Interview Transcript

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WDS Limited (ASX code: WDS) has today announced that FY2010 NPAT is anticipated to be a loss from normal operations (including restructuring costs) in the range $7M to $10M. What have been the key impacts on this result? What is the outlook for FY11? What is the prospect for dividends in the near-term?

Acting CEO Michael Jones

The delay in construction works associated with CSG-LNG projects and the contraction in pre-FID works together with severe rain and flooding across a large part of Queensland and South Australia, which halted work for a significant period, compounding the loss-making work levels of our Cooper Basin term contract were significant drivers of the result. Against our most recent guidance of NPAT $7M on February 2 this year, these delays account for a combined loss of approximately $6.8M with half of this attributable to weather.

As we mentioned in previous ASX announcements we were carrying overheads, including plant and equipment in excess of current requirements in anticipation of CSG. We have taken steps to realign our cost base and structure to our current revenues whilst still maintaining a sustainable level of capacity to ensure we are in a position to respond to the future CSG field developments. A level of overhead is required to maintain our triple certification, which is essential for future work, and to ensure our ongoing commitment to safety.

A number of one-off costs associated with the realignment of overheads, including redundancies and office closures will be booked in the current financial year. The associated costs for these are about $3.5M. Whilst we continue to review our position, we don?t expect there to be any further restructuring costs in the current financial year.

Issues across some of our micro tunnelling projects, which we had previously advised the market of, have been addressed through a revision to our tendering and project selection criteria and project controls and reporting. This will have a one-off cost this financial year of approximately $3.3M. We have also had to take a hit on some projects where we made assessments on recovery of claims and future costs. A reassessment was made based on the current stage of negotiations and these projects are essentially complete or in the process of being closed out, with an expected charge to the business of $3.5M.

Until we return to profitability it is unlikely we?ll see a return to paying dividends and with the timing of construction works for CSG projects uncertain, any assessment of the outlook for FY11 at this time would be premature.

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You have just completed the first part of your Business Review. What were the key outcomes and recommendations from the review? What initiatives have been implemented and how are you prioritising your action plan?

Acting CEO Michael Jones

The Business Review encompassed the entire business and enabled us to realise our key strengths as well as identify those areas where operational procedures and process could be improved.

An immediate initiative was to recombine our Oil & Gas and Infrastructure & Services divisions into a single Construction division. Whilst these divisions had been initially separated to enable Oil & Gas to prepare for the CSG expansion, delays in this area have meant that we were carrying an overhead structure in excess of our current requirements. This restructure has resulted in a number of redundancies and the closure of one regional office and some smaller workshops. These actions have resulted in a significant reduction in ongoing costs throughout the company and the opportunity to increase benefits from shared services. They did however come at a necessary one-off cost in this financial year. We have also put in place improved operational communications across all levels and in particular at a project level with greater corporate involvement.

Financial management has been tightened with amended levels of delegated authority and a greater focus on working capital.

As part of our employee development program we are implementing a training plan for our project managers and supervisors and strengthening our project review and reporting controls. We have also reset criteria for tendering especially in the tunnelling business and improved the tender review process.

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The recent difficulties appear to be largely confined to the Construction division. How is the Mining division performing? Are you happy with your progress into the Middle East?

Acting CEO Michael Jones

Mining is having a very good year, and we have recently commenced discussions for extensions to some major contracts. The Mining division, consistent with the total WDS group, is having its best year ever in safety performance, which is very pleasing as well.

We have a tunnelling operation in Kuwait which commenced operations in January and is performing well. Indeed, we are considering whether to expand the range of equipment we offer in that market as there is a strong opportunity for such services in that part of the world.

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As part of the interim Business Review you have identified a number of key changes to your balance sheet. What areas are you targeting? Is there any impact on your existing debt covenants? Has goodwill been impacted as a result of your revised NPAT outlook?

CFO Anne Hayes

The major target area for us in the short term is working capital. With a heightened management focus, the level of working capital is being addressed in a number of ways. We have set up weekly working capital meetings to look at the major issues, including actions, targets and reporting procedures. There will now be a far greater involvement at senior levels including customer discussions in connection with debtor collection and our internal procedures for commencement and invoicing of work. KPI?s will be set to increase the focus and ensure objectives are met. We are also reassessing the plant and equipment fleet and anticipate disposal of some non essential assets in due course.

At this time we do not believe that goodwill has been impacted but the business review is still underway and we will continue to review the carrying value of goodwill. There is still uncertainty around the timing of revenue from CSG related projects and this will be factored into our review.

As advised in our ASX Announcement of 19 February, our debt facility with GE was extended in February for a three year period to 2013 and we continue to remain within covenants.

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At June 30 2009 your work in hand totalled A$349M. What is the level of work-in-hand going into FY11? How secure is this amount?

Acting CEO Michael Jones

Current work in hand is $222M for the remainder of FY10 and beyond. Our mining business continues to produce strong results but as we have stated there remains uncertainty around the timing of revenues from CSG associated work.

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What is the status of your search for a new CEO? What do you see as the priorities to rebuilding shareholder confidence and value?

Acting CEO Michael Jones

The search for a new CEO has commenced by a specialist recruitment firm. We are currently focused on stabilising the business to enable the new CEO to hit the ground running and take advantage of the significant growth opportunities that we expect from the CSG sector: the company has specifically targeted this market.

We understand our shareholders are disappointed. We have also been disappointed with the delays to construction works relating to CSG projects and in our delayed response to the changing market conditions.
Our priority is to now implement and deliver on the recommendations out of the first part of the business review; to stabilise the business and ensure we are ready for the imminent growth in the CSG sector.

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Thank you Michael & Anne.