Chairman's report

Your Company is in a sound position financially and operationally to generate long-term shareholder value and continue on its long-term journey.

We won and renewed $5 billion of contracts during the year. Our order book dropped only slightly to $11.4 billion at 30 June 2011, despite the sale of our USM business in the US and the sell-down of our interest in Transfield Services Infrastructure Fund (TSIF) to 20 percent.

We achieved guidance, executed all our major strategic milestones, improved margins to 5.7 per cent*, and maintained our order book despite continuing tough global economic conditions. Markets are volatile and your Board believes we should continue a conservative stance in terms of our capital structure.

Our net debt at 30 June 2011 was $250 million and we have maintained debt headroom of $674 million with gearing at 18 per cent at 30 June 2011.

We achieved earnings guidance with operating net profit after tax (NPAT) excluding non-recurring items of $100.1 million, a 4.3 per cent increase on the prior year.

Your Board has declared a partially franked dividend of 9 cents per share payable on 26 October 2011.

The total dividend for the year will be 14 cents per share representing a dividend payout ratio (to normalised NPAT) of 78 per cent. This is a little higher than our long-term target range, however our cash position and balance sheet have allowed a payment above the typical dividend payout range.

Our operations in Australia reflect the impact of a two-speed economy. Our positive exposure to the resources sector has been bolstered by the acquisition of Easternwell. This sector offers opportunities for growth and higher margins. In infrastructure we are concentrating on water, rail, electricity distribution and telecommunications, all of which are the focus of government for investment and improved efficiency through outsourcing.

Some of our industrial customers have been affected by the stronger Australian dollar and rising input costs. With these customers, our aim is to continue to reduce their costs and improve productivity.

In New Zealand, our business is concentrated in telecommunications and electricity distribution, both of which are benefiting from increased investment. Through our joint venture with WorleyParsons we are well placed to capitalise on the growth sectors of the NZ economy, including resources.

Post the global financial crisis (GFC) our North American business is being repositioned to focus on higher value add and growth opportunities. The sale of our USM business reduced our exposure to the largely stagnant US property and retail sectors which are suffering from declining revenues and margins. Our Canadian business in oil sands is performing well and there are opportunities for expansion in oil and gas in both Canada and the US.

Our plan for our profitable Middle East business is to grow and achieve critical mass. The focus is on energy and facilities management. We are also exploring the growing infrastructure market in the Middle East.

Post the GFC, listed infrastructure funds have been undervalued by the market and this made it difficult to grow the TSIF as originally planned. Accordingly, we sold down to 20 per cent our interest in the Fund to Ratchaburi of Thailand. The Fund was taken private and we retained the right to provide operational and maintenance services.

Your management team, under the leadership of Peter Goode, continues to reduce costs and improve efficiency with significant strategic milestones achieved in these areas during the year. The Company is also investing in enterprise resource planning systems under a five-year plan that will bring the systems to a world-class standard, which befits a global company.

This investment will improve efficiency, increase cost competitiveness and lift the quality of service.

While the net impact of the proposed carbon tax should be relatively neutral we are assessing the impact of the tax on our existing and potential customers. Suffice to say some of our customers will be adversely affected and the materiality of this adverse effect must be assessed. On the other hand, the carbon tax will emphasise the need for the efficient use of energy and the Company is developing plans to assist customers in the reduction of their carbon footprint.

In most situations, where we are deemed to have operational control for the purposes of the proposed carbon tax legislation, either the responsibility for payment or the costs associated with the tax can be passed through to the client. This applies to more than 95 per cent of the carbon dioxide emissions reported by Transfield Services under the National Greenhouse and Energy Reporting (NGER) Act.

Your Company believes in delivering commercial, environmental and social sustainability in the use of all resources. This not only benefits the environment and society but also assists in raising productivity and efficiency.

I acknowledge the work of the Company in Indigenous participation. We signed a Reconciliation Action Plan in 2009 and today three per cent of our permanent Australian workforce classify themselves as Indigenous. Our target is now four per cent by 2013. I pay tribute to our Indigenous Advisory Board and to its Chairman, Eddy Fry who has led the Company in this important endeavour. If every Top 200 Australian company and their private company equivalents, achieved three per cent Indigenous employment, we would be well on the way to closing the gap between Indigenous and non-Indigenous Australians.

Diversity of experience, background and gender enhances the quality and robustness of decision-making. Since the end of the financial year, your Board has approved the revised Equality and Diversity in the Workplace Policy. The policy captures the Board’s recognition of diversity as an integral component of collaborative workplace culture and sustainable business success, and sets initial measurable objectives in relation to gender diversity.

Our remuneration structure continues to be designed to be fair and to attract and retain the best people and provide an incentive to grow profitable business, reduce costs, improve margins and ensure safety. 

Incentive remuneration outcomes directly reflect the Company’s short- and long-term performance and ensure alignment with shareholder interests by tying short- and long-term incentives directly to our results.    

We continue on the path of Board renewal and your Board is actively searching for a new non-executive director to ensure we continue to have the diversity of skills and experience suitable for a global engineering services company.

In October 2010, we were deeply saddened by the death of Transfield Services director, Mel Ward AO. Mel was a major contributor to the establishment and development of Transfield Services as a respected public company and is greatly missed.

Following the GFC, your Company has completed the major components of a strategic realignment plan. These include a management reorganisation, repositioning the Company to concentrate on growth sectors and higher value work, the sale of USM and the sell-down of our interest in the TSIF in association with the privatisation of that Fund. The focus now is on organic growth and improving efficiency and productivity. 

In times of constraint and uncertainty, Transfield Services is expressing confidence in the future. In 2012 we will invest up to

$200 million in growth and maintenance capital expenditure, which will ultimately create new jobs and contribute to the economy while improving the profitability of your Company.

Despite the economic conditions, we continue to forecast growth and 2012 should be another good year for us.

I thank and congratulate Peter Goode and his team on a positive operational result in a challenging global environment.

Anthony Shepherd
Chairman