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Bateman Engineering N.V.

('Bateman Engineering' or 'the Group')

    

Trading Update 

On 20 November 2008, Bateman Engineering announced that the changed macro-economic environment had led to markedly more difficult trading conditions with a few contracts placed on hold or cancelled and some prospective orders unlikely to come to fruition for the foreseeable future. Additionally, the Group reported that the majority of currencies in which it operates had depreciated against the USD resulting in an adverse effect on the Group's results, whilst legacy contracts continued to prove problematic such that further costs to close these out would be necessary. 

Following a period of review (including a detailed assessment of all key contracts, the Group's cost base and overall prospects), the Board now believes that it is in a position to provide shareholders and holders of depositary interests with greater clarity on the effect of these factors on the Group's financial results. 

The Board believes that the Group's strategy of offering global technology solutions with local execution capability remains robust; and with the actions currently being instigated by the Group, the Group will be positioned appropriately to meet the challenges ahead. 

Eddie Du Rand, Chief Executive, Bateman Engineering, said:

'The changed macro-economic environment has had an unprecedented impact on our industry and key customers. As a result we are taking rapid action which we believe will ensure that our company is positioned to withstand this turmoil. I believe that Bateman Engineering's technology led engineering base, geographic diversity and our focussed attention to improving our execution capability will continue to prove to be a compelling business proposition for our clients in this industry.'

Trading Environment 

Recent weeks have seen no let up in the difficult trading environment. For the industry as a whole, project deferrals, delays and cancellations remain the order of the day. A number of the larger metals and minerals companies have now formally announced their reduced capital expenditure budgets for 2009 and 2010 whilst many of the junior miners have come under intense financial pressure. With commodity prices continuing to search for an equilibrium and operators seeking to ensure cost recovery, the Group anticipates that currently there is limited direction on capital programmes in the wider metals and minerals market. Notwithstanding this background the Group continues to witness a respectable level of enquiries and remains confident that a number of these will be converted to orders in the foreseeable future. 

Key Initiatives

• Continued emphasis on securing reimbursable work: the process to secure more reimbursable work with the intention of reducing the contract risk to the Group is already underway. Group management continues its effort to ensure a balanced spread of risk in its order book.

• A programme to reduce controllable costs has been instigated across all regions, primarily focused on overhead reductions and realisation of SG&A efficiencies. Whilst a reduction in the Group headcount has already taken place, the Group will continue to ensure that it is correctly sized to match demand in the various regions and areas in which it operates. 

• A review of all material contracts to ensure that the Group has, in the current market, appropriately provided for additional costs where we believe they might occur. Whilst this exercise has confirmed that the Group is comfortable with the majority of ongoing work, a number of previously highlighted legacy lump sum turnkey contracts (including a heavy minerals project in Mozambique, a platinum concentrator in South Africa and a Zinc concentrator in India) remain extremely challenging. As a result the Group believes it prudent to provide for additional costs to completion on these projects. 

Impact on financial results 

The change in contract mix, overall activity levels and the impact of the significantly weaker RSA Rand and Australian Dollar will mean that Group revenues for 2009 will be materially below 2008. The Group, however, anticipates that the revenue should exceed $425m.

Critical items 

The Board believes that in respect of the change in market conditions and legacy contracts it will be necessary to account for a number of critical items in the results for the six months to end December 2008, including:

• A goodwill impairment charge of approximately US$5m will be taken against acquisitions made over the last two years. As a result of the current market conditions, a revision to the anticipated profit performance of these businesses is also deemed prudent.

• A US$6.2m increase in provisions against bad and doubtful debts. A number of the Group's clients are experiencing cash flow problems and difficulty in refinancing existing debt facilities. Although the Group remains hopeful that most of its outstanding debts can be recovered, it believes it is appropriate to provide for the potential non-recovery of certain specific debts.

• The treatment of deferred acquisition payments in accordance with IFRS 3 and IAS 39 results in the recognition of an interest charge in the income statement of US$5.6m.

• The Group believes it appropriate to provide in aggregate US$37.5m for additional costs to completion on the three legacy contracts described above. The Group continues to explore all means possible to minimise the actual final costs on these projects.

As a result of these items, the Board anticipates that the Group will report an operating loss in the financial period to the end of December 2008. On an underlying basis (i.e. before the above items) with the assistance of the remedial actions being taken by management, the Board anticipates that in the medium term the Group's operating margin target of 6% remains attainable.

Cashflows and financing requirements

At the end of June 2008 the Group had cash and equivalents of US$130m and debt of US$8.1m (excluding deferred acquisition payments of US$15m). At that time, the Group's net cash (excluding that required as bonding collateral) was US$129.9m. As anticipated and in line with management's expectations, the changing contract mix has resulted in a decline in net cash to $65.9m at the end of November and is anticipated to be about $45m at financial year end.

Management has undertaken a detailed working capital review. The Board believes that, based on current banking arrangements, the Group has sufficient funding to satisfy its working capital and other committed funding requirements.

Outlook

Looking forward, the legacy contracts will have been handed over to the clients by the end of this financial year. The risk in the order book will be substantially reduced with a more balanced portfolio of reimbursable versus lump sum turnkey contracts. The Group's focus on technology and execution excellence is showing results. With the actions taken and anticipated we are confident that the Group will be well positioned to perform in line with its peer group in the next full financial year. 

16 December 2008

 ENQUIRIES:

 

Bateman Engineering	+31 20 502 2370
Eddie du Rand: CEO
Pieter du Plessis: CFO
Dresdner Kleinwort	+44 20 7623 8000
Chris Treneman
Alex Metherell
Andrew Hollins
College Hill	+44 20 7457 2020
Mark Garraway
Adam Aljewicz

 

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