The 2004/05 fiscal year has continued the string of great results for Coates Hire Limited in recent years. We have taken advantage of the continuing strength in the Australian economy to deliver a superior result and management's strategic decisions on acquisitions, people development, systems improvement and hire fleet investment are paying dividends for our customers, staff and shareholders.

// Financial Overview

Coates’ performance in 2005 was a story of ‘efficient growth’. We are growing at a rapid rate both organically and through our strategic acquisition/investment program which resulted in hire sales growth of 15.5% and for the first time hire sales exceeded half a billion dollars as they reached $527.6 million. The true strength of this performance is underlined by the fact that we exited the UK onshore business in this period and accordingly lost $23 million in budgeted sales. The most pleasing aspect of this performance however, is the fact that we managed to leverage our sales growth to achieve a 35.6% increase in after tax net profit to $63.5 million demonstrating the enhanced efficiency of our business platform. As a result of our efficient growth, earnings per share grew to 30.7 cents (from 23.1 in FY2004) and we pleasingly announced a declared dividend per share for the year of 15 cents (fully franked) up over 15% or 2 cents per share from the prior year. This is in line with our determination to provide consistent dividend growth.

// Our People

The great result for FY2005 is due not only to strong market conditions but also to the hard work of the Coates team. Senior management have again demonstrated that they are the best management team in the Australian equipment hire business and we have taken steps to deepen, broaden and improve management of the talent pool within Coates.

We have developed specific programs to better equip our people to take this business forward including:

• The Leadership Development Program, which is aimed at senior managers. This program focuses on Leadership, Innovation, Change Management and Strategy. A group of 45 senior managers completed the first round of the LDP in July 2005 and the second intake of 20 managers is now starting out on the LDP journey.
• The Management Development Program is aimed at frontline managers and looks at relentless customer focus, business basics, building teams and taking ownership. Over 95 participants are now working towards their Certificate IV in frontline management.
• The Performance Development Program which has been developed to assist staff and managers in monitoring and managing performance, skills enhancement and career development.

We launched The Coates Way in FY2004 and this has been very effective in communicating to our staff the strategic direction for the company and how our Purpose, Vision and Values apply to them on a daily basis.

One of those values is ‘Relentless Customer Focus’ and it is a key focus area for the group. We are reinforcing it with the roll out of a new Coates Way module focussing specifically on this issue, however the embodiment of this value can be seen in the annual Jim Brown Award for Service Excellence. This year the award went to the inspiring Fred Quinless from remote Telfer, WA. Fred works in some of the world’s most hostile environments yet he ensures that his customers experience minimal down time under all conditions. Jim Brown was proud to present Fred with the award in Sydney in July.

We would personally like to take this opportunity to thank all of our people throughout Coates for helping to deliver their part of our business plan and ensuring such an outstanding result. Their commitment, expertise and support have been essential in turning Coates into the great company that it is today and we thank each and every one of them.

// Investment

This year’s result and our future performance are underpinned by our strong but prudent investment strategy. During the period we stepped up our investment with:

• Hire fleet investment of $92.4 million that will add depth to our existing fleet;
• Project Extension investments of $103.5 million that will broaden our product offering into new equipment lines;
• A continuation of our ‘sweep & plug’ acquisitions totalling $75 million ensuring that our product offering and geographical coverage match our customer requirements; and
• The major acquisition of Allied Equipment for $136.1 million that moves us firmly into the hire and sale of ‘big yellow iron’ market for our mining customers both here and abroad. This acquisition brings with it high EBIT margins and has been EPS accretive from day one.

Our investment strategy has been strategically driven by the need to build diversity into our revenue base – diversity of revenue by Geography, Product and Market Sector. For example we have increased our exposure to the resources sector and proportionally reduced our dependence on the construction sector. We remain well placed to take advantage in the growing upswing in infrastructure spending as public-private partnerships (PPP) increase government capacity to deliver new projects within budget constraints.

// Rights Issue

On the back of this investment activity our net debt to equity ratio grew to approximately 90% after the Allied Equipment acquisition. Whilst manageable we wanted to reduce this ratio back into our 40-60% target range. Accordingly we announced a 1 for 6 rights offer of ordinary shares at $4.50 per new share on 22 August 2005. This rights issue was intended to raise $154 million (net of costs) and underpin our balance sheet to allow us to continue investing for future growth.

// Business Unit Performance - Australia & Overseas

It was another strong year for all of our business units with each experiencing growth over FY 2004.

Coates Hire Northern operated in a difficult market in 2005 but still managed to improve its performance over the previous period. While missing out on achieving tough internal targets the business demonstrated a great leap in efficiency and is well placed to take advantage of a more productive environment as anticipated growth in infrastructure projects come on line. We are already experiencing an increase in demand in FY 2006 and are hopeful for a step change in performance in the future.

Coates Hire Eastern continued to improve efficiency as the market continued to experience healthy infrastructure and broad construction activity. The business has been highly successful at integrating acquisitions such as Dormer’s and Everyday (Dubbo and Cobar) to cater to existing strong customer demand and consolidating our position.

Coates Hire Southern was a different story completely. FY2005 saw a significant step up in their presence in the Melbourne market with the acquisitions of Western Access, Hi-Tower and Lilydale Hire. The contribution from these businesses added to an exceptional result and the business is well placed to capitalise on future opportunities.

With exceptional activity levels in the resources sector Coates Hire Western managed to eclipse its strong first half performance to post a record result. In addition to resources, shut-down projects and non-residential construction continue to provide the region with a strong deal flow and healthy outlook.

During the period we acquired Preston Hoists which transformed Coates Conrent into a full service east coast man and materials hoist business while its underlying performance maintained the positive trends set in the previous year.

Our other specialist businesses, Coates Shorco and Coates Prestige, had great years with impressive gains in return on investment as revenues were extracted from expanded capacity. Coates Prestige is gearing up for a major role in delivering the Melbourne Commonwealth Games in March 2006.

During the period we saw a change of government in Indonesia and a growing stability and optimism in the economic and political outlook. As a result Coates Hire Indonesia has experienced a satisfying business turnaround but there is much work still to be done. During the period the business operated on a break even basis (compared to a loss last year) and stands ready to leverage the introduction of Allied to the customer base and the growth in the Indonesian Offshore oil and gas business to underpin a move to profitability.

Coates Offshore, our UK based business as it is now known has sharpened its focus on the offshore oil and gas sector and restructured to meet customer demands. The results have been spectacular. Despite a reduction in hire sales from £14 million to approx. £7 million, net profit after tax grew by almost £700,000 and EBIT margins are well ahead of Group averages. The business is investing in enhanced fleet that can be deployed anywhere in the world and continues the diversification of revenue away from the traditional North Sea base.

// Outlook 

Three environmental factors were instrumental in delivering our strong result:

Firstly, the continued strength in the Australian economy driving non-residential and engineering construction combined with the accelerated delivery of infrastructure projects through public-private partnerships;

Secondly, the boom in the resources sector driven by demand for iron ore, thermal and coking coal and precious metals, particularly from North Asia, is driving demand for our services from mining companies and contractors struggling to keep up and;

Thirdly, increasing demand driving high energy prices have caused a surge in exploration activity in the oil and gas sector and a move towards previously marginal deep water fields that require the services of our Offshore operations.

We do not expect any of these factors to change in the short term and our opinion is backed up by independent external forecasters such as BIS Shrapnel and The Construction Forecasting Council who predict that the construction growth cycle still has significant room for growth and AME who predict that the total volume of earth to be moved (overburden and ore) in the mining sector will grow annually for the foreseeable future – this is the key indicator for growth in the Allied business.

Our own internal forecasts may not be quite as bullish as we believe infrastructure bottlenecks and resource constraints will cause a longer flatter cycle however we do believe that each of the next 4 – 5 years will be bigger than the year just passed. We are basing our investment decisions on this medium term outlook however we have the flexibility to adjust should our forward indicators change.

We have improved both our efficiency and our ability to service a wider range of customers, in a wider range of places with a broader and deeper range of equipment. We have upgraded our IT systems with the roll-out of CHERP (Coates Hire Enterprise Resource Planning) which has reduced our transaction costs and we will continue to invest in CHERP add-ons and other IT enhancements. We will continue to improve our sales and marketing effectiveness through improved customer understanding underpinned by effective Customer Relationship Management tools and systems and we will leverage our sponsorship of the Melbourne 2006 Commonwealth Games to capture the value that hosting a world class event provides.

The future for Coates will be based on consistent growth, greater diversity of income streams and improved profitability. We will further strengthen our position as market leader in the $3 billion equipment hire market and are strategically positioned to take advantage of business opportunities as they arise. We intend to continue to grow shareholder returns and look forward to keeping you informed on our progress as we deliver on our promises during FY2006.