Net profit after tax (PAT) was up 37% in US$ to US$296 million, and up 12% in A$ to A$427 million*.
Earnings per share (EPS) rose 37% in US$ to 31.3 cents and was up 12% in A$ to 45.2 cents. EPS pre-amortisation of goodwill rose 35% to 36.7 cents (US$) and 10% to 52.9 cents (A$). For our US shareholders, earnings per American Depositary Receipt (ADR), pre-amortisation, were US$3.67.
Profit from ordinary activities before interest and tax (EBIT) was US$493 million, up 25% or up 2% in A$ to A$713 million, while sales revenue rose 25% in US$ to US$3,706 million or up 2% to A$5,339 million. Earnings before interest, tax, depreciation and amortisation (EBITDA) rose 20% to US$727 million, but was down 2% in $A to A$1,050 million.
With around 80% of group earnings from the US, translating those profits into the stronger Australian currency – up 22% on average versus the previous year – impacted our profits reported in A$. At a constant exchange rate, A$ PAT would have been A$66 million higher, or up 29%.
Return on funds employed (ROFE) was also up strongly, to 17.1% in US$, from 14.3% in 2003, and up from 15.3% to 18.7% in A$.
Cash flow has long been one of the great strengths of Rinker. Net cash flow from operations rose 29% to US$661 million or up 4% to A$947 million, during the year. Free cash flow rose 15% to US$441 million but in A$ was down 10% to A$614 million.
The increase in dividend, fully franked, reflects Rinker’s improved performance and is one way to reward shareholders for their support. The buyback of up to 10% of our ordinary shares is another.
Strong results from the Australian subsidiary Readymix – with EBIT up 33% in A$ – and the Florida and Arizona operations of the US subsidiary, Rinker Materials, helped drive the performance. Rinker Materials EBIT was up 17%. These offset a lower result from the US concrete pipe business, increased costs of fuel, energy, and other raw materials, and US$16 million in writedowns – US$11 million for the US prestress operations and US$5 million for restructuring within the concrete pipe business.
The writedowns reflect lower valuations of the assets. Prestress is a small business, with only US$60 million in funds employed – but it is highly exposed to the depressed US non-residential construction sector. In March we sold two of the 11 prestress plants and more may be sold later, if appropriate.
Although it continues to deliver above its cost of capital the performance of the US concrete pipe business has deteriorated over the past two years because of its wide geographic exposure, including many states with weaker fiscal and economic positions. In the fourth quarter, costs of steel, used to reinforce the pipe, rose 25%. The business also faces ongoing competitive pressures.
Rinker’s financial position strengthened further over the year. Net debt fell US$348 million to US$601 million and EBIT interest cover was 11.5 times in $US, up from 8.0 times at end March 2003. Gearing or leverage (net debt/net debt + equity) improved to 20.9%, down from 33.5%, while net debt/equity was 26.4%, from 50.4%.
BUSINESS RESULTS
Rinker Materials sales revenue was US$2,868 million, up 20%. EBITDA was up 15% to US$591 million, while EBIT was up 17% to US$392 million.
US$ return on funds employed (ROFE) was up strongly to 17.9%, from 14.5% the previous year. All businesses performed well and improved their profitability and ROFE, except concrete pipe and prestress.
Readymix sales revenue was A$1,201 million, up 18%. EBITDA rose 21% to A$209 million, helped by price recovery, higher volumes and cost savings. EBIT was up 33% to A$158 million. Readymix ROFE in A$ rose strongly to 17.1% from 15.9%.
STRONG, CONSISTENT GROWTH OVER MANY YEARS
Whilst these results represent our first year as a separate company, Rinker has a history of strong, consistent growth over many years.
Over the past seven years, Rinker Materials has delivered consistent, compound average growth of 13% p.a. in sales revenue, and 20% p.a. in EBITDA. Compound growth in EBIT over that period has averaged 21% p.a. ROFE for the US operations improved from 12.7% to 17.9% in that time.
Readymix has been a more cyclical business. EBIT over the same period has grown 7% p.a. compound while EBIT margins rose from 8.2% to 13.2%. ROFE improved strongly from 10.3% to 17.1% last year.
For the Rinker group, proforma data shows consistent compound sales revenue growth of 11% p.a. over the past five years and 15% p.a. EBITDA growth, measured in US$. Compound growth in EBIT over that period has averaged 15% p.a.
These results mean that we continue to deliver on our objective of top quartile growth relative to Rinker’s sector peers.
The challenge for all of us at Rinker is to maintain this strong performance record into the future.
The growth has been a combination of organic growth and acquisitions. Organic expansion has come from Rinker Materials’ leading market positions in strong, fast growing states of the US. With around 80% of our US EBIT coming from nine of the top 10 growth states in the US – particularly Florida, Arizona and Nevada – we are well positioned for ongoing growth.
Prices continued to move up steadily in most products and we expect further increases this year.
Regarding acquisitions, we have made 31 since 1998 at a cost of US$1.7 billion. This has averaged US$200-300 million a year, which we should be able to sustain from cash flows. Investment will continue to be lumpy, as it depends on the availability and timing of value-adding acquisitions.
As might be expected in such an extensive program, a couple of the acquisitions have not performed as well as expected – and we gained valuable lessons from these – but overall, they are delivering ahead of their cost of capital.
Our largest acquisition was Kiewit Materials, purchased for US$540 million in September 2002. Kiewit’s integration progressed very smoothly and it began returning its cost of capital within 12 months, well ahead of schedule.
Rinker Materials made one small bolt-on acquisition in the US last year, Superstition, and purchased Loven on 1 April 2004 (see p 13). Readymix made four in Australia and one in China (see p 17).
The volume of US acquisitions has slowed over the past 12-18 months, both for Rinker and others within the industry. This is due partly to uncertainty about the US economic recovery. Forecasts are now more positive, and we are hopeful that the pace of acquisitions will pick up.
Rinker’s development capital spending during the year was US$94.0 million (A$131.9 million). We invested strongly in greenfields expansion in the US, with seven new concrete and concrete block plants in Florida and Nevada (see p 13). This allows us to extend into growth regions and to expand where we have been capacity-constrained, so we can better service both existing and new customers. It is a low-risk use of capital from which we expect strong returns.
Significant improvement opportunity exists within the US concrete pipe and prestress businesses. They are still under-performing, despite signs of progress.
On the cost side, operational improvement delivered a total of US$62 million (A$90 million) in savings last year, going a long way to offsetting higher wages, raw materials and energy costs etc. We aim to do so again this year.
SAFETY
I am distressed to report that three people lost their lives working for us during the year – two Rinker people and a contractor. For their families, friends and workmates, this is a tragedy, and on behalf of everyone at Rinker, I offer our deepest sympathies. We are working very hard to prevent all injuries. Much progress has been made and the number of injuries has fallen 33% in the past two years, but much more is needed. Safety comes before everything else.
MANAGEMENT CHANGES
Karl Watson Jr, who has headed the team at Readymix since December 2001 – nearly trebling profitability in that time – will run Rinker Materials West, following the departure of Chris Murphy in July.
Sharon DeHayes, formerly President of Florida Materials and Gypsum Supply – the concrete, concrete block and wallboard distribution operations in Florida – has moved to Australia to run Readymix. She is an excellent manager, very customer-focused, with extensive experience across our operations.
Our priorities for this year
•
Continue to grow, mainly in the US, through investments in greenfield operations and acquisitions
•
Continue the rate of performance improvement relative to competitors
•
Further operational improvement to reduce the impact of higher raw material, energy and freight costs, and
•
Improve our safety, occupational health and environmental performance.
OUTLOOK FOR THIS YEAR
Most commentators now agree that economic recovery is underway in the US, although questions remain about the pace of job growth. Construction activity overall is expected to increase slightly, with low interest rates sustaining housing at high levels, non-residential or commercial activity recovering and infrastructure spending remaining strong.
The outlook for Florida and Arizona is similar, with last year’s strong activity levels expected to be maintained. Some improvement in the non-residential sector in Florida and Arizona is evident, after two years of decline.
Congress is finalising the new federal, six year road transportation spending program. Debate continues about the final level of funding but the US industry expects the new plan to be well up on the previous US$218 billion TEA-21 program.
In Australia, BIS Shrapnel forecasts total construction activity this year to rise 1.2%, including a 2.5% decline in engineering construction from very strong levels, a 9.5% lift in non-residential/commercial construction and flat residential activity. Further price recovery is expected for Readymix.
Energy, raw materials, and freight have risen considerably, so the challenge is to offset these with price increases and other savings and efficiency gains.
Overall, the outlook is positive. Barring unforeseen circumstances, we expect further growth in operating profits in the US and Australia this year, in local currencies, with some further upside potential from any acquisitions or additional greenfields expansion.
David Clarke
CHIEF EXECUTIVE
*
All financial information for 2003 and before is based on unaudited pro forma information. See page 41 for details