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20 August 2003
2003 operating result points to improved outlook for Lend Lease
A$230.2 Million Operating Profit After Tax (A$714.8 million Loss After Tax following REI Write-down)
Lend Lease Corporation Limited (“Lend Lease”) today announced a net operating profit after tax of A$230.2 million for the year to 30 June 2003 and said it expected to report an increased net operating profit after tax in the range of A$240 million - A$250 million in 2004.
The outlook for Lend Lease’s 2004 operating profit does not rely on contributions from the sale of any major assets or businesses.
Lend Lease’s reported full year result to June 2003 was a loss of A$714.8 million after tax. This includes a total A$945 million write-down in the value of various Real Estate Investments (“REI”) businesses in the US, Asia and Europe, slightly lower than the amount announced earlier this year.
In accordance with its revised dividend policy as announced in May, the company declared a final dividend of 20 cents per share unfranked, compared to the 10 cents per share fully franked interim dividend paid in March and the 9 cents per share fully franked final dividend for the 2002 financial year.
Lend Lease Group CEO, Mr Greg Clarke, said the company had dramatically reshaped its business model during the year and is now well placed to generate reliable earnings growth.
“The decision to exit the US REI business in an orderly way has certainly been expensive and painful, but it has been the right thing to do,” Mr Clarke said.
“Lend Lease’s future and its earnings visibility are a lot clearer today than this time last year.
“The businesses that we are going forward with are in very good shape, having achieved around 13% operating profit growth in 2003 with a better outlook in 2004.
“Lend Lease is in a strong position financially. Our net debt is only A$17.4 million and we had A$867 million in cash at 30 June 2003. We expect to realise additional cash of approximately A$750 million as we complete the exit from the US REI businesses. Most of this cash will have been received by the end of the calendar year,” he said.
This excludes approximately A$400 million of co-investments that related to the businesses being exited, which Lend Lease is retaining and will realise over a period of time.
“With overall global economic conditions remaining challenging, we have secured A$88 million p.a. in sustainable, pre-tax operating savings, and have focused on growth opportunities like integrated urban and community development and real estate funds management here in Australia, healthcare PFIs in the UK and large military housing projects in the US,” Mr Clarke said.
On a global basis, Bovis Lend Lease produced an excellent result, with profit after tax up 19% to A$133.7 million, Backlog Gross Profit Margin increasing 12% during the year to A$564 million and its profitability ratio up from 33% to 36%.
Despite very challenging conditions over the next 12 months in some of Bovis Lend Lease’s project management and construction markets, the business is on track for 10% plus growth in profit after tax in 2004.
With the operating earnings performance returning to growth and the US REI exit well laid out, Lend Lease also implemented two capital management initiatives during the year to improve shareholder returns.
The company’s dividend policy was changed to lift the payout ratio to between 60% and 80%. The final dividend for 2003 announced today reflects a 73% payout ratio.
In addition, Lend Lease also commenced a 10% share buyback program in June and has so far bought back 2.9% of its shares. The buyback program was suspended in the lead-up to the results announcement. As the company is currently in negotiations with its joint venture partners in respect of its investment in IBM Global Services Australia, the buyback will remain suspended for the time being.
Given the significant level of cash proceeds expected from the exit of the US REI businesses, the Group expects to have surplus cash at the completion of the current buyback. Mr Clarke said he intended to seek shareholder approval for a further 10% share buyback at the AGM in November this year.
The company also announced that it was suspending the annual allocation of 0.5% of its issued capital to the employee share plans, effective immediately.
Mr Clarke said employee share ownership has been and will remain an important part of the Lend Lease culture.
“We will continue to reward employees with Lend Lease shares. However, shares will be purchased on-market in the future. This will eliminate the dilutionary impact of the annual allocation to employee share plans on existing shareholders,” he said.
OPERATIONS OVERVIEW
A key feature of Lend Lease’s 2003 result was the division between the continuing operations which will form the basis of Lend Lease’s future earnings and the continuing operations being divested following the decision to exit the US REI and other related REI businesses announced in May this year.
The continuing businesses have performed very well and are well placed to deliver further earnings growth going forward.
Key continuing operations results for 2003:
 | Overall operations - up 13% to A$198.1 million (A$174.8 million June 2002). |
 | Bovis Lend Lease - up 19% to A$133.7 million (A$112.7 million June 2002). |
 | Integrated Development Services - down from A$40.6 million in 2002 to A$31.6 million at June 2003, but skewed by significant PFI bid costs in the UK for the Allenby/Connaught project bid (bid costs of A$13.9 million after tax) and health care projects not yet awarded. Australian development businesses performed very strongly and Actus Lend Lease in the US posted a 24% increase. |
 | Real Estate Investments - up 16.4% to A$93.1 million (A$80.0 million June 2002). |
Discontinuing operations results:
While the net profit contributions from the discontinuing REI businesses increased by $8.8 million to $32.1 million in 2003, this was entirely due to reduced amortisation charges following the write-down of the carrying value of these businesses announced during the year. Operating earnings before amortisation from the discontinuing businesses were flat at $60 million after tax in 2003.
The outlook for these businesses, if they were to continue under Lend Lease ownership, would see them continue to impede the company’s performance, underscoring the importance of the decision to exit.
FINANCIAL PERFORMANCE
In his profit analysis, Finance Director, Robert Tsenin, said that looking beyond the disappointment of the REI write-down, there were a number of very pleasing factors in the 2003 result.
“At the operating level, Lend Lease has delivered a quality result, which clearly points to its earnings growth capacity as we remove the drag created by the various REI businesses that has been so disappointing over the last two years,” Mr Tsenin said.
“We have significantly reduced the contribution of net non-recurring items to the operating profit. Such items are down to just $15.7 million after tax, from A$64.8 million after tax in 2002.
“Continuing business operating earnings increased 32% to A$145.8 million after tax, while total investment income from investments like Bluewater in the UK and King of Prussia in the US are up 13% to A$61.2 million,” Mr Tsenin said.
“We are in very good shape financially, with balance sheet capacity and very strong cashflows to give the company significant flexibility for its future capital management strategies,” Mr Tsenin said.
Other financial highlights:
 | Net interest expense improved as a result of higher average cash balances during the year, reduced by A$4.2 million after tax to A$11.9 million after tax in 2003. |
 | Net foreign exchange hedge benefits up 34% to A$22.6 million after tax. |
 | Group restructuring costs of A$32.5 million after tax were effectively offset by tax benefits brought to account that were not recognised in previous years and additional recoveries from the THI and Chelverton investments in the UK. |
As previously announced, Mr Tsenin will retire from the Board and the company on 31 August 2003.
OUTLOOK
Mr Clarke said Lend Lease was well placed to achieve growth in both reported after tax earnings and on an earnings per share basis in 2004.
“There are a number of factors which will come into play,” he said.
“The key point is that we expect our continuing operations to produce earnings that will more than offset the lower earnings we could expect to achieve from the REI businesses we are exiting.
“With the benefit of the share buybacks, we are looking for reported eps growth in excess of 10% in 2004.
“We still have lot of work to do in securing Lend Lease’s future performance over the longer term, but I think the steps we have taken, and the operating result delivered in 2003, show that Lend Lease can and will do it.” Mr Clarke said.
Summary of Continuing Business Operating Results - FY 2003media | stock exchange
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