Bradken Limited Annual Report 2015 - page 43

Bradken Limited
Directors’ report (continued)
30 June 2015
Page 8
Bradken Limited
Review of operations (continued)
Operating and Financial Review (continued)
Cast Metal Services Business (continued)
The Australian foundry industry, and hence the consumables market, has been contracting for the past couple of years at an
accelerated rate. Opportunities for growth within the Australian market have slowed considerably with further opportunities
limited with Cast Metal Services’ current high level of market penetration. As a consequence, technical specialists have
been relocated to North America in conjunction with a sales office with this region experiencing growth.
Engineered Products Division
The Engineered Products Division is a leading North American manufacturer of large, highly-engineered steel castings and
differentiated consumable products to the mining, resource, transportation, structural, energy, and military industries. The
Division is a leader in the North American market for large, complex steel castings (over 4,500kg) and has an approximate
30% share of the US large steel castings market. The Division also has foundry capacity in the United Kingdom to serve
European markets.
Sales revenue of $267 million was down 4% on FY14, reflecting continued softness throughout the year in the capital mining
market. The release of deferred military projects, notably submarine builds, are expected to benefit the division in F16 as
well as translation of the US dollar. Sales in F16 are expected to be higher, as improved military and transit rail markets are
projected to offset a lower capital mining market
Business Risks
The Company maintains an Enterprise Risk Management System, which identifies potential risks by site, business, region
and function by actively pursuing the minimisation of identified business interruption risks. While each of the Company’s
Divisions has its own discrete business risks, as a group the Company’s Executive Management Team identify high level
business risks with the potential of having a material impact on the financial prospects of the Company. The most significant
business risks for FY16 will be the continued pricing pressures exerted by major mining customers, particularly in the iron
ore and coal sectors, the significant fall in oil and gas prices and pressure on the Australian dollar.
Business Strategies and Outlook
The Bradken vision, mission and business model continue to shape our business strategies. The Bradken business model
focuses on the creation of differentiated consumable products and the sales of their value to our customers. There is a
strong belief that the model can be adapted to our “consumable” markets, leading to end market diversification. A number of
acquisition opportunities were explored in 2014/15 and continue to be a key strategic initiative. Bradken has continued to
enhance its robust, bottom-up business planning program, which results in multiple growth initiatives being assessed and
implemented as each new opportunity arises.
The restructure of manufacturing to materially lower costs is close to completion. This well-positions us to gain volume
when the market improves.
The foundry in India will contribute to further cost reductions in F17 and will recover any lost capacity as a result of the prior
plant closures.
The Company’s short-term strategy is to focus on growing sound margin revenue through market share for consumable
products and product development in preparation for an eventual uplift in global mining demand.
Forecasting results in the current environment remains challenging, however any further reductions in volume and price are
expected to be offset by an additional $10 million EBITDA from full year run-rate savings of the restructuring program as well
as $9 million of EBITDA (based on current FX rates) due to higher translation of the US based business which provides
more than 50% of the Company’s profits.
Gearing is forecast to reduce significantly in the second half of F16 due to very low translation exposure of debt to any
further reductions in the AUD/USD exchange rates, continued inventory reductions especially in the Ground Engaging Tools
and Crawler Systems product lines, given that the relocation of their manufacturing will be complete. Additionally, the sale of
surplus properties and continued capex restrictions will assist gearing reduction further.
The Company’s business strategy for the mining industry remains focused on growing the mining consumables business by
designing, manufacturing and selling differentiated consumable wear products throughout the major global mining regions.
A number of discrete strategies are being implemented to aid this focus including:
expanding our sales presence direct to mining customers throughout the world;
new product design and innovation;
further reducing manufacturing costs by transferring product manufacture to targeted low cost facilities; and
developing the global distribution network to include stock holdings in key mining regions to support direct sales.
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