| |
| $ million, unless otherwise stated |
2009 |
2008 |
 |
|
|
| Sales: |
|
|
| – Air Distribution |
874.2 |
1,112.3 |
| – Bathware |
140.3 |
208.2 |
|
|
|
| |
1,014.5 |
1,320.5 |
|
|
|
| |
|
|
| Adjusted operating profit |
69.1 |
92.4 |
| Adjusted operating margin |
6.8% |
7.0% |
| Operating profit |
35.4 |
47.0 |
| Cash conversion |
214.9% |
118.6% |
| Net capital expenditure : depreciation |
0.5x |
0.8x |
|
|
|
Market background
Non-residential construction in North America accounted for 61% of Building Products’ sales in 2009. In the US, non-residential construction declined on a square foot basis by 46% in 2009 compared with 2008, and by 33% on a value basis (as measured by Dodge). Building Products’ key sector is offices followed by education, hospitals, public buildings and hotels. All of Building Products’ sectors declined, with offices and hotels the worst affected, declining by around 60% in square footage compared with 2008. However, the public buildings segment rose by around 10% on a value basis compared with 2008. The US Architectural Billings Index, which is regarded as a leading indicator of future commercial construction activity, remained under 50, indicating continuing contraction in activity. Office vacancy rates continued to rise, implying low future demand for new office space.
Residential construction in North America accounted for 32% of Building Products’ sales in 2009. The US residential construction market declined by 39% compared with 2008 to 554,000 housing starts (according to the NAHB), the fourth straight year of decline and a record low. In 2009, housing starts were over 70% lower than the peak of around 2 million units in 2005. Around the middle of 2009, the market stabilised at around 600,000 units on an annualised basis. Housing inventories fell throughout the year, reaching 8.1 months for new homes and 7.2 for existing homes. However, inventories still exceed the 10-year averages which are 6.0 months for new homes and 5.9 months for existing homes, which implies that, even though inventories fell during 2009, they remain higher than the historic level needed to stimulate new construction. Home prices, as measured by the Case-Shiller Index, fell throughout the first half of 2009 but recovered in the second half, showing month-on-month gains from May to October. Existing home sales improved throughout 2009, achieving year-on-year increases from July onwards. The US tax credit stimulus, which was in place for the majority of 2009 and provided some stability to the market, has been extended to April 2010.
The balance of approximately 7% of Building Products’ sales were outside North America.
Air Distribution
| $ million, unless otherwise stated |
2009 |
2008 |
Change
% |
|
|
|
|
| Sales |
874.2 |
1,112.3 |
(21.4) |
| Adjusted operating profit |
77.8 |
104.2 |
(25.3) |
| Adjusted operating margin |
8.9% |
9.4% |
|
| Operating profit |
48.2 |
61.2 |
|
|
|
|
|
Sales were $874.2 million (2008: $1,112.3 million), a decline of 21.4%. Sales fell $14.8 million due to exchange rate changes but recent acquisitions increased sales by $12.2 million compared with 2008. Sales were down $235.5 million, or 21.5%, on an underlying basis. After a strong start in the early part of 2009, sales into the non-residential construction markets weakened as a result of the declining market conditions. Orders and backlogs continued to weaken throughout 2009.
As a result, sales in our non-residential businesses (72% of Air Distribution’s sales in 2009) declined by 21% during 2009. During the year, we commenced work with a major US retail chain to fit energy recovery ventilators to over 200 stores, which is expected to save around 20% of their total heating and cooling costs.
We completed the first phase of the Dubai Metro project, worth over $1 million and, in Australia, supplied a major tunnel project with industrial tunnel fire dampers, worth over $3 million. Our new associate in the Middle East, Ruskin Titus Gulf, commenced operations. We are continuing to take advantage of the global investment in large infrastructure projects such as airports and subway systems with contract wins globally including in the UAE, India and Australia, totalling over $25 million.
Sales to the residential construction market (28% of Air Distribution’s sales in 2009) declined in the first half of 2009 but stabilised in the second half, reflecting market conditions. Overall, sales in our residential business were down 24% in 2009, compared with 2008.
Operating profit was $48.2 million (2008: $61.2 million) and included restructuring costs of $5.1 million (2008: $3.6 million) and impairments of $18.6 million (2008: $34.0 million). Impairments recognised in 2009 largely related to the goodwill and intangible assets recognised on the acquisition of Rolastar. In 2008, impairment related to the goodwill allocated to Selkirk. In 2009, the amortisation of intangible assets arising on acquisitions was $5.9 million (2008: $5.4 million).
Adjusted operating profit was $77.8 million (2008: $104.2 million), a decrease of 25.3%. Adjusted operating profit fell $1.6 million due to exchange rate changes and was down $24.5 million, or 23.9%, on an underlying basis. Adjusted operating profit fell as a result of reduced sales volumes in both the non-residential and residential construction markets, though this was partially offset by the benefit of restructuring initiatives. In 2009, the adjusted operating margin was 8.9% (2008: 9.4%).
Restructuring initiatives associated with projects Eagle and Cheetah were completed by the end of the third quarter of 2009, with five plants closed in North America.
During 2009, we completed the acquisition of the remaining 40% minority interest in Rolastar, a ducting manufacturer in India. Also during the year, we completed the integration of Trion, which we acquired in 2008.
In February 2010, we acquired a 100% interest in Koch Filter Corp, a leading manufacturer of air filters for the non-residential filtration replacement market, that will build on the Group’s filtration capabilities and green product strategy within the non-residential market.
Bathware
| $ million, unless otherwise stated |
2009 |
2008 |
Change
% |
|
|
|
|
| Sales |
140.3 |
208.2 |
(32.6) |
| Adjusted operating loss |
(8.7) |
(11.8) |
26.3 |
| Adjusted operating margin |
(6.2)% |
(5.7)% |
|
| Operating loss |
(12.8) |
(14.2) |
|
|
|
|
|
Sales were $140.3 million (2008: $208.2 million), a decline of 32.6% on both an actual and underlying basis. Bathware sells primarily to the US residential construction and remodelling market, which continued to weaken, particularly in the first half of 2009.
An operating loss of $12.8 million was incurred in 2009 (2008: loss of $14.2 million), which included restructuring costs of $1.6 million (2008: $2.2 million) and, in 2009, impairments of $2.5 million which arose as a consequence of the restructuring initiatives.
Bathware’s adjusted operating loss declined to $8.7 million (2008: loss of $11.8 million). Although Bathware benefited from cost reduction and restructuring initiatives (which were all completed in the third quarter of 2009), this was outweighed by lower overhead absorption due to reduced production levels. Bathware’s adjusted operating margin therefore worsened to (6.2)% (2008: (5.7)%).
Restructuring initiatives associated with projects Eagle and Cheetah were substantially completed in 2009, with one plant closed in the US.
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