 70 cents for the year, we expect Boral’s profit after tax for the full year to be around $200 million. First half earnings are expected to be around 40% of full year earnings. As foreshadowed in August, QEU earnings will be weighted heavily to the second half. The benefits of significant price and cost improvements are also expected to be greater in the second half..."
Mr Pearse’s full report addressed many other issues and the Chairman also reported at length.
ENDS