The main reason for the contraction in EGL's gross margin was the sharp fall-off in business in Italy. Although EGL Italia was able to boost sales locally, a number of one-off events contributed to a decline in margins. In early 2004 the Italian authorities set new price structures retroactive to the 2004 calendar year. Up until the summer months of 2004 EGL Italia was able to exploit the opportunities offered by this new price structure. But in the fourth quarter of 2004 this positive effect was reversed with a corresponding negative impact on margins. Since the start of the 2005 calendar year price structures have been fully synchronised, as a result of which the new tariffs will no longer have any impact.
In electricity transit business to Italy, a number of important factors also had a negative impact for EGL. Prices in the northern procurement markets rose much more sharply than selling prices in Italy. In addition, the introduction of new import charges coupled with the new delivery profiles depressed the margin on electricity exported to Italy via autonomous capacities.
The company's results were also adversely affected by the outage at the Leibstadt power plant. During this interruption, which lasted several months, EGL was forced to buy in significant volumes of electricity from other suppliers, sometimes at higher prices. At the same time it was unable to take full advantage of trading opportunities during the period when prices were high, which reduced company earnings by CHF 7 million.
Investments in building businesses
Personnel costs increased 6.7% on a 24.5% higher average headcount. Costs for materials and third-party services were down 2.2%, while other operating expenses were up 17.7%. The trend for all these expenses was within expectations. Project expenses associated with the company’s overall strategy had a corresponding impact on cost trends. We continued to expand our presence rapidly in various local European markets. This required additional capital spending, especially for the establishment of subsidiaries.
Operating profit as at 30 September 2005 thus came to CHF 103.5 million, a decrease of 49.3% versus the previous year. After depreciation and amortisation of CHF 21.2 million (+7.1%) EBITDA came to CHF 124.7 million. Before value adjustments, EGL's operating profit for 2004/2005 was down 44.3% on the year before.
Results well below prior-year level
At CHF 29.1 million, the contribution from associated companies was higher than in the previous year (CHF 23.8 million). The much weaker financial result of CHF 4.0 million (80.3% down on the previous year) is due to lower dividend earnings from investments in associates, higher interest expenses and the slight decline in currency gains compared with the prior period.
Weaker earnings resulted in a lower tax burden of CHF 12.1 million compared to CHF 44.1 million the previous year. After taxes and minorities, net profit for the year was down 36.2% to CHF 124.6 million.
Cash flow from operating activities came in at CHF 115.6 million, while cash flow from investment activities amounted to CHF -423.6 million. The negative net cash flow of CHF -319.8 million reflects the intensive investments made by EGL during the 2004/05 financial year.
Good progress in building up own assets
EGL's investments in new production facilities made good headway during the year under review. Two gas-fired combined cycle power plants are under construction in Italy; the first one is scheduled to commence energy production in the first half of 2007, the second one at the beginning of 2008. Approval, optional delivery contracts and financing have been received for two other projects in Italy, while two gas-fired combined cycle power plants are also in the early planning phase in Spain. EGL is also investing in two biomass power plants with partners in Spain. Last but not least, EGL is working on a project for a new natural gas pipeline across the Adriatic to Italy in order to secure transport capacities and to make the supply of natural gas for its gas-fired combined cycle power plants in Italy as economically advantageous as possible.
As a direct consequence of these investment activities, the company's equity ratio fell to 40.8% (compared to 51.2% the previous year), but is still at a high level.
Outlook
The business environment for EGL is unlikely to see any major changes in the 2005/06 business year. The development of a number of projects, along with the hiring of management and staff at power plants, will continue to have an impact on costs, while the growing costs of financing will depress financial results. Furthermore, the impact of the new regulatory conditions with regard to cross-border capacities of the Swiss high voltage grid from 2006 onwards is difficult to assess. Due to the numerous external factors at work, it is impossible to provide a more precise outlook. Nevertheless, in the 2005/06 financial year EGL expects to post earnings roughly on a par with those generated during the year under review. It also expects earning power to show a positive development over the long term, which is why the Board of Directors is proposing to the General Meeting of Shareholders that the company pays an unchanged dividend of CHF 15 per share.
Further information
Media:
Lilly Frei, Head Corporate Communications
phone: +41 (0)44 749 41 21
lilly.frei@egl.eu
Investors:
Andreas Rudolf, CFO
phone: +41 (0)44 749 42 68
