CSR Ltd today provided a trading update for the year ended 31 March 2009.
In the past three months, the Australian and New Zealand residential and non‑residential construction markets have declined more quickly and further than previously anticipated. In that same period the price of aluminium has also dropped very sharply to levels not seen in real terms for more than 25 years.
As a result of these and other smaller adverse factors, CSR’s group earnings to 31 March 2009 will now be lower than previously expected.
On 17th November 2008, CSR indicated that group earnings before interest and tax (EBIT) before significant items for the year ending 31st March 2009 (“YEM09”) were expected to be in line with the previous year. In light of the further market deterioration since then and our current assessment of market conditions, CSR now expects group EBIT before significant items to be in the range of $310-$330 million compared to $386.3 million last year.
Net profit after tax before significant items is expected to be in the range of $125‑$140 million, compared to $192.8 million last year.
“While market conditions for our Building Products and Aluminium businesses have deteriorated further than expected in the past three months, we remain very focused not only on short term mitigation but also on the company’s strategic goals,” said Managing Director, Jerry Maycock.
“With our reinforced balance sheet, CSR is well positioned to emerge from the tough period ahead with excellent prospects for the cyclical upturn.”
The residential construction market deteriorated significantly in the last quarter with latest Australian dwelling approvals data for December showing a decline of 2.9 per cent from the previous month and 32.9 per cent decline (seasonally adjusted) on the previous year, to the lowest levels since March 2001. Dwelling approvals per capita in Australia for December were at the lowest level since the data was first collected in 1983.
Dwelling approvals in New Zealand have continued to fall with dwelling consents for the year to December down 28 per cent on the previous year, the lowest annual total since 1993.
The non-residential construction market in Australia has also declined quickly with the December value of approvals declining 27 per cent from the previous month and 45 per cent from the previous year.
CSR continues to deal with this cyclical low period by generating further cost efficiencies and business improvements across its Building Products portfolio to ensure that its businesses are more appropriately aligned for current market conditions without compromising the ability to respond when the cycle improves.
The Building Products group has been consolidated to better co-ordinate market opportunities, streamline back office functions, and improve operating cost control. In the last twelve months approximately 539 full time equivalent positions have been removed from the Building Products group which currently has 4,485 full time equivalent staff. The business will continue to adjust resourcing levels in line with anticipated demand.
With high proportions of fixed costs, the CSR Bricks and Roofing and Viridian glass businesses are the most affected by volume declines. Viridian is also more exposed to the commercial building sector and consequently Viridian’s second half earnings are now expected to be slightly below first half earnings.
On a more positive note, the recent Federal and State Government initiatives to stimulate the housing sector in Australia, including the building of 20,000 defence and social houses, the $3.9 billion ceiling insulation package, and significant increases to the first home owners grant are expected to have significantly positive effects on the residential construction industry. CSR recently commissioned its new Bradford Gold glasswool insulation plant in Brisbane which provides increased capacity for the insulation market.
Lower mortgage rates should also progressively contribute to improved housing affordability this calendar year. There are signs of increases in finance applications for residential buildings, particularly among the first time buyer segment.
It is also reassuring to note that one of CSR Building Products’ key strategies of providing energy efficient products for the built environment is being validated by government policies to retrofit insulation and to accelerate the trend towards six star specifications for new homes.
While CSR will see modest benefits in its Bradford insulation business this financial year, and substantially more next year, it will be well into CSR’s next financial year (YEM10) before any overall improvement in residential construction demand is expected. Non-residential construction demand, which accounts for some 30% of CSR’s Building Products’ sales is still declining and at present appears unlikely to recover significantly during YEM10.
Current year EBIT from CSR’s Building Products business is now expected to be in the range of $120 to $135m.
The price of aluminium has fallen significantly since November 2008, with the average monthly LME 3 month price falling from $US1,905 in November to US$1,448 in January.
Savings from declining raw material costs are also not realised as quickly as the fall in the metal price. For example, the cost of alumina is linked to the previous month’s LME aluminium price, which means that in a declining metal price environment, there is a time lag before lower alumina costs are realised relative to aluminium sales.
Additionally, while the substantial high prices for carbon-based material inputs experienced last year have peaked, there is also a time lag before recent price reductions flow through to lower realised costs. Finally, the devaluation of finished product stocks in inventory reduces profit in a declining price environment.
The Tomago smelter retains its very competitive position on the global aluminium cost curve which, together with the current hedging position, helps to cushion CSR’s Aluminium earnings from the sharp fall in the price of aluminium. With recent spot prices being below the cash cost for more than half the world’s smelters, it can reasonably be expected that plant closures (many of which have already been announced) will start to progressively restore the supply/demand balance during the next few months, and prices should start to recover.
All of CSR’s physical metal is sold for YEM09. In terms of the pricing of this metal, CSR has around 80 per cent of its net aluminium exposure hedged at A$3,037 per tonne for the second half. The significant recent price decline for the unhedged portion will now inevitably have a material impact on divisional earnings this year.
CSR has not added to its metal hedge book during this low price period but has undertaken some additional currency hedging. CSR is currently 57% hedged for YEM10 at an average price of A$3,131.
Aluminium earnings this year are now expected to be materially lower than previously forecast with EBIT likely to be in the range of $100-$110 million.
CSR continues to build a more stable earnings stream in Sugar while re-investing in the mills to support its competitive raw sugar position. Sugar refining operations are performing ahead of prior years with positive conditions in the retail food and beverage sector. The price of fuel ethanol has fallen recently in line with lower oil prices.
Fundamentals for the global raw sugar price continue to be positive. CSR expects its average net realised price for YEM09 to be around A$320 per tonne.
It is still too early to be definitive about what impact the recent floods in northern Queensland will have on the sugar cane crop for YEM10. While sugar cane is generally a resilient plant, the degree of inundation and lack of sunlight means that the cane yield will be adversely affected. CSR’s very preliminary estimates indicate that this could result in 10-15% lower raw sugar production volumes next season. CSR will continue to assess the impact as water levels recede, crop estimates are firmed up and consequent operational responses developed. The rain has not caused significant damage to CSR’s facilities.
CSR advised in early November 2008 that approximately 49% of the then estimated sugar crop for the YEM10 season was hedged at A$360 per tonne. CSR has undertaken a small amount of pricing since and, with the lower expected crop size, a little over 60% of the YEM10 crop is now hedged at A$360 per tonne IPS.
Sugar earnings for YEM09 are still expected to be higher than last year, with EBIT in the range of $80 to $85 million.
Australian and New Zealand property markets have continued to slow markedly since November.
Slower market conditions have impacted the value and timing of various transactions across the industry and CSR is not immune from these factors.
CSR’s earnings from property are derived from the development and sale of a limited number of former industrial sites. Where market conditions preclude sales at sensible prices, CSR has elected to delay value realisation rather than engage in sales at very low prices. Consequently, EBIT from the Property division for YEM09 are now expected to be around $25 million, which is lower than the $35 million previously forecast.
Proceeds from the $349 million capital raising in November 2008 were applied to reducing debt, strengthening the balance sheet and reducing refinancing risk. CSR continues to operate well within its covenants.
The company is well advanced in refinancing debt facilities maturing in YEM10 and expects to finalise documentation by the end of March 2009.
Development capital expenditure levels are reducing quickly as the company has completed the majority of its recent reinvestment program.
The Board re-affirms the dividend policy which is to pay-out as dividends approximately 60%-80% of net profit after tax before significant items.
As previously advised to the market, CSR’s product liability provision is affected not only by the routine re-estimate of the underlying liabilities, but also by the AUD/USD exchange rate in regard to US liabilities.
The Board will review the accounting provision at year end, but the current exchange rate alone would result in an increase in the provision of approximately an additional $50m as at 31 March 2009. The final provision will depend on the updated projections of future liabilities, exchange rate and the Board’s decision on the appropriate prudential margin given the circumstances prevailing at year-end.
As also previously advised, costs associated with the closure of the Viridian automotive glass facilities of approximately $13 million will be treated as a significant item. Other costs associated with the integration of Viridian glass totalling $23 million will be included as significant items.
In light of current and anticipated trading conditions the Board will be reviewing asset carrying values at year end.
Full Year Results
CSR is scheduled to release its results for the year ending 31 March 2009 on 13 May 2009.