U.S. Markets closed

Edited Transcript of CDD.AX earnings conference call or presentation 21-Aug-19 10:59am GMT

Full Year 2019 Cardno Ltd Earnings Presentation

FORTITUDE VALLEY, QLD Aug 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Cardno Ltd earnings conference call or presentation Wednesday, August 21, 2019 at 10:59:00am GMT

TEXT version of Transcript


Corporate Participants


* Ian Ball

Cardno Limited - CEO, MD & Director

* Peter A. Barker

Cardno Limited - CFO & Joint Company Secretary


Conference Call Participants


* Fleur Graves

First Samuel Limited - Investment Analyst

* James Lawrence

Morgans Financial Limited, Research Division - Analyst




Ian Ball, Cardno Limited - CEO, MD & Director [1]


Thank you, Lexi, and good afternoon, everyone. I'm here in Sydney today with Peter Barker, who's my CFO, and we're going to spend about the next hour talking about our FY '19 results and also our proposed demerger of our QMT ( sic ) [QTM], quality materials and testing business. The presentation is online available. So I'm not going to propose that I present every point on every slide. We're going to run through this at a fairly good clip. I'm going to ask Peter to handle some of the financial sections on the agenda, and we'll move through it and allow time for questions at the end.

So on Slide 2, we are going to run through it in 3 parts: a brief overview of performance for FY '19; a more detailed look at the financial results for FY '19; and then spend some time at the end talking about the proposal to demerge Intega, which will be a new name for you, which is the proposed name for the demerged new entity, which will be listed on the ASX if it achieves shareholder approval.

Moving on to Slide 3 and getting straight into it. In terms of our performance for the year, we had an FY '19 underlying result of earnings before interest, tax, depreciation, amortization and impairment of $62 million. Around the half year mark, we gave guidance of $60 million to $63 million. So we're very pleased to come in at the top end of that, and that is the third year in a row where we've hit that guidance. We believe that's very important to provide that consistency as we move forward with the business.

In terms of some of the highlights of those results, and Peter will get into that in more detail, we're very pleased that our net fee revenue increased 17% on prior year. The EBITDA result was 10% up on prior year as well, which, given some of the volatility that we had in our businesses, we were very happy with. Operating cash was a good result at $40 million, a good conversion of that EBITDA result.

You'll also know that during the year, we completed 4 acquisitions: TGM in Regional Victoria; DDAI in Florida; Raba Kistner in Texas; and SureSearch also in Australia. Our balance sheet, we believe, remains strong, and we're very thankful for the lenders on the call for renewing our debt facility and positioning us for growth moving forward.

I'll get into some of the divisional performance in more detail on the next slide. I would say that the other result that we're really happy about is that growth in the backlog, which is 50 -- nearly 15% up. And we think that, that's going to position us well moving forward into the future.

On the next slide, I'll talk a little bit more about the divisional performance, so on Slide 4. In Asia Pacific, that's probably been the most challenging of our businesses in FY '19. We started the year with 2 divisions in Asia Pacific, Asia Pacific North and South, and that really wasn't getting us to where we wanted to get to in terms of making the operational improvements in the business.

So in January, we consolidated those 2 divisions into one under a single leadership team. We took out some overhead costs, and we've really been able to drive some operational improvements, implementation such as things that's focusing on our key accounts, 25 key accounts, introducing a project management framework and putting in place an Australian pricing model.

And these things were implemented at the back end of the year, and we expect to see benefits from those as we move forward. But we're in much better shape, much better control of that business moving forward and our focus there is on margin improvement.

In the Americas, we're really happy with FY '19. We had a really good year from a revenue and profitability perspective. Margins continue to increase. And actually, we've got 2 specific business units that weren't performing well in that business. Actions are underway to address one of those, and actually, one of those is implicated by the proposed split. But we're very confident that we are going to see increases in margin going forward in that business and parts of that business are really hitting their straps.

International development, obviously, a low-margin part of our portfolio, but it absolutely hit our expectations. Again, strong revenue growth, and although the margin was low, it was planned to be low because we were investing in that business. And as you can imagine, we hit some choppy waters. Part of our business there is exposed to the U.K. and the U.K. government spend on development. And with Brexit, that was a massive distraction that stopped a lot of projects being awarded. That is pent-up demand, and we expect to benefit from those awards coming on-stream when eventually, and hopefully, Brexit will be sorted out.

Construction science had a very strong year, very strong performance, a leading testing business in Australia. Revenue up very strongly, double-digit margins. I'm very happy about the performance of that business in Australia.

PPI is a business that's undergone a complete change in its business model. It's now hitting its straps and again, strong improvement in revenue. It's a profitable business now. It's turned the corner, and it has a very strong backlog and good growth opportunities.

And in Latin America, we continue to work through the case with Caminosca in winding up that business. And we have another business, Entrix, which is just a solid performer and continue to be that way throughout FY '19.

Moving forward to Slide 5 to some of the key focus for us during the year, and a lot of this will continue into next year as we look forward. About some of the key themes that we're working on in the business, safety is and always will be a key focus for us, and we had really good improvements in our safety metrics during the year. And PPI business, I just mentioned, is really exceptional in its industry. We've had a 0 TRIFR in that business for the last 3 years. So we're very happy about our safety metrics and the investment that we continue to put into what we call our Zero Harm culture.

The next 3 areas are always very important in our business. We talk about client excellence, people excellence and delivery excellence, and these are themes that the business is now really embedded all throughout our business. What does client excellence mean? It means a real focus on our clients and actually a shift away from being a project-focused business to being a client relationship-focused business. So putting in key accounts, key account leaders, investing in business development. We already have a pipeline tool that's embedded in the Americas and we're rolling that out into Asia Pacific. We're focusing on collecting more independent feedback on clients on quality that gives us important feedback so that we can continue to improve. And we're really imbibing the business with a focus on clients rather than just technical prowess which we have in the spades.

On people excellence, people, obviously, what we -- what is the makeup of our business. Our people are what we sell, and we really need to bring our people management to a new level like top professional services firms. In order to do that, we've been investing in our people programs. A new employee value proposition is being rolled out at the moment. We spend a lot of time thinking thoughtfully about our parental leave policies and have just launched the Domestic and Family Violence Leave program. We're focusing the leadership team on more authentic leadership for more engagement of our people. We're putting in place career path development, and there's a long list of other things that we'll continue. So turning up the dial on people development.

On delivery excellence, I've already talked a little bit about this, but I think, in particular, we're looking for margin improvement in both the Americas and in the Asia Pacific business. We believe that those businesses should be double-digit businesses. They have been in the past and we will return them to that level of performance. That means more discipline around delivery excellence. So we've put a project management framework in place in APAC. We're getting much smarter about how we manage our margins, and also, we're thinking about how we use our center in Manila to leverage lower cost resources to expand our margins in that way, similar to what our competitors are doing.

And then in business structure, as I said, we combined APAC North and South. Back in January, we integrated the TGM acquisition, which was very strategic for us because it gave us exposure to Regional Victoria, similar to the regional businesses that we have in New South Wales and Queensland. And I'm very pleased to say that we fully integrated that into our Victorian business, and that is performing very strongly.

And then finally, SureSearch, which was more a testing type business or quality management and testing type business, we've realigned that with our Construction Sciences business out of our consulting business in APAC.

Moving on, and I'll be very brief on this slide. Some of the -- on Slide 6, some of the functional areas where we've got activities, just taking some. On finance, I think one of the things that I reflected on coming into the business was that we had great information looking back, but we're really trying to build a better information set to give us headlights into the future so that we can be more effective as a management team in taking action about our business and reacting to market changes. So we're using Calumo analytics to give our leaders better dashboards into the future performance of the business.

HR, one area that I'd like to highlight is our gender payback -- pay gap. We had big improvements in our gender pay gap, and we're much better than our market peers in this respect in both our Americas dollar pool and our Australian dollar pool. And in our ID business, we're pretty much close to 0 on gender pay gap already.

Another big investment for us and focus for us in FY '19 was the appointment of Chief Digital Officer, and we have absolutely commenced our digital transformation. So we have new digitization of offerings going out to clients. We've recently innovated a new one, which is a drone-based infrared camera that can detect underground leaks and saves our clients lots of money in digging up holes looking for leaks, and we've already got 4 clients for that.

We will continue to build out a portfolio of global digital tools that we can use in our businesses in APAC and the Americas, and that's well underway at the moment. And we're also looking at our enterprise systems and making those more cost-effective as we move forward. So we'll see some changes there.

And I think with that, I'll move on to the next slide, Slide 7. So this really brings us into the detailed financial review. And for that, I'm going to pass over to Peter to take us through more detail behind the numbers.


Peter A. Barker, Cardno Limited - CFO & Joint Company Secretary [2]


Thanks very much, Ian. And before I kick off, a quick shout-out to my finance team who are listening from various parts around the world, who have really worked incredibly hard to get the results together and get them out. So a big thank you, and I won't use up too much of your time, and you can get back to work. Okay.

So in terms of the results, as Ian said, our underlying EBITDAI was $62 million, consistent with guidance. What we have on Slide 8 is a number of the key metrics that we look at. Now clearly, our statutory result was a loss after tax. And I've got a walk in a couple of slides that takes you from the EBITDA down to that loss after tax. The primary driver, of course, was the noncash impairment or impairment charge that we took in Asia Pacific, which we announced to the market in June.

Pleasingly, our operating cash flow is down on last year but it still reflects a really good performance in terms of debtors management and WIP management and cash collection. So it was pleasing to see our business continues to focus on that. Last year was extraordinarily good associated with the timing of some large client payments, i.e. debtors' receipts, and I'm really quite pleased with the result for this year.

Slide 9, I won't pause on because this is the half-by-half view of our results for the year.

Before then moving on to Slide 10, which is, as I said earlier, this is the bridge from our EBITDA (sic) [EBITDAI], which is what we have guided the market on at $62 million for the year.

Depreciation and amortization. So amortization, 2 large -- 4 acquisitions this year, as Ian referred to, 2 of them quite large, being Raba Kistner in Texas and TGM in Regional Victoria. And with them came a decent amount of specifically identified intangibles which, of course, are amortized. And included in that $27 million of depreciation and amortization is $5 million of amortization expense associated with those acquisitions which -- both of which came through in December 2018.

Finance costs are up slightly associated with the new debt facility, which we renewed in November, November, December. And obviously, we purchased Raba Kistner and TGM, primarily debt funding as well as using some of their own cash resources.

So our NOPAT was $16 million and then that noncash Asia Pacific domestic impairment or goodwill -- charge against goodwill of $46 million that I referred to earlier and then other expenses of $13.9 million including cost of acquisitions and a foreign tax credit charge.

Moving on to Slide 11, which is the world as Cardno's world today. Now this is before the proposed demerger that Ian spoke to and will speak to again a little later. So as has been the case with Cardno for quite some period of time, our -- the vast bulk of our business is in Asia Pacific and primarily Australia and the Americas and primarily the United States. And then we do -- we are involved in 20-plus countries around the world, but the vast bulk of our business is in those 2 geographies.

Moving through to Asia Pacific on Slide 12. So as Ian alluded to earlier, Asia Pacific really had a tough year. So as you can see there, margins are down. So FY '19 margins are down on '18 and '17. So 2 primary drivers. Firstly, as we've spoken to for some period of time, we had a number of major projects, so large revenue. And large revenue equals -- or large contract size equals very high utilization, staff utilization projects in the past. We don't have them in our business this year. And as Ian said earlier, we have set the business to the right shape going forward such that our business -- it will be great if we win major projects, but the business is structured. The Asia Pacific leadership team has structured their business such that it can run successfully going forward without major projects. And as and when we win any, then we will upscale accordingly. So the business is well set, albeit coming off a tough FY '18.

You can't see it in our overall group numbers, but -- because we don't break out cash flow by division, but I was very encouraged that the management team within Asia Pacific, their focus on balance sheet management, debtors -- with conversion to debtors and debtors to cash was very encouraging.

In the Americas, the Americas has had another good year. They have excellent momentum in the vast bulk of the business. Revenues, as you can see, they are up, as are margins. And there is the opportunity for this to improve in the future. Now the Americas has 3 areas within it, being sites and environment, our government services business and our infrastructure business. Varying parts of all 3 of them are performing extremely well and that business is well managed. It's disciplined and it's reaping the benefits of the investments that we made, that the company made a number of years ago. And as you can see, the Americas here today, in FY '19, if you look back at where they were in FY '17 and compare that, say, with where we would like to see Asia Pacific move, it gives you an indication of the potential of the business holistically in Asia Pac. And it also shows you how careful investment reaps rewards, but it is a 24-month journey as we are seeing in the United States.

Moving on to Slide 14, International Development. So as we've been saying for a year now, their margins are down on history but it's exactly where we need it to be. So we don't talk about our budgets externally to the market because the bulk of our competitors are privately owned. But International Development, that result there is pleasing compared to our internal targets. And that business, as Ian said earlier, has some headwinds in the Northern Hemisphere but has also had a very good year in spite of that. And it's pleasing to see them enter FY '20 with another year of very good backlog. So we're quite encouraged, again, by the progress with the International Development business.

Construction Sciences, which is on Page 15, which is a demonstrably larger business today with the acquisition of Raba Kistner in early December. Raba Kistner is a San Antonio, Texas-headquartered -- amongst other things, construction materials testing business. Broadly, it's quite similar to our Construction Sciences business in Australia. And Ian's going to talk to the structure of the go-forward business subject to shareholder approval in a few slides.

But Construction science, is pleasingly -- yes, its revenues and its EBITDA is up associated with the acquisition of Raba Kistner. Equally, as pleasingly, it would have been up anyway through organic growth, which is really encouraging. That business is -- it has tailwinds structurally in both Australia and the United States and it is -- it also is benefiting from ongoing business discipline and indeed, investment decisions made a few years ago.

On to Slide 16, our portfolio of companies, which are our Latin America business and our Oil and Gas business or quality assurance, quality control business in Texas, PPI. Now long-term investors or followers of Cardno remember that PPI was a lossmaker a few years ago. That business has turned around. It's profitable and it should start FY '20 in a very strong position, which is really encouraging. And absolute credit to that team for setting in place a strategy to diversify and to focus on midstream rather than upstream. And they are now reaping the seeds that they sowed, again, a couple of years ago and it is quite encouraging to see that come through.

Latin America, we continue to wind down our Caminosca business there, which slow and steady is the progress there. But we are making good progress, but it is a slow and steady process.

As Ian said earlier, 4 major acquisitions on Slide 17: DDAI in Florida; and TGM in -- sorry, DDAI in Florida and Trilab in Queensland in July; and then in December, TGM in Regional Victoria; and Raba Kistner in Texas.

Moving on to our balance sheet on Slide 18. Now remembering, of course, the balance sheet looks a little different with those 4 acquisitions flowing through the results, also the impact of the impairments you see in the intangible assets. Intangible assets come on through the 4 acquisitions, and you can see the specifics of that in the notes to the annual report, and of course, the $46.3 million impairment in Asia Pacific.

And our debt is up, less amounts paid. The surplus cash that we generated was used to retire debt, as has been the case for several years now. And so overall, the metrics for the balance sheet are encouraging.

Going through to Slide 19, these are those metrics in a little more detail. There -- in bold in the bottom half of that table are our lending covenants. And as readers can see, we are comfortably within our covenants across the board, and these -- the new covenants, we've got the new and the old there. So investors and stakeholders can compare them, and we're comfortably ahead of both. And the net debt position of $93.6 million at 30 June compares to $111 million at 31 December. So as I said earlier, our surplus cash is being used to retire debt. So there, you have it right here.

In terms of cash flow, as I said earlier, pleasing result for cash from operating activities, a little under $41 million, and you can see how we've deployed that in terms of borrowings, and also our modest share buyback continues with $21.5 million of stock bought back during the year.

With that, I'll pass back to you, Ian.


Ian Ball, Cardno Limited - CEO, MD & Director [3]


Thanks very much. So we're now on the third part of the presentation, and we'll probably slow down a little bit for this and talk about the proposed demerger of Intega, which will be a new name for you.

So where we're at on Slide 22 is that the Cardno Board proposes to consolidate Cardno's Quality, Testing and Measurement businesses and then demerge those businesses into a separate company, that's Intega, which will be listed on the ASX. So basically, one company, one Cardno today will become 2 companies. In the future, we will continue with Cardno and we will spin out a new business called Intega.

If you move -- or if you look lower down on that slide on the left-hand side, what is Intega. Intega, it will comprise of the Australian Construction Sciences business. It will also then add in Raba Kistner, the acquisition that we made in Texas. It will include PPI, the oil and gas business that we have. And it will take what we call UES, which is the underground, engineering and survey business that we have in the U.S. that used to be part of the consulting business in our Infrastructure division. We recently moved that internally out of our Infrastructure division in anticipation of this move and it now sits in the portfolio, and it will then serve to become part of the Intega business going forward, or at least that's the proposal.

What does that mean for what's left? Well, Asia Pacific Consulting, that business really doesn't change. So really, the impact of this demerger will have next to no impact on that business in terms of its structure.

In terms of International Development, the same there, no change. That business will not change.

The Americas Consulting business, last year, as I said, that included UES, and UES moves to become part of Intega. And that separation has already been announced and it's been moved internally and is ready then for that demerger subject to shareholder approval.

On the right-hand side, what does that actually mean for shareholders. So Cardno shareholders will receive 1 Intega share for every Cardno share that they have currently. There's no capital that we're raising as part of this demerger. And our largest shareholder, Crescent Capital, who currently owns 50.4% of Cardno shares, will own 50.4% of Intega shares should the demerger be approved by shareholders.

Cardno shareholders will be scheduled to receive the implementation booklet in early September 2019. So that booklet is making its way through the regulators at the moment, and we will issue that, as I say, in a couple of weeks' time. The proposed demerger will be voted on at the shareholder meeting on the 10th of October, which coincides with our AGM. And if it's successful, the Intega group will start trading on the ASX in around late October, early November. So that's the key details there.

Moving on to Slide 23. So why are we doing this? Well, really, in essence, the businesses -- it's become very apparent to me in the last year or so and probably others before that, that we've got really 2 quite different businesses here. They're different in terms of their operating model, their revenue model, the way that they -- the staff that we employ. The client set is quite distinct and there are very big differences between the 2.

So for instance, if you look, for example, at the Construction Sciences business, most of the business in Construction Science, from a revenue perspective, is generated on a per-test basis, whereas in the Consulting, in the Cardno Consulting business, we're obviously selling advice. We're selling projects. And our cost rate, it depends on hours and the mix of staff that we have working on projects. So we're really running in Cardno Consulting a professional services business. And in Intega and large parts of the Intega business, we're running a testing-based business.

Whilst we have some common clients, we also have quite distinct clients. And for instance, we have lots of small clients in Cardno Consulting. Intega tends to have fewer larger clients. And in many cases, they have multiyear contracts around big infrastructure projects. Now we have those too in Cardno Consulting but we also have a lot of small clients.

If you take, again, Construction Sciences, they run labs in the field that they set up on big infrastructure projects. They have lots of crews that go out in pickups, and they're basically sampling soil, sampling concrete, bringing those back to the labs, whereas, as you can imagine, in the Cardno Consulting business, yes, we have field work, but a lot of the work that we do is back at our offices. So there's really quite distinctive differences between the business, their consumption of capital and the profiles that they have in the markets that they serve. And what we wanted to do here is give investors a much cleaner view on those businesses so that they can really decide how they want to allocate their capital between a testing business and a consulting business.

So we think it's a cleaner split and it makes the Cardno business easier to understand going forward because we are aware that we've got lots of different businesses that can be quite complex from the outside to understand.

In terms of Page 24, what are the advantages of the demerger. I think that what it will allow each business to do is rather than being a business that contains 2 very different businesses, it will really allow them to focus on what's right for their particular business. So they can really develop a culture that's aligned with the Intega business or the Consulting business and really focus on improving operations. So operational improvement in consulting is a very different set of actions to operational consulting in a testing business, for example.

It will allow our investors to choose between 2 different businesses exposed to different markets, which might suit their investment strategy, and they can allocate their capital accordingly between those different businesses. The businesses will have different Boards and different management teams, and I'll come on and talk about that in a second. And therefore, they can raise their own capital and focus on different strategies moving forward. And the capital structure of the businesses will be quite different as well. And finally, the Board has supported this, and we also have the support of an independent expert who's looked at this.

Now moving on to Slide 25, what does that actually look like? So on a pro forma basis, if the split went through, what you see on the right-hand side is basically what the business will look like. So Cardno Consulting, 4,500 staff; 125 offices around about; $960 million of revenue; $38 million of EBITDA and 3 divisions.

So Asia Pacific, as it is today, pretty much untouched. Americas, with the UES business taken out of it, 1,200 people, 86 offices. And International Development, again, untouched.

What does that look like for Intega? Intega, 2,000 staff, just over 100 locations, $420 million around of revenue, $30 million of EBITDA. And then 2 divisions in Intega: the Americas business, about 1,100 staff and 49 different locations; and the Asia Pacific business, 850 staff and 52 different locations. So that really is how the businesses look.

In the next couple of slides, we've just got some information on the more detailed split-out. And I'm going to skip through those and really get to the corporate governance discussion, which is on Page 29. So as I said, different entities, as proposed. That means different board structure, different management team.

So on the Cardno Board, Michael Alscher will continue as our Chair, and we will continue with Jeff Forbes, Rebecca Ranich, Steve Sherman and Nat Thomson as our Board of Directors. You will notice that Neville Buch comes off the Board, and he actually becomes Chair of Intega. Michael also will sit on the Board of Intega, as will Jeff and will Steve.

I will continue with Peter to lead the Cardno Consulting business. And Matt Courtney, who's the very seasoned and very successful CEO of Construction Sciences, will become the CEO of Intega, supported by Shael Munz, who's the CFO. And both of those guys are already basically essentially running pretty much the portfolio of what will become the Intega business.

Matt himself has been a CEO since 2016, running Construction Sciences business. And you will have seen from the results that we just presented, he's running that with great success. There's a profile of Matt and of Shael on Page 30. I don't propose to go through that in detail.

But with that, I think what we will do is end the formal presentation part of the call. And Lexi, I think that we can open the lines up for questions now.


Questions and Answers


Operator [1]


(Operator Instructions) Your first question comes from James Lawrence with Morgans.


James Lawrence, Morgans Financial Limited, Research Division - Analyst [2]


I was just wondering if you could talk through the Asia Pacific margins. Obviously, you said that they've been depressed and you're targeting double-digit levels. How should investors want to think about margins going forward excluding the large contract wins that you talked about?


Ian Ball, Cardno Limited - CEO, MD & Director [3]


Yes. Thank you, James. It's a really good question, and it's obviously a key area of focus for us because we're not happy with where the margins are. So let me talk about some of the actions that we're taking to improve the margins. So I think the first one is that we're still yet to see the full benefits of the consolidation of Asia Pac South and Asia Pac North. And we've taken out cost, primarily overhead costs in that area. So that will be the first point.

The second point is that as those large projects are being run off, we're finding ourselves, as Peter said, with excess capacity. We actually took out a fair amount of capacity in June, and you won't have seen any impact in the FY '19 numbers from that at the moment. But we are running at a lower run rate on our billable cost structure and we'll carry that through into FY '20. So that's the second point.

The third point is if we look around at our competition, we see our competition delivering around about 15% to 20% of their work in Australia through offshore resources. And currently, we do very little. Our number is closer to 0%. So we do think there's a big opportunity, particularly as we have a Manila location, to leverage offshore resources. And that really goes hand in hand with the digitization of our business. So what used to be old-fashioned drafters are now in this parlance BIM modelers. And we see this as a real opportunity to deliver a center of excellence out of Manila and leverage our cost structure to have A, a more competitive price in the market but be actually a better margin as well. That's the third point.

And then the fourth point is that we have 6 large deal opportunities in our pipeline. And we can't announce it yet formally, but one of those we already have a very strong indication from a verbal perspective that we have won, and we have 5 others that we are looking at coming up in the next 12 months or so. So for all of those reasons, we believe that we have a real opportunity in APAC to improve our margins as we move forward.


Peter A. Barker, Cardno Limited - CFO & Joint Company Secretary [4]


And James, so just to support what Ian was saying there, look, it would be wrong to put a number on it. But suffice to say, a generally accepted industry practice as to what is best practice is -- in Australia is circa 10%, and you can see that our business has been in there in the past. The question you're going to ask is can you get there and when can you get there, and time will tell. It would be inappropriate for us to put a time frame on that but it gives you an idea of how we're thinking about it.


Operator [5]


(Operator Instructions) Your next question comes from Fleur Graves with First Samuel.


Fleur Graves, First Samuel Limited - Investment Analyst [6]


Just a question with regards to depreciation and amortization. I guess there's a fairly big jump year-on-year, about $11 million driven by construction services. You mentioned earlier about a $5 million amortization expense from acquisitions. I guess, I'm just trying to get my head around that. And in particular, I guess, where I'm heading towards is what -- how do I think about CapEx going forward.

And then a second question, and please don't take offense at this one, but just trying to understand a bit about PPI. The turnaround is obviously very positive in that business. Just doesn't feel like it quite belongs in either of the to-be-listed companies, either Cardno or in the testing business. Has that been considered for trade sale, for instance? Or am I thinking about that one incorrectly?


Peter A. Barker, Cardno Limited - CFO & Joint Company Secretary [7]


So thanks, Fleur. It's Peter here. I think I'll take the first one, and then I'll pass over to Ian to take the second one. So look, as I said a little earlier, and if you want to have a look at Note 12 in the annual report, you can see the identified intangibles that came through on our -- through the companies that we acquired. So there's some $17-odd million in intangible assets acquired, specifically, customer relationships, as well as a further $13 million in customer contracts that came on during the year. They obviously typically get amortized over anywhere between a 3- to 5-, possibly a bit longer year process. So that's that marked increase in amortization that you're seeing in the results.

You also can get a feel for the depreciation expense. If you just want to add up Note 11, you can see the depreciation expense come through there. So yes, as I said in that bridge, which is on Slide 10 of the investor presentation, it's up but the vast bulk of the increase is associated with amortization of identified intangibles together where, obviously, our balance sheet, is a bit bigger with the entities acquired. And again, if you look at the acquisition notes, you get a feel for what's come on. I'll just pause there and pass to Ian and -- to address your second point and -- before I see if there's any follow-up.


Ian Ball, Cardno Limited - CEO, MD & Director [8]


Yes. Great question, Fleur, on PPI. No offense taken whatsoever. The Q in QMT is quality, and that's what that business focuses on. So essentially, what it does in PPI, the new business model for PPI is they work for primarily very large oil companies and they look at critical components that are being manufactured for those oil companies.

So think about an oil rig and a drill set, and they're actually going in as the independent quality auditor into the manufacturing process of those key components and actually testing and independently verifying the quality of key components, which then get shipped out to large oil companies in very remote locations.

So we do share clients. So we work -- we do other stuff for large oil companies across our business. So there's a sharing there, and there's absolutely a sharing in the way that we are posting out our people to different locations and the whole quality management, quality audit type operational process, which is very close to the testing business that we have.

So there are synergies there. But I would agree it's not -- it's definitely a distinct part. The quality part is somewhat distinct from the testing part. But in an operational perspective, in how we manage that business, there are similarities there, but I take your point.


Operator [9]


There are no further questions at this time. I'll now hand back to Mr. Ball for closing remarks.


Ian Ball, Cardno Limited - CEO, MD & Director [10]


Well, thank you very much, everyone, for attending the call. I hope you're as excited as we are about the prospects for the business. As we say, obviously, we have a shareholder vote coming up for the proposed Intega demerger. And again, I would like to thank the lenders on the call who are supporting us through this process and also welcome the coverage that we'll be getting in the coming months. So thank you very much, everyone, for the call. And with that, I will end it. Thank you.