Chairmans' Review

The directors announced a fully franked final dividend of 85 cents per share (55 cents per share fully franked last year) taking the full year dividend to 150 cents per share (115 cents per share last year). The full year dividend represents a payout ratio of 73 per cent of the Group’s reported net profit after tax. The return on shareholders’ funds averaged 25 per cent for the year (versus 23 per cent last year). This return placed the Company 15th out of the top 100 listed Australian companies by market capitalisation.

The Group continues to maintain a strong balance sheet which provides the depth and flexibility necessary for tendering for large, complex projects, providing working capital, investing in plant and equipment, and pursuing new opportunities. The Group has shareholders’ equity of $2.6 billion, gross cash of $1.3 billion and available debt facilities of around $670 million. Managing the Group’s capital requirements remains a core discipline underpinning the strategy and future growth of the business.

The Group’s debt profile remained in good shape and, when combined with our strong capital base, has seen Moody’s issue an upgraded rating to Baa1 stable (from Baa1 negative). The operating cash for the year was over $1.7 billion from excellent project performances, a reduction in our variations and claims, and a strong level of depreciation. The operating cash underpins investment in new plant of $513 million to support the future growth in the mining operations. In addition, $300 million of operating leases were converted to finance leases in the year. Plant and equipment at year end represented $1.85 billion of the total property, plant and equipment of $2.0 billion.

The debt profile of the Group has continued to be restructured to a longer term maturity, reducing its reliance on short term financial markets. Gearing, including offbalance sheet leases, reduced from 48 per cent at 30 June 2009 to 38 per cent at 30 June 2010.

During the year, the Group secured a $280 million Medium Term Note facility with a maturity of June 2014. In July 2010, the Group successfully completed a US$350 million US Private Placement which further diversifies funding sources at substantially lower rates. The Private Placement comprised 5, 7 and 10 year tranches and the funds will be used to further diversify and extend the maturity profile of the Company’s core debt portfolio.

The LMENA limited recourse loan of US$366 million was refinanced at a lower rate with full recourse to Leighton. The Group has total available guarantee facilities of $3.5 billion of which only $2.9 billion has been utilised. The $650 million of undrawn guarantee facilities provides capacity for the continued growth in our business disciplines requiring these undertakings.

The Group’s work in hand at 30 June 2010 reached a record high level of $41.5 billion, with 65 per cent coming from Australia and the Pacific, and 35 per cent from offshore markets. The work in hand is 8 per cent higher than the $38.4 billion as at 31 December 2009 and 12 per cent higher than the $37 billion as at 30 June 2009. The value of work in hand was negatively impacted by approximately $700 million due to the strengthening of the Australian currency.

The order book was boosted by the award of some $23.5 billion worth of new work, extensions and variations during the period. The major construction projects awarded included the $3.5 billion Melbourne Desalination Project, an additional $1 billion worth of work at the Gorgon LNG plant in Western Australia, the M80 Ring Road alliance in Victoria and the Khalifa Port in Abu Dhabi. New mining work and extensions in Mongolia, Indonesia, Queensland and Western Australia supported the Group’s contract mining activities.

Services work remained at high levels with a number of telecommunications projects related to the National Broadband Network and the ongoing maintenance of water and sewerage infrastructure in Melbourne.

The successful early completion of the CLEM 7 Motorway in Brisbane in March 2010 triggered a cash investment by Leighton Contractors in RiverCity Motorway, the listed company that owns, operates and maintains the toll road. This investment has been revalued to market price at year end.

Leighton Asia sold its 16.5 per cent stake in the Manila North Tollway Corporation, the owner of the North Luzon Expressway, at a profit.

During the year, Leighton participated in Devine Limited’s successful 3 for 4 non-renounceable rights issue which raised a total of $54.4 million. Leighton also acquired the shareholding of David Devine and Ken Woodley which helped increase Leighton’s shareholding in Devine from 43.7% to 49.7%. Devine has recorded a solid year making a reasonable contribution to the Leighton Group.

On behalf of the Board I would like to welcome Mr Stephen Johns as a Director of the Company and Chairman of the Audit Committee effective from December 2009. Mr Johns was formerly Finance Director and Chief Financial Officer of the Westfield Group for almost 20 years until 2002 and remains a Non Executive Director. Mr Johns replaces Mr Peter Gregg who stepped down from the Board after being appointed Chief Financial Officer of Leighton Holdings in October 2009. I congratulate both Stephen and Peter on their appointments.

Corporate governance remains a key focus of the Board of Leighton Holdings Limited.

The Board recognises good corporate governance is dynamic and is continually seeking ways to improve its performance in this area.

In line with its focus on continuous improvement, the Board is currently enhancing a number of the Company’s policies and practices, including:

• refreshing our Code of Ethics;
• enhancing the Board’s performance evaluation processes; and
• providing a framework to further support workforce diversity initiatives in the Group.

Additional information on these initiatives is provided in the Corporate Governance Report found here.

Safety is an absolute focus in this Company, from the Board to Management to the worksite. The Group has a good safety record as measured by statistics such as Lost Time Injury Frequency Rate (LTIFR) and Lost Time Injury Severity Rate (LTISR), but these can always be improved and the Company is working hard to achieve that outcome. Fatalities are deeply regrettable and everyone across the Leighton Group is passionately committed to eliminating the risk of fatalities. Last year was a bad year for fatalities.

Each incident has been fully investigated, and the Board is focused on ensuring each operating company has taken the appropriate measures to prevent a recurrence. Additionally, programs have been put in place across the Group that specifically focus on the elimination of risks that could result in a fatality or permanent disability, and the Board will closely monitor the effectiveness of these programs.

Safety is a key component of operations, of every business plan, and is entrenched in our remuneration framework. Part of the remuneration for managers and executives is a bonus opportunity for outperforming predetermined objectives and this is assessed on the achievement of their business plan objectives as well as other measures. If safety targets are not met, then this will be a significant negative in their assessment. Of course any safety incident that impacts the performance of a project has a direct impact on managers’ performance based remuneration.

The Group remains positive for the 2011 financial year and expects to report an increased revenue and operating profit. The long-term outlook for the Group remains positive based on a record level of work in hand, a strong competitive position, and continuing economic recovery in its major markets. Australia’s resilience, and its proximity to its major trading partners in Asia, leaves Leighton well placed to respond to new opportunities.

David Mortimer AO
Chairman