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Edited Transcript of CIM.AX earnings conference call or presentation 17-Jul-19 7:30am GMT

Half Year 2019 CIMIC Group Ltd Earnings Call

St. Leonards, New South Wales Jul 19, 2019 (Thomson StreetEvents) -- Edited Transcript of CIMIC Group Ltd earnings conference call or presentation Wednesday, July 17, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Justin Grogan

CIMIC Group Limited - Executive General Manager, Sustainability and IR

* Marcelino Fernández Verdes

CIMIC Group Limited - Executive Chairman

* Stefan Camphausen

CIMIC Group Limited - CFO

* Michael Wright

CIMIC Group Limited - CEO

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Conference Call Participants

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* Guillermo Fernández

Kepler Cheuvreux - Analyst

* John Purtell

Macquarie Research - Analyst

* Paul Butler

Credit Suisse - Analyst

* Christian Korth

HSBC - Analyst

* Nathan Reilly

UBS - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the CIMIC 2019 half-year results investor briefing. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, July 17, 2019.

I would now like to hand the conference over to Justin Grogan. Thank you, please go ahead.

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Justin Grogan, CIMIC Group Limited - Executive General Manager, Sustainability and IR [2]

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Thank you, Richelle. Good afternoon, ladies and gentlemen, and welcome to CIMIC's conference call to discuss our 2019 half-year results. I am Justin Grogan, Executive General Manager, Investor Relations and Sustainability, and I'm accompanied by Executive Chairman Marcelino Fernández Verdes; CEO and Managing Director Michael Wright; our Deputy CEO Ignacio Segura; and CFO Stefan Camphausen as well as several other members of our senior executive team.

Today we launched with ASX a media release, an investor presentation, and our 2019 half-year report. These documents are also available on our website.

This afternoon, our Firm will give you a brief run-through of our key figures, financial performance, and the outlook. At the end of the presentation, we will address any questions you might have. We have allowed about an hour for the call based on experience, but if we run out of time, we can follow up with a call off-line.

It is now my pleasure to hand over to Marcelino.

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Marcelino Fernández Verdes, CIMIC Group Limited - Executive Chairman [3]

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Thanks, Justin, and thank you to all of those joining us on CIMIC's 2019 half-year earnings call. Today I would like to start this call by highlighting a couple of the major infrastructure projects we have successfully completed during the period, including WestConnex's 1B M4 East, which opened last weekend, a $3.8 billion, 5.5-kilometer twin panel road project, and the metro northwest, which opened in May, the first stage of this country's largest public transport project, and Stage 1 of the 12-kilometer Canberra light rail project Pacific PPP, which began services in April.

These projects highlights our ability to consistently deliver both value-added solutions for clients and another good result for shareholders. They also reflect the talent, hard work, and considerable effort of our teams as they execute on our strategy and drive innovation.

Innovation, along with our other principles -- integrity, accountability, and delivery, all underpinned by safety -- are what we work and we live by and put us on a strong [foot-in] for the future. Looking forward, our diverse pipeline continues to grow and our balance sheet remains in a strong position to pursue strategic capital allocation opportunities as they arise.

Now let's move on to our key financial highlights for the first half of 2019 on slide number 2. As I mentioned earlier, we successfully completed a number of large (technical difficulty) and infrastructure projects during the period. These were complemented by the continued spend in our global mining and mineral processing business and the stable performance of our services business.

However, this was partially offset by a slowdown in the Hong Kong market, which impacted the otherwise good revenue growth. Hong Kong is coming off a period of elevated infrastructure spending and we are temporarily restricted from tendering for some work in the market. Pleasingly, though, margins at all levels remain solid.

This enabled the Group to deliver a net profit after tax of $367 million in the first half of the year. As a result, the Board has declared an ordinary interim dividend of $0.71 per share fully franked and payable on October 3, 2019. This dividend reflects our shareholder-oriented focus and equates to a payout ratio of 62.8%.

We have again delivered a solid cash-backed (inaudible) with operating cash flows of $1.8 billion in the last 12 months. This resulted in an EBITDA cash conversion rate of 87% over the same period and helped maintain our really robust balance sheet with a net cash of $1.4 billion.

We were also pleased to be awarded $8.3 billion of new work in the first half of the year, bringing our total work in hand to $36.8 billion. We remain disciplined in our approach to tendering and focused on the quality of work that we take on. The strength of our work in hand and inherent profitability in that work should help us to achieve our NPAT guidance of between $790 million to $840 million, subject to market conditions.

Turning to our operating performance on slide 3, the Group reported stable revenue of $7 billion (technical difficulty) in the first half of 2019 with growth in the mining and Australian infrastructure business. Our continued focus on project execution and cost discipline helped deliver steady EBIT, PBT, and NPAT margins. Overall, the Group achieved a profit before tax of $504 million and NPAT of $367 million.

An increase in net finance cost was driven by high levels of bonding due to growth in the Australian construction business and the successful closing of some PPP projects. Working capital initiatives also contributed to this increase.

The implementation of AASB 16 leases increased EBITDA and EBIT margins when compared to the previous period disclosure. But as we have previously disclosed, this is an accounting adjustment only and does not reflect any change to the Group's operations.

Now I would like to give an overview of the performance across each of our segments for the half year. Construction. Construction revenues were $3.6 billion and the segment reported a PBT contribution of $269 million. This performance reflects our disciplined approach to tendering, project delivery, and cost control. This result was achieved despite a reduced contribution from our Hong Kong operations.

The mining and mineral processing segment delivered another strong performance with revenues increasing by 16% to $2.1 billion and recording a PBT contribution of $236 million. Revenue in the Group's services segment was sustained at $1.2 billion and delivered a PBT contribution of $75 million.

In the Middle East, the strategic review of BICC is ongoing. CIMIC has provided additional financial support during the half, while BICC pursues the collection of outstanding legacy receivables.

Slide 4 shows our solid cash generation. In the last 12 months, CIMIC delivered $1.8 billion of operating cash flows. These helped deliver an EBITDA cash conversion rate of 87%. After several periods of elevated conversion rates, this development in the cash flow should reflect the evolution of our business and the markets in which we operate.

Some specific factors contributing to this evolution include: firstly, CIMIC has won numerous alliance contract over the last year, which have different working capital requirements as well as risk and return profiles to traditional E&C contracts. Secondly, in construction, we have completed a number of large Australian infrastructure projects, some of which I mentioned earlier. In these cases, the associated mobilization payments received in prior years are now unwinding. Also in the construction sector, the slowing of activity in the Hong Kong operations have been a contributing factor.

And lastly, the mining business has grown by 16% year on year, which has provided CIMIC with stable long-term annuity style income. But again, it has a different working capital profile which has to be handed.

As you know, we maintain a strict focus on managing working capital and generating sustainable cash-backed profit. The Group's gross capital expenditure of $341 million has again increased in the half as we continue to take advantage of [transient] opportunities that present themselves specifically in the tunneling and mining market. To finish the slide, you can see that CIMIC generated almost $1 billion of free operating cash flow in the last 12 months.

Turning to our balance sheet on slide 5, a solid cash generation helped CIMIC maintain its strong balance sheet position. We ended the period with a net cash position of $1.4 billion, representing a 5% increase on June 2018. At the end of June, CIMIC had $2.7 billion of undrawn debt facilities available. This available liquidity on our financial expense allows us to take advantage of strategic capital allocation and growth opportunities as they arise, including investing in PPP projects.

Last week, Standard & Poor reaffirmed the strong investment grade rating for the Group, which acknowledges our robust financial position. Standard & Poor's assessment took into account our factoring balance of a little less than $2 billion at the end of 2018 and concluded that overall, CIMIC's financial risk profile remains conservative.

At the end of June 2019, factoring remained at a similar level to December 2018. June 30, the Group's $675 million contract debtors provision remains unchanged. And the gross average cost of debt has declined 30 basis points year on year to 3.6%.

Turning to the next slide on page 6, which shows our well-diversified order book and extensive pipeline of opportunities. For the work in hand at June 30 was $36.8 billion, which is equivalent to more than two years' worth of revenue. Our operating companies' work in hand increased by nearly $2.5 billion or 8% year on year.

Driving this growth, we saw numerous major contracts awarded during the period. This increased to major PPP projects. Firstly, as a part of a consortium, CIMIC Group companies were awarded the $2.7 billion tunnel stations and development PPP package on Brisbane's Cross River Rail, which is the first of the two major packages for the Cross River Rail project.

On the alliance package for the rail integration and systems, we are preferred and we will advise the market on the value when we get to financial close. During the period, we were also awarded the $725 million Regional Rail PPP in New South Wales where we will finance the new rail fleet, design, construct, and commission the maintenance facility, and maintain a fleet of 117 railcars for 50 years.

You can see a number for the contracts that were awarded in the first half of 2019 on the slide. In the appendix, we have provided more detail on the new work awarded during the period. The diversified nature of our work in hand is demonstrated in the chart on the right-hand side of the slide.

And looking forward, our warm pipeline and a strong competitive position continues to provide us with confidence for the future. Gross mining, construction, and services we have identified at least $60 billion of tenders relevant to CIMIC come into the market for the remainder of 2019. And around $400 billion of projects has been identified as coming to the market in 2020 and beyond. Within this pipeline, $130 billion can be attributed to PPP projects.

Now let's move to slide 7. Creating long-term shareholder value remains our core focus. Today the Board has declared a fully franked interim dividend of $0.71 per share to be paid on October 3, 2019.

So to conclude, we are pleased with the results we delivered in the first half of 2019 and we remain confident for the future. We have an extensive and expanding pipeline of opportunities in our key markets and have identified $460 billion of opportunities coming through the market in 2019 and beyond.

These opportunities will continue to support our cash-backed growth in the medium and long term. Our global footprint combined with our robust balance sheet puts us in a strong position to pursue strategic growth and capital allocation opportunities as they arise. Finally, we remain committed to our guidance for 2019 for an NPAT of between $790 million and $840 million, subject to the market conditions.

And thank you for your time and looking forward to taking any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Guillermo Fernández, Kepler Cheuvreux.

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Guillermo Fernández, Kepler Cheuvreux - Analyst [2]

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Good evening for you guys there and thanks for taking my question. I have a couple ones. First would be on the cash conversion on H1, which has been basically weaker than the previous year. I know Marcelino has touched on the presentation. If you could give us a little bit more color on the reason for that, for the weaker cash conversion. If you could provide as well a compared factoring number versus Q1 this year and also versus H1 in 2018.

And the second one would be on the -- when you mentioned construction, you mentioned in the presentation it's related to the market conditions in Hong Kong. The question would be whether we should expect a reversion of that in the remaining of the year. Or the rest of the geographies, mainly Australia, would be enough to offset the weakness. If you could give us a hint on which is the weighting of the Hong Kong activities for the whole Group. Thank you.

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Stefan Camphausen, CIMIC Group Limited - CFO [3]

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Guillermo, it's Stefan. Thank you for the questions. I start with the first one, the cash conversion, on the factoring, and then Michael will talk about the construction market.

From the cash conversion perspective, as you've said and as Marcelino explained, the cash conversion is on a different level than what we have seen before. But as we have also said, it was more elevated. So at a point in time if it is more elevated, it also needs to be on a slightly different level, which is what we see right now. It is always reflective of the mix of the business and I think some of those drivers that have influenced the mix of the business is what Marcelino has outlined already.

From a factoring point of view, we are getting frequent balancing on that. And there is a number of the factoring at the half-year in the operating and financial report, which is just below $2 billion and that is consistent with the number that we had at December 2018.

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Michael Wright, CIMIC Group Limited - CEO [4]

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Yes, so Michael here. So regarding the construction revenues, so in all of our construction markets are performing well. The Hong Kong market has come off and it has come off quite a high infrastructure burn there. We do see that returning in (technical difficulty), but what you are seeing is essentially the Australia/New Zealand market is strong and the Hong Kong market coming off somewhat.

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Operator [5]

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John Purtell, Macquarie.

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John Purtell, Macquarie Research - Analyst [6]

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Good morning, guys. How are you? Just had a few questions in terms of if you can provide some sort of comment on the outlook for construction and revenue in the second half. Obviously, we saw weakness in the first half.

Are you expecting stronger revenue trends moving forward into the current period? Obviously, Cross River Rail should assist that. Are there any other projects to be aware of there? And I guess the second part of that is is there any sort of potential for the Hong Kong government ban to be overturned soon?

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Michael Wright, CIMIC Group Limited - CEO [7]

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Yes, thanks. It's Michael. I will take that. So yes, certainly second half of the year, I mean, we see the construction market in Australia/New Zealand to continue to be strong, as you said. On June 30, we go to financial close on the Cross River Rail contract, which is fantastic. That moves into the next phase.

We are preferred on the RIS Alliance up there as well, which we expect to close sort of coming up. We have got a strong order book of construction works that are in various phases of construction -- design and construction. So we continue to see that sort of perform well into the second half and into next year certainly.

On the Hong Kong market, certainly we are a part a commission of inquiry that is going on. The report from that gets handed down later this year. We expect to sort of work through that with our clients and with government there and move into next year tendering works again. We have got existing works that we are still executing in Hong Kong and a strong order book there that will continue well into next year.

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John Purtell, Macquarie Research - Analyst [8]

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Just a couple of others, if I can. Just Michael, in terms of the mining result was strong. Any particular areas to call out or was it a similar sort of continuation of strong coal markets here and Indonesia?

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Michael Wright, CIMIC Group Limited - CEO [9]

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Yes, look, important -- thanks for the question. Important to note that the Thiess and Sedgman business both have spent quite some years now diversifying their business, both geographically and by commodity. So it is certainly not just a coal result by any means. Their Indonesian mining business is performing well.

You would have seen earlier this year we signed up a $1.7 billion project in Botswana, which is obviously with De Beers and obviously a blue-chip client in a very different commodity than coal. We continue expanding in Chile in copper. So we have got a very diverse mining portfolio.

We continue to drive the costs of the business and the efficiency of the business and use our scale to make sure we get the right procurement deals globally. So very strong business and we can see it continuing to be so.

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John Purtell, Macquarie Research - Analyst [10]

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Thank you. And just a last one for Stefan, if I can. Just in terms of the factoring and obviously you mentioned that there has been a stable level in the first half. Are you expecting, Stefan, that that continues at a stable level? Are we likely to see much movement from here?

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Stefan Camphausen, CIMIC Group Limited - CFO [11]

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As we discussed, factoring is great tool for the industry as a whole and also important for us as it does provide a good and efficient way to manage funds and liquidity. And our factoring is not [recalled], as you know. It does depend on the mix of the business and so that can always go up or down. But as I've said over the last half year, it has actually been stable.

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John Purtell, Macquarie Research - Analyst [12]

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Okay, thank you.

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Operator [13]

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Paul Butler, Credit Suisse.

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Paul Butler, Credit Suisse - Analyst [14]

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Hi, there. I just had another question on the cash conversion. How should we think about this throughout the remainder of the year? Are you expecting to continue to see the mix of business or the contract roll-offs that have led to this lower level you have reported just now? Or how quickly do we see a reversion with new projects starting?

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Stefan Camphausen, CIMIC Group Limited - CFO [15]

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As you know, we don't give guidance on matters outside of NPAT. But the cash conversion will continue to be a reflection of the trend that we see in the business and reflect the evolution of the composition of the business.

I think what we have seen right now, including the recent award of more alliance by contract, the growth in mining is something that will probably continue. So therefore, the very robust level that the current cash conversion reflects is something that I will (technical difficulty) future (technical difficulty).

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Paul Butler, Credit Suisse - Analyst [16]

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Okay, so you are expecting the composition of work or the business mix that you have had in the last sort of six months to sort of continue to be a similar composition for some time going forward? Is my understanding correct?

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Stefan Camphausen, CIMIC Group Limited - CFO [17]

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I think what I would complement what I said before, it does reflect what the market is providing in terms of project opportunities. And we don't create those project opportunities. These are project opportunities that come to us from the market.

And if those project opportunities continue to be more, for example, alliance by contract, then they do have a working capital profile that is different to the type of work that we would otherwise be. So it does depend on what the market is giving to us, but I think what is also fair to say in general terms is that our second-half performance due to seasonality and other impacts is usually stronger than the first-half performance.

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Paul Butler, Credit Suisse - Analyst [18]

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Okay, thank you.

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Operator [19]

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Christian Korth, HSBC.

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Christian Korth, HSBC - Analyst [20]

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Thank you very much. Good evening. I have a couple of questions, please. The first one is around the Hong Kong development once again. Could you maybe clarify the exposure to Hong Kong that you have in your construction business and how that changed between 2018 and 2019? Just to get a better feel of the size of the business that you have there.

Secondly, I also thought that previously the Hong Kong market had readily good pipeline coming up. So my question is if the pipeline is still there or if it dried out or if the recent political events also had an impact on your business?

And then the last question on Hong Kong is that I think you explained earlier that you expect the Hong Kong market to return. But unfortunately, the line was bad then. So did you give a time horizon on this? Like, do you expect it more positive already in the second half 2019? Thank you.

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Michael Wright, CIMIC Group Limited - CEO [21]

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Yes, thanks for your question. Firstly, I guess on the pipeline, I mean, there's quite a significant amount of work, particularly with MTR, over the last some years. However, there is still a very strong pipeline of work in Hong Kong, with both transport infrastructure, social infrastructure, airports, etc. So that continues and we see that unchanging in the foreseeable future.

Regarding our business in Hong Kong, we've still got a strong pipeline of work that we continue to execute. We see that some of the challenges we've got at the moment sort of being worked out over the backend of this year and into early into next year and we see ourselves into the market again later in the year next year.

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Christian Korth, HSBC - Analyst [22]

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Okay. And how much does it currently account for within the construction business overall?

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Stefan Camphausen, CIMIC Group Limited - CFO [23]

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We aren't providing additional disclosures on the breakdown of construction between the companies and Firm. So we aren't giving that number.

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Michael Wright, CIMIC Group Limited - CEO [24]

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I mean, we have got obviously a strong business in Australia/New Zealand, in Hong Kong, in Singapore, and other jurisdictions as well. And we continue to grow in those sectors.

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Christian Korth, HSBC - Analyst [25]

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Sure. I was just wondering, because of the 7% decline in top line in the first half, that entirely being on Hong Kong was a little bit surprising. That is why I was asking. Okay, thank you.

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Operator [26]

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(Operator Instructions) Nathan Reilly, UBS.

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Nathan Reilly, UBS - Analyst [27]

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Good evening. I just had a question about this shift to alliance style contracting. I appreciate your comments there, that the working capital profile is slightly different to your typical fixed-price contracting model.

Could I just get you to explain I guess the dynamics of that shift? And also just I guess the differences between the fixed-price contracting model and the cash flows all added to that versus your alliance style contracting model?

And I am also curious to understand whether that implies a lower margin outcome on your earnings from alliance style contracting, given what you would typically have shown to be a lower risk profile on those types of contracts.

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Stefan Camphausen, CIMIC Group Limited - CFO [28]

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Nathan, thanks. I think in general terms, the alliance style contracting is a model where you have got a, call it, collaborative approach from a client and contractor point of view. And within that collaborative approach, the risk and returns are being dealt with on a very individualized basis and follow a very specific best for project perspective.

And depending on the share of that risk, obviously your return will be somewhat reflective of that share of risk as well. So it is a very bespoke model for a number of very bespoke contracts.

From a working capital profile point of view, as you basically said yourself, the mobilization payment that we would normally associate with large E&C contracts is something that in the working capital profile of alliance projects we normally don't.

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Nathan Reilly, UBS - Analyst [29]

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Okay. And as a follow-up, can you just explain part of the reasons why you would be seeing an increase in alliance style contracting in this environment? And I am also interested to understand how that mix has changed in your construction order book relative to typical fixed-price contracting.

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Michael Wright, CIMIC Group Limited - CEO [30]

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Yes, Nathan, Michael. I will take that. It obviously depends on jurisdiction and environments. But certainly what we are seeing is that sort of increase in some of the infrastructure projects working in a brownfield environment, where certainly there is more unknowns, more complexity. And I guess clients more and more wanting to work collaboratively with the expertise of the contractors to deliver those outcomes. So we are certainly seeing a move in that direction, and particularly in Australia.

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Nathan Reilly, UBS - Analyst [31]

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So can you give an idea of the level of alliance style contracting as a percentage of your order book for construction and how that has changed?

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Stefan Camphausen, CIMIC Group Limited - CFO [32]

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We don't typically give that breakdown. But if you look over the last couple of months, over the last four quarters into our announcement, then you can see and identify the number of projects that are out there. And the most recent one, which we actually mentioned, is the Rail Integration Systems Alliance on Cross River Rail. That is a large alliance or it will end up to be a large alliance.

That is in addition to a number of, especially in the railway space, alliances that we have announced to the market as well, both in New South Wales and in Victoria, where you have got major rail upgrade works in that live environment brownfield corridor that Michael was alluding to. We are talking about a large number multibillion dollar projects with a very positive risk [over] that are coming to market and are coming to us.

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Nathan Reilly, UBS - Analyst [33]

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Okay, thank you. And finally, just picking up in the small print on the accounts -- I haven't had a chance to go through all of the detail yet. But just it looks like there is a prepayment related to some deposits on asset purchases related to the BICC joint venture. Can I just get an explanation on the nature of that transaction, please?

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Stefan Camphausen, CIMIC Group Limited - CFO [34]

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Yes, that transaction, as Marcelino alluded to in his speech, is part of the strategic review that is continuing with BICC. And it is one of the instruments that we are considering as part of that strategic review.

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Nathan Reilly, UBS - Analyst [35]

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So what assets are you purchasing?

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Stefan Camphausen, CIMIC Group Limited - CFO [36]

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As we have said that there is no transaction concluded at this point in time. So the assets we are looking at are under discussion and we would update you as we go ahead with those.

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Nathan Reilly, UBS - Analyst [37]

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Okay. And some of the potential strategic outcomes in relation to that situation?

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Stefan Camphausen, CIMIC Group Limited - CFO [38]

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Again, as a strategic review, it was and continues. Once we have concluded it, it is something that we inform you about as well.

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Nathan Reilly, UBS - Analyst [39]

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Okay, thank you.

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Operator [40]

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Christian Korth, HSBC.

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Christian Korth, HSBC - Analyst [41]

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Thank you very much. I have a few follow-ups. The first one, if you could please give us an update on the Gorgon Jetty situation. What is the status there? I mean, we are still summer of 2019 now, so just wanted to ask if there is any progress and what is the next steps.

And secondly, just wanted to ask what the current status and situation of BICC is? I am aware that it is not a big part of the earnings contribution because of the known situation. But I'd rather like to ask what makes you confident that you will be able to be repaid the loan in full that you have loaned to BICC? Thank you very much.

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Stefan Camphausen, CIMIC Group Limited - CFO [42]

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Christian, on BICC, again, that strategic review, as just discussed with Nathan, is ongoing. And as we conclude that, with those outcomes, we will inform you.

On Gorgon Jetty, we actually do make some standard disclosures on Gorgon Jetty in our receivables note in the accounts. And the arbitration we have on foot is ongoing with the hearings and a determination is expected thereafter. And again, once that is available, we will also inform you about that as well.

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Christian Korth, HSBC - Analyst [43]

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Okay, thank you.

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Operator [44]

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(Operator Instructions)

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Justin Grogan, CIMIC Group Limited - Executive General Manager, Sustainability and IR [45]

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All right. Well, if there is no more questions, I am not seeing any coming up in the queue here, thank you very much, Richelle. And thank you, everyone, for your time today. We appreciate you dialing in and taking time to listen to our results call. Marcelino, would you like to --

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Marcelino Fernández Verdes, CIMIC Group Limited - Executive Chairman [46]

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Thank you very much to all of you for attending to this conference call. I will see you next quarter again reporting to you and giving to you all the potential answers to your questions. Thank you.

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Justin Grogan, CIMIC Group Limited - Executive General Manager, Sustainability and IR [47]

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Thank you very much, Richelle. And good night, everybody. Thank you.

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Operator [48]

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Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.