2008 interim result strategic review update

ASX Release
21 August 2008

2008 INTERIM RESULT & STRATEGIC REVIEW UPDATE

Summary of Result
• Reported Group Profit of $175 million includes the impact of non-cash impairment
charges of $386 million and realised trading losses of $55 million across the four
divisions.
• Net operating cashflow increased 62% on pcp to $299.6m
• Rolling 12 month interest cover at 30 June 2008 was 5.3x
• Undrawn capacity and unrestricted cash at 20 August 2008 in excess of $800
million
• Total remuneration as a % of Net Revenue was 38% compared to 46% on pcp
• Infrastructure Division driver of growth with a 97% increase in Net Revenue1
generated primarily from the expanded funds and asset management platform and
development revenue. Prior to impairment charges net revenue increased 125%
• Prior to impairment charges Real Estate Net Revenue was $126¹ million. The
Division recorded an overall net revenue loss of $71.7¹ million for the period due to
non-cash impairment charges and lower overall trading profits from assets sales.
• At the operating level Aircraft Operating Leasing delivered a small increase on pcp2
a good result in the current environment. The reported result of $118.8 million was
impacted by stronger $A and an impairment charge
• Higher tax rate of 24% reflects strong contribution from North America and the
impact of impairment charges flowing through from the GPT Joint Venture.
Six months ended 30 June 2007 2008 chg
Net Revenue ($’m) 800 561 (30)%
Net Revenue prior to impairment charges and asset
revaluations ($’m) 764 1,002 31%
Operating cashflow ($’m) 185.5 299.6 62%
EBITDA ($’m) 393.1 335.7 (15)%
NPAT attributable to the BNB Group ($’m) 250.1 175.0 (30)%
NPAT to Babcock & Brown Limited ($’m) 199.6 150.9 (24)%
Basic EPS (¢) 72.1 47.9 (34)%
Assets under Management ($’bn) 52.6 74.4 41%
1 After minority interests
2 Prior to impairment charge and impact of currency movements over pcp
International investment and specialised fund and asset management group Babcock
& Brown (ASX: BNB), today announced a 2008 Interim Group Net Profit after tax of
A$175 million.
Operating cashflow increased 62% over pcp to $299.6 million reflecting the non cash
nature of most of the losses in the reported profit result.
New investment in the development pipeline included a 14% increase in wind energy
development to $748.5 million, a further $50 million invested in solar energy
development and $24.5 million in public private partnership projects. Total
development investment declined to $1.2 billion due to the reclassification of completed
real estate, and renewable fuel projects and the sale of the Transbay cable project.
During the six month period the three key business divisions focused on further
institutional capital raising initiatives, with in excess of $2.6 billion of new capital
commitments raised from co-investment partners. Uncommitted capital under
discretionary management in our wholesale infrastructure funds at the current time is
A$3.2 billion. Managed capital to expand aircraft under management in our Operating
Leasing Division is in excess of US$584 million.
Dividend Policy
As a matter of prudence, no dividend will be paid until sufficient progress has been
made on corporate debt reduction. Dividends are expected to re-commence in 2009.
Strategic Review Update
As part of the strategic review the Group is undertaking, Babcock & Brown also
announced today a series of Board and Senior Executive changes. The changes
include the decision by Managing Director and CEO, Phil Green, to step down from his
Executive Director role with current CFO, Michael Larkin becoming Managing Director
and CEO effective immediately. Mr Green will remain on the board as a Non-Executive
Director.
Mr Larkin said, “Over the last few years in particular, Babcock & Brown has been very
successful at achieving substantial growth based on the high levels of liquidity in the
capital markets. This has led to the group being too highly leveraged and not
sufficiently focussed. In view of the changed market environment, we are taking the
necessary steps to reduce the leverage and refocus the Group on the areas where we
can best deliver earnings growth for Babcock & Brown shareholders and investment
performance for our Limited Partners and, investors in our funds other co-investors
over the longer term, without taking undue risk.
“While the strategic review, which is being conducted with input from financial advisers
Deutsche Bank and Goldman Sachs has some way to go, we are effecting four key
areas of change that accelerate the evolution of Babcock & Brown’s business to a
leading global alternative investment originator and asset manager:
1. Focus resources and capital on sectors where the company has a clear and proven
competitive advantage in both origination and asset management – Infrastructure;
Real Estate; and Operating Leasing.
2. Reduce the risk profile of the business through a de-leveraged and more
transparent balance sheet. We will reduce the level of principal investment activity
the firm undertakes and increase the emphasis on operating returns through growth
in AUM. Consistent with this, we will target a lower ROE of 15-20% and operating
cost savings run rate of at least 20% of annualised 2008 1H cost base to be
delivered by the end of 2009.
3. Adopt a more disciplined approach to the allocation of capital focused on coinvestment
and development activities, confined to our key business areas.
4. Enhance the alignment of interests between shareholders, fund investors, LP and
other co-investor interests.
Mr Larkin said the primary purposes for which the balance sheet will be used can be
broadly summarised as;
• Co-investment in our specialised fund and asset management platform.
• Greenfield and brownfield development of assets in our key business areas.
“To implement these changes, we have restructured the senior management team to
improve capital allocation decisions across the Group” Mr Larkin said.
The senior management restructure includes:
• Creation of Chief Investment Officer (CIO) Role – Peter Hofbauer. In this role
Peter will be responsible for the investment process across Babcock & Brown.
• Capital Markets Group to support all businesses – Headed by Richard Allsopp
and Martin Rey this group will co-ordinate our interaction with long-term providers
of capital across the key business and be responsible for deepening our existing
relationships
• Infrastructure division organised into three regional units reporting direct to
CEO – EMEA - Antonio Lo Bianco; North America - Mike Garland; Asia Pacific
John Bowyer
• Real Estate and Aircraft Operating Leasing continue as global units headed
by Eric Lucas Steve Zissis
• COO – David Ross to focus on achievement of reduced group operating cost base
and restructuring employee compensation to achieve better shareholder / investor
alignment
• New CFO – currently considering both internal and external candidates, a further
announcement will be made shortly.
“The Corporate & Structured Finance Division (CSF) will gradually be wound down.
Other assets and businesses not within the key areas of focus will be kept under
review and divested or wound down as appropriate to maximise shareholder value,” he
said.
“Existing private equity funds, BBDIF and BBGP, will continue to be managed by
Babcock & Brown and have access to the Group’s co-investment pipeline. BBC, BCM,
BBGI also will continue to be managed by Babcock & Brown and will pursue strategies,
as previously announced, to maximise value for investors” said Mr Larkin
Rob Topfer, Head of the Corporate and Structured Finance Division will step down
from that role, however he will continue to be a Director of and actively involved in
BCM, BBC and BBDIF.
“The strategic review to restore value to the Australian listed funds platform also
continues with fund Board initiatives underway in most funds. We remain committed to
having both listed and unlisted funds, in key focus areas to ensure that value is
delivered for investors,” Mr Larkin said.
Outlook
As previously advised, the Group 2008 NPAT is not expected to be above the 2007
Group NPAT of $643 million. The result is dependent on market conditions and:
• execution on the 2008 transaction pipeline
• 2008 asset sales program
• progress in relation to restructuring and cost reduction program
• impact of costs associated with the restructure
Mr Larkin said, “The volatile global capital market conditions have made and continue
to make business conditions uncertain and forecasting in the short term difficult. The
environment has created a number of challenges for the Group which we are actively
working through at the current time to reach resolutions which endeavour to weigh the
interests of all stakeholder groups.
“We believe that the changes to the business announced today will better equip
Babcock & Brown to operate in the current market environment, to build on its leading
position in its key markets and position itself for ongoing earnings growth in future
years.
“I particularly want to acknowledge the continuous commitment and support of
Babcock & Brown’s employees. The last few months have been very challenging and
their support is key to the success of the Group,” Mr Larkin said.
ENDS
For further information please contact:
Kelly Hibbins
Babcock & Brown
+61 2 92291866
[email protected]
APPENDIX
Michael Larkin
Michael holds a Bachelor of Commerce degree from the University of NSW, is a
member of the Institute of Chartered Accountants and the Taxation Institute of
Australia.
Prior to joining Babcock & Brown, Michael was Group Financial Controller for
Lend Lease Corporation, based in London. In this and other roles in his 7
years with Lend Lease he developed a strong set of skills and experiences in
dealing with financial and management reporting for a global company listed on
the Australian Stock Exchange. Michael was with Coopers & Lybrand for 13
years, culminating in the position as Director of Tax Services in the financial
services sector.
Michael joined Babcock & Brown in August 2004 as Chief Financial Officer
Mike Garland
Mike Garland is head of Babcock & Brown’s North American Infrastructure
Group. Mike has over 25 years experience developing, constructing, managing
and investing in infrastructure in the US and around the world. Mike’s
experience includes creating and advising on government privatisations,
transactions in the energy, transport and water sectors, and overseeing
Babcock & Brown’s infrastructure advisory and investment businesses in North
America. Mike sits on several boards of Babcock & Brown operating
companies, holds a Bachelor of Arts in physics from the University of California
at Berkley and is a registered representative of NASD. He is based in the San
Francisco office.
Antonino Lo Bianco
Antonino Lo Bianco is the Head of European Infrastructure and Project Finance.
He was a founder of Babcock & Brown Milan office in 1993. Prior to this he
worked for Nomura International plc. As a member of the Italian Corporate
Finance group since 1991, he has been involved in debt financing for Italian
banks and corporations, asset-based financing and privatisation equity issues.
Prior to joining Nomura he worked as a management consultant in London.
Antonino is a graduate in Business Administration from Bocconi University. He
is based in the Milan office
John Bowyer
John joined Babcock & Brown in September 2005 and heads up their PPP and
Social Infrastructure Group.
Prior to this, John was Head of the Infrastructure Capital team at ABN AMRO.
John joined ABN AMRO in 1998 after 20 years with Hansen Yuncken where he
led the project development group.
The ABN AMRO infrastructure group was widely recognised as one of the
leaders in structuring social and economic infrastructure transactions and for
taking the principal position on these projects.
Some of the more recent projects John has worked on include Darwin
Convention & Exhibition Centre, Brisbane Square Development, NSW New
Schools Project Tranches 1 & 2, Southbank Education and Training Precinct
Development Project, Spencer Street Station Redevelopment, EDS Asia Pacific
Headquarters, Mt Gambier Hospital, CSIRO Corporate Headquarters, NSW
Police Headquarters in Parramatta, Victoria Point (500 apartment residential
development in Melbourne’s Docklands).
John holds a Bachelor of Applied Science from the University of South
Australia.
Richard Allsopp
The management of the global unlisted capital raising activities will be headed
by Richard Allsopp who joined Babcock & Brown in May 2008.
Prior to joining Babcock and Brown, he co-founded and headed the Private
Funds Group of the Investment Banking Division of UBS in Europe. During his
10 years with UBS, this team raised more than $100billion for 50 unlisted funds
for a variety of external managers. While at UBS he also led the successful
fundraising activities for our European Infrastructure Fund and North American
Infrastructure business.
Richard’s experience in private equity fund development, his wide network of
relationships with investors globally and his deep knowledge of Babcock &
Brown combine to position us well to understand investors objectives and
structure products that will meet their requirements.”
About Babcock & Brown
Babcock & Brown is an international investment and specialised fund and asset
management group with longstanding capabilities in structured finance and the
creation, syndication and management of asset and cash flow-based
investments. Babcock & Brown was founded in 1977 and is listed on the
Australian Securities Exchange.
Babcock & Brown operates from 33 offices across Australia, North America,
Europe, Asia, United Arab Emirates and Africa and has in excess of 1,400
employees worldwide. Babcock & Brown has four operating divisions including
real estate, infrastructure, operating leasing, corporate and structured finance.
The company has established a funds management platform across the
operating divisions that has resulted in the creation of a number of focused
investment vehicles in areas including real estate, renewable energy and
infrastructure.
For further information about Babcock & Brown please see our website:
www.babcockbrown.com