Infrastructure.

The Infrastructure division is a vertically integrated business supplying aggregates, cement, ready-mix concrete and a range of concrete products in New Zealand; and concrete pipeline products and a range of aggregate sands throughout Australia. It is the largest construction contractor and residential builder in New Zealand.

Performance overview

Sales for the year were similar despite weaker demand. A stronger Australian dollar, the purchase of Australian Construction Products, and increased house sales, had a positive impact on turnover. Sales volumes in New Zealand and Australia were lower for most construction materials products, as were billings in the construction business. Operating earnings increased by $21 million to $185 million. Infrastructure’s operating performance for the current year improved over the last year as a result of continuing operational improvements and efficiency gains in all key areas of the business, and higher earnings from property. The New Zealand market experienced softer demand from the commercial construction and residential construction sectors. The Canterbury earthquakes saw activity levels decline for most businesses in the period. In Australia, the Queensland market, already affected by the global financial crisis, recorded further weakness as a consequence of the floods, while most other markets were also weak.

The earnings of the New Zealand and Australian concrete businesses increased by $19 million to $124 million. Sales volumes of most products in New Zealand were lower for the third year in succession. The effect of softer demand was mitigated by the cost reductions and operational efficiency enhancements achieved over the last three years. In Australia sleeper and pipe-related volumes were down and the market for sand in New South Wales was more difficult than anticipated. A focus on product pricing and operational enhancements enabled Rocla to improve margins in some areas. Construction earnings declined from $39 million to $37 million with activity softening in 2010. The property and residential operations improved by $4 million to $24 million. The Stonefields subdivision in Auckland has been very successful.

Operating earnings from the cement business were $4 million higher despite lower volumes. In New Zealand, volumes were three percent lower but the domestic price of cement increased by $11 per tonne on 1 September 2010. Export sales volumes and prices increased but margins remained low. Manufacturing performance was excellent.

Aggregates sales volumes were seven percent higher than last year but still 26 percent below peak of cycle volumes. The volume improvement was largely low value product and roading product. The business continued to make significant progress in lowering its costs and earnings increased by $2 million.

Readymix and masonry operating earnings declined by $5 million. Sales volumes of concrete dropped by three percent and masonry volumes were down 10 percent. Tighter market conditions led to intensified competition and reduced prices and margins. Despite many profit improvement initiatives, earnings declined. On 1 July a long sought after readymix operation was acquired in one of the few markets where we do not currently operate.

The concrete pipe and precast markets were similar to last year but demand for other products was weaker. Due to a favourable sales mix, overall margins were higher despite competitive pricing and slightly higher input costs.

In Australia, the pipeline and quarry businesses performed well with combined operating earnings of $64 million compared with $52 million in 2010, although $5 million of those earnings were from a one-off land sale. The pipeline products business experienced weaker demand for most products but a renewed focus on pricing saw margins improve despite softer demand. The quarry business recorded a very strong result despite building activity remaining subdued.

In August 2010 the division acquired Australian Construction Products, a specialist in the supply of road barrier and associated roading products in Australia. The business was adversely affected by the Queensland floods but still exceeded its earnings target for the period.

Construction's operating earnings were $37 million, down five percent on the previous year, reflecting a similar percentage reduction in turnover. A total of $747 million of new work was awarded during the year. The backlog of construction at year end was $764 million compared with $930 million at the end of the previous year. The major projects awarded during the year were the ASB Bank head office in Auckland and the Ngaruawahia bypass. Unfortunately the most notable events of the year were associated with the devastation arising from the Canterbury earthquakes. The Earthquake Commission appointed the company project manager for residential repairs in the range between $10,000 and $100,000 on insured homes. We are also one of five contractors working in alliance to repair Christchurch's infrastructure. The size of these tasks is yet to be accurately determined.

Earnings from property-related activities include those from quarry end use and the residential business. Earnings from residential house sales increased by $4 million to $24 million due to increased house sales and a favourable sales mix with higher margins. Property sales earned $1 million. Earnings from this source are not expected to be significant in 2012.

Back to topLooking ahead

The division continues to experience very weak demand in New Zealand, and the Australian businesses are expected to experience significantly weaker underlying demand in 2012. There has been significant cost rationalisation and operational enhancement over the last three years and further business improvement initiatives will be implemented this year. These will mitigate to some extent the impact of any further downturn in activity and will position the division well for the upturn.

In the meantime the division will also continue to explore high-returning organic growth initiatives.