CSR Limited today announced that operatingprofit after tax (PAT) for the half year ended 30 September 2002 (HYES02) wasA$319.4 million, up 15.3% on the previous corresponding period. Earningsper share (EPS)rose 17.2% to 34.1 cents.

Earnings before interest and tax (EBIT) was up 5.3% toA$541 million. Trading revenue was down 2.0% to A$3,638 million. EBIT/salesmargins rose from 13.8% to 14.9%.Excluding the impact of a higher Australian dollar on US$ earnings, EBITwas up 10.5% and revenue was up 2.6%.

Other highlights

*EBITDA after deducting tax and net interest paid, operating capital and change in workingcapital

** Excluding acquisition of Kiewit Materials Company,acquired 26 September 2002 # ona 12 month basis

Shareholder value added was again positive and upsignificantly on the previous year.

The heavy building materials businesses performed well,contributing 70% of CSR group EBIT.TheUS subsidiary, Rinker Materials Corporation (“Rinker”) deliveredanother solid result, with EBIT up 3% to US$176 million, although the strongerAustralian dollar meant A$ EBIT fell 5% to A$320 million. Despite a tougher economic environment,all the major Rinker segments lifted US$ EBIT, apart from Concrete Pipe &Products.Construction Materials(Australia & Asia)delivered a very strong 81% increase EBIT, to A$59million, due to improved margin management and operational improvement costsavings.

Building Products(Australia, NZ & Asia) EBIT was up32% to A$63 million, helped by strong domestic housing activity.Aluminium EBIT rose 11% to A$61million due mainly to lower costs.SugarEBIT fell 25% on lower world prices, which impacted the milling business- although EBIT from the downstream businesses – mainly sugar refining andethanol - rose 28%.

Directors declaredan unchanged interim pidend of 11 cents per share, payable on 16December.Franking increased to 70%,from 40% for the previous interim pidend.

Financial position

The group’s balancesheet remained very strong with net debt at end September of A$2,311 million,following the acquisition of Kiewit Materials Company, up from A$2,130 milliona year earlier.Gearing (net debt / netdebt plus equity) was 35.2% from 34.0%. Interest cover was 11.8 times, up from8.0 times.

Overview

“This is anothervery pleasing result which reflects the strength of the group’s marketpositions and the hard work we have put in to improve our base businesses,”said CEO & Managing Director Peter Kirby. “Rinker’s position in Florida,and in high growth southern US states, helped offset the impact of a weaknon-residential sector which hit the concrete pipe and products businessparticularly hard. In Australia,improvements in Construction Materials, bricks and roofing, and the downstreamsugar businesses, also contributed strongly.”

Mr Kirby said Rinker’s US acquisitions are also performingwell overall - in line with expectations and ahead of the weighted average costof capital.Integration of theArizona-based Kiewit, acquired in late September, is proceeding to schedule andearnings expectations have been affirmed.Operational improvement measures are well underway as part of thepost-acquisition management plan.

“In Australia, internal initiatives to improve marginmanagement and customer service in Construction Materials significantly liftedprofit.The business is improving butit is still not earning its cost of capital,” said Mr Kirby. “Further priceincreases were implemented in October.

“Building Products benefited from the lift in residentialhousing in Australia. The lag effect seen earlier this year, attributed toissues with the availability of home warranty insurance, has largely beenresolved.Bricks and roofing introducedseveral initiatives to lift profits, including lower production costs and priceincreases.

“Sugar was impacted by the decline in world prices, butthis was partly offset by the improvement in refining. The ethanol business ispoised to benefit from any moves to encourage the use ofenvironmentally-friendly motor fuels. CSR Distilleries is supplying BP’ssuccessful ethanol trial in Brisbane, where motorists have responded veryfavourably to the 10% ethanol fuel blend.We are optimistic about prospects in this area.The sugar industry meanwhile is workingtogether on a major restructuring and efficiency program to help restoreAustralia’s productivity advantages over other sugar producers.”

Business Performance

• Rinker sales rose 4% to US$1,119million. EBITDA was up 4% to US$256 million.US$ EBITDA/sales margins increased slightly to 22.9%.US$ ROFE for the 12 months to September was16.9% from 15.6%.Comparable $US sales(adjusted for acquisitions and pestments in the year to September) rose 3%and EBIT rose 1%.

   

  Price increases rangedfrom marginal to 5.0%. Volumes rose in all major businesses except ConcretePipe & Products:

  • Aggregates EBIT US$56 million, up 24%.Volumes up 19%.

  • Concrete, Block & Asphalt EBIT US$37 million, up 5%. Concretevolumes up 8%.

  • Cement EBIT US$42 million, up 11%.Volumes up 2%.

  • Concrete Pipe & Products EBIT US$41 million, down 24%.Volumes down 8%. The business was impacted by the substantial fall innon-residential building.

  Gypsum Supply profit increased 9% on increasedvolumes. The small Polypipe and Prestress businesses also continued to sufferfrom the non-residential construction downturn.Prestress EBIT was breakeven.The pipeline rehabilitation business was sold during the half.

  • Construction Materials EBITrose 81% on an 8% lift in sales.ROFE(12 month basis) was 11.1% from 4.7%.EBITDA/sales margin was 15.9%, up from 11.9%.The Tianjin Readymix quarry and concrete business in Chinacontinued to improve.

  • Building Products EBIT was up 32% on a 17%lift in sales.ROFE (12 months basis)was 19.5%. EBITDA/sales margin was 17.3% from 16.2%.Installation of the SAP computer system was completed inplasterboard and insulation.Productionstarted at the new roof tile plant at Rosehill, Sydney.

  • Aluminium EBIT was A$61 million, up11%.Aluminium prices were 7% lower onaverage and the A$ was stronger but profits were underpinned by hedging andlower alumina costs.

  • Sugar EBIT fell 25% to A$59 million.Average raw sugar prices were down 27%.Harvested cane volumes were up 10%.Distilleries EBIT was down due to lowerfertiliser sales as a result of the drought but export sales werestronger.Refining EBIT was A$12million, up from A$7 million.

  Strategy

  Almost three quarters of CSR group EBIT now comes fromheavy building materials (primarily aggregates, premix concrete, cement andconcrete pipe & products). Group strategy since 1998 has been to grow internationally in this sector, whilstconcurrently working to separate the remaining assets, in a way that hasdelivered value for shareholders.

  “The logical next step inour strategy is to complete the separation of the heavy building materialsassets through a demerger,” said Mr Kirby.

  “For some time now we havebeen carefully examining the various separation options.We believe a demerger will be the bestoption for shareholders. The newdemerger legislation means that we can now do this without shareholders incurringsubstantial tax penalties.Accordinglywe are moving forward with a demerger proposal which would involve splittingthe group into two listed Australian companies.We are completing our own due diligence process, aiming topropose to shareholders a demerger to take effect in the first half of nextyear.

  The demerger would mean theformation of a focused, heavy building materials group – Rinker Group Ltd (“Rinker Group”).It would bespun off from CSR Limited and would comprise US subsidiary Rinker MaterialsCorporation and the Readymix and Humes businesses (Australia & Asia).

  “Based on historical performance, both Rinker Group and CSR would have substantial free cashflows.We expect both companies toreceive investment grade credit ratings, and to be listed in the ASX Top 50 andTop 100 stocks respectively,” said Mr Kirby.

  “We anticipate that RinkerGroup will be one of the top 10 heavy building materials stocks in the worldand a disciplined, top quartile performer in its sector,” he said. “RinkerGroup is expected to be a growth stock - able to participate more effectivelyin the global consolidation of the industry.With around 85% of earnings from Rinker Materials in the US, over timewe would expect it to be re-rated by investors, more in line with its US peers.

  “CSR Limited would return to its roots as a persified, Australian company, holding some ofthe strongest and best known household brands in the country.It will comprise three businesses- CSR Building Products, Aluminium and CSRSugar- each of which is a leader inits industry.A demerger will allowthese businesses to focus more effectively on their respective strengths and topursue value-adding, low risk growth options which have previously ranked as alesser priority for the CSR group.

  “CSR Limited is expected tobe a highly franked stock, appealing to yield driven investors.It has been a strong generator of cash andof shareholder value – that is, earning above its cost of capital – for manyyears.

  “A demerger will facilitatechoice for the different types of shareholders – that is, those who preferRinker Group’s growth characteristics and those who prefer CSR’s higher,franked yields. We expect both companies to be well-regarded and to proveattractive to these respective shareholders.”

  Mr Kirby will lead thecompany through the demerger process.Upon completion of the demerger, he will hand over his role to DavidClarke, current chief executive of Rinker Materials and Alec Brennan, currentCSR group deputy managing director, who will become chief executives of RinkerGroup and CSR respectively.

  CSR group chairman JohnMorschel said Mr Kirby would then remain with the group for up to four monthsas an advisor, to assist in the critical phase of demerger implementation.

  “Since joining the companyin January 1998, Mr Kirby has played the key role in transforming the CSR groupfrom a poorly-regarded Australian conglomerate into a respected internationalbuilding materials group.

  “In that time, EPS growthhas averaged 22% p.a. compound, EBIT has doubled and return on equity has risenfrom 6.1% in 1997 to the 14.3% we announced today,” said Mr Morschel.“On behalf of the Board, I would like tothank him for his enormous contribution and wish him all the best for thefuture post the demerger.”

  All current CSR groupnon-executive directors are expected to join the boards of one or other of thetwo companies.Mr Morschel will becomechairman of Rinker Group.IanBlackburne, currently a CSR non-executive director and former CEO and managingdirector of Caltex Australia, will become CSR chairman.

  Mr Kirby said that subjectto the necessary approvals as outlined above, the demerger should be concludedprior to the middle of next year. “We are confident that a demerger will addfurther value for our shareholders, although we recognize that the nature ofdemergers is such that this may take time to be realized,” he said.

  Outlook for the second half

  There are indications that the US economy isbottoming.However, the short termoutlook is for a further softening.Overall, US construction activity for calendar 2003 is forecast to bedown about 1.1%, according to the US economic forecaster McGraw HillConstruction–Dodge.

  Rinker is expecting an improved second half, comparedwith the previous year, due to the addition of Kiewit. The base business isexpected to be relatively flat.Theexposure to the high growth southern states and strong road spending under thefederal TEA-21 program should help offset declining non-residential activity.Price increases for aggregate and concreteare forecast to be slightly ahead of inflation. Rinker’s short-term focus is onbedding down the important Kiewit acquisition.

  In Australia, BIS Shrapnel forecasts a 2% increase intotal construction during the year to March 2003. Commercial activity isexpected to improve, with housing declining in the second half in line withlower approvals. We expect housingstarts over the year to be around 142,000, from 152,000 last year.

  The developing boom in Australian engineering constructionis expected to benefit Construction Materials.Major projects are currently being tendered, althoughcommencement is not generally expected during the current year.Further price increases are beingimplemented.

  Around 74% ofBuilding Products’ sales are related to housing but the business shouldalso benefit from any uplift in commercial activity, which represents 21% ofsales. We expect the result to be ahead of YEM02.

  Aluminium profit should be slightly abovelast year, due to hedging of both the currency and the metal price.

  Sugar prices are now at a 14-month high, but with muchof the current season’s crop already priced at lower levels, it will have alimited impact on current year results.Crop volumes are up over 15% on YEM02.These factors are expected to at least offset the usual small loss inthe second half due to seasonal factors.Low cost growth initiatives are also underway to improve the overallstability of returns.

  “The CSR group has lifted its forecasts for the currentyear’s trading profit.We now expect asmall improvement over last year’s underlying earnings – that is, excludingdemerger costs and the A$41 million one-off tax refund benefit.Kiewit is not expected to contribute toafter-tax profit this year after goodwill charges, but it is contributing asexpected to EBIT.However we arecautiously optimistic that the improvement in Construction Materials, ongoingwork to lift the base business performance across the group and furtheroperational improvement cost savings will offset the effects of a higher A$,low sugar prices, and the expected softening in US construction.

  “Our priorities will be the successful implementation ofthe demerger, to further improve the performance of the base business and topursue value-adding, bolt-on growth opportunities as they arise.As always, our commitment remains to furtherdeliver value for our shareholders, and it is our expectation that we willcontinue to do so in the year ahead.”