AUSTIN ENGINEERING LIMITED — Annual Report 2009

Nov 12, 2009

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Chairman’s address Managing Director’s address AGM formalities Close and opportunity to meet over refreshments

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• Record full year EBIT result of $21.6m, up 27%, reflecting high levels of activity on the mining sector

• Revenue growth from increased market penetration and customer acceptance of Austin’s Westech and JEC product lines and service capabilities

• Domestic and overseas customer base expanded

• Operational challenges - reduced labour availability, demanding customer delivery requirements, increased costs in the first half of the year and a marked change in economic conditions and customer requirements in the second half - managed successfully

• Austin’s proven business model, product range and capabilities enabled the impact of the GFC to be mitigated and forecast profitability to be maintained - at a time when many other companies in the mining services sector were experiencing a significant downturn and reporting profit and dividend downgrades

Final dividend for 08/09 maintained at 6.5cps and full year dividend up 7% from

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continued growth

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		FY2009 $m	FY2008 $m	Increase %	Significant year-on-year revenue growth across all operations, reflecting elevated activity levels in the mining sector Exceptionally high level of activity in first half of year, with activity in the second half progressing as expected at a reduced, but still solid, level across operations Some dilution in EBIT % margin caused by: - $1.3m being provided for unpaid revenue and associated recovery costs for the supply of engineering services to a customer, recovery of which is being pursued - lower than average margins on a newly-introduced, innovative product line for WA operations, which was the first of-its-kind manufacture - increased labour costs due to critical shortages in the availability of skilled labour, particularly for Austin Mackay over November 2008 to February 2009 - no external licence income being recognised Strong operational cash flow, with commercial arrangements with customers and suppliers being maintained despite tighter economic environment
	Revenue	179.32	106.34	69%
	EBITDA	23.84	18.86	26%
	EBIT	21.61	17.05	27%
	PBT	20.87	16.40	27%
	NPAT	14.83	11.54	29%
	Basic Earnings per Share (cents)	31.39	24.73	27%
	Final Dividend per Share (cents)	6.5	6.5	-
	Total annual dividend per Share (cents)	8.0	7.5	7%
	Net Assets	51.95	31.62	64%
	Operating Cash Flow	21.90	13.48	62%

Strong operational cash flow, with commercial arrangements with customers and suppliers being maintained despite tighter economic environment

Continuing benefit of low interest costs on US Dollar-

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		30 June 2009 $m	30 June 2008 $m	Increase %	Underlying balance sheet strengthened significantly in the year as a result of solid operational performance Strong operational cash flow in the year resulting in underlying cash balances increasing by 155% to $14.9m $5.7m total capex in the year, including $2.5m for the Austbore workshop in Mackay (part-funded by bank debt), all other capex funded from cash flow Increase in intangibles due to USD/AUD currency exchange rate variances EBIT interest cover of over 24 times for the year Year-end balance sheet includes $10.2m of Tranche 1 placement funds for the purchase of Conymet business as confirmed in August 2009 Debt reduced post year-end upon repayment of $2.1m bank loan for the purchase of the Austbore
	Working capital	8.99	9.32	-4%
	Property, plant and equipment	26.71	21.85	22%
	Intangible assets	17.71	16.75	6%
	Total assets	105.85	82.82	28%
	Total liabilities	53.90	51.20	5%
	Net assets (Incl $10.2m from Tranche 1 of Capital Raising)	51.95	31.62	64%
	Cash (Incl $10.2m from Tranche 1 of Capital Raising)	25.07	5.81	332%
	Debt	26.95	21.84	23%
	Net Debt (Incl $10.2m from Tranche 1 of Capital Raising)	1.88	16.03	-88%
	Net Debt (Excl $10.2m Tranche 1 Capital Raising	12.08	16.03	-25%

Debt reduced post year-end upon repayment of $2.1m bank loan for the purchase of the Austbore workshop

Net Gearing % (Incl $10.2m from

Signs of macroeconomic stability and growth returning:

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Source: The Wall Street Journal, livemint.com, 12 October 2009

China’s urbanisation program expected to continue:

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Major miners are taking a forward view:

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Rio Tinto has announced capital expenditure of at least $5bn for 2010 and envisages that metals demand will double over the next 15 to 20 years, requiring a significant supply response

• Vale has recently announced a US$12.9bn capital expenditure program for 2010, with US$10bn earmarked for organic growth projects

• FMG reports record quarterly shipments to September 2009 and has identified expansion opportunities such as its Solomon project

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East Coast Operations:

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• Customer purchasing behaviour showing strong signs of returning to normal with enquiries for larger numbers of equipment for longer periods of time

• Activity in the Bowen Basin and Hunter Valley mine sites remain at elevated levels, with over 80+ ships recently seen awaiting loading at the Dalrymple Bay Coal Terminal in Mackay

• Significant market penetration of Westech dump truck bodies into the important Hunter Valley region with new end-user customers and OEMs

• Product pricing remains largely unchanged, with steel input costs having remained at pre-GFC levels

• Greater labour availability and stability enables our operations to respond quickly to further upturns in activity levels

• Productive performance continuing to improve as operations gain more experience and the benefits of repetitive manufacture of mining products

• Solid levels of on-going activity with very good prospects for securing new orders in the near future

West Coast Operations:

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• Iron ore producers continue to operate at high activity levels albeit with minimal capital expenditure during the current 2009 calendar year

• Capital expenditure programs now recommencing to pre-GFC levels which will lead to a stronger second half in FY10

• One key customer actively contemplating an exclusive multi-year deal for the supply of Westech bodies

• Overseas opportunities in Africa and Indonesia continue to be an important focus following the successful completion of a large fleet of dump trucks for an Indonesia-based customer

North America:

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• Recovery of economic and mining activity continuing to lag behind Australia and South America

• Customers now showing the early signs of emerging from their “lock down” business approach with enquiry levels having picked up in recent weeks

• Short-termism is still the theme, with customer planning horizons extending out to the middle of the first calendar half of 2010

• Canadian Tar Sands region showing improved activity, with a number of important sales leads and opportunities actively being pursued

• Westech’s productive activity to remain at reduced levels for the remainder of 1H FY10 with activity levels forecast to rise slightly over the course 2H FY10

• Product development a key feature for Westech during this period in order to take advantage of new design processes and methodologies with the objective of releasing a new range of market-leading products in the future

Oman, Middle East:

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• Operations progressing very satisfactorily with a high level of activity currently being experienced

• Two major projects - for the manufacture and installation of busbars and rectifiers for an aluminium smelter - underway with completion in early 2H FY10

• Projects progressing very well, with completion on time and well within budgets

• Ongoing four-year maintenance project for the repair of anode stems for the Sohar aluminium smelter returning solid revenue and profits

• Joint venture arrangement with our partner STS (Special Technical Services LLC) working very well and leading to further significant and long-term business opportunities and projects in the region

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• Austin Ingenieros Chile Limitada (Austin Engineering Chile) up and running, branding and identity already well-established in Chile, Peru and Colombia Integration successfully completed in a short period of time

• Productive and financial performance to date above budget expectations, despite limited availability of steel in the region

• Orders on hand ensure a solid level of activity through to the first quarter of the 2010 calendar year; over 50% of budgeted annual workload for FY10 already secured

• Further orders expected imminently for projects based in Peru and Colombia and for major Chile-based miners and OEMs

• Full year budgeted revenue expected to be secured by December 2009

• Tenders already submitted for significant dump truck body projects for delivery in 2010 and 2011

• Excellent opportunities for the JEC product range in the Chilean market; operational and engineering teams are currently preparing for the introduction of these products into operations

• Redevelopment and expansion of workshop facilities in the ‘La Negra’ region adjacent to Antofagasta actively progressing, with a modern, specially-designed 2,400m² workshop at advanced planning stages

• New facilities, which will take 8-12 months to build, will expand product offerings and delivery performance to customers as well as improved operational and

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First body deliveries to Xstrata/ Anglo American’s Collahuasi mine in Northern Chile

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• Slight delay in set up of joint venture due to finalisation of the commercial aspects of steel supplies to the region and government regulations

• Large, well-established and respected engineering company identified as joint venture partner

• Virtually no local competition capable of servicing customer needs from a design and supply point of view, together with the cost benefits of volume production

• Relatively easy and quick setup of operations possible, requiring some reconfiguration of the joint venture partner’s production facilities

• Well-publicised increase in capital expenditure by Vale; US$12.9bn capital expenditure program for 2010, with US$10bn earmarked for organic growth projects

Completion of joint venture set up expected by the end of January 2010

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• Bank facilities renewed and extended following completion of the bank’s annual review in November 2009

• USD 19m Westech loan facility now extended to late October 2011 on an interest-only basis, with interest rates currently below 2% (including the bank’s margin), resulting in very low interest costs

• Continued access to low US interest rates which are expected to remain low following the US Fed’s announcements and economic outlook in November 2009

• Lending facilities also expanded by a further AUD11m/USD9m to accommodate expansion plans for South America operations No change to covenants - Debt to EBITDA ratio of 2.5:1, EBIT interest cover of at least 4 times - covenants expected to be very comfortably complied with throughout the FY10 year

• More favourable pricing secured for provision of facilities following improved general business and economic conditions and strength and depth of Austin’s business model

Net gearing ratio of 15% to 17% at the December 2009 half year (assuming a AUD/USD exchange rate of 90c)

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• More sustained levels of economic recovery likely to become evident in the second half of the financial year in Australia and South America mining regions

• Slower and much more gradual recovery in North America throughout the remainder of FY10

• Increased business confidence will lead to miners and OEMs embarking upon capital expenditure programs in Australia and South America

• Existing products lines will continue to serve the company well, with further expansion opportunities across a number of existing and new customers and mines Australia-wide

• Business expansion opportunities in the Hunter Valley region and Indonesia actively being considered in order to increase product and service offerings to key customers

• Recurring revenue streams from the significant replacement dump truck body market in Australia a key focus

• South America revenue streams expected to grow and to become a more significant feature of Austin’s operations, with further contributions expected from the setup of satellite maintenance operations in Peru and Colombia

• Stronger levels of activity expected across Australian and South American operations in the second half of the year, with North America below FY09’s levels

• FY10 revenue and profit will be more biased towards the second half of the year, in line with continued economic recovery trends Forecast EBIT of $10.5m-$11.5m for the first half of FY10 (six months to December 2009)

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For more information please visit www.austineng.com.au