Transfield Services 2010 Online Annual Report / Managing Director and CEO’s report

Managing Director and CEO’s report

The Company produced a strong performance in 2010 in what has been a challenging business environment and has delivered its net profit after tax (NPAT) guidance.

We continue to drive discipline at all levels of the business, which has enabled us to deliver a record operating cash flow result for the full year, improving again on our strong half year result.

Sustained capital management has strengthened the balance sheet further, establishing a stable base from which to pursue growth.

Importantly, the growth we are targeting is underpinned by a quality order book of contracted revenue which grew by five per cent this year, or eight per cent if you exclude the impact of unfavourable currency movements.

The Company is benefiting from the global experience of a strengthened executive team and a streamlined operational structure, which has delivered real savings and importantly, a change in the way we approach the market.

Our business development focus has been revitalised and it is clear that those companies that can respond more quickly and effectively to customer needs and market demands will be best placed to benefit from the recovery.

The Company has a robust pipeline of work developing in power, defence, transport and social infrastructure, providing continuing diversification for the business.

Transfield Services’ disciplined approach has sustained its strong order book of long-term contracts that deliver consistency of earnings, generating solid and reliable returns.

We are well placed to pursue our growth aspirations.

Financial review

Total segment revenue for the Company was $3.2 billion, down seven per cent on the last year, with Group EBITA also down, 13.7 per cent.

The main driver for the decline in Australian dollar revenue was the impact of the strengthening Australian dollar that has decreased the contribution from our international businesses, particularly from North America.

A strategic imperative for the Company is to maintain margins and the quality of our order book.

Despite the very challenging market, margins for the Company were relatively resilient. The Australia and New Zealand business margins were stable. Margins fell in our international business, particularly in North America where one off operational issues and currency affected operating results.

The stability of overall margins demonstrates our contract discipline and the positive effect of transformational overhead reductions throughout the Company.

NPAT, normalised to exclude the one-off loss from the sale of the Mount Miller Wind Farm by Transfield Services Infrastructure Fund, grew 2.7 per cent to $96 million. This result is even stronger if the $10 million invested in business efficiency initiatives is taken into account.

Our record operating cash result was a highlight for the business and continues on from the significant improvements achieved in previous periods.

This strong cash conversion rate was due to our ongoing working capital management program and increased business discipline.

During the period the Company continued to pay down debt, resulting in another significant reduction in debt levels.

Net debt is now A$275 million, resulting in gearing of 25 per cent, down from 33 per cent at June 2009 on a net debt to net debt plus equity basis.

The successful completion of a placement in the US debt market, raising US$170 million in December 2009 was particularly pleasing. We took this as a vote of confidence in our business by the capital markets who continued to support us during the second half of the year.

Dividend per share is 14 cents, up two cents on the previous year and reflecting the stability of earnings and cash flows and our positive outlook for the business.

Despite tough conditions, the business delivered its guidance. This demonstrates the effectiveness of the changes we are making and the improved discipline around forecasting and operational delivery.

Our balance sheet remains strong with record low levels of gearing and this positions the business solidly for growth.

Operational review

The Company has significant capacity to pursue value creating acquisition opportunities and will prudently assess any opportunities that arise. However, we maintain a disciplined approach that is consistent with the approved strategy.

This intent was demonstrated with the acquisition of Industrial Contract Designers (ICD) to boost our engineering capabilities, delivering engineering and design of maintenance and brownfield capital projects to the hydrocarbons, processing and related industries.

Australia and New Zealand

During the year, we integrated our Australia and New Zealand businesses, sharing skills and knowledge, and producing great results from close and productive teamwork, and a strong and diverse presence in key industries.

We continue to win work on the strength of our market leading presence in key sectors such as oil and gas maintenance.  A highlight during the year was the extension of the Transfield Worley relationship with Woodside for the delivery of brownfield project and maintenance services to Woodside’s Western Australian offshore and onshore gas facilities for a further four years.

As a global liquefied natural gas (LNG) operations and maintenance service provider, we are well positioned to secure opportunities in the coal seam gas and LNG sectors.

We are well placed to take advantage of investment in the mining sector with demonstrable expertise and presence in whole-of-life asset support services.

In Infrastructure Services we are benefiting from the continued growth momentum in social infrastructure, as well as the water, power and rail sectors with an increase in investment in upgrading and maintaining existing assets.

Our rail business saw growth in projects and also benefited from Australian Federal Government stimulus spending. The business is focused on delivering rail maintenance, program management, engineering and project delivery services and maintains over 4,500 kilometres of track across Western Australia, South Australia and New South Wales.

The water group continued to deliver strong year on year organic growth from existing long-term contracts and new business wins.

Our roads business is a leading motorway and tunnel operator across Australia and New Zealand. A highlight of the year was the renewal of the 10-year PSMC006 contract, valued at NZ$103 million, covering the maintenance for part of the State Highway Network in the Western North Island for the NZ Transport Agency.

Our Property and Facilities Management business achieved strong growth compared to the same period last year. It capitalised on successful contracts with long-term government customers, improved its pipeline of opportunities and is providing services to new customers and regions.

During the year, our project management subsidiary, APP, secured engineering project management services for the Australian Grand Prix in Melbourne for the next three years and project management of Qantas’ new corporate offices in Sydney and NAB’s offices in Melbourne.

Americas

Larry Ames took over as Chief Executive, Americas during the year and is responsible for managing and growing our North American business and our Chilean joint venture, INSER Transfield Services S.A.

Our Canadian oil sands joint venture, FT Services, continues to provide a portfolio of asset management services including maintenance, turnarounds, sustaining projects, subcontractor management and execution for clients including Suncor Energy, Shell Canada and Canadian Natural Resources Limited.

Our US subsidiary, USM, is a leading provider of outsourced contractor management services in the United States with blue-chip retailers including Toys‘R’Us, Michaels, The Home Depot and Ross Dress for Less Stores. The business continues to build its order book with work secured since July 2009 exceeding US$300 million despite subdued retail trading conditions. In July 2010, we expanded our services with Walmart to include exterior facilities maintenance services to over 4,000 Walmart stores across America.

Transfield Services North America – Transportation Infrastructure (TSNA-TI) saw modest revenue growth in local currency terms. The business continues to hold its market share within its traditional United States markets as well as secure opportunities in Canada, where more than US$750 million of work was awarded to TSNA-TI during the year.

TIMEC secured renewals with its top three clients during the second quarter of the financial year. The subsidiary also secured a contract with ConocoPhilips to provide pipeline and terminal maintenance, outside of the traditional refinery maintenance sector.

Middle East and Asia

Transfield Services has established a new regional headquarters in Abu Dhabi with a resident Chief Executive, Philip Wratt, and boosted business development capabilities. This will assist in establishing strong country specific partnerships providing the capabilities to pursue and secure a significant pipeline of opportunities.

A highlight for the region was the commencement of the Shell Philippines Exploration B.V. contract, with the establishment of the Transfield Services-WorleyParsons team in Manilla. This seven-year contract at the client’s Malampaya gas facility is valued at approximately A$76 million, with a three-year extension option, and has exceeded expectations to date.

Intergulf General Contracting LLC, which provides services in civil construction, civil repair works and concrete rehabilitation, continues to grow with new contract wins providing strong bottom line contribution to the region from both oil and gas and civil related sectors in the United Arab Emirates.

Our Transfield Mannai Facilities Management Services WLL joint venture has consolidated its position as the leading quality provider of facilities management services in Qatar resulting in strong year-on-year growth.

Safety

As Managing Director and CEO, the most important thing for me is to make sure everyone is safe.

In the past 12 months, we have reduced our Lost Time Injury Frequency Rate (LTIFR) by 20.1 per cent, from 1.94 injuries per million hours worked the previous year to 1.55 this year. We also reduced our Total Recordable Injury Frequency Rate (TRIFR) from 7.49 injuries per million hours worked the previous year to 6.78 in the past 12 months, a reduction of 9.5 per cent.

In April 2010, we introduced Mandatory Safety Rules designed to protect employees and contractors from serious injury or death. The Rules apply to everyone working in all Transfield Services operations around the world, including our subsidiary companies and contractors.

Following the launch, we trained more than 1,400 of our business leaders in the implementation of the Rules. On 8 June 2010, every Transfield Services site and office around the world took part in a global safety stand down highlighting our safety imperatives.

The Company’s future

We are pursuing both organic and acquisitive growth to boost our capabilities in key areas, enabling us to deliver our strategic plan.

A key focus will be on broadening our skills to provide tailored asset services. By taking a smarter, more sophisticated approach to asset management, Transfield Services will become a trusted advisor as well as a supplier of labour.

Cross selling opportunities and leveraging into adjacent asset types and sectors is the most important focus for our strengthened business development teams.

Our priority is to seek out and grow a quality order book and secure long-term contracts that will ultimately result in sustainable returns.

Our market continues to be very competitive – a challenge I know the Transfield Services spirit will rise to. By working together and getting closer to our customers and our markets, we will meet this challenge. 

I would like to thank everyone in our global team for their continuing hard work and contribution to our success.

Peter Goode
Managing Director and Chief Executive Officer

Transfield Services Annual Report 2010 - Working on tomorrow today