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Edited Transcript of CIM.AX earnings conference call or presentation 5-Feb-19 6:00am GMT

Full Year 2018 CIMIC Group Ltd Earnings Call

St. Leonards, New South Wales Feb 7, 2019 (Thomson StreetEvents) -- Edited Transcript of CIMIC Group Ltd earnings conference call or presentation Tuesday, February 5, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Justin Grogan

CIMIC Group Limited - Head of IR

* Marcelino Fernández Verdes

CIMIC Group Limited - Executive Chairman

* Michael Wright

CIMIC Group Limited - CEO & Managing Director

* Stefan Camphausen

CIMIC Group Limited - CFO

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Conference Call Participants

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* Craig Wong-Pan

Deutsche Bank - Analyst

* Jolyon Wellington

JPMorgan - Analyst

* Paul Butler

Credit Suisse - Analyst

* John Purtell

Macquarie - Analyst

* Tony Mitchell

Ord Minnett - Analyst

* Nathan Reilly

- Analyst

* Christian Cohrs

HSBC - 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 CIMIC's 2018 full-year results investor briefing. (Operator Instructions). I must advise you that this conference is being recorded today, February 5, 2019. I would now like to hand the conference ever to Justin Grogan. Thank you. Please go ahead, sir.

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Justin Grogan, CIMIC Group Limited - Head of IR [2]

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Thank you, Rochelle. Good afternoon, ladies and gentlemen, and welcome to the teleconference of CIMIC Group's full-year results for the period to December 31, 2018. I'm Justin Grogan, AGM, Sustainability. I'm joined by Executive Chairman, Marcelino Fernández Verdes; and Chief Executive Officer and Managing Director, Michael Wright; and Deputy Chief Executive Officer, Ignacio Segura; Chief Financial Officer Stefan Camphausen; and other members of the our senior executive team.

This afternoon we launched from ASX a media release, comprehensive investor presentation and our 2018 annual report. These documents also available on our website. On this call, Marcelino will present an overview of the results referring to the investor presentation, then we'll open the lines to questions and answers. We've allowed about 60 minutes for the call based on our experience. If we run out of time you 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 for joining us on CIMIC's 2018 full-year analyst call. Today we released the 2018 full-year results and I'm pleased to report that it was another strong year for CIMIC. (Inaudible) we delivered an outstanding operating performance, but our growing pipeline and strong competitive position and [good wide] focus on disciplined risk management provide us with confidence for the future. Resulting from the actions taken during the strategic review over the past few years, today CIMIC is a much stronger, more focused business with an improved business culture.

However, the journey is not complete. Utilization is having a fundamental and lasting effect on the industries in which we operate. We on the forefront of these changes and the next phase of our transformation will seek to leverage the opportunities presented by these changes. We continue to focus on generating sustainable cash back returns for shareholders while delivering innovative and competitive solutions for our clients.

CIMIC would not be able to deliver such strong outcomes if it wasn't for our talented team of around 50,000 people. Across our business projects, our people are now [contractors] where to fulfill our clients' commitments, focusing on the safe delivery of our project. I want to thank all of our employees for their continued hard work as well as our clients for their ongoing support.

So turning now to the key financial highlights on slide 2, CIMIC reported a net profit after tax of AUD781 million. This was at the top end of our guidance range, representing an increase of 11% on the prior year. This performance was driven by strong margins at all levels -- EBIT, PBT and NPAT -- and disciplined top-line growth.

Today the directors have declared a final dividend of $0.86 per share, 100% full franked, to be paid on July 4, 2019. This brings the total dividend distribution for 2018 to $506 million or $1.56 per share, up almost 16% on 2017. This increase represents a compound annual growth rate of 17.6% over the past four years and a dividend yield of 3.6% on December 31, 2018 closing price. In total over the past four years CIMIC has returned AUD2 billion to shareholders through dividends and share buyback.

Today's result also reflects our [staked] focus on generating sustainable cash [back profit]. Our cash generating from operating activities was up by 22% to $1.9 billion for the year. And we delivered an EBITDA cash conversion rate of 109% in 2018. Our robust balance sheet was further strengthened by this strong cash back performance, increasing CIMIC's net cash position by more than $709 million to $1.6 billion.

With a solid order book of almost $37 billion as of December 31, 2018, CIMIC has maintained a disciplined approach to tendering. Operating companies have all continued to grow their work in hand and we have a strong pipeline in front of us. In addition, we are pleased to announce our net profit after tax guidance, NPAT, for 2019 of between $790 million to $840 million, subject to market (technical difficulty).

Turning now to our solid operating performance on slide number 3. The Group recorded a revenue increase of more than 9% to $14.7 billion, with all operating companies recording growth. The full year EBITDA and EBIT improved by 12% and 14%, respectively, to $1.7 billion and $1.1 billion. Our focus on project delivery and cost discipline underpinned was positive for operating result. In addition, the profit before tax for the year increased by 12% year on year to $1.1 billion.

Now I'm going to give an overview of our operating companies, positive revenue and profit before tax performances. Let us start with mining and mineral processing. In the segment we recorded a very strong performance this year with revenues increasing by 25% to $4 billion and a PBT contribution of $431 million. This result is a testament of the value we provide to our clients across a range of commodities and geographic markets, driven by new contracts, contract expansions and increased production levels.

In construction, a disciplined approach to tendering, project delivery and cost control resulted in an increase in revenues by 0.8% to $8 billion and a PBT contribution of $626 million. The group also sustained a strong competitive position in the operations and maintenance services market, reporting a (inaudible) revenue which increased by 2.7% to $2.7 billion and a PBT contribution of $160 million.

The corporate segment improvement recorded this year was mainly driven by a reduction of the losses in [BAC] contracted compared to the previous year. Additional information on the segmental performance can be seen in the appendix on slide 10. Solid performance of our operating companies helped drive the group NPAT to $781 million, an increase of 11% year on year.

We show our strong cash generation on slide 4. Cash flow from operating activities improved by $1.9 billion. This represents an EBITDA cash conversion rate of 109% in 2018. We continue to maintain a strict focus on managing working capital, optimizing our working capital position and minimizing the capital we deploy. We also maintain our strict focus on generating sustainable cash back profits.

Gross capital expenditure for the year increased to (technical difficulty) due to a [raw] investment in the growth of the business, specifically mining and (inaudible). Overall we generated a free operating cash flow of around $1.2 billion in the year, representing an increase of almost 18%. The $671 million of the fourth quarter was nearly 30% higher year on year.

Moving to slide 5, this slide provides a current snapshot of our robust balance sheet position as strong cash flows further strengthened our balance sheet. This helped CIMIC in the year with a net cash position of $1.6 billion, up by [$700] million (technical difficulty) 2017 and $418 million during the fourth quarter of 2018. Hence, despite being a much larger business today, our gross debt position is at the lowest level since 2007.

This trend, along with our $2.8 billion of gross debt facilities, places CIMIC in a strong position to take advantage of a steady growth in capital allocation opportunities as they arise. Standard & Poor's and Moody's both acknowledged our financial position this year by in affirming our strong investment grade rating.

The group's operating leases increased to 808, in line with our fleet management study and reflecting the growth of our mining business. Our net contract debtors stood at $1.1 billion, the change driven by the growth of the business. And the $675 million contract debtor's provision remains unchanged.

Net finance costs increased mainly due to lower shareholders' loans and, [as was said], (inaudible) come from BIC Contracting as well as an increase in the total level of funding which supports the growth of the business. On a year on year basis, our average cost of debt fell 30 basis points, down from 4.2% (sic - see slide 5 - 4.1%) to 3.8%.

Turning to the next slide which shows our strong order book. Total work in hand has steadily grown over the year, closing at $36.7 billion. This is equivalent to more than two years revenue and this is very positive in all our operating companies. In 2018, we were awarded $17.9 billion of new work and contract extensions, including several major construction services and mining and mineral processing contracts.

As you can see on the slide, a number of major contracts for awarded in the fourth quarter of 2018. The significant mining services contract at the Mt. Arthur mine in Hunter Valley; further service contracts at the Peak Downs at Caval Ridge mines in Queensland, Bowen Basin; and Stage 1 of the Parramatta Light Rail; [a finance significant] of WestConnex in Sydney, the Stage 3B (inaudible) only to change; the line-wide rails work package in support of the Sydney Metro North Southwest project; and asset management services to support the Royal Australian Navy's Landing Helicopter Dock and Landing Craft vessels.

In the appendix we have rather more detail on some of the project wins achieved in the year. The chart on the slide shows the well diversified and balanced nature of our work in hand across our different segments.

And then looking forward, a strong competitive position continues to provide us with confidence for the future. We have an expanded pipeline of opportunities across all markets which will continue to support our future growth. At least $130 billion of tenders relevant to CIMIC are to be bid and/or awarded in 2019. And prices valued at around $300 billion have been identified as coming to the market in 2020 and beyond.

And within this pipeline there are around $120 billion worth of PPP projects, almost double the level we highlight at the (technical difficulty), boosting the prospective and services opportunities for CIMIC in rail, [roads] and [also] infrastructure.

In terms of bidding opportunities, this pipeline includes a number of large contracts scheduled to be awarded this year, to (inaudible) Primary Package PPP in Victoria, Inland Rail PPP in Queensland; Auckland Light Rail Stage 1 in New Zealand; a North/South Corridor in Singapore; awarding a mining and services contract in Botswana, and many more across infrastructure, mining and resources, utilities and services.

Let's turn to slide 7. This slide provides an update on the new AASB 16 accounting standard, which is applicable to all companies from January 1, 2019. The main change to report on this is in the financial statement. This means that previous differentiation between operating leases and finance leases no longer exist.

The initial reduction is estimated to be reflected in the position of net cash operating leases as shown in the page on the right-hand side of the slide. However, it is important to highlight that the adjustments have a consequence of implications of the new accounting standards only and are not reflected for any change in the operations of CIMIC.

Let's move to slide 8. We remain focused on building long-term shareholder's value through generating sustainable cash back profits and maintaining a disciplined approach to capital allocation, while an aspect of this is to continue to reward our shareholders. Over the last four years, this is evidenced in CIMIC returning $2 billion to shareholders through dividends and share buybacks.

Four 2018, the Board has now declared a final dividend of $0.86 per share to be paid on July 4, 2019. This brings the total dividends (inaudible) last year to $1.56 per share. This increase represents a compound annual growth rate of 17.6% over the past four years and a dividend yield of 3.6% on the December 31 closing share price.

Let me just summarize. We are pleased with the results that we have delivered in 2018 and we remain confident for the future. We have a positive outlook for our [pool] markets which continue to offer an extensive and expanding pipeline of (inaudible) which will support sustainable cash back profits growth in the medium and long-term.

CIMIC's robust balance sheet allows the Group to pursue steady growth and capital allocation opportunities as they arise. After reporting an NPAT of $781 million in 2018, the guidance for the current year is for the Group to achieve net profit after tax in the range of $790 million to $840 million, subject to the market conditions.

In 2019, we will continue to focus on our core activities of construction, mining and services and (technical difficulty). We will try and deleverage (inaudible) opportunities within the Group and we will maintain our focused approach to tendering, operational discipline and cost control and risk management. And we will continue to deliver creative value-added solutions to the benefit of our clients and further develop and challenge our safety and performance culture.

Fundamental to our ongoing transformation, growth and sustainabilities have significant investment in the utilization and [information]. At the forefront of driving these changes in (inaudible) is changing the way we work and creating new opportunities for the business, our clients and our employees.

Finally, thank you for your attention and now we are ready to take any questions you may have.

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Justin Grogan, CIMIC Group Limited - Head of IR [4]

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Thank you, Rochelle, and happy for you to pass it over and take questions from the line now.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Craig Wong-Pan, Deutsche Bank.

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Craig Wong-Pan, Deutsche Bank - Analyst [2]

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Hi there. Just wanted to ask about your construction business. The revenues for the period were a little bit weaker than what I was expecting and the growth did seem to decelerate in the second half, or the last quarter. Could you just talk to what conditions you're seeing there? And could you explain that slower growth profile towards the end of the year?

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Michael Wright, CIMIC Group Limited - CEO & Managing Director [3]

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Yes, sure. Michael Wright speaking, Executive Officer. The construction business and the construction segment certainly made up from our Australia, New Zealand, and our Leighton Asia business, predominantly we've experienced significant growth in our Australian business and you would have seen contract wins come through there. Similarly in New Zealand as well, for example with Waikeria PPP that was awarded in the second half of the year.

So I guess our Australia/New Zealand business is growing. Our Leighton Asia business continues to perform, but the market in Hong Kong particularly is coming off somewhat. Our presence in Singapore remains stable. So I guess overall Australia/New Zealand growing, Asia coming off a lot, and I think that's what you're seeing with the construction business revenues.

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Craig Wong-Pan, Deutsche Bank - Analyst [4]

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And are those trends -- should continue -- should they continue into 2019?

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Michael Wright, CIMIC Group Limited - CEO & Managing Director [5]

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We certainly see the Australian and New Zealand markets very strong, particularly in the infrastructure base on the East Coast and the West Coast of Australia. We see the construction market in mining coming back in the West particularly. We see the construction market in oil and gas starting to pick up also, and in New Zealand as well some opportunities in transport, particularly in the North Island of New Zealand.

So we see Australia/New Zealand continuing to grow. Singapore, we'll continue to see growth there as well with the right focus obviously on risk and tendering and then executing works. Hong Kong we see coming off somewhat. We've come off a peak infrastructure market in Hong Kong and we will see that come off somewhat.

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Craig Wong-Pan, Deutsche Bank - Analyst [6]

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Thanks. And my next question just on the cash flows. Very strong cash flow performance again, so well done on that. Just wanted to understand with the fourth-quarter cash flow generation, was there any particular items that were driving that very strong cash flow generation number?

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Stefan Camphausen, CIMIC Group Limited - CFO [7]

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Craig, it's Stefan. There was particularly to call out. And as you know, every quarter can be a little bit higher or a little bit lower, and that's what you can see in the fourth quarter as well.

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Craig Wong-Pan, Deutsche Bank - Analyst [8]

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Okay. And then just my final question, if you could talk about what you're seeing on the import cost side, like are you seeing much inflation there or sort of price increases across your cost base?

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Michael Wright, CIMIC Group Limited - CEO & Managing Director [9]

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I guess again, it comes down to different segments having obviously different cost base. I mean, it's across all three of our market segments. Labor is quite a significant component of those. We've been through cycles and -- in the past. Mining is strong for us, construction is strong for us, services is strong also.

So on the labor side we certainly see -- we've got good relationships with our labor workforce, both direct and subcontract. We've got a strong pipeline of graduates and traineeships coming through. So again, we don't see that as a particular challenge for us in the markets. And on the supply side of things, with procurement again, we've got significant buying powers. We're not seeing any significant change in that.

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Craig Wong-Pan, Deutsche Bank - Analyst [10]

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Okay. So just to summarize it, it doesn't sound like there's any major cost inflation that you're seeing at the moment or expecting?

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Michael Wright, CIMIC Group Limited - CEO & Managing Director [11]

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No.

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Craig Wong-Pan, Deutsche Bank - Analyst [12]

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Okay. All right, thank you.

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Operator [13]

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Jolyon Wellington, JPMorgan.

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Jolyon Wellington, JPMorgan - Analyst [14]

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Good afternoon. I'd like to just kick off by just asking about the divisional performance. Looks like the margins declined in the construction and services businesses in the second half of calendar 2018. Just wondering if you can explain what caused that, please.

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Michael Wright, CIMIC Group Limited - CEO & Managing Director [15]

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Yes, look, so in the construction sector, I guess different regions -- so we don't obviously give guidance by region in our sectors but -- or our segments as such. Certainly Leighton Asia coming off; increased pipeline and growth in Australia, a positive. I guess quarter on quarter we'll see -- depending on the projects that we have, we'll see the margins move up and down depending on the contributions in the relevant (multiple speakers).

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Marcelino Fernández Verdes, CIMIC Group Limited - Executive Chairman [16]

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As Michael is saying, and you know that the business in both mathematics and (inaudible) is really every quarter, you are doing exactly the same jobs. You are starting new wells, you are finishing old ones, and then the average is what we are showing. But this is not showing any trend or any special thing.

That's the same thing that's for instance when you are looking at the cash collection. Traditionally typically the fourth quarter is the most important one, then for (inaudible) is the same. What is important is just to look at the average, not just to look every specific quarter if the margins are going up and down, because they are depending on many different circumstances.

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Jolyon Wellington, JPMorgan - Analyst [17]

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Okay. I mean I suppose Leighton Asia coming off is one point that would impact the construction business. Just interested in services, though. That's predominantly an Australia/New Zealand business. Are you seeing anything in there in terms of input costs?

I'm mostly wondering if you could comment on the -- a number of your -- [not only] competitors, but a number of companies in the sector have talked about delays to major infrastructure projects? I was wondering if that had any impact on the construction business in the fourth quarter.

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Stefan Camphausen, CIMIC Group Limited - CFO [18]

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As Marcelino said, and I don't think there is a much more to add on the input cost (inaudible) there.

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Jolyon Wellington, JPMorgan - Analyst [19]

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So, you -- sorry, I didn't catch that. Just asking about the impact of any -- of the delays that we've heard about to some of the major infrastructure projects in Australia. Has that had an impact on your construction business?

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Marcelino Fernández Verdes, CIMIC Group Limited - Executive Chairman [20]

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No, no, no. I was explaining that depending on the moment you can have impacts here and there, but the average is what we are showing. We are not specifically worried about any special delays or something like that.

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Jolyon Wellington, JPMorgan - Analyst [21]

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And just on to -- I just wanted to ask specifically about equipment hire costs. What are you -- you are obviously a large consumer of equipment hire. What are you seeing in terms of equipment hire costs, please? Are they going up or what kind of trends are you seeing in that market?

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Stefan Camphausen, CIMIC Group Limited - CFO [22]

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A lot of our equipment is in tunneling infrastructure, and that is equipment that we own by and large. And we also have a large equipment fleet in mining. And given our ties we do have good relationships with the OEMs and that has -- with the cost and supply side of it. So from an equipment hire point of view this is nothing special to us as a business.

And again, the large (technical difficulty) of equipment is in tunneling and that is specialized equipment, some are boring machines, (inaudible) and the like. And they are -- those pieces of equipment are drop costed, so they are written [off] over the life of the project. So from that perspective equipment hire is not necessarily a concern at this point.

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Jolyon Wellington, JPMorgan - Analyst [23]

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Okay. Not a concern. And just on your guidance for next year, I know that implies a 1% to 8% growth in NPAT. Just wondering which areas you are expecting to see make up most of that growth. Do you expect to see broad-based growth across all divisions? Is it going to be more driven by mining or construction? Which areas should we expect to see the most growth in 2019?

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Stefan Camphausen, CIMIC Group Limited - CFO [24]

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Michael commented already on the markets and the market situation, but we don't give segmental guidance. So over and above the numbers we provided, we wouldn't comment.

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Jolyon Wellington, JPMorgan - Analyst [25]

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Okay. All right. That's all for me. Thanks very much.

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Operator [26]

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Paul Butler, Credit Suisse.

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Paul Butler, Credit Suisse - Analyst [27]

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Hi, thank you very much. I just wonder if you could comment on the level of competition that you are seeing for new projects, particularly in the construction market where obviously it seems one of your former competitors is probably no longer particularly active.

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Michael Wright, CIMIC Group Limited - CEO & Managing Director [28]

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Yes, look, competition sort of goes up and down, but I mean stable generally in construction. Comes down to different size of projects, but the competition's there, it's always been there. We don't see any change necessarily in that.

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Paul Butler, Credit Suisse - Analyst [29]

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And what about in the other sectors? Is that all some similar to what the previous trend has been or is there changes there?

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Michael Wright, CIMIC Group Limited - CEO & Managing Director [30]

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Yes, it certainly is. We've got a strong market position across all of our segments certainly. We've got a competitive differentiation in each of the markets in which we service and the competition's certainly there in mining, services and construction, but it's no different than it has been in the past.

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Marcelino Fernández Verdes, CIMIC Group Limited - Executive Chairman [31]

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And Paul, in the markets that we are operating which are operating usually are very stable markets. And then you realize what we are presenting also, the pipeline for the future is always similar or even increasing, and has given to the market a lot of stability. And as a consequence, a lot of stability in the competitors also.

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Paul Butler, Credit Suisse - Analyst [32]

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Okay. The chart you included in the presentation for major transport infrastructure projects is now showing a decline from the period of 2024-2025. I mean, are you expecting that there's going to be more (technical difficulty) to continue to push that up a bit? Or have we reached the peak now?

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Michael Wright, CIMIC Group Limited - CEO & Managing Director [33]

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No. Look, this is identified prospects I guess going out some five, six years. Certainly as the years roll by, we certainly do you expect to see substantial infrastructure, mining, oil and gas growth moving forward in those prospects. So we'll update this chart as they come out, but we don't see any particular change.

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Marcelino Fernández Verdes, CIMIC Group Limited - Executive Chairman [34]

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And even if you realize, if you could compare with the previous years' charts and then you roll back to four years [until at that], you realize that every year there is a kind of a (inaudible), meaning that there are new contracts that are coming in and there are some of them that are going a little bit longer.

And fortunately the shape is similar, that obviously they are continue growing for the future. It looks like a stability in the markets in which we are involved in is going to be longer than this 2025. We consider that we have very stable markets at least for the next 10 years. And this is exactly what the market is showing, and you realize that every year there are new contracts coming in, there are some of them that they are postponed, but in the end the market continues increasing.

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Paul Butler, Credit Suisse - Analyst [35]

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Okay, thank you very much.

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Operator [36]

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John Purtell, Macquarie.

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John Purtell, Macquarie - Analyst [37]

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Good afternoon or good morning. I've got three questions, please. Just firstly, in relation to Hong Kong just in terms of Michael's comments there on Hong Kong coming off peaking from market, is there any sort of impact from the temporary ban that's been imposed middle of last year? Or is this a market issue?

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Michael Wright, CIMIC Group Limited - CEO & Managing Director [38]

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(technical difficulty) [getting] Hong Kong has come off. There is a temporary ban, but the positive thing is we've got a significant work in hand up there that we continue to execute. As you allude to, the Commissioner of inquiries running, we are fully supportive of that. And we're seeing Hong Kong as a very positive market and strong market into the future.

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Marcelino Fernández Verdes, CIMIC Group Limited - Executive Chairman [39]

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And we'll continue -- this is strategic to us, Hong Kong.

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John Purtell, Macquarie - Analyst [40]

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And just to clarify the earlier comment there in relation to the margin weakness in construction for the second half, is that largely bound to Leighton Asia and the same sort of issue here? I mean, would you describe the performance of the Australia/New Zealand business as relatively stable?

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Michael Wright, CIMIC Group Limited - CEO & Managing Director [41]

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Yes, look, I mean -- no, it's not specific to Leighton Asia at all. As Marcelino alluded to before, our construction business is many, many projects across many jurisdictions, different styles of contracts, different risk profiles, different margin expectations.

So depending on which projects we're executing and which phases of projects those are at, the margins sort of change from project to project and therefore the compilation of our overall construction margin will generally be stable. But we'll have new answers from quarter to quarter.

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John Purtell, Macquarie - Analyst [42]

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Thank you. And just on the mining side, strong revenue performance there. It sounds fairly broad-based across the mix of new contracts. I mean, strip ratios seem to be going up and also up in Asia.

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Michael Wright, CIMIC Group Limited - CEO & Managing Director [43]

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Yes, so -- yes, strip ratios, I mean again, depending on which commodity you're talking about, clearly an open cut -- obviously you're referring to not [on the] ground. But I mean the [pits] business, particularly through a diversify -- from a commodity perspective, from a contract [start], and from the countries in which it operates, [a client stole] a contract and it's been deliberately -- we've deliberately strategized to get the business asset play.

So strip ratios rise, but the reality is we don't take strip ratio risk. So we see the market -- the mining market very positively, as you'll see from the results. And we see that not changing in the future.

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John Purtell, Macquarie - Analyst [44]

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Thank you. And just last question is one for Stefan in terms of the new lease standard. Is there any profit impact from the lease standard? I know that there's an increase in liabilities of $900 million. What about actual P&L impact?

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Stefan Camphausen, CIMIC Group Limited - CFO [45]

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I think what is important to note is that this is an accounting standard implementation and that does apply to all companies so that is not specific to CIMIC. And obviously we have outlined disclosures in the annual report where we are saying the liabilities on balance sheet will increase by $900 million, but that does not imply any change in the underlying business of CIMIC or the economic situation.

And of course complementing the liabilities will also be an asset, and so there is a balance in the balance sheet going forward as well. We will implement it as of January 1, 2019, so with the next call we'll then give an update on the broader P&L and cash flow implications.

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John Purtell, Macquarie - Analyst [46]

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But suffice to say does the guidance you've given today for 2019 take account of that new lease standard?

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Marcelino Fernández Verdes, CIMIC Group Limited - Executive Chairman [47]

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[Could you please repeat] the question?

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John Purtell, Macquarie - Analyst [48]

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Just the guidance you've given today for 2019, does that take account of the impact of a new lease standard?

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Stefan Camphausen, CIMIC Group Limited - CFO [49]

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Yes, it absolutely does, and NPAT will be not be impacted by the new lease standard in a material matter, if at all. So the NPAT guidance does take it into account, but again it would not be impacted one way or the other, whereas EBITDA will actually change given that with the asset and the liability we will see an increase in depreciation, also CapEx directionally.

So all of that will be something we will reflect. But again, directionally, you will see an increase in some of the components of the P&L but not from an overall bottom line perspective. The NPAT will stay similar.

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John Purtell, Macquarie - Analyst [50]

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Okay, thank you.

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Operator [51]

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Tony Mitchell, Ord Minnett.

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Tony Mitchell, Ord Minnett - Analyst [52]

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Congratulations on your result. Outstanding. Will you be buying any shares back in the next 12 months?

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Stefan Camphausen, CIMIC Group Limited - CFO [53]

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As you well know, we do have a share buyback on foot and that is up to 10% over the next 12 months. And then when -- [life] at the end of December. So we certainly do have that flexibility as part of the capital allocation alternatives that we are looking at. And we are looking at all of the capital allocation alternatives, but we will be deciding that operationally during the year and on a day-to-day basis.

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Marcelino Fernández Verdes, CIMIC Group Limited - Executive Chairman [54]

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Tony, what we show and then you look at our history in a way that we are using the capital allocation is that we try, as I said, to find out what is the best solution for [vetting] capital at every moment. And we want to have all the doors open regarding for instance a money transaction, regarding for instance buybacks, or regarding for instance increasing dividends, like we've done in this second half of the year. Because we thought that was the most convenient way for vetting capital for our shareholders.

And then you know also that we are increasing also our stake in PPPs, and PPPs is a standard way of our getting capital. And we are finding let's say to continue increasing this amounts PPPs that we've had it three years ago. And then as you realize right now we have more than nine PPP projects. And we are aiming -- as I said when I was commented about the pipelines, we're aiming to get some more next year or this year.

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Tony Mitchell, Ord Minnett - Analyst [55]

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Okay. And do you anticipate for 2019 having a similar dividend payout ratio to this year?

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Marcelino Fernández Verdes, CIMIC Group Limited - Executive Chairman [56]

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We are not anticipating anything. What I am telling you that the capital allocation is a question of opportunity. And then if the opportunity that we consider is the best way for our shareholders, we will reward this way. But [if my info was the reason] we considered that it's better to start a buyback program we'll do it. But that's not the moment at this point as I say to make any (technical difficulty).

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Tony Mitchell, Ord Minnett - Analyst [57]

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Okay, thank you.

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Operator [58]

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Nathan Reilly.

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Nathan Reilly, - Analyst [59]

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Yes, afternoon, gents. Couple of questions. Firstly, just a quick update if possible, please, just on HLG, the new BIC Contracting. Previously you've flagged that you'd give us a bit of a strategic update or there'd been some sort of strategic review undertaken on that business. Can you give us an update on where that is currently sitting, please?

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Stefan Camphausen, CIMIC Group Limited - CFO [60]

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That strategic review had continued during the year. That led to a reduction in the size of BIC, which was one of the targeted outcomes of the strategic review. And in line with that we were minimizing the risk of the business (inaudible). As a consequence, though, BIC does not need to (inaudible) short of the segment anymore.

So while we have highlighted that the losses have been reduced in BIC, that is one of the consequences of the strategic review as well. We are not separately disclosing the financial statements or the further financial data on BIC anymore. But the strategic review you are alluding to has progressed and it has yielded further outcomes during 2018.

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Nathan Reilly, - Analyst [61]

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Right. So is that still a core part of the business, albeit a much smaller part of the business? Or are you still looking to divest the asset?

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Stefan Camphausen, CIMIC Group Limited - CFO [62]

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I think we do have all options for BIC and we continue to pursue all options, but no decisions have been made one way or the other at this point in time.

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Nathan Reilly, - Analyst [63]

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Okay. Second question just around capital allocation. Obviously there's a lot of cash on the balance sheet and you've spoken -- you've got a number of opportunities there and you've got a lot of flexibility there. But I'm just curious, when you look at the business mix at the moment, are there any -- from your perspective, any gaps in strategy that you might like to fill with potentially some M&A?

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Marcelino Fernández Verdes, CIMIC Group Limited - Executive Chairman [64]

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Nathan, when we are looking at the strategy we are not looking only through M&A. We are looking at this through the markets, we are looking at what is more convenient to [developers] here and there. If we have a (inaudible) position that we are aiming to get strategically speaking in this region or in that region, for instance, I have not (inaudible).

If we are happy with our position in this region or we are aiming to increase it, then strategically speaking or the capital allocation is not only about M&A. But we continue always analyzing M&A because if M&A can say speed up the process of growth in different regions, we take this also into account, if there is an opportunity within the market.

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Nathan Reilly, - Analyst [65]

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Okay. I'm just going to ask about tendering activity now. And I know you gave us some detail around the level of work which you are tendering. But just in the context of a federal election cycle and a New South Wales state election cycle, can you give us an update on how you are seeing tendering activity? Are the election cycles causing any delays there? Or are you still seeing continued momentum in those markets?

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Michael Wright, CIMIC Group Limited - CEO & Managing Director [66]

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Yes, look, I mean -- irrespective of the election cycle we're in, the market -- the infrastructure market (multiple speakers) growing the -- I mean the transport infrastructure needs to get built. There's a strong commitment from all sides of government to continue the build that needs to happen, particularly in our cities, in our regional areas within land rail and regional rails and these sorts of projects. So we don't see any change (multiple speakers).

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Marcelino Fernández Verdes, CIMIC Group Limited - Executive Chairman [67]

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And Nathan, what the government's been doing is just establishing priorities that they invest in. Maybe they come, as I said, they postpone a project and they are starting a new one. That's typical and normal, but the infrastructure plan is ongoing.

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Nathan Reilly, - Analyst [68]

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Okay, thanks. And final question just in relation to your trade payables. Looks like there was about a $1 billion increase in the trade payables. You've disclosed the level of -- well, I guess in the mix there, the movement between contract payables, and that looks broadly consistent year on year. And I guess the movements are pretty consistent with your contract receivables as well.

So I'm just trying to get a sense for what's driving that increase in the overall -- the total payables. It looks like it might be to do with accruals or something like that. Can you shed a bit more light on that movement, please?

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Stefan Camphausen, CIMIC Group Limited - CFO [69]

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In the end it is a consequence of the good growth we've had in the business. You will see that's also on the debtor side and the creditor side we've had increases. And on the creditor side the increase you have mentioned is driven by us expanding the business across all segments and both domestically and internationally. So that is something that is then reflected in creditor growth as well.

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Nathan Reilly, - Analyst [70]

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But is it at a contract level? Or is it at a corporate level?

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Stefan Camphausen, CIMIC Group Limited - CFO [71]

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Our trade creditors would be on a contract level. They are operational creditors and that's what's growing.

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Nathan Reilly, - Analyst [72]

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Okay. All right. Thanks very much for that.

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Operator [73]

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Craig Wong-Pan, Deutsche Bank.

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Craig Wong-Pan, Deutsche Bank - Analyst [74]

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Yes, I just wanted to ask you about the Middle East. You talked about losses being minimized. I just wanted to understand what kind of activities you did and how you've gone about minimizing the losses there.

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Michael Wright, CIMIC Group Limited - CEO & Managing Director [75]

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As Stefan suggested before, the Middle East has been part of a strategic review. We are a joint venture partner. There's been a strong operational focus from the joint venture and a focus on completing projects and being very selective from a risk perspective around new projects that they enter into.

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Craig Wong-Pan, Deutsche Bank - Analyst [76]

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So have -- any kind of contracts that were loss making, have they -- are they still ongoing or have they rolled? I guess I'm trying to understand is that one of the reasons -- the sort of roll off or the completion of the previous work.

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Michael Wright, CIMIC Group Limited - CEO & Managing Director [77]

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We don't comment on individual projects in any part of our business, but certainly we are completing projects in the Middle East. And as we come off those, as I said, we've been very selective about the [birth] of new projects that we enter into and the clients that we deal with.

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Craig Wong-Pan, Deutsche Bank - Analyst [78]

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Okay, thank you.

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Operator [79]

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Jolyon Wellington, JPMorgan.

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Jolyon Wellington, JPMorgan - Analyst [80]

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Hi there. Just wondering, just in terms of your guidance for FY19, are you expecting to see margin expansion overall for the business? Or are you expecting that to just be driven by revenue growth?

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Michael Wright, CIMIC Group Limited - CEO & Managing Director [81]

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Yes look, we don't give guidance on margin or revenue. We've given our guidance -- we expect growth in all of our sectors and we'll report on a quarterly basis.

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Jolyon Wellington, JPMorgan - Analyst [82]

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Okay, thank you.

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Operator [83]

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(Operator Instructions). [Christian Cohrs], HSBC.

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Christian Cohrs, HSBC - Analyst [84]

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Thank you very much and congratulations on the results. I have two questions, please. The first one is a more technical one. After the first nine months of 2018, you reported new work of $11.8 billion, and during the fourth quarter you announced several large orders for I think a rough total of $7.4 billion.

So I'm wondering more are you now reporting total new work for the full year of $17.9 billion. I was just trying to get my head around that. So where there any cancellations in there or very long-term orders that are not fully recognized in the new work number?

And secondly, just wanted to ask if there's any update on the Gorgon Jetty process, please? Or is it still the case that the next data points will be the hearing in a couple of months? Thank you very much.

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Stefan Camphausen, CIMIC Group Limited - CFO [85]

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[Point of view] we do have in the fourth quarter for foreign exchange and some other minor adjustments, so that might explain the difference you are referring to at this point in time. From a Gorgon Jetty point of view, we have given disclosure in the note for the accounts and the arbitration continues in line with the timetable. And we will continue to update you as there are milestones reached or achieved.

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Christian Cohrs, HSBC - Analyst [86]

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Okay. Thank you very much. Maybe just one last one on the mining business that you -- you talked about a strong growth in last year, so in 2018. Could you remind us if that was due to special commodities or to special regions where you had particularly strong growth?

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Michael Wright, CIMIC Group Limited - CEO & Managing Director [87]

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Yes, thanks for the question. No particular commodity nor region. It's been a -- experienced strong growth across the mining business, across the commodities and in jurisdictions in which we work.

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Christian Cohrs, HSBC - Analyst [88]

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All right. Thank you very much.

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Operator [89]

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(Operator Instructions).

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Justin Grogan, CIMIC Group Limited - Head of IR [90]

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Okay. Thank you very much, Rochelle. It doesn't sound like there's any more questions, so we'll thank everybody for their time today. Any closing comments?

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Marcelino Fernández Verdes, CIMIC Group Limited - Executive Chairman [91]

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Thank you, yes, for attending this conference call. And we'll see you the next one, and I think it will be -- when?

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Stefan Camphausen, CIMIC Group Limited - CFO [92]

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July.

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Marcelino Fernández Verdes, CIMIC Group Limited - Executive Chairman [93]

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In July -- once we have the fiscal [users] and we are confident that we can provide again good news for you and for the market. Thank you very much.

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Justin Grogan, CIMIC Group Limited - Head of IR [94]

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Thank you very much, everyone, for dialing in and taking the time to listen to our results call. If you have any follow-up questions, please feel free to call me. And before we go, special congratulations to [Rohan Carmen Smith] of Goldman Sachs who became a father just in the last few days. Thanks very much, everyone, and good day.

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Operator [95]

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