What company

results mean for

your industry
3 What the big retailers are telling your business
4 What the big construction companies are
telling your business
5 What the big manufacturers are telling your
business
6 What the big fnancial companies are telling
your business
7 What the big miners are telling your business
8 What the big telco companies are telling your
business
9 What the big media companies are telling
your business
10 What the big transport companies are telling
your business
11 What the big property companies are telling
your business
12 What the big insurers are telling your business
Business Spectator special issue
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Australias biggest retailers have emerged from the latest
fnancial year with mixed results, but the underlying theme is
that its still tough out there in retail land.
The chase for discounts is evident, with the discount
department store chains faring better than the premium
stores. At the same time, online sales volumes continue to
rise as consumers focus on sourcing quality goods at prices
that are typically lower than can be found in the traditional
bricks and mortar stores.
According to NABs online retail sales index, online sales
growth was ahead 25% year-on-year in July and is now
equivalent to 5.3% of traditional retail spending. Interestingly,
domestic e-tailers dominate online spending, with a
72% share, although there has been a marked pick-up in
international sales July.
The last fnancial year
The most recent round of annual results from bricks
and mortar retailers showed varied growth in sales and
proftability at the end of what was a fairly dismal year.
Woolworths recorded a statutory earnings fall of 14.5%, its
frst earnings decline in more than a decade, although its
proft before a big write-down on its Dick Smith stores was
up a modest 3.6%.
Wesfarmers, which owns the Coles Group, including Target
and Kmart, posted a net proft of $2.1 billion, an 11% per
cent rise on the previous corresponding period. Revenue
from ordinary activities rose 6% to $5.08 billion.
In contrast, electrical and homewares retailer Harvey Norman
posted a 32% drop in net proft to $172.5 million, refecting
the weaker economic conditions generally, and 32 per cent
softer than the previous corresponding period.
For businesses in the retail sector, there are several points
worth noting:
The major department stores are fghting hard to
win back sales and market share. This means that
discounting is here to stay. Low-cost stock sourced from
overseas manufacturers will continue to be the main
play, and the majors bulk buying power means it will be
hard to compete on price.
Online sales are continuing to grow, and the majors
are moving quickly to ramp up their so-called omni-
channel strategies. This means that retailers serious
about competing will need to open up online channels,
including social media, to reach out to customers.
Smaller retailers will need to work harder to source lower-
cost stock, including negotiating with suppliers, and will
need to look closely into loyalty programs to add value so
customers are not enticed to head to the majors and/or
online.
What the big retailers are telling your
business
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The latest round of proft results from the major building,
construction and engineering companies and those
involved in allied industries present a fairly bleak picture for
businesses in this sector at this point, especially those with
links to resources projects.
The impact of lower consumer confdence, combined with
lower selling prices and industry wage pressures, has fowed
right through the big companies.
The Australian construction sector contracted for a 27th
consecutive month in August, as project delays afected
demand, according to a leading survey.
The latest Australian Industry Group/Housing Industry
of Australia performance of construction index sank to a
seasonally-adjusted 32.2 in the month, from 32.6 in July.
Any reading below 50 indicates the sector is in contraction.
The report found apartment building was the weakest sub-
sector during August, recording a drop of 10.8 points to just
22.1.
Engineering construction remained the strongest of the sub-
sectors, but still fell to 35.7, amid a decline in resource sector
demand as project delays afected activity.
The last fnancial year
The most recent round of results from the big companies
exposed to the construction sector, either directly or
indirectly, tell much of the story although some of the
larger conglomerates are also exposed to weak conditions
overseas.
Construction group Leighton Holdings posted a net proft of
$114.6 million in the latest year, although its result was down
on the previous year and refected difcult conditions in
Australia and the UK.
Building products group CSR said it expects housing activity
in coming year to drop to its lowest level in 15 years after
reporting a sharp fall in proft for the fnancial year.
CSR posted a net proft attributable to shareholders of $76.3
million, an 85% fall on the previous corresponding period,
with total revenue dropping 6% to $1.8019 billion and
earnings before interest and tax down 26%.
The company said it expects total private detached
commencements to remain steady around 90,000, with multi-
residential starts expected to fall by about 10% to 50,000.
Earnings in the majority of CSRs businesses - including
building products, aluminium and glass all dropped.
Conclusion
For businesses in the building and construction sector, there
are several points worth noting:
Conditions across the sector remain weak, and those
businesses linked into development activities architectural,
engineering, building supplies, construction, labour hire and
others are likely to face difcult conditions over the near to
medium term.
Expect continued reduced levels of incoming work and a
shortage of new tender opportunities.
For many businesses, the period ahead will require further
cost cutting and it may be prudent to renegotiate borrowing
arrangements to lock in the current low interest rates on ofer
from the major banks.
What the big construction companies are
telling your business
5
With job cuts being announced across many parts of
Australias manufacturing sector, its evident that conditions
remain subdued.
Proft results in the latest earnings season refect the
conditions, with a large number of manufacturers reporting
earnings falls. Downturns were recorded by the major car
and automotive parts manufacturers, building products
manufacturers, as well as those involved in areas such as
minerals and metals processing.
Manufacturing activity continued to contract across Australia
in August, albeit at a slower rate than in July. Indeed, only
three out of the 11 manufacturing sub-sectors expanded
last month, including miscellaneous manufactures; food and
beverages, and wood products and furniture manufacturing.
The textiles, clothing and footwear; paper, printing and
publishing; chemicals, petroleum and coal products;
and fabricated metals sub-sectors recorded moderate
contractions in activity, although the rates of contraction in
activity were less severe than in July.
In contrast, August saw more intense declines in activity in
the construction materials; basic metals; transport equipment
and machinery and equipment sub-sectors.
The seasonally adjusted Australian Industry Group-PwC
Australian PMI rose 5 points to 45.3. (Readings below 50
indicate a contraction in activity with the distance from 50
indicative of the strength of the decrease.)
The production and employment sub-indexes improved in
August, but remained frmly contractionary, at 43.1 and 41.2
points respectively. More positively for the outlook, the new
orders sub-index improved to 49.1 points (only just below
expansion), which was the best reading for this sub-index
since February.
In surveying manufacturers, respondents to AIG-PwC
remained cautious about the outlook and cited a range
of inhibitors of activity including: soft retail demand; the
subdued housing market; higher utility charges; weak
export markets; stronger import competition; and the strong
Australian dollar.
Wages and input costs continued to rise in August, while
the decline in selling prices persisted, indicating that
manufacturers profts remain under pressure.
Conclusion
For many Australian manufacturers, the current and medium-
term outlook remains subdued. Industry participants should
consider the following:
The high Australian dollar presents an opportunity to
lock in favourable prices on plant and equipment being
purchased from ofshore.
Low interest rates also present a favourable opportunity
to lock in fnance at favourable rates under a range of
diferent fnancial instruments available through banks
and fnance companies.
Be aware of diferent government grants that may be
available to manufacturers and businesses in general, at
both a federal and state level.
Also be aware of government support available for
areas such as research and development, employment
and training, including subsidies available for new
apprenticeships.
What the big manufacturers are telling your
business
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On the surface, the large profts reported by Australias major
banks and other fnancial institutions appear to have little
direct correlation to the majority of businesses operating
across Australia.
But, digging a little deeper, the results do accurately refect
the condition of the broader economy and, more specifcally,
whats likely to be in store for smaller businesses in critical
areas, including the availability of fnance to facilitate
corporate growth.
Moreover, the activities of the banks and fnanciers
in accessing their own lines of capital are a mirror of
macroeconomic conditions on a global level and what is
likely to be in store for Australia over the short, medium and
long term.
The latest major bank results
The Commonwealth Bank reported a full-year proft of
$7.09 billion, the largest result by a non-mining company in
Australia. The net proft was aided by cost cuts and a drop
in bad debt provisions. Since the announcement, and recent
developments in European fnancial markets, the bank has
gone out to raise more capital from investors which is an
indication that banks are broadening their sources of funding.
ANZ Bank reported a record frst-half underlying proft of
just under $3 billion, although the bank warned of its proft
margins being under pressure in Australia.
National Australia Bank reported its frst-half earnings had
risen almost 6% to $2.82 billion, roughly in line with what
some analysts expected, although bad debt charges rose
14% to $1.13 billion.
Westpacs frst-half cash proft came in at $3.195 billion, up
1% from a year earlier, although the banks net proft fell 25%
to $2.97 billion. The bank blamed a rise in bad debts and
costs associated with setting up the Bank of Melbourne for
dragging its proft lower.
Weaker demand
Despite their results, and the current low interest rate
environment, the big four banks are battling weaker demand
growth for their fnancial products. With many areas of the
domestic economy subdued, many businesses are currently
straining to maintain their existing operations, let alone
expand them. Businesses are also taking advantage of
lower interest rates to refnance their debt, opting to repay
borrowings rather than take on new loans.
Conclusion
The major fnancial companies, particularly the major banks,
are continuing to focus on improving their operational
margins, which will become even more imperative as the
demand for fnance from businesses remains weak and
businesses move to repay debt rather than borrow more.
For businesses, it is opportune to revisit current fnancial
arrangements with a view to negotiating better terms.
The low interest rate environment means cash holdings
will generate lower income returns. It is therefore
sensible to use existing surplus cash to pay down
business debt.
The indication from banks that their operating margins
remain under pressure, and the rise in bad debt
provisions by some, suggests that access to fnance by
some businesses (those under their own pressures) will
be difcult.
What the big fnancial companies are telling
your business
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Australias mining boom is not over by any means, although
there is little doubt that conditions in the sector have
deteriorated at a rapid pace.
Declining commodity prices, particularly for iron ore, coupled
with weaker demand from the likes of China our major
trading partner have caused mining profts to slump in the
latest reporting period.
For many businesses, the happenings in the mining sector
are far removed from the daily realities of manufacturing,
retailing, services, and the myriad of other industries that go
into making up the wider economy. However, there are direct
fow-ons, and business owners would be wise to take note of
the events that are likely to shape our economic conditions in
the short, medium and long term.
The latest fnancial results
Below are results from some of the biggest miners in
Australia, which are indicative of the conditions being
experienced across the sector.
BHP Billiton shelved more than $50 billion in projects after
announcing its full-year net proft had slumped by more than
a third to $14.77 billion. Lower commodity prices and high
write-downs on US, shale, Australian nickel and its Australian
Olympic Dam project contributed to the loss.
Rio Tinto sufered a 22% slide in frst-half net earnings to
$US5.89 billion, which included a $US1 billion deferred tax
asset following the introduction of the Minerals Resource
Rent Tax. Rio cautioned about near-term uncertainties and
said it was focusing on improved productivity, although it
remained confdent demand would remain strong in the long
run.
Peabody Energy, the worlds biggest non-government
coalminer and owner of Australias Macarthur Coal, warned
that Australian coalmines face more cutbacks and closures
amid slumping prices and rising costs. Peabody cut
production and earnings forecasts by around US$100 million.
The impact on business
The latest mining corporate earnings results are a signal
for more project closures across Australia over the short
to medium term, and that will have a direct fow-on to
employment levels across many sectors as cross-industry
spending dries up. But on a broader level, the slowdown
in mining will directly impact Australians terms of trade
which is already in decline and that will likely trigger both
government and central bank responses.
The federal government, and Reserve Bank, will be under
pressure to ofset the trade downturn through fscal and
monetary policies which, in turn, could directly impact
exchange rates and interest rates.
So what should businesses do?
Being on the front foot is always prudent and, in light of
our current economic conditions which include a high
Australian dollar and low interest rates taking advantage of
these makes perfect sense.
Steps could include locking in the value of the high
Australian dollar through overseas stock and/or
equipment purchases;
Likewise, locking in borrowings at the current low
interest rates is sensible;
Preserve cash fow, particularly in view of potential
impacts on business and consumer demand over the
medium term.
What the big miners are telling your
business
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Australias telecommunications sector is consolidating but,
for businesses, the opportunities for growth and achieving
cost efciencies are actually expanding.
Telstra, which has the primary contract for the massive
roll-out of Australias national broadband network, or NBN,
remains the powerhouse across the telecommunications
sector last month delivering a $3.4 billion full-year proft
and forecasting further growth in the year ahead as it attracts
new mobile phone and broadband customers.
Earlier this year, Telstras biggest rival, Optus, reported it
had lifted its annual net proft to $787 million despite intense
competition from its telco rivals.
Competition is certainly ferce across the sector, and for
businesses thats very good news. The range of services and
deals is ever-changing, and advances in technology such
as the expansion of the national 4-G wireless network is
providing businesses with better tools than ever before.
Another feature of the market is consolidation through
acquisitions, and while that has reduced the total number
of players, it has also helped to provide a greater range of
services to businesses.
Take, for example, the business telco M2 Communications,
which has soaked up around 12 telco businesses over
the past few years including the likes of Primus, which it
bought in May. The strategy is based around building critical
mass, with a clear focus on providing high-level services to
businesses.
Another telco on the acquisitions hunt is BigAir, which owns
and operates Australias largest metropolitan business fxed
wireless broadband network. Companies use it for direct
high-speed internet access and to extend their local area
networks to wide area networks, and connect their outlets,
employees, customers and suppliers nationwide.
For businesses, the biggest thing to look forward to is the
NBN, and Telstra and others will be directing their earnings
towards ofering a competitive range of products and
services once the network comes on stream.
If youre in business and used to coping with slow internet
connectivity, that will all become a thing of the past. The
NBN will bring high-speed connectivity, making business
systems and productivity more efcient than ever before, so
business can connect and stay connected to customers and
employees.
The NBN will also enable businesses to improve the speed of
communications to ofshore ofces, including distributors in
regions such as Asia, Europe and North America, allowing for
real-time information and knowledge transfers and the ability
to tailor systems to meet individual customer needs.
Expect a major shift in areas such as telecommuting and
video conference streaming. The speed of the NBN will
allow businesses to reduce the amount of time required for
face-to-face meetings by making real-time video hook-ups
seamless. As such, it is likely that video communications will
play a much greater role in business interaction over time as
technology delivery systems improve.
What the big telco companies are telling
your business
9
Australias media sector provides a unique window view
into the state of business, and the economy in general,
and the latest round of corporate results from listed media
companies display a rather depressed scene.
Advertising revenue has continued to slide, refecting the
fact that many companies have continued to reduce their
expenditure over the past year across print and electric
media formats. And for those companies that are continuing
to advertise, there has been a marked shift from print to
online.
The latest fnancial results
Fairfax Media - owner of newspapers including The Age and
Sydney Morning Herald, reported its revenue had dropped
from $2.5 billion to $2.33 billion, with the company recording
a total loss of $2.73 billion for 2011-12, driven by massive
write-downs on the value of its newspapers.
Meanwhile, News Corporation - owner of mastheads
including The Australian, Herald-Sun and Daily Telegraph,
posted a US$1.6 billion net loss in the fourth quarter of the
2012 fscal year, which was afected by a US$2.8 billion
write-down related principally to the publishing business.
News reported a 56 per cent fall in net proft to $US1.2 billion
in 2012, while revenue rose 1% to $US33.7 billion.
Fundamental shifts
For businesses, the results of the media companies also
point to a fundamental shift in consumer behaviours, similar
to the trends occurring in the Australian retail sector. Online
ad revenue passed newspaper advertising for the frst time in
the six months to June ($1.63 billion versus $1.5 billion) and
was just behind TVs $1.65 billion.
According to the Commercial Economic Advisory Service of
Australias half-yearly report, the total advertising market fell
0.4% to $6.745 billion in the six months to June. However,
online advertising grew 30% and accounted for 24.2% of
the total market, while free-to-air television had 24.4% and
newspapers had 21.6%.
Online trends
For businesses, the online trend signals the fundamental shift
in consumer reading patterns - particularly the greater focus
on reading news on websites and increased usage of smart
phone and tablet devices. Online advertising is generally
cheaper than print advertising - depending on placement -
hence businesses now have a greater opportunity to be seen
at a lower cost than before. That trend is likely to continue,
although expect online advertising rates to increase over
time as demand exceeds supply.
What the big media companies are telling
your business
Who sees Australian business?
We do.
nab.com.au/seebusiness
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The economic road has been rather bumpy for many
companies involved the transport and logistics sector, and
that means all businesses should be on alert for rough
conditions ahead, with plenty of fnancial twists and turns.
Australias biggest publicly listed transport companies have
just reported their latest fnancial results, and for some
the period just completed was far from smooth. These are
companies involved in road, rail, aviation and shipping - and
their results are indicative of the fow of commodities and
goods from almost every segment of the wider economy.
Poor results are therefore a mirror of the distressed
conditions in many areas, and there are few bright spots on
the horizon at this point.
The latest fnancial results
National diversifed transport group Toll Holdings said it
does not expect any short-term improvement in external
conditions after recently posting a massive fall in proft
in fscal 2012. For the 12 months to June 30, Toll posted
a net proft of $65 million - 77% down from the previous
corresponding period.
The company said while its manufacturing and discretionary
retail customers were doing okay, the overall market in those
sectors remained tough, and Toll was also having to deal
with increasing labour, property and other cost increases.
In aviation, national carrier Qantas said it also expected
conditions to remain challenging, volatile and dependent on
a number of uncontrollable external factors, after swinging
to a huge loss in the full year. For the 12 months to June
30, Qantas posted a net loss of $245 million, worse than
expectations and compared to a $249 million proft last year.
The airline also cancelled a large order of Boeing 787s as
part of its fve-year turnaround plan, in a move that will cut
the companys capital expenditure by over $8 billion.
In contrast, pallets and containers supplier Brambles says it
had entered the 2012-13 fnancial year in good shape despite
uncertain economic conditions. However, much of its growth
is expected to come from ofshore operations. Brambles said
it expected an underlying group proft of between US$1.01
billion and US$1.07 billion (A$991.80 to A$1.05 billion) at
June 30 foreign exchange rates.
The road ahead for business
The depressed results of many of the large companies in the
transport sector - and forecasts of a continuation - point to
expectations that demand for transport and logistics services
will be lower. This suggests consumer demand will remain
weak, and hence sales of goods across other sectors such
as retail and automotive will be fat.
For those businesses wanting to lock in longer-term
transportation contracts, now may a good time to negotiate
a better deal.
What the big transport companies are
telling your business
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Conditions across the Australian commercial property market
remains weak, although there has been signifcant variance in
the performance of diferent property segments over recent
times.
This is evident in the latest earnings results from listed
Australian property companies, including development
groups, property investment companies, and companies
spanning the retail, ofce and industrial segments.
The latest fnancial results
Property development giant Lend Lease recently reported a
net proft of $501.4 million, up just 1.7%, which it said was
supported by continued growth in its construction business.
Lend Lease identifed a large construction backlog combined
with the depth of the groups signifcant urban regeneration
pipeline as giving it strong earnings potential over the
medium term.
But that result was in contrast to the $222.9 million loss
recorded by shopping centres owner Centro Retail, refecting
the parlous conditions in the retail sector overall. In the
companys half-yearly report last December, Centro Retail
unveiled a net loss of $100 million.
There are mixed signals in the sector however. Shopping
centre giant Westfeld Groups half year proft was up more
than 30% despite a 10% fall in revenue amid tough trading
conditions.
According to NAB chief economist Alan Oster, conditions
remain especially tough in the retail property sector, which
continues to sufer from the ongoing reticence of consumers
to spend, weak retail business conditions and depressed
confdence among retailers, especially in discretionary retail
sectors.
While segments of the industrial property market are
benefting from mining sector requirements and increased
trade and online activity, overall conditions in the industrial
property market remain negative, he said. Ofce property
remains one of the best performers in the commercial
property space, but the impact of the two-speed economy
is also evident here. Persistent uncertainty in global fnancial
markets has impacted the Sydney CBD more heavily as the
majority of tenants are in fnancial or professional services
sectors. In contrast, ofce markets in Perth and Brisbane
are benefting from robust increases in tenant activity from
mining/resources companies.
The property lessons for business
The mixed conditions in property signal several things for
business.
Firstly, property valuations have declined and, with interest
rates remaining low, now could be a good time to purchase
commercial property. In retail particularly, high vacancy
rates are pushing some owners to sell down their property
assets, and that means there are some good opportunities
for buyers.
Secondly, the results from the majors do indicate that
economic conditions are fckle, and businesses can get
a very good feel of the economic pulse (specifcally ofce
space demand) by taking note of the number of new
commercial building projects under way in capital cities.
The current trends indicate that demand has weakened, so it
is likely the undertone of economic caution will continue for
some time to come.
What the big property companies are telling
your business
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Australias biggest insurance companies have reported
strong proft returns from the last fnancial year following a
difcult period overshadowed by large payouts for natural
disasters.
The latest results refect an increase in insurance margins
over the previous corresponding year achieved through
a combination of organisational cost reductions and, not
unexpectedly, a general increase in the insurance premiums
charged to their customers.
The latest big insurer results
Insurance Australia Group announced it expected its
performance to continue to improve in fscal 2013, despite
posting a fall in annual proft. For the full year to June 30, the
insurer posted a net proft of $207 million, a 17.2 per cent fall
on the previous corresponding period.
IAGs gross written premium margin for the year rose 11.7%,
and the company said it had set guidance of gross written
premium growth of 9-11% and a higher insurance margin
in the range of 11-13%. The groups insurance margin, a
measure of the proft it makes on premiums, was 10.6% in
the year to June, up from 9.1% in the previous year.
Meanwhile, Suncorp Group said it was confdent about
the future despite a challenging external environment after
posting a 60% leap in net proft to $724 million for the 12
months to June 30.
Suncorps general insurance business increased its before-
tax proft to $493 million in the year to June, and increased
its gross written premium by 9.3% to $7.96 billion.
At the same time, QBE Insurance Group said it expects
to achieve low single digit growth in gross and net earned
premium for the full year, following a slight rise in interim
proft.
QBE said its premiums should begin stabilising following
rises imposed after several natural disasters, including the
2011 Queensland foods.
Premium growth is expected to beneft from solid premium
rate increases currently being achieved, and QBEs
underlying insurance margin for the full year is tipped to grow
by 12%.
Key messages for business
For businesses, there are two key messages from the latest
insurance results.
1. The major insurance companies have lifted, and
probably will again, lift their premiums to ofset the
impact of major claims and potential future claims.
2. Businesses especially those that are already
fnancially stretched will need to review their insurance
arrangements as they come due for renewal, with a view
to consolidating their cover and also potentially seeking
out cheaper insurance options.
What the big insurers are telling your
business