U.S. Markets closed

Edited Transcript of DOW.AX earnings conference call or presentation 6-Feb-19 10:00pm GMT

Half Year 2019 Downer EDI Ltd Earnings Presentation

North Ryde, New South Wales Jul 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Downer EDI Ltd earnings conference call or presentation Wednesday, February 6, 2019 at 10:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Grant Anthony Fenn

Downer EDI Limited - MD, CEO & Director

* Michael James Ferguson

Downer EDI Limited - CFO

================================================================================

Conference Call Participants

================================================================================

* Craig Wong-Pan

Deutsche Bank AG, Research Division - Research Analyst

* James Redfern

BofA Merrill Lynch, Research Division - VP

* John Purtell

Macquarie Research - Analyst

* Jolyon Sinclaire Wellington

JP Morgan Chase & Co, Research Division - Analyst

* Nathan Reilly

UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials

* Paul Butler

Crédit Suisse AG, Research Division - Director

* Rohan Sundram

MST Marquee - Gaming and Contractors Analyst

* Scott Ryall

Rimor Equity Research Pty Ltd - Principal

* Siraj Ahmed

Citigroup Inc, Research Division - Associate

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Thank you for standing by, and welcome to the Downer Half Year Results Conference Call and Webcast. (Operator Instructions)

I'd now like to hand the conference over to Mr. Grant Fenn, CEO. Please go ahead.

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [2]

--------------------------------------------------------------------------------

Well, good morning, ladies and gentlemen, and thank you for joining the Downer team for the presentation of the Downer EDI Limited Results for the 6 months to 31 December 2018. My name is Grant Fenn, and I'm the CEO of the Downer Group. This morning, I'll take you through an overview of the results and the outlook for 2019. And Michael Ferguson, our group CFO, he'll take you through the financial position of the company in more detail. And at the end, we'll take questions.

So let's get started on Page 2. The Downer Group continues to deliver both operationally and financially for its stakeholders. Downer's earnings for the half have increased to $163.4 million. Earnings growth is at 23.8%, and we've increased our full year guidance to $352 million NPATA. As Michael will detail later, this includes $17 million in an unbudgeted revaluation gain from an acquisition in late December 2018. Downer's full year guidance provides 19% earnings growth and is in the top quartile of expected growth for companies in the ASX 100.

Over the past 9 years, our earnings have been consistently cash-backed, and this period is no exception with operating cash flows of $355.3 million and EBITDA cash conversion of 90.7%. And this is the hallmark of the Downer Group. The quality of earnings and strength of the business is clear. Downer Group cash performance is strong, predictable and reliable.

Our balance sheet continues to strengthen with gearing reduced to 23.8% from 24.6%, and our liquidity is $1.4 billion. We have the capacity and flexibility to support our growth strategy of investing in our existing businesses and expanding strategically through targeted acquisitions.

Most importantly, our efforts in the Zero Harm and well-being of our staff is resulting in fewer and less serious injuries across the group. Our safety statistics continue to improve, with our Lost Time Injury Frequency Rate at 0.68 and our Total Recordable Injury Frequency Rate at 3.09.

Off the back of this result, and in line with the group's forward view, we've decided to increase the interim dividend to $0.14 per share. The dividend will be franked to 50% and payable on the 21st of March 2019 to shareholders on the register at 21st of February.

Downer's business portfolio is now heavily weighted toward the urban services markets of transport, utilities and facilities. The growth driver of these markets is population growth with the major cities. Over 80% of group EBITA is generated in these growing and consistent markets. Increasing urbanization, as I said growing population, government outsourcing in new digital technology makes these sectors exciting and critical for the business.

Urban services now represents around 88% of the group's work-in-hand.

Territory and state governments will continue to spend on both economic and social infrastructure and will increasingly use the private sector as the service provider.

Our Mining, Energy and Industrial services represents 20% of EBITA and remains an important part of our portfolio mix. These resource-based businesses have historically been strong performers for the group and continue to perform in line with commodity cycles and investment flows.

In the 2014 financial year, mining contributed over half of the group EBITA. And as you'll see in more detail later, mining has lifted earnings by 76% and margins by over 2% in this half. It's been an important contributor to the Downer story over time.

Production volumes are expected to grow over the next 5 years, and this will translate into growth for the contract mining sector. And our focus is to continue to diversify our commodity exposure and improve the capital efficiency of our fleet.

Our Engineering, Construction and Maintenance business has also been instrumental in the development of the Downer business, with its market leadership, particularly in large scale electrical construction. This has now expanded into asset management services, which is now larger than the construction arm. We will continue to push further into the long-term maintenance and overhaul markets in both mining and oil and gas.

Another important portfolio adjustment in the Downer Group is the relative size of our services businesses compared to construction. As the group has grown, construction, including the NBN rollout, now represents less than 17% of our earnings. So what does that mean? Well, it means that we're not reliant on heavily contested and high-risk construction projects.

Our construction efforts are intentionally limited and focused in areas that will help drive long-term contracts in service markets. We limit our risk through the size of projects we undertake, the type of project and the commercial risks we accept.

Downer's shareholder value proposition is simple: grow the business through aligning our services to the right markets and customers; expansion of our low capital services -- low capital, service-oriented businesses; strategic acquisitions that grow capability in markets; and to use capital efficiency by delivering strong cash-backed earnings, maintaining a strong balance sheet and credit rating and restricting capital expenditure to worthy allocations.

Business growth, combined with efficient use of capital, will see Downer grow earnings per share and dividends per share, and our payout ratio will remain in the range of 50% to 60% of earnings. By delivering on this proposition, shareholders should expect Downer to achieve a strong relative TSR performance.

This next slide is very important for all stakeholders. Downer is often seen as a large and complex company. And as we did at our most recent Investor Day, it's worth, again, going through how we manage at this business for success.

The culture of the organization is critical to its success, and it begins with the 4 Downer pillars of safety, delivery, relationships and thought leadership. Our organization is based on these principles, and we make decisions based on them. Downer is generally a people business, and the talent and capability of our people is at the heart of our success. We are an employer of choice in both Australia and New Zealand, and we foster innovation and opportunity across the group.

Our accountability framework is integral to the way we run things. Our divisional CEOs are all very senior executives and are accountable for the performance of their business. Importantly, their autonomy is balanced by an obligation to be open about what is happening in each business. Our systems are focused on transparency.

Another important element of the accountability framework is our remuneration structure. The KPIs for the CEOs drive a consistent focus on safety and environment, earnings, cash and people.

A vital component of managing the group for success is risk management. This includes a consistent approach to safety, robust bid approval, project management and internal audit processes and centralized legal and compliance functions. Obviously, we win a lot of work each year. We could win a lot more but choose not to. Our risk management systems are a real strength at Downer, and it differentiates us from many of our peers.

Each year, we run a 3-year business plan focusing on strategy, earnings, capital allocation, return on investment and cash conversion. This is a bottom-up, top-down process that involves each of the divisions and head office. We emerge with a business plan that aligns our CEOs to the expectations of our Board and investors. Importantly, we monitor the performance with regular reviews. This detailed and disciplined exercise allows us to issue guidance each year. And as you know, we've met our guidance for 7 years in a row.

I'd now like to hand over to Michael Ferguson, our CFO, to take you through our financials in more detail. Thanks, Michael.

--------------------------------------------------------------------------------

Michael James Ferguson, Downer EDI Limited - CFO [3]

--------------------------------------------------------------------------------

Thanks, Grant, and good morning, everyone. I'll pick up from Slide 10, outlining the financial performance of the group for the first half.

Downer has recorded a strong revenue result. Group revenue, including Downer's share of revenue from joint ventures, increased 8% to $6.6 billion. It is worth noting that prior period result included a significant contribution from Downer's Freight Rail business that was divested in late 2017. Adjusting for the divestment, revenue would have increased by 10%.

This revenue growth reflects Downer's strong position across both our urban services and Mining, Energy and Industrial markets, particularly in Transport, Utilities and EC&M. We are also seeing pleasing revenue recovery in our mining division. The strong revenue performance has translated to growth in earnings, with total EBITA of $268 million being 20.6 million -- sorry, 20.6% higher than the prior corresponding period. This result included a one-off $17 million gain that I'll explain in the next slide. Excluding this gain, period-on-period growth was still strong at 13%.

Noncash acquisition-related amortization is $31.4 million compared to the prior corresponding period of $30.7 million. This includes the unwinding of the identifiable intangibles of $423 million that were ascribed to Spotless' customer contracts, relationships and brand.

Net interest expense has increased 2.7%. This includes the unwind of the discount applied to the provision recognized to reflect present value of the estimated losses on the new Royal Adelaide Hospital contract. The provision estimates the present value of the losses through to September 2022, and the unwinding of the discount applied is disclosed in net finance costs. Adjusting for this, interest expense reduced $1.7 million or 1.5% period-on-period, reflecting the benefits of the refinancing completed in 2018.

A tax expense of $53.1 million reflects an effective tax rate of 27.3%, which is consistent with prior periods. This is below the Australian statutory rate of 30% due to nontaxable distributions from joint ventures and a low corporate tax rate in New Zealand. This all equates to a net profit after tax and before amortization or NPATA of $163 million, which is up 23.8%.

Downer's return on funds employed has increased to 12.8% from 11.3% and is consistent with the growth in earnings. The directors have declared an interim dividend of $0.14 per share franked at 50%. This equates to a payout ratio of 52.3% of first half NPATA within the payout ratio range of 50% to 60% we have previously disclosed as our target.

Moving on to Slide 11, summary of earnings. Pleasingly, we are reporting a very clean result for the period. You'll recall in FY '18, we had a significant number of reconcile -- reconciliation items between our statutory result and the underlying operating profit of the business. These arose predominantly from the impact of portfolio shaping through acquisition, divestment and restructure as well as the impairment charge recognized against the carrying value of goodwill in our mining business.

We would like to identify one significant positive nontrading item that is being included in the results. As Grant highlighted, Downer acquired the 50% share of the Downer-Mouchel joint venture that it did not already own from Kier Group for net consideration of $24 million. Downer-Mouchel is part of the road network service offering within Downer's Transport business.

The transaction reached financial close on the 21st of December 2018 and, as a result, has not provided any real earnings contribution in the first half. However, on attaining 100% ownership, the accounting standards required Downer to revalue its original 50% investment in the JV to reflect this market value. This has resulted in a gain on revaluation of $17 million being recognized in other income. And as this gain is noncash and was not included in our guidance, it is appropriate we highlight its impact on our result.

The next slide outlines the impact of Downer's transition to AASB 15 revenue from contracts with customers. The full disclosures in relation to the transition are included in Note 1e of our financial statements.

When we released our full year results, we highlighted that the cumulative impact of the new standard would be reflected in the group's opening retained earnings at 1 July 2018. This was estimated to be $252 million net of tax across 3 key areas being treatment of contract modifications or claims and variations, treatment of tender costs and changes in performance obligations. During the period, we identified an additional $5.9 million of claims and variations related to 30 June 2018, which did not meet the high recognition hurdle imposed by the new standard. This has increased the total adjustments to $258 million.

We have also included in our disclosures the difference between the half year profit following the adoption of AASB 15 to that which would have been recognized applying the previous accounting standards. This disclosure has been included to allow period-to-period comparisons, given Downer used a cumulative impact and did not restate comparatives.

The disclosures show that had the new standard not been adopted, net profit after tax would have increased by $2.3 million. It's worth noting that many of the larger claims included in the 1st July 2018 transition adjustment, including the claims related to Tan Burrup and nRAH remain outstanding. We will continue to track the status of these claims for the remainder of the year and update these disclosures as part of our full year reporting.

Moving on to cash flow on Slide 13. Grant has already spoken to the strength of the operating cash flow performance of both Downer and Spotless during the half year. The group generated total operating cash flows of $355 million, with strong performances across the group. Spotless' operating cash flow processes are now consistent with those of the other Downer divisions. This is reflected in the Spotless operating cash flow conversion which, when adjusted for the cash losses at nRAH, came in at 91.6%.

In terms of overall cash flow, net capital expenditure was $192 million, consistent with the prior period. Total mining capital comprise approximately half of this amount, with growth capital invested to support recent contract wins at Cadia, Carrapateena, Gruyere and Blackwater. In addition, the group has also invested in upgrading its asphalt and rail facilities and improving the productivity of the Spotless laundries.

Acquisition outflow, net of cash acquired, totaled $46 million. This included the acquisition of the other 50% of the Downer-Mouchel joint venture from Kier for $24 million, with the balance related to small acquisitions and deferred purchase consideration.

IT transformation and other includes the development of Downer's multi-fleet management system in preparation for the mobilization of the TLS phase of the Waratah extension and the HCMT metro project.

Financing cash outflow includes the net repayment of borrowings of $106 million. This includes the repayment of a maturing Aussie dollar medium-term note issue of $150 million. Total dividends paid of $87.4 million has increased 16.1% as a result of the increase in the final dividend for FY '18 from $0.13 per share to $0.14 per share in addition to the rights dividend. Cash held at 31 December was $505 million which, when combined with undrawn facilities of $855 million, provides us with significant liquidity of $1.5 billion -- $1.4 billion and leaves Downer well positioned for growth.

Turning to Slide 15, the Downer Group balance sheet remains strong with comfortable gearing and a strong net asset position. The reduction in current and net assets is due to the transition to the new revenue recognition standard and the resultant reduction in claims in work-in-progress. Gearing at 31 December was 23.8%, still comfortably within Downer's target range.

Finally, on Slide 16, our group debt maturity profile. Weighted average debt maturity of 3.8 years reflects the significant refinancing that took place in 2018 across both the Downer and Spotless debt platforms. The group had total net debt of $940 million, being $237 million in Downer and $703 million in Spotless. We have previously highlighted to reduce -- the need to reduce the Spotless net debt, and it is pleasing to see this has reduced by 5% since June 2018.

We continue to sit comfortably within our credit rating and debt covenant metrics. Our credit rating with Fitch remains at BBB with a stable outlook. Further details on debt and bonding including covenant calculations can be found in the supplementary information on Slide 31.

Thanks very much, and I'll now hand back to Grant.

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [4]

--------------------------------------------------------------------------------

Thanks, Mike, and I'll now run through some of the highlights for each of the 5 service lines. And we'll start with Transport.

So Transport delivered a small increase in revenue for the half year, which was a significant achievement given that the prior corresponding period included $83 million of revenue from freight rail and in that business we sold in late December 2017. The 10% growth in EBITA was driven by strong performances across our roads, bituminous products, rolling stock and light rail businesses. The major rolling stock projects, that's Sydney Growth Trains and the Melbourne High Capacity Metro Trains, are progressing well.

12 of the 24 Waratah Series 2 trains are in passenger service. And yesterday, as you probably have heard, the New South Wales government announced that they had ordered another 17 of these Series 2 trains. Once these initial trains are delivered, there will be 119 Waratah trains servicing the Sydney network and being overhauled and maintained by Downer for the next decade.

There's a very solid pipeline of work for transport, including the building of Stage 1 of the Parramatta Light Rail project and the JV with CPB Contractors. Michael referred earlier to the acquisition of the remaining 50% of the Downer-Mouchel roads business that we didn't already own. And importantly, this investment has an extensive footprint across WA, New South Wales and Queensland and more substantially enhance our network management capability.

Moving to Utilities. Utilities delivered significant growth in both revenue and earnings, with another strong performance from communications and an improved contribution from the water business. Our power and gas distribution businesses are also winning work and expanding. The margin for Utilities was negatively impacted by poor performance in our solar farm business. I'm pleased to say that our remaining solar projects are performing to budget.

The rapid and substantial investment in renewables generation has created the requirement for significant investment in the transmission grids around the country. This is a significant opportunity for Downer as the market leader.

If we move to facilities now. So the facility services line includes Spotless and Hawkins. We have decided to combine those businesses for reporting purposes to better reflect our leverage into the facility sector. We see increased opportunities for Hawkins and Spotless to drive revenue together in the New Zealand market. The stand-alone Spotless results are set out in the supplementary information.

While revenue was down slightly, EBITA and EBITA margin improved, mainly due to the hospitality and FM, defense and laundries businesses. We continue to invest in Spotless to improve performance, including in business development, operational excellence and bid and delivery governance. The integration of our mechanical and electrical and HVAC, or heating ventilation and air conditioning, has created a strengthened service offering that is creating new service opportunities.

Outsourcing opportunities are emerging across the government and hospitality sectors, and there is a strong pipeline of work in the justice, critical infrastructure and defense of state development sectors, all of which are growth markets for us.

We're doing a very good job at the new Royal Adelaide Hospital. And we continue to work with the South Australian government and Celsus for solutions to the various operational and commercial issues. Our monthly financial position has improved in line with the reduction in headcount.

I'll now turn to our Mining, Energy and Industrial services businesses. As we foreshadowed at the 2018 full year results presentation, the first half of 2019 has seen our mining business rebound. With underground contract wins and renewals at the Newcrest, Cadia and CSA Glenncore copper mines and also at Cosmo Gold Mine. Our open cut team also secured wins and extensions in both coal and iron ore.

The growth in EBITA was driven by overhead cost reduction and improved operational productivity. Importantly, our mining services offering has diversified beyond coal and iron ore with long-term contracts at copper and gold mines, with underground now a significant contributor.

EC&M achieved robust revenue growth, driven by our ongoing strong performance at Ichthys and a number of contract wins. Engineering services won more work in the global mineral sands, base metals and industrial mineral processing sectors. We also won long-term asset service contracts with Chevron for 5 years and BHP Iron Ore for 3 years. Significantly, the maintenance and asset services component of EC&M is now a larger and more profitable contributor to this service line than construction.

There has been a lot of talk about investment in iron ore projects in WA, and these projects are now coming to market. We have won work in this space, and we expect to win more. These projects will contribute to our performance in 2020 and 2021.

I'll now turn to the outlook for the remainder of the 2019 financial year.

Downer has increased its target guidance for the 2019 financial year to $352 million NPATA. The increase takes into account the unbudgeted fair value gain of $17 million from acquiring the remaining 50% of the Downer-Mouchel joint venture.

Our goals for the rest of this financial year include ensuring a safe environment for employees, with improving injury rates and well-being; delivering our EPS growth of 19%; maintaining our strong cash performance; managing capital actively and maintaining a dividend payout ratio of between 50% and 60% of NPATA; maintaining a conservative gearing position and providing balance sheet flexibility to support growth.

As you can see from this final slide in today's presentation, our outlook is supported by work-in-hand of $43.5 billion, up from $42 billion at 30 June 2018. This is a significant body of contracted work, which continues to build.

And with that, thank you, ladies and gentlemen. And I'd now like to hand back to the conference convenors for the Q&A. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And your first question comes from James Redfern from Merrill Lynch.

--------------------------------------------------------------------------------

James Redfern, BofA Merrill Lynch, Research Division - VP [2]

--------------------------------------------------------------------------------

Just 3 questions, please. The first one is on the guidance to NPATA. I guess if we strip out the $17 million fair adjustment that I presume is a nonrecurring accounting item, the NPATA guidance is unchanged or reaffirmed at $335 million? That's the first one.

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [3]

--------------------------------------------------------------------------------

Yes, well, that's great.

--------------------------------------------------------------------------------

James Redfern, BofA Merrill Lynch, Research Division - VP [4]

--------------------------------------------------------------------------------

Okay. And then in terms of the 2 loss-making construction projects in EC&M, can you please just remind me what they were?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [5]

--------------------------------------------------------------------------------

I won't call them out specifically, but they weren't particularly large but, in the end, impacted on the EC&M margin and were in the generation. Not in solar or renewables but in power generation.

--------------------------------------------------------------------------------

James Redfern, BofA Merrill Lynch, Research Division - VP [6]

--------------------------------------------------------------------------------

Okay. And then just last quick one, Downer recently won the Parramatta light rail contract. Just wondering how the bidding part one looks for the next 6, 12 months in terms of what we should we look out for in terms of projects that you're currently bidding on?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [7]

--------------------------------------------------------------------------------

Sorry, which light rail contract?

--------------------------------------------------------------------------------

James Redfern, BofA Merrill Lynch, Research Division - VP [8]

--------------------------------------------------------------------------------

Well, you said Parramatta Light Rail.

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [9]

--------------------------------------------------------------------------------

Sorry, Parramatta. Yes, so we picked up Parramatta. Sorry, the question?

--------------------------------------------------------------------------------

James Redfern, BofA Merrill Lynch, Research Division - VP [10]

--------------------------------------------------------------------------------

The question is just in terms of the bidding pipeline outlook and what we can look for or forward to in the next 6, 12 months.

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [11]

--------------------------------------------------------------------------------

Well, that's pretty solid. We -- the -- our CRM opportunities for all of the businesses are very solid. And as you'll understand with the focus of the presentation, our interests are much more in the long-term service contracts than they are in large civil projects. We focus ourselves to the extent that we're involved in those civil projects to areas that will help drive other service revenue. I can understand with light rail, that's important to us. We're on the largest light rail network in the world with Yarra Trams, with also Gold Coast Light Rail and Newcastle, et cetera, et cetera. So it's important to us on that. But the pipeline for all of the business is very strong.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

Our next question is from Craig Wong-Pan from Deutsche Bank.

--------------------------------------------------------------------------------

Craig Wong-Pan, Deutsche Bank AG, Research Division - Research Analyst [13]

--------------------------------------------------------------------------------

Just wanted to understand with the acquisitions you announced or you've got in your report and also the acquisition of the remaining 50% of the joint venture with Mouchel, how much per revenue or earnings would that add in the second half, given that you're beginning an extra 6 months' worth of contribution from those businesses?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [14]

--------------------------------------------------------------------------------

Yes, so we're talking about the half that's just gone by, it's been immaterial.

--------------------------------------------------------------------------------

Michael James Ferguson, Downer EDI Limited - CFO [15]

--------------------------------------------------------------------------------

Yes, we closed on the 21st of December, so a very small contribution.

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [16]

--------------------------------------------------------------------------------

And there will be some contribution at the second half but relatively immaterial there as well. So we'll update you on that a little later, but it's relatively immaterial.

--------------------------------------------------------------------------------

Craig Wong-Pan, Deutsche Bank AG, Research Division - Research Analyst [17]

--------------------------------------------------------------------------------

Okay. And then just wanted to understand with the facility services decline, that decline in revenue, what's caused that?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [18]

--------------------------------------------------------------------------------

Well, nothing in particular. It's just, as we've run our business, there's been -- in some of the service contracts, there's been less construction work. It's just the way that the government procurement has worked. So there just hasn't been the work there. But we're expecting that to pick up. So it's not a -- it's just a seasonal issue, we believe.

--------------------------------------------------------------------------------

Michael James Ferguson, Downer EDI Limited - CFO [19]

--------------------------------------------------------------------------------

There's a lot of Adelaide mobilization work in the first half of '18 as well which has not come through this issue.

--------------------------------------------------------------------------------

Craig Wong-Pan, Deutsche Bank AG, Research Division - Research Analyst [20]

--------------------------------------------------------------------------------

Okay. And then my last question, just on the Royal Adelaide Hospital contract. I noticed that the present value or losses has been reduced, and you talked about the monthly losses or the run rate has been reduced due to lower headcount. Is that now at -- is that sort of -- is there any more to go to reduce those losses? Or is it now just contingent on you negotiating another contract with the government?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [21]

--------------------------------------------------------------------------------

We think always -- it depends how the hospital works, right? The hospital, there's a lot of improvement still to go in that hospital, and that may impact further resources that we need. But that will largely be part of the next phase of sort of improving hospitals, so it's not just us. In terms of how the hospital works today, it's there or thereabouts, we might see slight improvements, but it's about where it's at. That provision was made with a view to the cycling of what we thought our improvements would be, and we're tracking slightly better than that.

--------------------------------------------------------------------------------

Craig Wong-Pan, Deutsche Bank AG, Research Division - Research Analyst [22]

--------------------------------------------------------------------------------

And just following on from that, the negotiations with the government, I mean, it's probably very hard to put a timing on that, but can you give any estimated time frame for when we might be able to get...

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [23]

--------------------------------------------------------------------------------

Yes, well, we certainly would have hoped that it was sorted by now. But in these situations-- because there's a PPP in the middle, it's not as easy as a straight direct negotiation here. So there's lots of parts to this. We are no less confident around getting this sorted. We believe that we will have it sorted. Of course in the background, there is also quite a substantial arbitration claim that's being worked. But we believe we won't need to go down that path and there will be a negotiated settlement. But it has dragged on. We hope that it's not going to drag on to the full year. And we're in negotiations now. So let's hope that, that gets to where we need it to go to.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

Next question is from Paul Butler from Crédit Suisse.

--------------------------------------------------------------------------------

Paul Butler, Crédit Suisse AG, Research Division - Director [25]

--------------------------------------------------------------------------------

Could you just remind me what the size of the provision increase related to Royal Adelaide was? I mean, I think overall you're saying the provision increase was around $80 million.

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [26]

--------------------------------------------------------------------------------

$80 million -- $85 million.

--------------------------------------------------------------------------------

Paul Butler, Crédit Suisse AG, Research Division - Director [27]

--------------------------------------------------------------------------------

So it's $85 million related to Adelaide?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [28]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Paul Butler, Crédit Suisse AG, Research Division - Director [29]

--------------------------------------------------------------------------------

And just trying to understand what's the worst-case scenario, when is the reset date for that contract?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [30]

--------------------------------------------------------------------------------

Yes. So what we've disclosed, the contract does a reset in 5 years. So what we've done is we've taken our expected losses for that period out to 2022 should we not negotiate a better position. And if we're unsuccessful in what would then be resulting arbitration claims. So that is the worst scenario that we've currently got on deck at the moment.

--------------------------------------------------------------------------------

Paul Butler, Crédit Suisse AG, Research Division - Director [31]

--------------------------------------------------------------------------------

Okay. So the reset is 2022? Is that...

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [32]

--------------------------------------------------------------------------------

Yes, that's correct.

--------------------------------------------------------------------------------

Paul Butler, Crédit Suisse AG, Research Division - Director [33]

--------------------------------------------------------------------------------

Is that midway through the year? Or when is that?

--------------------------------------------------------------------------------

Michael James Ferguson, Downer EDI Limited - CFO [34]

--------------------------------------------------------------------------------

September.

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [35]

--------------------------------------------------------------------------------

September.

--------------------------------------------------------------------------------

Paul Butler, Crédit Suisse AG, Research Division - Director [36]

--------------------------------------------------------------------------------

Okay. And so based on your current loss rate, that -- your run rate at the moment, do you reckon this provision covers you at that sort of pace for that remaining time period?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [37]

--------------------------------------------------------------------------------

Yes, so provision rate was worked off a -- well, worked off our view of where our headcount and cost would get to. We're tracking slightly ahead of that at the moment.

--------------------------------------------------------------------------------

Paul Butler, Crédit Suisse AG, Research Division - Director [38]

--------------------------------------------------------------------------------

Okay. And my next question is the -- you've changed the segment reporting, I'm just wondering...

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [39]

--------------------------------------------------------------------------------

Yes, slightly. So what -- yes, you'll see the couple of things that we've done is that we've -- with the sale of freight rail in December of '17, that meant that the rail business was vastly smaller than the rest of what we had. And in fact, was being managed through our transport part of the business. So we've joined rail into transport. That's -- I guess, that's -- well, I think it's minor. But that's what happened. And on our facilities, we've joined Hawkins and Spotless together. We've done that because increasingly, we see a lot of effort and opportunity for those two to be working together, and they are in a similar vein, one constructing and one servicing facility. So Spotless is...

--------------------------------------------------------------------------------

Paul Butler, Crédit Suisse AG, Research Division - Director [40]

--------------------------------------------------------------------------------

But I mean, then -- but it's not the way you run it -- run the business though, is it? I mean, Spotless is operated separately to Hawkins?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [41]

--------------------------------------------------------------------------------

Well, it has a lower level managers that are -- or management that is different but it comes up to a joint position here. And we also disclosed what the Spotless numbers are. So you'll just have to work that out. So in our view, that is how we think about our business. And if you think of the push of the presentation with urban services and the resource base Mining, Energy and Industrials, it's a very clear picture that we're pushing here and that's the reality of our business. Facility services being part of that urban side. Hawkins and Spotless are part of that. Now you may say, well you'd prefer to see it elsewhere but that's how we see it.

--------------------------------------------------------------------------------

Paul Butler, Crédit Suisse AG, Research Division - Director [42]

--------------------------------------------------------------------------------

Yes. Now I don't know if I've missed it, but have you provided the FY '18 full year numbers under the restated basis?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [43]

--------------------------------------------------------------------------------

No. No, we've not done that.

--------------------------------------------------------------------------------

Paul Butler, Crédit Suisse AG, Research Division - Director [44]

--------------------------------------------------------------------------------

Could we get those, please?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [45]

--------------------------------------------------------------------------------

Look, we'll consider that, I'll speak to Michael and perhaps you can speak, you can talk offline and if we did that of course, which I'm not sure that we will, but if we did, then we'll make it available to everybody.

--------------------------------------------------------------------------------

Paul Butler, Crédit Suisse AG, Research Division - Director [46]

--------------------------------------------------------------------------------

Okay. And just a couple of other ones. You've made a management change at Spotless. Just wondering if you'd comment on what you're seeing there in terms of the progress of the improvement in that business?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [47]

--------------------------------------------------------------------------------

Yes, well progress is substantial. We're -- we now have, not entirely, but very close to the senior executive both group and structure. There's a bit more to be done there. We're developing centers of excellence for some of the technical aspects of what Spotless does and we think that's what's been missing certainly for a period of time. Not always missing, Spotless had this in the past, and we're now bringing that back in. And what that will allow us to do is to focus very clearly on our customer base and give them the absolute best in the services that we provide rather than a conglomerate view of things. So Peter Tompkins has come in as the CEO of that business. That's a significant change. Peter has been a long-term Downer, very senior executive and he will do a very good job there and he certainly has started since he's been appointment -- since he's been appointed, he's excellent.

--------------------------------------------------------------------------------

Paul Butler, Crédit Suisse AG, Research Division - Director [48]

--------------------------------------------------------------------------------

Okay. And so if we exclude Royal Adelaide, I mean, is -- how's Spotless performing in terms of the turnaround compared to your expectations?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [49]

--------------------------------------------------------------------------------

Look, I -- we look at the opportunity list within Spotless, and it's very large and it's in the areas that we want. We still have a base level of work to do on that business to be where we want it to be. So it's still a work in progress. But we're seeing in a number of areas, there are very, very good things. So on -- and the board is still very, very positive about the acquisition. But we've -- we still got work to do and we still got work to show the investment community that we've done the right thing there, frankly. But that's our belief, and it's given Downer a whole new set of growth opportunities. So we have work to be done but, so far, going well.

--------------------------------------------------------------------------------

Paul Butler, Crédit Suisse AG, Research Division - Director [50]

--------------------------------------------------------------------------------

Okay. And just one last one is can you give us a bit of color on the High Capacity Metro Train project? I think the first train is due to be delivered this year. I think in the presentation, you said it's performing well. Just I don't know if you can give us a bit more color on that. And particularly, what's made this -- or what's making this project perform better than, say, the original Waratah project?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [51]

--------------------------------------------------------------------------------

Yes, it's a good question. Yes, so HCMT, this is basically the build of a brand-new train. So it's not the Waratah or a derivative of it. So with that comes a lot of complexity in the project. And I've got to say that we are, at this point, very happy with that progress. And that's both with our own team at Downer and also working with our partners, CRRC, the Chinese train constructor. We have got to the point where we have produced the first train and that has -- that train has now been moved from our manufacturing site at Newport in Melbourne out to Pakenham, where the depot is. And that is now undergoing -- the start of the work and testing in that facility. So that's quite a milestone. If you think about what's happened there is that, that train has been designed. That design has been approved. We've built the depot. We've got that train. We've moved it out there. And that's a very significant set of milestones there. As with all very complex projects, every day there is a new problem and every second day, we solve them. And that's the way that is. And for a train project this size and in complexity, we're very happy with it. And you also need to understand it, I'm sure you do, that the beating entity here is a joint venture between ourselves and CRRC and there is a scope split. So our role in the design and construct of those trains is very much in the project management. So we are helping the Chinese with the build of the train. Then of course, we are also building the depot which is being done. And then we will take over them. We will do the maintenance once the trains are produced. So whilst we are not directly in the firing line or, if you like, the risk of design and construction, when we talk about the project going well, we have been sort of integral with working with our partner in getting that construction going, and we're pretty happy with it. So I don't know, is there any more that you'd like to know there?

--------------------------------------------------------------------------------

Paul Butler, Crédit Suisse AG, Research Division - Director [52]

--------------------------------------------------------------------------------

Yes. Look, while I understood one of the issues with the original Waratah project is those, if you like, too much micromanaging by the state government in the design process. And have you managed to avoid that in this particular project?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [53]

--------------------------------------------------------------------------------

Yes, look, we can go into hours on Waratah. But let's say this, when you are designing a brand-new train, which Waratah was and, of course, this one is now, you can understand from your customers' point of view that they want to be sure as you go through that design process that, that train is going to meet the requirements that they've specified there. And so that obviously means that you are going to have to, along the way, work with the state and their representatives, the consultant representatives, to make that happen and go past approval points. Now in the Waratah, that was a difficult process, and it was difficult from the state side and also our own. In this case, having been very wise to the issues on Waratah, we were at pains with the state in Victoria to have a process that would work more seamlessly and, thankfully so far, that's certainly been the case. And of course, Waratah wasn't without its issues on the construction side either. And we also took the learnings from Waratah into -- we are taking the learnings of Waratah into the construction of the HCMT. So whilst we wouldn't say at all that all risk has been retired on this project, it is going, at the moment, very well.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

Our next question comes from Rohan Sundram from MST.

--------------------------------------------------------------------------------

Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [55]

--------------------------------------------------------------------------------

Just a few questions. Firstly, apologies if I missed it, but what is the headcount at the moment on Royal Adelaide?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [56]

--------------------------------------------------------------------------------

It's -- it ranges between sort of 780 to 800.

--------------------------------------------------------------------------------

Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [57]

--------------------------------------------------------------------------------

Okay. And on your guidance, can I just ask, how locked in do you feel it is? Do you feel you need to win more work? Or is it more a case of execution from here onwards?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [58]

--------------------------------------------------------------------------------

Look, you could ask the same question when we put it out in August of the year. Look, you've always got to produce to meet your guidance, and it's no different here, right? So the fact that we are confirming our guidance plus the 17 should tell you, given our history, that we think we will meet that. And I guess, should we be in a position or at any stage that we think that we're not, then we'll tell you. But I think you'd have to take us on our past experience on that.

--------------------------------------------------------------------------------

Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [59]

--------------------------------------------------------------------------------

Okay. And on the Waratah contract from your side, roughly ballpark-wise, what's the mix between maintenance and construction in that $900 million?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [60]

--------------------------------------------------------------------------------

Yes, look, roughly it's about 1/3, 2/3. So 1/3 construction and 2/3 maintenance.

--------------------------------------------------------------------------------

Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [61]

--------------------------------------------------------------------------------

And is there much of a margin differential towards the maintenance? I think from memory maintenance is much better, margin, is that right?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [62]

--------------------------------------------------------------------------------

Look, the construction side of it has been priced by CRRC. So I'm not going to go into how they price because actually I don't know. But I do know our margins on the maintenance are reasonable. But these are all competitive and competitively bid. So there's no super profits here. We have to work very hard to make our money.

--------------------------------------------------------------------------------

Michael James Ferguson, Downer EDI Limited - CFO [63]

--------------------------------------------------------------------------------

And similar to the current trains we've got, Rohan, for the extensions as the CRRC element of that 1/3 just passes through our books. So that appears as fairly low margin to Downer when, in fact, it's a pass-through.

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [64]

--------------------------------------------------------------------------------

One of the benefits that, of course, we get here is that all of those trains are maintained from the urban maintenance facilities. So there is, of course, some scale advantage. And it's not just the Waratah's but also the Millenniums that are maintained out of that facility. So that helps. That helps not just in benefits to us but also benefits to the state in better reliability as well.

--------------------------------------------------------------------------------

Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [65]

--------------------------------------------------------------------------------

And last question is, is it your expectation that the New South Wales government will exercise that option for further Waratah trains? I think it might be another 28 or so.

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [66]

--------------------------------------------------------------------------------

Well, I've got a fantastic product and I'm not sure whether you had the opportunity to listen to Minister Constance yesterday. There are many benefits of the state to continue procurement of this train, in particular, reliability and also training costs for drivers and other crew. But I think, of course, that they should buy many more. But we'll just have to wait and see.

--------------------------------------------------------------------------------

Operator [67]

--------------------------------------------------------------------------------

Next question is from Siraj Ahmed from Citigroup.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [68]

--------------------------------------------------------------------------------

Just a few questions from me. The first thing, I might have missed this, but just on the EC&M, has the 2 contracts completed, the 2 problem contracts? Any color?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [69]

--------------------------------------------------------------------------------

One is and one is 80%.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [70]

--------------------------------------------------------------------------------

Okay. And these are -- and did you say these are construction -- I mean what type of contracts are these?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [71]

--------------------------------------------------------------------------------

EPC.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [72]

--------------------------------------------------------------------------------

EPC, okay. And just again on the renewables, you did call out solar continue to be an issue. Again, is that complete as well? And the rest of the -- just wanted to know if the problem contracts are completed.

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [73]

--------------------------------------------------------------------------------

Well, virtually completed. So there's still some bits and pieces, but we've taken our pain on those, we believe. And they are -- construction is basically done. It's now minor bits and pieces. The pleasing thing is that we've learned a lot on this during the process and that 2 solar farms that we have on deck at that moment are -- we're doing well on. The risk -- what we have seen now is over the period is that the EPC risk on the solar includes taking connections and your ability or your -- the ease of connection has changed dramatically with all of the solar plants coming on deck. It's meant that the grid in certain areas where these have been put has become much more volatile and that has created a lot more work for people like ourselves to get them connected. And that's an area that we're looking very closely at. So the future of what risks we will take, it's very unlikely that we'll be taking connection risk any further unless it's very clear around the requirements for connection. So we're taking a pretty risk averse position on solar at the moment. The projects that we're doing are going well, but it's a developing market. That's for sure.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [74]

--------------------------------------------------------------------------------

Just to confirm. I mean, you've won a few contracts recently. And in that, have you -- I mean, have you taken the connection risk for that or that's not included?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [75]

--------------------------------------------------------------------------------

Yes, the 2 that we've got on deck, yes, we do. Of course, again, we've got a lot more understanding of the nature of both AMOS requirements and also the transmission grid owners. So we've got a place to do that. And we think we've ironed out what has also been issues with material supply, et cetera. So we're in a much better spot. We don't think we'll get losses on the next 2. But of course, just the variability in the requirements to connection would mean that we're going to look very carefully before we take too much more of that risk.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [76]

--------------------------------------------------------------------------------

And just thinking of margins for EC&M and Utilities, I mean, that declined with the problem contracts. Should we expect second half to step back to where historicals were, when the contracts are over?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [77]

--------------------------------------------------------------------------------

Yes, there was no reason why we shouldn't see that. We've taken the pain now. So that's right. We should see margins kick back in.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [78]

--------------------------------------------------------------------------------

Okay. And just on EC&M, I mean, first half would have had some Ichthys in their rate. Can you just remind us, are you -- is Ichthys completed now?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [79]

--------------------------------------------------------------------------------

We're still on it. We've still got a very sizable workforce on Ichthys. We think that we'll start to ramp down in the next couple of months. And we'll just see where it goes. But it's been a bit longer than we had expected also.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [80]

--------------------------------------------------------------------------------

And just on the previous question. On guidance, I mean, at the FY '18 results, you have mentioned 75% of revenue is secured. Where do you stand right now? If you could give an update.

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [81]

--------------------------------------------------------------------------------

On -- sorry, for the full year?

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [82]

--------------------------------------------------------------------------------

Yes, for the full year secured revenue. I mean, it could have increased but just trying to see where you are. Is it 90% or...

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [83]

--------------------------------------------------------------------------------

Yes, look, it's mostly -- look, I couldn't give you an exact number. I'm not sure that I've calc-ed that out. Somewhere in the organization, we've got it. But put it this way, I'm not concerned about -- at this stage, concerned about having to win revenue and deliver in the next 4 months.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [84]

--------------------------------------------------------------------------------

Okay. And just a couple more. So Spotless, their revenue declined in this half. Is that just the Royal Adelaide modernization of it? I missed that because of the -- actually Spotless revenue has declined 5% or so?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [85]

--------------------------------------------------------------------------------

Yes, we were just saying that there's a bit of previous sort of corresponding period noise in that as far as what was in there. And there's been a bit of delay on some project work in some of our long-term contracts which we think is simply seasonal, which will pick back up so...

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [86]

--------------------------------------------------------------------------------

And the interest cost for this half, was it $1.5 million of one-offs? Is that right?

--------------------------------------------------------------------------------

Michael James Ferguson, Downer EDI Limited - CFO [87]

--------------------------------------------------------------------------------

Yes, they're not one-offs, but it's the unwinding of the discount on the Adelaide provision. So when we book it, we book it at present value. And as you unwind or you reduce it, you reduce the provision issue incur the losses but you also unwind the base pay of the provision and you show that through interest cost. So that's the -- I mean it's a noncash and a book entry as to reset the provision, but the accounting standards requires to put it through finance costs.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [88]

--------------------------------------------------------------------------------

Okay. And then just thinking through -- you had mentioned, there will be a strategic bid cost of $10 million. Has that been completely incurred in the first half or?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [89]

--------------------------------------------------------------------------------

Yes. Yes, it is.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [90]

--------------------------------------------------------------------------------

Yes, so that should have come through in the second half or I mean there will be some bid costs on second half as well but not that...

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [91]

--------------------------------------------------------------------------------

Yes, so just to -- just so you understand it, we have got -- our bid costs are significantly more than $10 million. We called out $10 million as costs related to major strategic bids, which are funded out of the center. And at this stage, we don't see that, that's going to be the case in the second half.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [92]

--------------------------------------------------------------------------------

So it's, I guess, the incurred corporate costs and record costs on that, that's back in that sort amount. Is that the way we should think about it?

--------------------------------------------------------------------------------

Michael James Ferguson, Downer EDI Limited - CFO [93]

--------------------------------------------------------------------------------

Yes, some of those costs have gone through our corporate costs for the half.

--------------------------------------------------------------------------------

Operator [94]

--------------------------------------------------------------------------------

Our next question is from Scott Ryall from Rimor Equity.

--------------------------------------------------------------------------------

Scott Ryall, Rimor Equity Research Pty Ltd - Principal [95]

--------------------------------------------------------------------------------

Grant, have you ever given -- or are you prepared to talk to the split in -- within urban services, the split between the different layers of government in terms of importance to your business, revenue contribution, whatever you're prepared to say?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [96]

--------------------------------------------------------------------------------

We haven't, and I'd be reluctant.

--------------------------------------------------------------------------------

Scott Ryall, Rimor Equity Research Pty Ltd - Principal [97]

--------------------------------------------------------------------------------

Okay, that's fine. Can you then just -- I've got 2 questions with respect to, I guess, the exposures you'd have to federal and state and to local. How -- can you just talk for federal and state, how you manage -- I understand you're not as much exposed to the construction side, which is good particularly at this time of the cycle. But how do you manage the risks associated with the potential for change in government? And then in terms of your local government exposures, given the -- how many local governments there are across Australia. Can you talk to what you do to win new business from an entirely new council? What do you take in that shows your capability, your ability to value add and those sorts of things? If you can just talk to those 2 things.

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [98]

--------------------------------------------------------------------------------

Yes, we could be going on for hours here. I'll give you -- okay, so you'd understand that state governments and local governments are the 2 levels of government which provide us with the vast majority of our work, although, we do have a large defense business which, of course, is at the federal government level. We interact with state governments, in particular, at a number of levels in the organization, very much at the operational level and that is almost at site level through to the management structures that sit below that. And then we have the CEOs who have strong relationships across all of their counterparties within the state organizations, whether it be in roads or rail or health or whatever you like. We then, of course, have a -- at head office level, myself having relationships and our SG&I, so it's our strategy, growth and innovation area, also having relationships at ministerial and also at department level bureaucracies. So we're just getting a bit of feedback here, which I'm just trying to solve. Sorry, so it's a bit difficult. Sorry, that's better. So we track our opportunities and what we want to bid for. We're doing a lot of work upfront with our state government customers and local governments. So bidding in the local governments, our people are constantly in dialogue across the local government markets. And if -- perhaps, you have seen a lot of publicity for the very good R&D work that we do on our road servicing, right, the bituminous products.

--------------------------------------------------------------------------------

Scott Ryall, Rimor Equity Research Pty Ltd - Principal [99]

--------------------------------------------------------------------------------

Yes, I have been there.

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [100]

--------------------------------------------------------------------------------

Right, so that -- and we're doing a lot of stuff in waste and risk. But there are -- that effort is not run from the center. That effort is run from our operations individually. And sometimes, in some cases, geographically. And if you think about Downer and Spotless -- but I'll talk Downer for a moment. We have operations around the country and around New Zealand, and we are very close at all levels of government. And it's -- it's just a very important aspect of what we do, and Spotless is no different.

--------------------------------------------------------------------------------

Operator [101]

--------------------------------------------------------------------------------

Your next question does come from Nathan Reilly from UBS.

--------------------------------------------------------------------------------

Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [102]

--------------------------------------------------------------------------------

Just a really quick question, just in relation to this Spotless provision. I just want to make sure I've got the accounting right because I think when you last sort of disclosed the information around this provision, you sort of flagged it as an onerous provision that would be booked, I think, on the 1st of July of this -- of 2018.

--------------------------------------------------------------------------------

Michael James Ferguson, Downer EDI Limited - CFO [103]

--------------------------------------------------------------------------------

That's right.

--------------------------------------------------------------------------------

Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [104]

--------------------------------------------------------------------------------

So just to confirm. So that was -- I think, it was -- $94 million was the estimate of that -- or the fair value of that provision at that point in time. So that's gone. So that was adopted on the 1st of July, is that correct?

--------------------------------------------------------------------------------

Michael James Ferguson, Downer EDI Limited - CFO [105]

--------------------------------------------------------------------------------

That's correct.

--------------------------------------------------------------------------------

Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [106]

--------------------------------------------------------------------------------

So you haven't actually increased the provision by $67 million. Is the balance of that provision now $67 million?

--------------------------------------------------------------------------------

Michael James Ferguson, Downer EDI Limited - CFO [107]

--------------------------------------------------------------------------------

The balance, yes. We've -- so we've -- as the losses -- as we've incurred the losses, we recognized the losses against the provision and that's scaled down from when we were -- where we were at July through to where we are at December with the reduction in heads. And so that reduces the provision accordingly. And then we then have to unwind the interest component or the fair value or the -- sorry, the financing cost element of the provision back against the provision through the P&L through finance charges. So if you think of it from an accounting perspective, it was the AASB 15 adjustment reduced equity and created the provision on 1 July. And then as we incur the losses, we reduced the provision and then we unwind the fair value of the provision through our P&L. And that was about $2 million. So that the P&L impact or the impact of the losses is about $2 million through interest charge. The rest of the losses for Adelaide have been incurred through the -- or been adjusted to the balance of the provision, which when you look at then the cash flow, we've called it out because it's not gone through the P&L. We then adjusted the operating cash flow conversion to take into account the losses that we've incurred.

--------------------------------------------------------------------------------

Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [108]

--------------------------------------------------------------------------------

And what was that cash flow impact?

--------------------------------------------------------------------------------

Michael James Ferguson, Downer EDI Limited - CFO [109]

--------------------------------------------------------------------------------

About $18 million.

--------------------------------------------------------------------------------

Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [110]

--------------------------------------------------------------------------------

$18 million, okay. So on 1 July, the -- your estimate of the future losses there was $94 million and the net position now is where you've taken those losses against that provision. So you haven't actually needed to increase your estimate of future losses during this period?

--------------------------------------------------------------------------------

Michael James Ferguson, Downer EDI Limited - CFO [111]

--------------------------------------------------------------------------------

No, in fact, it's almost -- and Grant alluded to the modeling that we did on the headcount reduction where we've reduced the heads slightly quicker. And so when we're tracking the model reduction versus the actual reduction, we're going slightly better than we anticipated. So we have an adjusted provision to reflect that because there's still a fair bit to go through to September 2022, but we're comfortable that we are not in the position that provision is unstated at this point.

--------------------------------------------------------------------------------

Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [112]

--------------------------------------------------------------------------------

Okay, that's great. And could I just get a quick update on the NBN project. Just where you are in terms of the status there and how much work is left to sort of roll through?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [113]

--------------------------------------------------------------------------------

Yes, it rolls on. So obviously, that project has had 3 or 4 or maybe 5 or 6 machinations. But it will roll through in the sort of mid-2020, we believe, at least.

--------------------------------------------------------------------------------

Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [114]

--------------------------------------------------------------------------------

Sorry, I'm having trouble hearing you there.

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [115]

--------------------------------------------------------------------------------

Yes, sorry, we're having issues with our technology here. But can you hear that?

--------------------------------------------------------------------------------

Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [116]

--------------------------------------------------------------------------------

Yes, I still can't hear you.

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [117]

--------------------------------------------------------------------------------

Michael?

--------------------------------------------------------------------------------

Michael James Ferguson, Downer EDI Limited - CFO [118]

--------------------------------------------------------------------------------

Yes, can you hear me?

--------------------------------------------------------------------------------

Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [119]

--------------------------------------------------------------------------------

Yes, I can. So the contract runs through to 2021 that we've got at the moment. So volume's strong through '18, strong through the first half of '19. We expect that to continue through to '20 with the trail off in '21.

--------------------------------------------------------------------------------

Operator [120]

--------------------------------------------------------------------------------

Next question comes from John Purtell from Macquarie.

--------------------------------------------------------------------------------

John Purtell, Macquarie Research - Analyst [121]

--------------------------------------------------------------------------------

Just had two questions, please. Just again in relation to Royal Adelaide. I don't think you sort of mentioned it before, Grant. But if you're able to quantify what the monthly losses are now running at?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [122]

--------------------------------------------------------------------------------

Yes, I think some time ago, we were talking about 3.5 to 4, and we are now talking around 2 below.

--------------------------------------------------------------------------------

John Purtell, Macquarie Research - Analyst [123]

--------------------------------------------------------------------------------

And just a second question, are you seeing any indications of a more disciplined market out there? I mean, obviously, there's been some cyclic casualties, which does potentially put the incumbents in a better position as far as negotiating terms and conditions.

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [124]

--------------------------------------------------------------------------------

Look, I'm not sure about price, John, but I think certainly on terms and conditions, I think we all certainly -- from our perspective anyway, that's our view. So that's what we're doing. And I think that's also what the other smart players in the market are doing. The thing has been balanced very heavily the other way, and we're just trying to pull it back certainly. So -- and you can -- that's certainly the way that we're doing.

--------------------------------------------------------------------------------

Operator [125]

--------------------------------------------------------------------------------

And the final question we have in queue is a follow-up from Craig Wong-Pan from Deutsche Bank.

--------------------------------------------------------------------------------

Craig Wong-Pan, Deutsche Bank AG, Research Division - Research Analyst [126]

--------------------------------------------------------------------------------

Actually, my question have been answered. I didn't know how to remove my question from the queue.

--------------------------------------------------------------------------------

Operator [127]

--------------------------------------------------------------------------------

There are no problems. Sorry, and we've just had another question come up from Jolyon Wellington from JPMorgan.

--------------------------------------------------------------------------------

Jolyon Sinclaire Wellington, JP Morgan Chase & Co, Research Division - Analyst [128]

--------------------------------------------------------------------------------

Just -- first of all, just wanted to ask about the divisional growth levels. Just wondering if you're expecting the trends at the first half to continue through into the second half, talking about strong growth in utilities, the margin trends, et cetera? Just wondering which of those sort of divisions you're most excited about.

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [129]

--------------------------------------------------------------------------------

Well, Jolyon, you can imagine, right, I'm excited about all of them. We've given you what we think is a full year number. We're not going to cut that up. But all of these businesses, we expect to perform in the second half and all have opportunities for growth. So we -- we're looking at it. We're not unhappy with any part of our business. Of course we could do better in some elements of construction where we've had poor results. And that in itself if we -- we will sort that out, and that in itself will drive improvement. So no, we're not done or unhappy with any part. And you can see that -- well, as we've said, that the opportunity list is pretty long for each of them.

--------------------------------------------------------------------------------

Jolyon Sinclaire Wellington, JP Morgan Chase & Co, Research Division - Analyst [130]

--------------------------------------------------------------------------------

Okay, that's good. And then just on the segmental change, do you have the new segmental data available for full year '18?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [131]

--------------------------------------------------------------------------------

Well, I'm sure we do, Jolyon, it's whether we're going to give it away. But I think we'll speak to Michael -- we'll speak to Michael after this as to whether that's something that we're able to provide.

--------------------------------------------------------------------------------

Jolyon Sinclaire Wellington, JP Morgan Chase & Co, Research Division - Analyst [132]

--------------------------------------------------------------------------------

Okay. And then just talking about your guidance, you've clearly given NPATA guidance, including the gain of the -- on the acquisition of a JV. Just in terms of cash flows, are you able to give any guidance on what you expect in terms of cash flow for the full year '19, so what level of conversion you expect, where you would expect net debt to end up at the year-end, please?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [133]

--------------------------------------------------------------------------------

Well, I'd rather leave that to you, mate. You know our history in cash conversion. And so we can -- you could look at the last 8 years on conversion and use that as a guide.

--------------------------------------------------------------------------------

Jolyon Sinclaire Wellington, JP Morgan Chase & Co, Research Division - Analyst [134]

--------------------------------------------------------------------------------

Okay. And then just on to the mining business. Look, there's been a lot of speculation in the press around whether this business is going to be sold or not. Just wondering if you can give an update on what your strategy is for the ownership of this business, please?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [135]

--------------------------------------------------------------------------------

Yes, well this business has been a very good performer for Downer for a number of years. And you can see in this first half that it's certainly getting back to being -- performing in the way that we want it to. It's been a pretty key part of our story and continues to be. Should we think that we would like to do something else with it, then, I guess, we'll let the market know. But at this point, it's an important part of our business. It is the most heavily capital-intensive which, of course, is a little different to the rest of the business. But we continue to invest and we continue to grow the business. So that's where it is.

--------------------------------------------------------------------------------

Jolyon Sinclaire Wellington, JP Morgan Chase & Co, Research Division - Analyst [136]

--------------------------------------------------------------------------------

Okay. So it sounds like your current intention is to keep the business?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [137]

--------------------------------------------------------------------------------

Yes, we're working hard on improving this business.

--------------------------------------------------------------------------------

Jolyon Sinclaire Wellington, JP Morgan Chase & Co, Research Division - Analyst [138]

--------------------------------------------------------------------------------

Okay. And then just on the Royal Adelaide contract. Back at the full year results, you seemed quite confident around the resolution pretty quickly. I think you sort of gave the timing around September. Just wondering what changed in that period between the full year result and that September date? What changed which made the resolution harder to achieve?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [139]

--------------------------------------------------------------------------------

I wouldn't say anything really changed, mate, but the wheels of PPPs and SPVs and government sometimes turn slowly.

--------------------------------------------------------------------------------

Jolyon Sinclaire Wellington, JP Morgan Chase & Co, Research Division - Analyst [140]

--------------------------------------------------------------------------------

Okay. And then just on Spotless, just in terms of the synergies, can you give an update on where you are with the synergies on Spotless, so what the total amount you expect to achieve is? And how many synergies you've achieved to date? So what were the synergy -- how much -- how many synergies you achieved in the first half of '19? And then also, can you give an update on the timing of the delisting of Spotless from the market and what kind of incremental cost savings that would give you?

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [141]

--------------------------------------------------------------------------------

Yes, sure. So on the synergies, yes, we haven't changed our view on what we think these synergies are and there are substantial synergies being worked through. The point that I would raise though is that we are investing in this business heavily. We think that the investment that we're making is going to pay back in spades. We -- almost every opportunity that exists there. Now we are working together with both Spotless and Downer. In some cases, we have parts of the Spotless business being managed through the Downer site. So we're seeing those synergies come through. IT is now under the one banner, procurement under the one banner, et cetera. So there's a lot of benefit there. I'm not going to go into the individual carve-ups. But you can work on the numbers that we have given you before but understand that we're also investing in that business. On the delist, we're looking at the delist. Currently, the share price of Spotless sits at around $1.65, $1.69, something like that. We're looking at that and looking at how a delist process might work. But that's something we'll talk to the market about in due course should we go down that path. The listing is, let's say, $3 million to $4 million in terms of direct costs but it's part and parcel with -- or the strategy around that is part and parcel with what we're doing to take the remaining 11-plus-percent. So I think we'll leave that at that because that's something to be dealt with in the future.

--------------------------------------------------------------------------------

Operator [142]

--------------------------------------------------------------------------------

And we have a follow-up question from Siraj Ahmed from Citigroup.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [143]

--------------------------------------------------------------------------------

Yes, just two quick ones. Just on the cash flow, just confirming that the first half includes the maintenance costs for Waratah? Because I don't think that it was mentioned.

--------------------------------------------------------------------------------

Michael James Ferguson, Downer EDI Limited - CFO [144]

--------------------------------------------------------------------------------

Yes, so it includes the bogie overhaul costs for the Waratah. So I think we've flagged as part of the general reporting that the timing of the cash flows of that meant that the cash flows from the operations would be slightly lower than the cash flows that we would incur from the periodic overhaul but, pleasingly, we've been able to offset that with our performance in the rest of the business. Still delivered very strong result.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [145]

--------------------------------------------------------------------------------

Great. And does that continue in the second half as well, the maintenance, the overhaul?

--------------------------------------------------------------------------------

Michael James Ferguson, Downer EDI Limited - CFO [146]

--------------------------------------------------------------------------------

We hope so.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [147]

--------------------------------------------------------------------------------

Yes, and just a second thing, just a quick thing. The tax rate for the second half, do we just assume the same thing as the first half or...

--------------------------------------------------------------------------------

Michael James Ferguson, Downer EDI Limited - CFO [148]

--------------------------------------------------------------------------------

Yes, I mean, it's always going to trend, I think, somewhere between 26% and 29%. So there's always the natural arbitrage with New Zealand. And then the portion of revenue and profitability we get from our joint ventures also reduces it. So yes, somewhere between 26% and 28%.

--------------------------------------------------------------------------------

Operator [149]

--------------------------------------------------------------------------------

We've got a follow-up question from Rohan Sundram from MST.

--------------------------------------------------------------------------------

Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [150]

--------------------------------------------------------------------------------

A question for Michael. Sorry to keep going back to this, but can you just, Michael, please reiterate your comments around the provision increase for Royal Adelaide? The $88 million. How does that flow through to the P&L? So what was the P&L impact for that again?

--------------------------------------------------------------------------------

Michael James Ferguson, Downer EDI Limited - CFO [151]

--------------------------------------------------------------------------------

So it's -- the provision has gone down. So there's been -- so we -- when we adopted the new accounting standard -- so on 1 July, we recognized the provision. So we flagged that at 30 June, reporting that we would flag -- that we would recognize this at 1 July. We recognized that sort of like $85 million net of tax, and then we've reduced that for the losses that we've incurred down to $67 million. And so the accounting is through retained earnings and the provision for the initial balance. And then as the losses get incurred, that provision reduces. So there's no P&L impact of that at all. But from the 1st of July 2018 through to the 31st of December, we've had to unwind the finance cost element of that provision. And so that's caused us to debit interest expense, credit the provision and that's about $2 million.

--------------------------------------------------------------------------------

Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [152]

--------------------------------------------------------------------------------

Yes, which is -- okay, now I -- I get it now. So it's basically -- okay, reduced to $67 million because of the headcount reductions, hence the losses if you were to reduce.

--------------------------------------------------------------------------------

Michael James Ferguson, Downer EDI Limited - CFO [153]

--------------------------------------------------------------------------------

Yes, so the losses. So if we were to reduce the provision in accordance with our initial headcount profile, the provision would have reduced more because the losses were higher, but the provision has reduced less because we have got less heads, which is positive.

--------------------------------------------------------------------------------

Operator [154]

--------------------------------------------------------------------------------

It looks like we've got no further questions at this time. So I'll hand back to Mr. Fenn for any closing remarks.

--------------------------------------------------------------------------------

Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [155]

--------------------------------------------------------------------------------

Yes, thank you. Look, thank you all for taking the time to listen to the presentation and also the Q&A. No doubt we will see many of you as we do the rounds. So thank you very much and look forward to seeing you shortly.

--------------------------------------------------------------------------------

Operator [156]

--------------------------------------------------------------------------------

The conference has now ended.