ERG 0.00% 5.9¢ eneco refresh ltd

ERG Results Looking Better

  1. 54 Posts.
    ERG LIMITED 2002-09-12 ASX-SIGNAL-G

    HOMEX - Perth

    +++++++++++++++++++++++++
    IMPROVED SECOND HALF RESULT FOR ERG

    The Directors of ERG Group today announced an improvement in the
    second half performance on the back of better than expected cost
    savings achieved in the half and second half trading in the supply
    and installation segment.

    The Group recorded full-year revenue of $301.6 million (an increase
    of 1% on the prior year) and a loss of $243.9 million, which included
    $165.3 million in one-off write-downs and provisions, $38.2 million
    in depreciation and amortisation, and $22.1 million in interest
    costs.

    HIGHLIGHTS OF THE RESULTS

    * revenue on a normalised basis (removing the telecoms revenue from
    the 2001 year - as the business was sold in 2001 - and non-trading
    revenue) grew by more than 25% from $223.0 million to $280.3 million;

    * recurring revenue from infrastructure (long-term fare collection
    and smart card projects) jumped 173% from $51.3 million to $140.0
    million;

    * excluding the one-off write-downs, EBITDA for the second half was
    positive $2.3 million compared with a loss of $17.0 million in the
    first half;

    * cash flow from operations improved in the second half due primarily
    to a reduction in employee costs of $21.1 million;

    * major projects generating recurring revenue, ie Melbourne and Rome,
    are now EBITDA and cash flow positive;

    * total R&D costs dropped from $42.3 million in 2001 to $23.2 million
    in 2002; and

    * operating costs have been slashed by over $30 million on an
    annualised basis.

    Tough market conditions, significant delays in contract awards by
    customers and the impact of September 11 on the insurance and bonding
    market all impacted the Group's performance in the full-year. These
    delays impacted revenue in the full-year by more than $40 million and
    led to the high level of staff cuts across the Group. Furthermore,
    costs associated with the major Rome infrastructure project were
    incurred and the commencement of the Lazio phase of the project was
    delayed, resulting in reduced revenue.

    Directors elected not to declare a dividend, compared to a 1 cent
    unfranked dividend in 2001.

    A summary explanation of the result is included as Attachment 1.

    REDUCTION OF OPERATING COSTS

    Major structural changes were implemented in the second half as part
    of an aggressive cost reduction program. The Group's focus remains on
    cash flow generation, with expected ongoing annual savings of $30
    million resulting from cost cutting initiatives.

    Since the half-year, management's priority has been on:

    * achieving aggressive cost cutting targets;

    * rationalising the Proton business acquired in March 2002 and
    integrating it with ERG's business;

    * reducing the cash outflow from the business; and

    * restructuring the Group's finance and strengthening the balance
    sheet.

    All of these objectives have been achieved or are ongoing.

    ONE-OFF CHARGES

    The Group made provisions, write-downs and accelerated depreciation
    totalling $165.3 million for the year ($155.4 million in the first
    half and $9.9 million in the second half). The Directors are hopeful
    that the write-downs are not permanent reductions in value but
    represent a conservative approach to carrying values. The provisions
    are substantially due to the accounting treatment of equity
    historically received in exchange for the license of ERG's
    technology. Although the Directors are confident of the business
    plans of each of these entities, they believe it is difficult to
    precisely measure the future returns these investments will generate.
    Accordingly, provisions were raised against these investments and
    other amounts related to these entities. The breakdown of these items
    is included as Attachment 2.

    GROUP FUNDING

    The Group has focused considerable attention on restructuring its
    financing and balance sheet to ensure all new projects can be
    supported.

    ERG has extended its relationship with the ANZ Bank which has
    provided facilities for Melbourne and terms for funding of the Sydney
    project. In addition, funding arrangements have been put in place and
    others are being negotiated with major banks, and a major
    infrastructure group. The total of these arrangements is over $100
    million. This is in addition to the existing $60 million facility for
    Melbourne.

    The unlisted convertible notes, due in October 2002, will be
    converted under the terms of agreements reached with the holders of
    100% of those notes, resulting in payments by the Group being reduced
    from $22.8 million to an estimated $5-10 million.

    Shares held by the Group in Downer EDI have been sold over the past
    two months generating approximately $16 million. The proceeds were
    used to pay out the Commonwealth Bank.

    The Directors are confident the Group has ample funding available to
    meet all its commitments and growth prospects.

    PROJECT UPDATE

    The maturing status of major projects is reflected in the nature of
    revenues reported for the year. The infrastructure or recurring
    revenue grew 173% to a level comparable with that of system supply
    and installation. This growth trend is expected to continue in future
    years driver primarily by the large city projects for which ERG holds
    long-term outsourcing contracts. The status of the Group's major
    projects is as follows:

    * The Singapore system - one of the world's most advanced - is fully
    operational and a great success, processing more than 1.5 million
    transactions per day. The customer has entered a three-year
    maintenance contract with ERG.

    * Rome is now EBITDA and cash flow positive, despite continued delays
    in the Lazio area joining the system. The Group has significant
    compensation claims lodged in respect to these delays which are
    outside the Group's control. Refinancing of the Rome project has been
    deferred due to these delays.

    * Melbourne is EBITDA and cash flow positive and the revised contract
    arrangements are due to be finalised this month. Further payments of
    approximately $20 million are due from the customer in September. ERG
    will receive an additional $3 million per annum for management of the
    system. Overall performance of the system has improved significantly
    with improved cooperation between both the operators and Government
    lowering the impact of vandalism on the system.

    * San Francisco Phase 1 has been extremely successful. Phase 1 is
    continuing with the large operator, MUNI, extending the system to its
    entire rail network during Phase 1. A decision to move to Phase 2 is
    due before year-end.

    * TKE - a new contract in Hong Kong - was delivered ahead of time and
    with better profit than budgeted.

    DEPRECIATION AND AMORTISATION

    Depreciation and amortisation increased from $17.1 million in 2001 to
    $38.2 million in 2002. The increase reflects the first full year of
    depreciation of the infrastructure owned by the Group in the Rome
    project, amortisation of the Proton goodwill and amortisation of the
    Group's investment in the MASS (multi-application smart card
    solution) technology.

    REVIEW OF OPERATING SEGMENTS

    * Supply and installation. Revenue of $140.4 million was recorded for
    the supply and installation of automated fare collection (AFC)
    systems throughout the world. Before one-off items, an operating
    profit of $3.7 million was recorded. Revenue was the previous year
    figure of $171.7 million. The reduction in revenue was caused by the
    delay in commencement of certain major projects which are now due to
    commence in the current financial year.

    * Infrastructure and cards business. The infrastructure segment of
    the business represents the source of long-term recurring revenue for
    the Group derived primarily from the outsourced operation of AFC
    systems once installed. Revenue from these sources increased
    significantly to $140.0 million up from $51.3 million in the previous
    year. Currently the Melbourne and Rome projects are the largest
    individual contributors to this segment; however their accounting
    profitability is impacted by the sizeable depreciation charges
    against the large-scale capital equipment infrastructure cost. It
    should be noted however, both projects are currently EBITDA and cash
    flow positive. Future infrastructure projects, such as Sydney, will
    not follow this format as the AFC system will be owned and paid for
    by the customer. Accordingly the operating phase of these projects
    will not be burdened with depreciation charges for the
    infrastructure.

    * R&D and Corporate support. This segment of the business provides
    the technology, financing and administrative support to the two
    operational segments outlined above. With the Group's technology at a
    level of maturity where standardised modules can be successfully
    deployed in cities throughout the world, the necessary level of R&D
    activities can be reduced significantly. Total expenditure on R&D in
    the current year was $23.2 million compared with $42.3 million in the
    2001 financial year.

    OUTLOOK

    * The Group is hopeful that signing of contracts in Sydney and
    Seattle will be finalised during the coming months. Finalisation of
    these contracts has been delayed by as much as 2-3 years. Both are
    supply and long-term operating contracts. In both cases the
    Infrastructure equipment is being acquired by the customer and its
    operation outsourced to ERG. ERG is the preferred proponent in both
    cases.

    Project financing is being arranged for Sydney and all other projects
    are forecast to be cash flow positive. San Francisco is expected to
    move to Phase 2 by the end of the year. The total value of these new
    projects is expected to exceed $750 million.

    The Group is involved in large tenders in Canada, the Netherlands,
    Sweden and the United States (Maryland, Virginia and Washington DC).
    Decisions are expected during the current financial year.

    * Today we have also announced that we have been awarded an important
    new contact in Las Vegas, which further strengthens our business in
    the United States. The contract has been awarded by the large
    Canadian group, Bombardier Inc, with whom we will bid for the
    Montreal project. The new contract is initially worth US$6 million.

    * Due to delays experienced in the finalisation of the contracts in
    Sydney, Seattle and elsewhere, the operating revenue from supply
    contracts will build towards the end of the current half-year.
    Revenue in the second half is expected to be stronger than the first
    half as the major projects ramp up.

    Overall revenue should grow in 2003 with a much stronger growth in
    2004.

    * Depreciation and amortisation, mainly arising from the major
    infrastructure investments, will continue to run at approximately $35
    million (before amortisation of the Proton World goodwill of $11
    million each year).

    * EBITDA and operating cash flow is budgeted to improve in 2003 as
    the cost cutting initiated in the second half of 2002 has full impact
    and new projects commence.

    Profitability at the EBITDA level in the 2003 year will be, to a
    large extent, dependent upon both the timing of signing and
    commencement of new projects.

    MORE TO FOLLOW

 
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