20/02/2009 - 13:24

Essa upbeat despite interim profit fall

20/02/2009 - 13:24

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Mineral sampling equipment manufacturer Essa Australia expects to remain profitable during the second half of this financial year after it posted a 34 per cent drop in its interim net profit.

Essa upbeat despite interim profit fall

Mineral sampling equipment manufacturer Essa Australia expects to remain profitable during the second half of this financial year after it posted a 34 per cent drop in its interim net profit.

During the six months to the end of December, Essa delivered a net profit of $1.3 million, down from $1.96 million from the previous corresponding period.

Essa said earnings were affected by a reduction in the sales of higher margin standard equipment and mixing bowls, however this was offset by an increase in project revenues.

"In addition, the rapid depreciation of the Australian dollar against major currencies significantly reduced the profit margins on a number of Essa's existing sales contracts during the period as well as increasing the costs to Essa of sourcing certain overseas manufactured products going forward," the company said.

Sales revenue was down slightly, 1 per cent, to $20.2 million while earnings before interest and tax was down 40 per cent from $3 million to $1.8 million.

The directors have not declared a dividend for the period.

 

 

The announcement is below:

 

 

 

The Directors of Essa Australia Limited ("Essa" or the "Company") report a net profit after tax of $1.256 million (after minority interests) for the Company in the half year ended 31 December 2008. This represents a decrease of 34% on the $1.916 million profit for the corresponding period in 2007, but is well above the previous earnings guidance range of the Company. The after tax profit equates to earnings per share of 2.44 cents per share on weighted average issued capital, versus 4.03 cents per share for the corresponding period last year.

Essa's sales revenue was down 1% to $20.244 compared with $20.440 million for the half year ended 31 December 2007.

The improvement in sales and profit performance over the Company's previous guidance for an after tax profit of approximately $0.95 million on sales revenue of around $20 million sales was primarily driven by the sale of depreciated plant and equipment, which yielded an after-tax gain of approximately $0.25 million.

In the current financial and economic turmoil and the associated market instability, the directors believe it is appropriate not to declare an interim dividend. This prudent approach to capital management will enable the Company to strengthen further its balance sheet, take advantage of any expansion opportunities during the coming months and weather the expected weaker trading conditions. The Directors will consider the payment of a final dividend taking into account all of the relevant circumstances at that time.

Cash flows from operations were negative $1.183 million in the half year. The timing of tax payments and the working capital requirements associated with the Company's Brazilian and European operations affected operating cash flows and administrative expenses in this period. An increase of approximately $0.6 million in income taxes paid compared with the prior corresponding period, one-off restructuring expenses relating to the adjustment of staffing levels of around $0.2 million and a rise in accounts receivables were also negative factors. Nonetheless, Essa maintained a net cash balance of $2.768 million as at 31 December 2008 and working capital management will be a priority over coming months.

Review of Operations and Performance

In the face of an extraordinarily difficult trading environment which deteriorated rapidly over the half year period, the Directors were pleased that the Company maintained a reasonable level of profitability taking these circumstances into account.

Sales revenue from the sale of Essa's main sampling and sample preparation equipment lines decreased by just 2% in the half year from $18.393 million to $18.009 million, with the majority of the decline occurring in the second quarter. However, earnings were affected by a reduction in the sales of higher margin standard equipment and mixing bowls, although this decline was partially offset by an increase in project revenues. In addition, the rapid depreciation of the Australian dollar against major currencies significantly reduced the profit margins on a number of Essa's existing sales contracts during the period as well as increasing the costs to Essa of sourcing certain overseas manufactured products going forward.

The half year result included sales of $4.9 million from Essa's automation and sampling systems business and further orders have been received during the period. However, an amount of $3.2 million remains outstanding in relation to an ongoing automation project ($1.8 million as a trade receivable and $1.4 million as work in progress). The receipt by the Company of this amount is subject to Essa meeting the remaining technical requirements in relation to the project. Essa is working to address these matters and believes it will be able to satisfy the technical requirements to the client's satisfaction in due course.

On 1 July 2008, Essa sold a 25% interest in its now 75% owned specialist marine repair and testing services and engineered fabrication subsidiary, STACE, to the senior management team of that company. Sales revenue from STACE for the six month period was $2.235 million, up from $2.047 million in the previous corresponding half. However, the net profit before tax contribution of this business was only $0.031 million, reflecting the very competitive market in which it operates at present.

Essa's senior management team has acted promptly in response to the sharp downturn in trading conditions.

As reported in November 2008, the following measures to improve profitability have been undertaken:

 outsourcing of manufacturing and fabrication at lower costs;

 reduction in staffing levels, with the number of employees presently 103 compared with 121 six months ago in mid August 2008;

 reduction of expenditure in all areas and in particular in those that do not immediately contribute to sales revenue; and

 renegotiation of supply contracts to address the currency situation.

The costs associated with the overhead reductions noted above, including one-off payments of around $0.3 million relating to the staff reductions, were borne by the Company within the first half result. Essa continues to monitor and evaluate its overall cost base going forward and will respond as required in order to address the challenging economic environment.

Outlook

The severity of the present economic downturn and its affects in particular on both the global resources industry and demand for the Company's products make it very difficult to forecast future activity levels.

Nonetheless, the combination of the restructuring measures that have been implemented, together with Essa's ongoing cost reduction strategies, should ensure that the Company remains profitable during the second half of the financial year notwithstanding a possible sharp decline in activity.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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