Last year I said that in 2007/08 and looking forward it was not business as usual. I said that several extraordinary external factors had coincided to create a particularly challenging business environment. In 2008/09, those external market challenges intensified, with the global recession having a significant impact on Boral's US and Australian markets, and in Asia.

The synchronised downturn in market activity has required a comprehensive response to lift performance in the short-term and to position the Company well for an inevitable recovery and for long-term growth.

Market challenges intensify in 2009
In January 2009, we foreshadowed to the market that our second half earnings would be well down on the first half as a result of an anticipated deterioration in market activity in the USA and Australia. This is precisely what happened.

Fortunately, the Australian infrastructure market (predominantly roads, highways and bridges) remained strong during the year, supported by government spending. Activity in Boral's other major markets deteriorated significantly. The market downturn was particularly severe in the second half of the year.

Boral's reported sales revenue of $4.9 billion for the year ended 30 June 2009 was 6% lower than last year. Boral's underlying profit after tax (PAT) of $131 million, before significant items, was 47% below last year's underlying PAT of $247 million but was 9% above Boral's January guidance.

Australia
Australian dwellings were down by around 18% to an estimated 130,000 starts in 2008/09. Dwelling starts in the first half were running at around 144,000 per annum, and in the second half activity declined to around 116,000 starts on an annualised basis. This compares with BIS Shrapnel's forecast of underlying demand of 183,000 starts per annum for the past three years.

Non-dwelling approvals, which indicate the level of forthcoming commercial construction, were down by around 25% with project cancellations and deferrals increasing as weaker business confidence was coupled with funding constraints and increased borrowing costs.

Approvals for the construction of dwellings and non-dwellings were down in all states during the year. In Boral's largest state market, New South Wales, approvals for dwellings were down 26% and non-dwellings value of work approved was down by around 28%. Housing activity in New South Wales remained the lowest it has been in more than 40 years.

In Australia, Boral's production output has been slowed to match sales demand and to reduce inventory. We have suspended production at several operations, including the Walcha timber mill, our lime kiln at Galong, Midland Brick's Kiln 8 and the Kempsey brick plant, and we have continued a program of temporary and extended plant shutdowns and slowdowns.

Boral's Australian Building Products revenue of $1.3 billion was down 6% and EBITDA of $98 million was down 41% due to significantly weaker market conditions and reduction of inventories, particularly in the June half. Higher manufacturing costs resulting from plant slowdowns and shutdowns had a significant adverse impacted on profits. Construction Materials revenue was down 5% to $2.8 billion, reflecting lower volumes and lower Quarry End Use (QEU) revenues offsetting benefits from price increases and higher asphalt volumes. Construction Materials EBITDA was down 3% or $14 million on last year to $475 million including QEU earnings of $47 million which were $7 million lower year-on-year.

USA
In the USA, housing activity continued its dramatic decline. Housing starts were down 42% to 650,000 starts in 2008/09. In the first half of the year, housing activity was at an annualised rate of around 765,000 starts while in the second half it deteriorated to around 535,000 starts per annum. Over the past 50 years, US housing starts have averaged 1.5 million starts per annum and underlying housing activity is estimated to be around 1.8 million starts per annum.

We operated our concrete roof tile plants at around 20% of capacity in the first half of the year and lowered this to 12% in the second half. Similarly, capacity utilisation in our brick plants averaged 30% during the year with second half utilisation around 20%. At year end, eight of Boral's 23 brick plants were mothballed and a further six temporarily closed until market demand recovers.

We are operating at record low volumes in the USA and are well below the break-even point. With revenue down 33% on the prior year to US$406 million, the US business reported an EBITDA loss of US$45 million (or A$61 million in Australian dollars), which compares to a US$10 million (or A$11 million) profit in the prior year.

The US business moved from a position of profitability to reporting a loss once the market had fallen below around 1.1 million housing starts. Through a significant cost reduction program, we have reduced the break-even point of the business; it should return to an EBIT profit when the market exceeds around 900,000 to 950,000 housing starts per annum.

Asia
In Asia, Boral's key market exposures are in South Korea,Thailand, Indonesia and China. The global economic downturn impacted Asian construction activity from the September 2008 quarter. Various governments in Asia, notably China, have announced major stimulus packages to counter the economic downturn which should be favourable for future construction.

Pleasingly, revenues from Asia increased by 15% to A$219 million, reflecting significant price increases that were necessary to recover input cost increases. EBITDA from operations in Asia increased to $30 million from $16 million last year reflecting significant operational improvements and price gains in construction materials despite lower volumes and difficult market conditions. Results from Boral's 50%-owned plasterboard joint venture, LBGA, were weaker in the first half but pricing improvements and a significant cost reduction program offset lower volumes and cost pressures during the second half.

Responding to the downturn by lifting short-term performance
Our response to the significant synchronised downturns in Boral's markets has been to substantially decrease production to match sales and to manage inventories, together with a disciplined approach to pricing, widespread and rigorous cost reduction initiatives, a focus on improving cash flow and substantial constraints on capital expenditure.

The $195 million of cost reduction benefits delivered during the year represent a record 4.5% reduction in compressable costs. These benefits are being delivered through a range of initiatives including: reductions in overtime and labour hire; streamlining of management and administration functions; improvements in logistics, concrete and asphalt mix designs, and quarry yields; increased use of alternative fuels and materials; and rationalisation of transport depots and distribution branches.

In the USA, we have rolled out a comprehensive US$94 million cost reduction program which delivered US$49 million of benefits in 2008/09. Further incremental benefits in excess of US$24 million have been targeted for 2009/10 (including Boral's 50% share of MonierLifetile). The size of these additional savings will be dependent on market activity levels but will be based on a further reduction in the workforce, improved manufacturing processes and lower procurement costs.

A disciplined approach to price management has also been critically important in lifting performance through the downturn. Prices increased in most businesses in 2008/09 with $165 million of benefits delivered from price improvements, the largest year-on-year price lift in at least 10 years. Our pricing focus in the first half of 2009/10 will be to gain full traction from previously announced price increases and where possible implement new price increases. For example, concrete, quarry and cement price increases that were announced effective 1 April 2009 are continuing to be realised. Price increases of 6% have been announced for bricks and pavers in New South Wales and Queensland to take effect from 1 October 2009 and a similar increase was implemented in Victoria effective 1 July 2009.

With increased focus on cash management, managing working capital and reducing capital spending has been a priority. While operating cash flow decreased by $163 million to $419 million over the year, cash flow of $278 million in the June half nearly doubled the cash flow of $141 million delivered in the December half.

Capital expenditure has continued to be significantly wound back, with growth and acquisition capital expenditure reduced by 76% to $77 million. Stay-in-business capital of $163 million was $6 million lower and remained at around 62% of depreciation levels. Several new growth investments have been delayed until markets and cash flows recover. We are, however, continuing to monitor and assess growth opportunities that will create shareholder wealth through the cycle.

Boral's balance sheet is in a relatively strong position at the bottom of the cycle with gearing (debt/equity) of 55%, well within Boral's target range of 40%-70%. Boral's liquidity is strong and should continue to sustain us well through the downturn; we have around $820 million of undrawn committed facilities at 30 June 2009 and no material refinancing requirements until August 2011.

Outlook for 2009/10

While forecasting remains particularly difficult in the current economic climate and Boral's businesses have developed plans that allow for a range of market outcomes, we expect that 2009/10 will be another year of challenging market conditions.

In Australia, Boral's Building Products businesses are currently producing at a rate to supply housing starts of around 120,000. However, the Housing Industry Association is forecasting a lift to around 145,000 starts in 2009/10 and BIS Shrapnel is forecasting a more significant rebound to 160,000 starts. Lower interest rates combined with improvements to the First Home Owners Grant have significantly improved affordability and flow through is expected from the social and defence housing component of the Federal Government Stimulus Package. Finance approvals for new dwelling construction have risen which will eventually flow through to building activity. Boral's production levels will lift to match sales increases as they eventuate and our Australian Building Products earnings are expected to lift in 2009/10 on the back of stronger volumes and improved pricing.

On the other hand, Construction Materials activity and earnings in Australia are expected to decline in 2009/10 due to the decline in non-dwellings and softer infrastructure activity. We anticipate QEU earnings to fall in 2009/10 to around $25 million to $30 million due to the downturn in the property sector and to be less heavily weighted to the second half than in previous years.

In the USA, it remains unclear when a turnaround in housing activity will occur. Many economists are forecasting a recovery to begin from late calendar year 2009. We expect US housing starts in the December 2009 half to be similar to June 2009 half starts, with a recovery occurring in the June 2010 half. Overall, we anticipate a broadly similar level of housing activity in 2009/10 as was experienced in 2008/09. Continued benefits from significant cost reduction programs across the entire business and increased second half sales and production volumes will reduce losses in the US in 2009/10, particularly in the June half.

In Asia, domestic building activity remains sensitive to the effect of the global recession, however, plasterboard volumes and profits will be more resilient as product penetration continues and a strong focus on better pricing outcomes and cost reduction programs is expected to continue to support margins. In Construction Materials in Asia we expect some volume and earnings pressures.

Across Boral's businesses, performance enhancement programs and step change initiatives of 4% of compressible costs have been targeted for 2009/10. Interest expense will be lower because of reduced debt levels. Capital expenditure will be further reduced and working capital will continue to be managed tightly.

Current market conditions are expected to broadly continue during the first half of 2009/10. Second half activity levels are expected to be stronger than in the December 2009 half but are difficult to forecast at this point in time.

We will provide a trading update at Boral's Annual General Meeting on 28 October 2009.

Positioning the Company well for the long-term

Despite the current depressed levels of demand, we have long-term confidence in Boral's markets. We support the view of Harvard University's Joint Centre for Housing Studies that underlying demand for new housing in the USA is around 1.8 million starts per annum. In Australia, according to BIS Shrapnel, underlying demand over the past three years has been around 183,000 starts per annum and over the next five years will be around 169,000 per annum, reflecting a reduction in net overseas migration.

Over the past 10 years, we have positioned the Company well to supply the market through the peaks and the troughs of the building cycles and to deliver strong returns when the market is operating at underlying demand and long-term average levels. We have invested in low cost modern capacity in higher growth markets and we have closed higher cost older capacity at the bottom of the cycle. We have grown Boral's distribution networks and stepped out into new markets and new geographies. A decade ago, Boral was operating in five countries; today, Boral has operations in 10 countries and a distribution presence in a further three. We have strong, cost-competitive resource positions that have strengthened Boral's competitive advantage over the past decade.

Over the past year, we have significantly reduced capital expenditure until markets recover. We are, however, moving forward with several capital projects. We are rebuilding the Artarmon concrete batching plant for around $12 million, which is critical to supply Sydney, North Sydney and Chatswood business districts; the Artarmon plant is expected to be completed in the June 2010 quarter and is benefiting from the Federal Government's Investment Allowance. In Western Australia, the construction of our previously announced new $44 million masonry plant to replace two existing plants was slowed but is now continuing; market growth and cost reduction benefits together with cash flows from the sale of the Jandakot and Cannington sites will result in strong investment returns. In Asia, LBGA is building a new US$48 million plasterboard plant at Baoshan in Shanghai, China, and a new US$43 million production line at Saraburi in Thailand, which are expected to be in operation by June 2010 and September 2010 respectively. These investments are being funded by the JV and are important to retaining LBGA's leading position in Asia and to supplying the strong underlying growth in plasterboard in the region.

Delivering our objectives through the cycle

When I took over as Boral's CEO and Managing Director nearly 10 years ago, following the demerger of the Company from Boral Energy (now Origin Energy), our goal was to reshape Boral into a focused building and construction materials company operating in Australia and increasingly offshore. This increased focus has made Boral more exposed to the cyclical highs and lows of the building industry but considerable shareholder value has been created as a result of the increased focus.

Over the past decade, we have had four financial objectives and, through the cycle, performance against objectives has been solid.

Our first objective is to deliver returns that exceed Boral's weighted average cost of capital through the cycle. Since demerger, Boral's EBIT return on funds employed has averaged 12.7%, which is above Boral's weighted average cost of capital.

Our second objective has been to deliver better financial returns than the competition in comparable markets. Pleasingly, Boral's financial returns continue to compare well with competitors in like markets across most businesses, and in some businesses where there was a performance gap it has closed as Boral has outperformed in areas such as cost and price management.

Boral's third objective has been to deliver superior total shareholder returns (TSR) for our shareholders. Despite extraordinarily challenging conditions and Boral's share price deteriorating in recent years as a result of the market driven earnings decline, Boral's TSR from share price appreciation and dividends was around 16% per annum over the nine and a half years since demerger to 31 August 2009. Boral's TSR performance is above average, ranking in the second quartile of ASX 100 companies over the period.

Finally, Boral's fourth and overarching objective is to deliver superior returns in a "sustainable way"; this means in a financial, human resources, environmental and social sense. From a cost, price and capital perspective, Boral is positioned well to deliver strong sustainable returns. Boral's non-financial sustainability measures have continued to improve over time, including safety. In 2008/09, a lost time injury frequency rate for employees of 1.8 was delivered versus 2.5 in the prior year and 9.0 in 1999/00 and 1998/99; contractor safety management has also improved significantly. This improved safety performance was better than our targeted performance improvement; however, it was tragically overshadowed by the death of an employee in Indonesia who was fatally injured in a heavy vehicle accident involving two concrete agitators in November 2008. This employee fatality was a tragic reminder of the risks we need to manage every single day and the importance of continuing to focus our efforts on ensuring a safe workplace for all of Boral's people. Further details about Boral's safety performance and environmental and social impacts can be found in Boral's 2009 Sustainability Report, which forms part of this Annual Review.

Boral's fifth changing of the guard

After 10 years as Boral's CEO and Managing Director, I will retire at the end of December 2009. I have had a personal goal of wanting to hand the business over in better shape at the end of my tenure than when I started. Over Boral's 63 year history, I believe that my four predecessors have done this.

I am confident that the underlying performance of the business has strengthened considerably over the past decade. This has better positioned Boral to weather the most severe downturn that we have witnessed in our careers. It also means that as markets recover, Boral's financial returns will dramatically lift.

I thank Boral's Management Committee and all of Boral's employees for their hard work, their persistence and their support during my time as CEO. I also thank the Chairman Ken Moss and the whole Board for their support and their invaluable counsel.

It has been a pleasure and a privilege to lead Boral over the last decade. I will hand over the reins to Boral's next CEO in coming months. I wish my successor the very best of success with Boral's future.

Rod Pearse, CEO AND MANAGING DIRECTOR