DELTA
plc
ANNUAL RESULTS 2009
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For the year ended 31 December 2009
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2009
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2008 (Restated 2)
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Before
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After
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Before
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After
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exceptional
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exceptional
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exceptional
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exceptional
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£ million (unless otherwise stated)
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Items1
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Items1
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Items1
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Items1
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Continuing operations
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Revenue
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333.0
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333.0
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330.8
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330.8
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Operating profit
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46.6
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50.4
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36.7
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39.9
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Profit before tax
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52.6
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56.6
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43.7
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4.5
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Earnings/(loss) per share (pence)
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20.2p
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21.2p
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18.2p
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(6.0)p
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Continuing and discontinued operations
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Profit/(loss) for the year
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37.1
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39.7
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34.0
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(3.2)
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Earnings/(loss) per share (pence)
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20.2p
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20.2p
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18.2p
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(5.7)p
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Cash generated from operations before tax
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86.4
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49.0
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Net cash 3
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146.9
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109.6
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1
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The reconciliations of profit and earnings per share before and after exceptional items are given on the consolidated income statement and in note 9. Exceptional items are discussed in note 6.
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2
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MMC an associate entity has been reclassified from discontinued to continuing.
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3
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Net cash is defined as cash and cash equivalents plus other financial assets less bank overdrafts and borrowings.
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-
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Group operating Profit from continuing operations and before exceptional items increased by 27%.
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-
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Earnings per share from continuing operations and before exceptional items increased 11%.
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-
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Earnings per share from continuing and discontinued operations after exceptional items was 20.2p.
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-
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Cash generated from operations before tax totalled £86.4 million, a 76% increase.
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Divisional Performance
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-
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Engineered Steel Products operating profit increased by 48% to £31.5 million.
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-
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Galvanizing Services’ operating profit reduced as expected from £10.2 million to £8.4 million.
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-
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Delta EMD’s operating profit increased by 20% to £11.0 million.
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Commenting on the results, Todd Atkinson, Chief Executive, said:
“The Group’s 2009 results demonstrate the strength of the Group’s market positions and management. Against a backdrop of more difficult economic conditions, the Group provided a further year of earnings growth, as well as substantial cash flows. We are also pleased to have made possible an attractive outcome for the Group’s shareholders – the cash offer presented to shareholders by Valmont Industries Inc.”
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Chairman’s Statement
Overview of 2009 Results
2009 has seen a continuation of the excellent trading performance we enjoyed in 2008. Profit before tax and before exceptionals of £52.6 million was up 20%. Cash flow generated from operations before tax at £86.4 million was up 76%, assisted by reductions in working capital levels. This was achieved despite the global economic crisis but assisted by the fact that our operations are largely in markets which have proved to be more resilient than most.
Engineered Steel Products, which accounts for just over two thirds of the Group operating profit, had a strong year. In Galvanizing Services we did feel the effects of lower volumes and an increase in pricing pressure as the lower volumes exposed additional capacity across the industry. Delta EMD continued its strong performance in 2009 and managed a second successive year of profits at very acceptable margins.
The Group has continued to invest in its businesses with a new factory for Webforge opened in Chengdu and plans underway for new facilities to be established in the Middle East and Northern China. We also fully opened the new Galvanizing facility in Melbourne and completed some of the development spend on the other galvanizing plants. Due to the economic uncertainty it proved difficult to find suitable acquisitions but efforts continue to find attractive businesses that complement our existing businesses in the same geographic area.
The Group’s consolidated net cash at year end amounted to £146.9 million. This, as I have previously stated, provides Delta with options to invest in the core operations, fund add-on acquisitions and when the time is right to consider further actions on the Delta Pension Plan (“DPP”).
The future
On 4th March 2010 the Board announced a recommended cash offer for Delta by Valmont Industries Inc (“Valmont”). The offer comprises 185 pence per ordinary share and values Delta’s issued ordinary share capital at approximately £284 million. We believe this provides shareholders with an opportunity to realise fair value for their Delta investment with certainty.
The prospects for the Group’s core businesses remain good but the substantial cost of a full pension solution at the current time continues to limit strategic options. The planned disposal of the EMD business and an eventual exit from our shareholding in MMC are expected to be achieved in 2010. Any solution for the DPP, however, remains uncertain in terms of its timing and in the ultimate cost to shareholders.
The Board has carefully considered retaining the DPP, completing the Manganese disposals and continuing for the foreseeable future with Delta in its current form. Should the takeover not proceed, we will continue to monitor the cost of transferring the DPP. The indications are that the exit costs will remain substantial, and there is no assurance that they will reduce over time. Investment in the core businesses would continue, as with the new plants recently commissioned in both China and Australia during 2009. However, even allowing foreseeable organic investment plans plus some greater success in identifying and delivering add-on acquisitions in our core markets within the Asia Pacific region, it is unlikely that the Group’s surplus net cash can be substantially deployed.
The remoteness of the Group’s operations from the PLC head office, it’s Executive management, and shareholders, and the scale of the DPP in relation to Delta’s market capitalisation all represent significant issues for the Group.
An alternative strategy for Delta, involving the pursuit of investment opportunities on a broader sectoral and geographic front, would represent a material change in the risk profile for existing investors. This would require prior shareholder consultation and necessitate a change in managerial and Board focus.
In the considered view of your Board, the immediate value and certainty being offered by Valmont represents the most attractive outcome.
The Board has not recommended a final dividend in the light of the terms of the Valmont offer. In the event the offer lapses or is withdrawn, the Board would consider declaring a second interim dividend in relation to the year ended 31 December 2009.
Chief Executive’s Review
Overview of 2009 Results
We are pleased to report that the Group’s profit after tax for the year from continuing operations and before exceptional items improved by 9.1% to £37.1 million (2008: £34.0 million), providing basic earnings per share from continuing operations and before exceptional items of 20.2 pence (2008: 18.2 pence). This improvement was made against difficult global economic conditions, with favourable exchange rates and with revenue of £333.0 million (2008: £330.8 million).
The Group’s total profit for the year included £2.6 million of exceptional profit, whereas the year prior included £37.2 million of exceptional loss, including a £48.8 million charge related to the 2008 de-scaling and de-risking of the Delta Pension Plan. Including exceptional items and discontinued operations, the Group’s profit for the year attributable to equity holders was £39.7 million (2008: loss of £3.2 million), providing basic earnings per ordinary share attributable to equity shareholders of 21.2 pence (2008: basic loss per share of 6.0 pence).
The Group’s net cash generated from operating activities totalled £73.8 million (2008: £39.0 million), providing a year end net cash balance of £146.9 million (2008: £109.6 million) of which £122.0 million was held in wholly owned subsidiaries.
Offer from Valmont Industries Inc.
Valmont has made a recommended cash offer to purchase the Group’s ordinary shares for 185 pence per share.
The offer presented by Valmont provides a most attractive strategic outcome for the Group. The Group’s shareholders would realise value for the Group’s progress over the past several years as well as for our businesses’ potential for further growth. The Group’s businesses would become part of a substantially larger group that has similar strategic ambitions, management practices and culture, and the Group’s businesses, management and employees would have greater opportunities for new challenges and development. As only a sale of the Group’s shares would result from the Valmont offer, the Group’s businesses and assets would remain in support of the Delta Pension Plan, preserving the strong covenant that has supported the plan responsibly over many years
Over the past several years the Board has sought attractive strategic outcomes for the Group. The Delta Pension Plan and the Group’s relative size and complexity, geographic spread and more recently the global recession, have slowed or frustrated many of those efforts. The Valmont offer is a particularly attractive outcome for the Group and its shareholders, and we are pleased to present it to our shareholders and to recommend it to them.
Review of 2009 Trading
Engineered Steel Products
The Group’s Engineered Steel Products division performed better than expected during the year and improved markedly upon the prior year’s performance. Operating profit increased by 47.9% to £31.5 million (2008: £21.3 million) on continuing revenue that increased by 8.9% to £218.7 million (2008: £200.9 million).
Ingal Civil Products (ICP) performed very well during the year with very good sales volumes and the effective management of selling prices as steel prices reduced substantially. The Australian market for safety barrier systems proved resilient with continued public investment in highway development and improvement, and ICP successfully defended its market share against imported products notwithstanding a very strong Australian dollar. ICP’s market position strengthened further as further efficiencies were achieved with its automated roll forming equipment and bespoke galvanizing facility, and with further improved service and a superior product range.
Product development efforts also progressed nicely during the year and should provide further product differentiation.
The performance of Ingal EPS improved markedly during the year, with a return to profit after a difficult year in 2008. A new management team simplified the business and implemented improved systems and controls, assuring far better management of selling prices and costs. Margins improved significantly, and inventories were simplified and relocated to assure more timely delivery and reduced stock levels. Reasonable profit, reduced working capital and good cash flow all resulted. Given the similarities amongst Ingal EPS’s and ICP’s products, markets and customers, opportunities to integrate some activities of the two businesses have been identified, and first steps included combination of certain sales and distribution facilities. The year’s successes demonstrate that Ingal EPS’s industry reputation and market position provide a solid foundation upon which an attractively profitable business can be developed further.
Webforge Australia performed very well during the year against a backdrop of more difficult market conditions. Whilst sales volumes softened, selling prices were well managed and costs were reduced, particularly as steel prices fell during the year. Webforge management continued to build upon new market positions for complementary products such as expanded metal products, civil products and planking, and further developed effective distribution channels for standard gratings. Further operational efficiencies also were identified through the implementation of lean manufacturing techniques.
Webforge Asia performed exceptionally well during the year. Sales volumes varied by geographic market but in total reflected Webforge Asia’s very good market positions and the continuation of large projects that had commenced before the economic crisis. Selling prices were successfully managed against reducing steel prices as well as heightened competition in markets where volumes softened. Webforge Asia’s Greenfield plant in Chengdu, China was commissioned ahead of schedule and with a full complement of capable management and employees. Planning, design and site procurement are well underway for similar facilities in Northern China and the Middle East.
Donhad’s sales mix of grinding media includes a significant portion to gold and copper mines and consequently Donhad’s sales volumes didn’t suffer as much during the year as might have been expected with the general reduction in Australian mining activity. Donhad management successfully protected its market position against foreign imports notwithstanding a strong Australian dollar, and also successfully managed steel supply and cost during the year against a backdrop of reducing steel prices and increasing variances in the cost of domestic and imported steel. Selling prices also were well managed providing acceptable margins and profit in more difficult market conditions. Whilst anticipated development of additional mining capacity in Australia was delayed during the year due to uncertain global economic conditions, in many instances those plans are now again underway and should provide further growth in demand for grinding media.
Galvanizing Services
The Group’s Galvanizing Services division did not perform as well as expected during the year and fell below prior year performance. Galvanizing Services operating profit declined by 17.6% to £8.4 million (2008: £10.2 million) on continuing revenue that decreased by 10.5% to £77.5 million (2008: £86.6 million).
Galvanizing volumes suffered most immediately from the year’s worsened economic conditions. Volumes related to residential and commercial construction, consumer products and mining products and development deteriorated substantially, and price competition heightened in markets that suffered from the resulting overcapacity. Last year’s substantial reductions in the cost of zinc also increased market pressures on selling prices, notwithstanding steady increases in the cost of zinc during the year. Profit benefited from lower than expected energy costs and from cost of sales determined with FIFO accounting methodologies and reflecting lower zinc prices.
Australian Galvanizing commissioned a new plant in Melbourne, Australia. The facility includes a large kettle for structural steel as well as a spinning kettle for manufactured products. The plant also employs newer technologies intended to reduce energy consumption and emissions. The former plant will be demolished and the plant site rehabilitated so that the site can be sold during 2010.
The Group’s US galvanizing operations performed well in difficult market conditions with a new management team and renewed focus on housekeeping, health and safety and operational efficiencies. Market shares were maintained through provision of superior service and quality and without matching the lower pricing of our competition. Margins improved as lower cost zinc turned over in galvanizing kettles, offsetting reduced volumes and providing acceptable profit given difficult market conditions.
The Group’s Asian galvanizing operations performed better than expected given difficult economic and market conditions in both Malaysia and the Philippines. Malaysian management continued to improve service and quality, assuring a favourable market position and share, and also managed selling prices and costs during the year, providing better than expected revenue, margins and profit. Improved pole and tower sales volumes provided the Group’s galvanizing operation in the Philippines better base load volumes, and the contribution provided through pole and tower sales, as well as from the galvanizing operation, afforded much better profit and cash flow than during recent years.
AusZinc’s sales volumes didn’t meet expectations as worsened economic conditions reduced demand for galvanizing zinc, zinc alloys and zinc oxides, and also reduced the availability of zinc residues, AusZinc’s feedstock. Consequently AusZinc struggled to source sufficient residues and to meet reduced demand. Nonetheless AusZinc’s profit improved during the year as the LME zinc price increased and favourable margins were realised on lower cost stocks. As manufacturing activity improved late in the year, residue sources and demand for alloys and oxides improved and provide an improved outlook for AusZinc.
Manganese Materials
Delta EMD
2009 was a very good year for Delta EMD: a substantially strengthened senior management team relocated to the Delta EMD facility in Nelspruit, South Africa, significant operational improvements were initiated, overhead costs were reduced, and financial performance remained strong notwithstanding more difficult market conditions.
Delta EMD’s total revenue reduced by 15.0% to £36.8 million (2008: £43.3 million) due to sales from Delta EMD’s former Australian operation concluding during 2008. More importantly, revenue from Delta EMD’s South African plant improved by 18% over 2008, with improved selling prices more than offsetting marginally lower sales volumes. The 2009 operating profit reported by the Group for Delta EMD improved by 19.6% to £11.0 million (2008: £9.2 million), and was assisted by a stronger rand.
Global demand for electrolytic manganese dioxide reduced during the year as consumer demand for batteries weakened with the global recession. Sales volumes did not meet expectations and Delta EMD’s production was limited substantially to reduce stocks to desired levels. The global market nonetheless remained well balanced and selling prices afforded the margins necessary to cover poor overhead recoveries and to provide an acceptable return.
The majority of Delta EMD’s sales during the year were made in rand denominated selling prices, effectively protecting Delta EMD’s margins from foreign exchange movements. This marks an important change from historic practice and assured more certain financial performance. The strengthening of the rand during the year however reduced the competitiveness of Delta EMD’s rand denominated selling prices.
Delta EMD’s stocks were simplified during the year to reduce stock levels and to assure more responsive delivery to key customers. Delta EMD’s terms of sale also were changed so that title passed at the port of loading, also reducing Delta EMD’s stock levels. These efforts together with effective collection of outstanding receivables substantially reduced working capital levels and provided very good cash flow.
Environmental assessments were concluded successfully during the year at Delta EMD’s former Australian plant site, confirming that the site is suitable for commercial and industrial uses without further remediation or rehabilitation. This will facilitate the sale of the site, and a demolition contractor has been contracted to demolish the remaining structures. Earlier efforts to sell the site with those structures proved unsuccessful, and the site will now be marketed as a vacant site. An amendment to the environmental license governing the rehabilitation of the Kooragang Island residue disposal site was agreed with regulatory authorities during the year and allows a more cost effective rehabilitation of that site. Negotiations toward the sale of the Kooragang Island site are underway. These favourable developments allowed the provisions that had been established for the remediation and rehabilitation of those sites to be reduced, affording £5.7 million of exceptional profit.
Subsequent to the year end Delta EMD Limited has commenced a process intended to realise shareholder value through a disposal of the Delta EMD business, Delta EMD Limited’s last remaining operation. The disposal process is well underway with considerable interest indicated.
Manganese Metal Company (MMC)
MMC performed well during the year but not at the exceptional levels achieved during 2008. The Group’s share of MMC’s post-tax profit totalled £3.1 million (2008: £8.2 million, inclusive of a £6.4 million impairment reversal). Market selling prices and volumes softened with reduced global production of steel and aluminium. The relative strength of the rand against the US dollar also adversely affected margins. Sales volumes and selling prices improved during the second half of the year.
Efforts to dispose of MMC by Samancor, MMC’s 51% shareholder, faltered during the year, resulting in an unattractive offer. The Group has decided against participating in that transaction and will account for MMC as a continuing operation whilst exploring other options for realising value from the Group’s 49% shareholding.
Delta Pension Plan
The triennial actuarial valuation of the Delta Pension Plan (“the Plan”) as at 31 March 2009 was finalised during the year. The Plan’s assets at that date totalled £184.3 million and the value of the Plan’s liabilities totalled £232.8 million, resulting in a deficit of £48.5 million. In respect of the funding shortfall, annual contributions of £6.3 million will be required over the next ten years, the first of which was made during the year, and the remaining nine of which are to be made annually on 31 March until 2018. The Group also will fund the Plan’s administrative expenses, inclusive of pension protection fund levies, which in the aggregate are expected to total approximately £1.0 million per annum.
The discount rate used to determine the Plan’s liabilities was fixed having regard to the Plan’s interim investment strategy (approximately 90% corporate bonds) that has been continued whilst opportunities to de-scale and de-risk the Plan are being sought. A full investment review has commenced so that a revised investment strategy can be implemented during mid 2010 should a full buy out of the Plan remain unattractive. If the revised investment strategy provides an anticipated investment return less than the assumed discount rate, the agreed recovery plan will be reviewed and adjusted accordingly.
The Plan’s year end IAS 19 determination was made with actuarial and financial assumptions similar to those used for the actuarial valuation but as at different dates, and the net deficit totalled £71.2 million (2008: £2.5 million). The Group’s IAS 19 total liabilities were determined with an assumed inflation rate of 3.6% (2008: 2.5%) and a 5.7% discount rate (2008: 6.3%), which estimates the year end investment return for AA corporate bond with durations similar to the plan liabilities.
Cash Flow and Balances
The Group’s cash generated from operations before tax totalled £86.4 million (2008: £49.0 million) and reflects improved operating profit and favourable working capital movements. The value of the Group’s zinc and steel inventories reduced with the lower market prices, and Delta EMD’s inventories were substantially reduced as planned.
The Group paid £7.0 million during the year to the Delta Pension Plan following completion of the 2009 actuarial valuation. This compares favourably with the £50.2 million paid during 2008 in connection with the Pension Insurance Corporation transaction that insured approximately two-thirds of the plan’s former liabilities.
Capital expenditure increased to £14.3 million (2008: £13.1 million) and exceeded depreciation, which totalled £7.9 million. The total expenditure included investments in Webforge Asia’s Greenfield plant in Chengdu, China and completion of Australian Galvanizing’s Greenfield plant in Melbourne, Australia, as well as more routine capital expenditures.
Corporate tax paid totalled £12.6 million (2008: £10.2 million) and included £1.9 million of Secondary Tax on Companies paid by Delta EMD Limited in connection with the special dividends paid by Delta EMD Limited during the year.
The Group’s cash balance was reduced by £11.9 million of dividends paid to minority shareholders (2008: £1.5 million), principally Delta EMD Limited’s £8.2 million of special dividends, and by £10.9 million of dividends paid to group shareholders (2008: £8.2 million).
The Group’s net cash balance increased to £146.9 million (2008: £109.6 million) of which £122.0 million was held in wholly owned subsidiaries. The balance was enlarged by £3.5 million during the year by favourable foreign exchange movements.
Prospects for 2010
The Group’s businesses performed well during the past year’s more difficult global economic conditions, and market conditions in many geographies have begun to improve. The Australian economy appears to be in recovery, as do many Asian economies. Recovery of the US economy appears less certain although US market conditions appear to have at least settled.
Continuing government spend on infrastructure development and improvement is expected to provide a foundation for the Group’s businesses in most markets whilst projects requiring private funding or related to the development of additional mining capacity are expected to return over time to the levels enjoyed before the global recession.
Future movements in the cost of energy, steel and zinc, the Group’s key input costs, are difficult to anticipate. Zinc prices increased substantially during 2009 and appear to have stabilised recently. Steel prices declined substantially during early 2009 and have been relatively stable since, whilst energy costs have remained relatively low. Inflationary cost increases nonetheless remain a concern, particularly as selling price competition remains vigorous, as is expected to be the case until market volumes improve with sustained economic growth.
Absent significant economic growth and provided input costs remain stable, the Group’s businesses are expected to continue to perform in line with the second half of 2009.
Strategic Development
During the year the Group commissioned a new galvanizing plant in Melbourne, Australia as well as a new Webforge plant in Chengdu, China. Plans for the development of new Webforge plants in Northern China and in the Middle East also progressed. Acquisition opportunities were investigated, but none were completed due to uncertain economic conditions and prospects.
Should the offer presented by Valmont not be accepted, the Group will need to decide in the near future between two alternative strategies: resolving the pension plan so that the Group’s executive management, businesses, development and ideally ownership can be geographically aligned, or pursuing a more diverse investment strategy across a broader geographic area so that investment can be accelerated and the Group’s accumulated capital deployed.
The cost of resolving the Delta Pension Plan remains high due to market conditions surrounding longer term gilt returns, and whilst reasons remain to expect such conditions to change, movement over the past eighteen months has not been significant. Geographic alignment of the Group’s ownership, executive management, businesses and development would certainly provide a more sustainable structure and better strategic focus and success. Unfortunately the cost of doing so presently remains high.
Pursuing a more diverse investment strategy across a broader geographic area in order to deploy the Group’s accumulated capital more rapidly would mark a significant change in the Group’s investment strategy, would be accompanied by different risks, and would require formulation of a new industrial strategy as well as additional management to execute such a strategy. The immediate appeal of such a strategy would be to achieve returns better than those presently realised on cash balances, to overcome concerns about the Group’s relatively small size, and to “outgrow” the pension plan. Whilst all might be possible over the longer term, more than the rapid deployment of the Group’s accumulated capital would be required to achieve such objectives. Good investments, value creation over the longer term, and an industrial strategy that provided an attractive equity proposition also would be essential.
The offer presented by Valmont provides a more certain and immediate outcome for the Group’s shareholders, at a value that the Group’s alternative strategies cannot necessarily improve upon in the foreseeable future. The offer is the result of several year’s effort to achieve such an outcome for the Group’s shareholders, businesses, management and employees, and I am pleased to recommend it to our shareholders.
2009 Annual Report and Accounts
The 2009 Annual Report and Accounts, incorporating the audited financial statements, have been published today and are available as a PDF document on the Group’s corporate website at www.deltaplc.com.
Director’s responsibility statement
The directors confirm that to the best of their knowledge:
1. the financial statements, prepared in accordance with the applicable set of accounting standards give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and
2. the Business Review, which is incorporated into the Director’s report, includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.
This statement is in accordance with DTR 6.3 to cover our dissemination requirements.
To view full report please click this link
Enquiries:
Todd Atkinson, Chief Executive
Jon Kempster, Finance Director
Tel: +44 (0) 207 842 6050