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WDS Limited (ASX code: WDS) reported a net loss of $7.5 million for the financial year ended 30 June 2010, versus a net profit of $20.3 million in FY2009. You’ve indicated you’re trading profitably in the current year to date. What have been the most important factors contributing to this turnaround in performance so far?

MD & CEO Terry Chapman
There are a number of factors contributing to our improved performance. Primarily, we have right-sized the business to match our cost base with activity levels and available revenue. Unanticipated delays in infrastructure projects and particularly delays in coal seam gas (CSG) projects in FY2010 had a negative impact on our results. In response to these delays we restructured the company to bring our cost base down.

We were also affected by exceptionally heavy rain and flooding across the Cooper Basin and south east Queensland that halted work. Adverse weather conditions have continued to impact us in FY2011, but to a lesser degree than last year.

Activity levels in our Mining business for the current year to date are consistent with the same period last year and our Energy and Infrastructure division has been successful in winning new work.

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One of your priorities for the current year was to draw more value out of your existing assets, in particular by increasing capacity utilisation levels. What has been the progress in this regard and will improved utilisation levels materially contribute to earnings and returns in the current year?

MD & CEO Terry Chapman
Our mining plant utilisation remains at healthy levels, similar to last year and above budget. We are continuing to leverage that plant for other works, as demonstrated by the recent Dendrobium contract win.

Utilisation of rigs within the Titeline business has improved recently, but in other parts of Energy and Infrastructure utilisation remains at similar levels to last year, and below where we’d like it to be. Recent contract wins, particularly in tunnelling, will result in improvements. We continue to review our assets and we will be looking at some minor disposals. However, we will remain in a position to react quickly should CSG opportunities arise.

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During FY2010 WDS introduced greater discipline around its project selection criteria, greater focus on project margins and improved contract risk management including securing stable cash flows. Have these initiatives delivered any benefits to date?

CFO Anne Hayes
Most importantly we have seen some contract wins in this financial year. As part of our interim business review we looked at the criteria for jobs we wished to pursue and the structure of our contracts. The most important aspects of our contract management are the level of risk that we are willing to take up-front and structuring the flow of cash receipts during the project to achieve an appropriate result for WDS. We conduct ongoing team-based reviews of our projects as they progress. We are in a position to quickly identify and address issues should they arise.

These contract and project management initiatives are ongoing and we have already seen benefits to date. We are better at managing our projects, structuring our contracts and maintaining financial discipline in our tendering. We continue to operate within our working capital and bank guarantee facilities.

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The FY2010 interim business review resulted in measures to reduce your cost base, including a restructure which resulted in one-off costs that contributed to WDS’s net loss in FY2010. What cost savings are expected to flow from this review over FY2011 and are further cost saving measures planned?

CFO Anne Hayes
The interim business review undertook to match our cost base with current activity levels while maintaining our capacity for future growth. The focus on reducing our cost base throughout the business is ongoing. We continue to reassess our plant and equipment and continue to look at the possibility of further savings through a consolidation of offices and workshops and further reduction in overheads.

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Work in hand stood at $285 million as at the end of October, up from $187 million at the end of June, and included the recently won $100 million contract with Xstrata for underground works at the Oaky Creek coal project. Can you comment on the competitive environment and the outlook for work in hand?

MD & CEO Terry Chapman
It is pleasing to see the work in hand figure increase, recognising that the increase is net of the sales we have booked to date in FY2011 at activity levels consistent with those of last year.

We are winning work but the environment is competitive, particularly for infrastructure projects. While we are maintaining our activity levels in Energy and Infrastructure, some of this work is shorter cycle work, leading to a decline in work in hand since June 2010. Work we are currently undertaking in the CSG sector is largely supported by purchase orders, however our forward visibility is somewhat clouded by the lack of clarity as to when the QGC and other proponents’ CSG export works will commence.

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There are increasing concerns about the re-emergence of labour shortages in the mining industry and the potential for wage inflation. Are you experiencing labour constraints in any area of operations? How might costs be impacted in the nearer term?

MD & CEO Terry Chapman
With respect to Mining, we are starting to see some labour tightness. We’re managing that through our training programs and retention strategies. We remain mindful of the effect of potential labour shortages on our project costings and delivery obligations.

In respect to our Energy and Infrastructure business, labour resources are not currently an issue.

If all the currently proposed CSG-LNG work commences over the next couple of years, the labour market will tighten substantially. We’re confident WDS can manage that problem: we have an established track record in the CSG Industry, a loyal workforce, and also the advantage of being able to offer participation in our employee share ownership plan (ESOP). The ESOP is an effective way for us to attract and retain the best people.

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At your recent AGM, WDS withdrew Resolution 8, which sought approval of your deferred share and incentive plan, and Resolution 7, which sought approval of the ESOP, was passed narrowly on a poll. How will these developments impact the employee share plans and how you are able to use them going forward?

CFO Anne Hayes
We will continue to operate both the ESOP and the deferred share and incentive plan and use them as a way of incentivising and retaining our key employees. The reason for putting the plans to our shareholders at the AGM each three years is not to seek approval of the plans but simply to approve the mechanism for acquiring the shares. Approval of the plans enables the directors of the company the flexibility to issue securities under the plans as an exception to ASX Listing Rule 7.1 which limits issues of securities within a 12 month period to 15 percent of shares on issue without shareholder approval.

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A number of coal seam gas projects have recently progressed, including that of British Gas (BG), which has announced a final investment decision (FID) for its LNG project in Gladstone. What impact is this progress likely to have on the value of work in hand and earnings in FY2011?

MD & CEO Terry Chapman
Although we expect CSG activity to begin to ramp up from early 2011, we do not expect any significant work to come to market from LNG-CSG export projects until FY2012. We do not expect these projects to have any material impact on earnings until this time.

We currently have a substantial number of personnel and pieces of equipment on a number of the proponents’ sites, primarily involved in work related to domestic gas sales. We consider we are well positioned to compete for work on CSG export projects.

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Thank you Terry and Anne.