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31th October 2003
Managing Director’s Report
Ladies and Gentlemen,
Review of 2002/03
The Lemarne group of businesses has experienced significant change in the past year.
Lemarne’s wholly owned subsidiary Pacific Composites increased its earnings considerably
in 2002/03. The Australian operations’ results were strong, underpinned by a large
project, while the company increased profitability by maintaining a strong focus on cost
control and selectively targeting higher margin work. The UK subsidiary, Fibreforce
experienced mixed fortunes at its Runcorn and Clacton operations. The results at Runcorn were
adversely impacted by lengthy site delays and production problems involving a major bridge
project. Whereas, Clacton produced very good results based on a high level of local
infrastructure and transportation projects. Pultrex, our small UK machinery manufacturing
business made a minor profit in the year and was sold in June 2003, due to its unsatisfactory
earnings prospects and the fact that following a strategic review, it was deemed to be a
non-core business.
Lemvest Limited, our 61.93% owned subsidiary, carried out considerable restructuring in
2002/03. Its Lemtronics and C10 Communications subsidiaries performed satisfactorily in the
year, while its main subsidiary Richardson Pacific Limited (“RPL”) was sold in March
2003.
Lemtronics, an Electronic Manufacturing and Service (“EMS”) provider based in
Malaysia, suffered from the severe contraction and volatility of the global EMS market in
recent years. Under the circumstances, Lemtronics’ return to profitability in 2003 was
creditable as was the improvement in its balance sheet, which benefited from reducing
inventories and better cash management.
C10 Communications supplies access network products (telephone accessories and ADSL filters)
and data communication products (ISDN and ADSL) into the telecommunications industry. In 2003
this subsidiary achieved an EBIT of just over $1 million, which was pleasing as it was the
first full year the business has operated as a stand alone operation.
Lemvest’s main subsidiary RPL was sold in March 2003. This business was Australia’s
oldest and largest manufacturer of perforated metal. It is in a very mature industry sector
and in recent years the business focussed largely on reducing its cost structure to maintain
its market competitiveness. In spite of this focus on reducing costs, the impact of the SARS
epidemic in Asia and the limited market opportunities available for perforated metal in
Australia and New Zealand, constrained RPL from achieving an acceptable return on the capital
employed in this business. The opportunity to sell RPL, to its major competitor who believes
it is able to access potential synergies by combining the two businesses, enabled Lemvest to
achieve a profit on sale of $10.1 million. Achieving this profit not only contributed to
Lemvest’s strong results in 2003, but also allowed the utilisation of much of that
Company’s previously accumulated income tax losses.
Outlook for 2003/04
As highlighted in our 2003 Annual Report, Lemarne’s profits in 2003/04 will decrease
significantly from the level achieved last year. This decrease is largely the result of much
lower profits in Lemvest, due to its disposal of RPL and the slow start made by each of the
continuing businesses. The relatively low returns generated on the cash currently on deposit
and the time needed to introduce new earnings streams will also constrain Lemarne’s
profits this year.
Pacific Composites’ Australian operations have commenced the new financial year slowly,
as management are currently finalising negotiations involving a large overseas order, which
will underpin earnings in the second half of the year. The Melbourne operations are to
consolidate into a purpose built factory in February 2004, which will facilitate ongoing
manufacturing efficiencies and improve the business’ international competitiveness.
In the UK, Fibreforce has started the new financial year satisfactorily at both its Runcorn
and Clacton operations. UK revenues are at a similar level to that achieved in the September
quarter last year, while the operating profit is slightly higher. Callum Gough was recently
appointed to be the new General Manager / Director of Fibreforce. Having considerable
experience in the European composites industry and in manufacturing, Callum’s appointment
will considerably strengthen our UK operations.
Recently the Australian and UK operations of Pacific Composites were selected as one of three
parties successful in the global tender issued by Deepwater Composites AS, Norway. This tender
covers the manufacture and supply of significant quantities of carbon fibre reinforced rods
for use in tethering oil and gas platforms in deepwater locations. In such applications, the
benefit of this innovative use of composite product, as compared with traditional steel, is
its high tensile strength, corrosion resistance, high thermal insulation, excellent fatigue
performance and its lighter weight. These attributes combine to make it more economically
viable to locate platforms in much deeper water than previously possible using much heavier
steel tethers. While we are very pleased to be one of the successful tenderers, we are
conscious that the supply of this product is dependent on our Customer securing orders for the
supply of composite tethers, which we believe may commence in 2004/05.
Lemtronics has commenced the current year slowly due to a weak order book, compared with the
first half of last year. The volatile nature of the EMS market at this time, coupled with a
sluggish European economy, makes forecasting more than two months ahead very difficult. A
program of upgrading Lemtronics’ plant is currently underway, which will improve
manufacturing capabilities and enable the business to compete aggressively for more
sophisticated higher margin work. These upgrades are expected to have a positive impact on
results in the second half of the year by improving product quality, manufacturing
capabilities and efficiencies.
C10 Communications is continuing with initiatives to develop its range of core products, to
commercialise intellectual property (both in-house and in conjunction with third parties) and
to develop a value added service revenue stream that complements the products it supplies to
the market. Some of these initiatives are at commercially sensitive stages of development and
even if they were consummated in coming months would make little contribution to profits in
this financial year. We also await the outcome of a large tender, which closed in April 2003.
If this tender is lost it has the potential to adversely impact the business’ second half
results.
As previously mentioned, each of our continuing operating businesses have made slow starts to
the current year and their profitability is significantly down against that achieved in the
first quarter of 2002/03. As a result, Lemarne’s unaudited operating profit before tax
for the three months ended 30 September 2003 for the continuing operations is down some 53%
compared to the corresponding period last year. At this stage we expect a much stronger second
half, with 2003/04 full year earnings for the continuing operations expected to be ahead of
last year’s. However, there are a number of factors, which could change this situation
including the success or otherwise the existing businesses have in winning important
contracts.
Darryl Rainsbury
31 October 2003
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