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Edited Transcript of DOW.AX earnings conference call or presentation 22-Aug-19 12:00am GMT

Full Year 2019 Downer EDI Ltd Earnings Presentation

North Ryde, New South Wales Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Downer EDI Ltd earnings conference call or presentation Thursday, August 22, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Grant Anthony Fenn

Downer EDI Limited - MD, CEO & Director

* Michael James Ferguson

Downer EDI Limited - CFO

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Conference Call Participants

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* Alexander George Philip Karpos

Goldman Sachs Group Inc., Research Division - Equity Analyst

* James Redfern

BofA Merrill Lynch, Research Division - VP

* John Purtell

Macquarie Research - Analyst

* Nathan Reilly

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

* Scott Ryall

Rimor Equity Research Pty Ltd - Principal

* Siraj Ahmed

Citigroup Inc, Research Division - Associate

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Downer full year results conference call and webcast. (Operator Instructions)

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

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

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Good morning, ladies and gentlemen, and thank you for joining the Downer team for the presentation of the Downer EDI Limited results for the 12 months to 30 June '19. 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 what you can expect from the company for 2020 and a bit beyond. Michael Ferguson, our Group CFO, will cover the financial position of the company in more detail. We'll take questions at the end of the presentation.

Downer has delivered a strong operational and financial performance for its customers and its shareholders in the 2019 financial year. Our underlying NPATA growth was 14.7% on 2018 with revenue growth of 6.6%. The group EBITA margin increased from 3.8% to 4.2%, and return on funds employed, up 2.2 percentage points, to 13.7%. We had focused on margins and returns over the past year, and we will look to further improve going forward, and I'll have more to say on that later.

Our cash performance remains strong and reliable with operating cash of $630 million and cash conversion of 89% of EBITDA. Dividends for the year were $0.28 per share, up from $0.27 in 2018. If you are having any dramas in reconciling the statutory to underlying earnings, a reconciliation of underlying and statutory NPATA in the guidance is set out in the supplementary Slide 9 and Michael will run through this with you later, in any case. During the year, our urban services businesses, transport, utilities and facilities, continued to grow strongly, contributing 76% of group revenue and 84% of EBITA at a margin of 5.4%.

Transport continues to outperform in both Australia and New Zealand, with strong results in road maintenance, rolling stock maintenance and bituminous products. Excluding our challenges with Murra Warra, utilities achieved particularly strong EBITDA -- EBITA growth, driven by a combination of NBN, UFB in New Zealand Power Networks and overhead cost reduction. Facilities, whilst relatively flat, saw significantly improved performance in hospitality and FM, government, defense and laundries offset by lower contribution from AE Smith and Nuvo.

With a clear focus on productivity and cost efficiency and our mining services business has really kicked in 2019, with revenue up 8.8% and EBITA up 52%. Our management team has done a great job in turning this business around and we've had some help with production volumes increasing in both metallurgical coal and iron ore.

EC&M EBITA performance was down 8.3% due to reduced volumes as we completed construction on Gorgon and Wheatstone and the impact of first half construction losses that we dealt with at the half year. However, we're very excited about the growth from our asset services businesses over the past 2 years. Our asset services revenue has grown significantly and earnings have doubled in the past year as we've increased our market share. We expect asset services will increase to around 60% of EC&M earnings in 2020, which will grow despite resource-based construction remaining relatively subdued.

Downer has continued to build its pipeline of work. Over the past year, work-in-hand has risen from $42 billion at 30 June 2018 to $43.5 billion at 31 December '18 to $44.3 billion at 30 June '19. We continue to win trust of important, blue-chip customers and our brand is strong. As you can see from the chart, 88% of our work-in-hand is now in urban services: transport, utilities and facilities. Essentially government customers dealing with population growth and urbanization pressures. This will continue, and we are well placed being highly leveraged to servicing both economic and social infrastructure. We also continue to build our resource-based work-in-hand with substantial opportunities ahead, particularly in mining services and asset services.

I'm pleased to report, as announced yesterday, that we've reached agreement with the South Australian government and Celsus in relation to services provided by Spotless of the new Royal Adelaide Hospital. A term sheet has been negotiated and signed by the parties and it includes settlement of historic abatement clients, a revised KPI and abatement regime that better reflects the actual services provided by Spotless and the reality of operating in that environment, an increase in Spotless' monthly service fee, a number of agreed initiatives to further reduce costs and improve patient care.

Now the settlement date is expected to be signed by the end of September and it will take effect from 1 July 2019. The increased service fee will be paid for 1 July '19 until June 2022. At that point, there will be a repricing process. We expect that the agreement reached with the state and Celsus, including the increased service fee and initiatives to further reduce cost, will result in the contract becoming profitable. We expect cash flows to turn positive over time as initiatives are delivered and our profitable lifecycle maintenance volumes step up. In 2022, we have the opportunity to reprice our soft services, cleaning, catering, orderly services, security, et cetera, to further improve the profitability of the contract.

In financial year '19, there is no impact on Spotless or Downer financial accounts as a result of the agreement. The implications of the agreement will be reflected in the first half of financial year 2020. The provision that currently exists to absorb annual losses will be reduced in FY '20 to reflect the new agreement.

In addition to dealing with the Royal Adelaide Hospital, there has been significant progress at Spotless during the year. We've improved the business in a number of ways. A highly -- a new highly competent and experienced management team is now in place under Peter Tompkins.

The business has been restructured to better align its customers and markets. Centers of delivery excellence are now in place and driving quality, innovation and growth. Robust governance and risk management processes are in place. Importantly, cash flow and cash conversion is now consistent, and Spotless' debt has reduced by 7% since June 2018. Spotless has $15.6 billion of work-in-hand and a multibillion-dollar pipeline of new opportunities. Spotless is working closely with Downer on nearly all of its major contracts and contract renewals and the opportunities to work together are ever increasing.

Now I must acknowledge that turning Spotless around has taken considerable effort over the past 2 years, lifting its quality outperformance across almost all of what it does. But we are on the cusp of having a really good business that will contribute significantly to the group in the future.

I'll now hand over to our CFO, Michael Ferguson, and he'll go through the financial results in more detail.

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

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Thanks, Grant, and good morning, everyone. I'll pick up from Slide 8, outlining the underlying financial performance of the group for the year.

Group revenue, including Downer share of revenue from joint ventures, increased 6.6% to $13.4 billion during the year. This solid growth reflects our market-leading position across both our urban services and mining, energy and industrial markets with the utilities, mining and AGM's asset services divisions achieving particularly good growth during the year.

The group's revenue performance has translated to strong growth in earnings, with total EBITA of $560.6 million, which is 17% higher than the prior corresponding period. A full breakdown of the revenue and EBITA performance for all divisions is included in the supplementary information of this presentation.

Noncash acquisition-related amortization was $70.4 million compared to the prior year of $66.7 million, with the increase arising from Downer's acquisition of Kier Group share of the Downer Mouchel joint venture.

Net interest expense has increased 8% to $82.4 million. This is a result of higher debt levels during the period and also includes $2.4 million of noncash interest arising from the unwind of the provision recognized to reflect the present value of the estimated losses on the new Royal Adelaide Hospital contract. Adjusting for this amount, interest has increased $3.7 million or 4%.

Tax expense of $117 million reflects an effective tax rate of 28.7%. This is above the prior period of 25.8% due predominantly to the reduction in Downer's research and development claim following recent legislative changes reducing these initiatives. The effective tax rate remains below the Australian statutory rate of 30% due to nontaxable distributions from joint ventures and a lower corporate tax rate on our New Zealand earnings.

This all equates to an underlying net profit after tax, and before amortization or NPATA, of $340.1 million, which is up 14.7%. Downer's return on funds employed has increased from 13.7% -- increased to 13.7% from 11.5%, reflecting the growth in earnings during the period. Downer's directors have declared a final dividend of $0.14 per share, franked at 50%. Total dividends for the year totaled $0.28 per share, up from $0.27 per share last year. This equates to a payout ratio of 53% of statutory NPATA, within the payout range of 50% to 60% we have previously disclosed as our target.

Slide 9 outlines the reconciliation of both Downer's underlying and statutory NPATA for the year to the original FY '19 guidance of $335 million. This shows 2 reconciliation items being the fair value gain arising from Downer's full acquisition of the Downer Mouchel joint venture as reported in the first half and the after-tax impact of the expected loss on the Murra Warra Wind Farm project.

Slide 10 provides an overview of unallocated costs. Unallocated costs totaled $173 million and included $98.4 million of corporate costs. The increase in corporate costs, compared with last year, is mainly due to amortization of IT costs arising from Downer's major business transformation program and restructuring costs incurred during the period.

Moving on to operating cash flow on Slide 11. Grant spoke earlier about the continued strength of the cash performance of both Downer and Spotless, with operating cash flows for the year totaling $630 million. We have now delivered cash flow conversion greater than 88% of EBITDA for 8 consecutive years from an increasing proportion of cash-predictable, service-based contracts across our portfolio. After adjusting for the cash losses at the new Royal Adelaide Hospital, Spotless operating cash-to-EBITDA conversion was 84%, continuing the improved cash performance following Downer's acquisition. The unadjusted Spotless conversion was 70%.

In recent times, there has been some discussion in the market about receivables and supply factoring. Downer only uses receivables factoring in very limited circumstances to better match cash flows where payment terms for material contracts have exceeded 60 days. At 30 June '19, we had factored a total of $90 million of receivables relating to 2 customers. This represents a very small portion of our total receivables book with the receivables factoring facilities used being on credit terms that are cheaper than Downer's average cost of funds.

Turning to overall cash flow on Slide 12. Net capital expenditure was $395 million, in line with the prior period. Downer continues to invest in growth capital for the mining business, but has also invested in significant growth opportunities in rail maintenance and in increasing our footprint in roads in Australia and New Zealand through the strategic purchase of land and national facilities.

Acquisition outflow, net of cash acquired, totaled $71.5 million. This includes the acquisition of the other 50% of the Downer Mouchel joint venture, as disclosed at our half year results, with the balance related to small acquisitions and deferred purchase consideration. Financing cash outflows totals to net proceeds from borrowings of $155 million. This includes the proceeds from Downer's $300 million medium-term note issue, issued in April, offset by the repayment of the maturing bond of $150 million.

Total dividends paid of $175 million increased 11.6% as the result of the increase from $0.27 per share to $0.28 per share. Cash held at 31 December was $710 million, which when combined with undrawn facilities of $1.1 billion, provides us with significant liquidity of $1.8 billion.

Turning to Slide 13. The Downer Group balance sheet remains strong. With strong net asset positions, gearing at 30 June 2019 was 24.9%, still comfortably within the target range.

Our group maturity profile is set out on Slide 14. Weighted average debt maturity remains healthy at 3.6 years, with the major funding activity during the year being the successful issue of the 7-year, $300 million medium-term note. The note issue was well-priced, again reflecting Downer's continued shift to a more predictable, infrastructure-based services business and was very well supported by Downer's existing and new institutional investors in Australia and Asia.

The group's total net debt is $1 billion with $324 million in Downer and $688 million in Spotless. Pleasingly, Spotless' net debt continues to reduce. We continue to sit comfortably within our credit rating and debt covenant metrics. Downer's credit rating with Fitch remains at BBB with a stable outlook. Further details of debt and bonding can be found in the supplementary information on Slide 25.

I'll now finish on Slide 15, which provides an overview of the expected impact of the new leasing standard, AASB 16. AASB 16 has not impacted Downer's FY '19 results. It is effective from 1 July 2019 and disclosure has been made on the expected impact in G1 of the annual report. The most significant impact of the new standard will be to bring the majority of operating leases on balance sheet and the requirement to recognize the interest expense component of these leases.

The 2020 outlook statement we have included today takes into account the transition to AASB 16. Whilst we expect the transition will increase -- will result in increased EBITA and EBITDA, this will be offset by increased depreciation and interest expense, resulting in a minimal impact to NPATA. Whilst the earnings impact is expected to be immaterial, the gross-up of the balance sheet is estimated to be within the following ranges: a $720 million to $770 million increase in lease liabilities, offset by a $560 million to $610 million arising from the creation of an associated right-of-use asset; and a $65 million to $75 million reduction in opening retained earnings. We will provide more information on the impact of the new standard when we release our FY '20 half year results.

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

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

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Thanks, Mike. So if we move now to an important slide on our shareholder value focus. And I think -- look, you might wish to spend some time going through this after the presentation. Each of the boxes on this page is important in understanding how we're managing the business to drive shareholder value. And our proposition is this: If we generate reliable earnings growth into the future and if we do that while deploying our capital efficiently and we do these 2 things in a way that supports our people and communities, we will drive superior shareholder value.

To drive growth, we need to be in strong and growing markets, serving quality customers. As you know, we've been shaping our business to take advantage of the buoyant economic and social infrastructure markets. Our contract base is around 70% government or government-related and we're highly leveraged to the major megatrends that I'm sure all of you have heard about and they're real as population growth, urbanization, technology and data proliferation.

Communities and governments will need to increase spending in the areas in which we have major positions. We have a growing exposure to these urban service markets with low capital intensity and long contract tenure and we'll continue to add strategically to our business through selective acquisitions, where they make sense.

The efficient use of our capital requires, first and foremost, strong operating cash flow discipline. Downer has a reputation for delivering in this area and our systems and are driving much better results in Spotless. Over the coming reporting periods, we'll be working hard to improve our operating margins, while reducing our overhead base across the group and through improved project performance. There are significant opportunities and we're confident that our margins can rise materially.

Further to our capital efficiency. Downer will be undertaking a review to determine whether there are opportunities to enhance the alignment of our portfolio. An important focus area is mining, either operating or alternative ownership strategies that could unlock value for our shareholders. And the mining business is a leader in Australia with a proven track record. The new management team there has implemented initiatives to improve financial performance in financial year '19, with additional benefits to be delivered in future years. As a result, mining is well-positioned to capitalize on its strong market position and pipeline to deliver significant earnings growth and improved returns.

Over the past 2 years, a number of parties have approached Downer expressing interest in acquiring our mining services business. In reviewing the options, we will ensure mining remains well-placed to deliver for our people and customers, and we will keep shareholders informed of the progress of the review.

The Downer Group will continue to maintain a strong balance sheet and credit rating through driving cash-backed earnings and strategic capital allocation. Our portfolio review announced today will be an important part of unlocking value for shareholders.

Increasingly and importantly, how you do business is becoming as important, if not more important, than the business itself. This is not something concerning or new for Downer. We've always seen ourselves in this light. The safety of our people, the environment we care for and the communities in which we live are paramount in how we go about our job. Our customers care, our people care and so do we.

This year's sustainability report will be available on our website in about a week and it's a fantastic read and a real testament to the people working in the Downer Group. I recommend it to you for a real look into some of the amazing things that the Downer Group does .

I'm pleased to say that we received higher ratings for our 2018 sustainability report from independent ESG agencies, including ISS, ACSI, MSCI, Sustainalytics and DDSI. But the 2019 report is better.

We'll now move on to the outlook for 2020. Downer's targeting earnings growth of 7.3% on the FY 2019 underlying earnings base of $340.1 million. As a result, we expect NPATA will increase to around $365 million before minority interests. That's all for the formal presentation.

And I'll now hand back to the coordinator for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from John Purtell from Macquarie.

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John Purtell, Macquarie Research - Analyst [2]

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Just had a couple of questions. Just in relation to transport services, very strong result there. Can you just sort of comment on what were the key drivers? And just the second aspect, really EC&M, that was sort of a disappointing result in terms of the second half. What were the sort of drivers there?

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

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Yes. So starting with transport. Look, it was a very strong result. And it's got great positions in a market -- in its markets, really, which is what's driving that at a time when government is spending a lot of money. So that's the underlying position here, and it relates to road maintenance. It relates to rolling stock maintenance. Both of those things are very strong. And also, as a result of that, particularly on the road maintenance side, and also an amount of -- the amount of work and new roads that are being formed, we had a very strong performance in bituminous products, both in Australia and New Zealand. So transport, yes, very good.

Now EC&M. Look, I don't agree with your position on EC&M. Now we can see that the numbers are down slightly, but when you unpick that, the points that I'd like to make here is that, in the previous corresponding period, you had a lot of earnings coming from Gorgon and Wheatstone, which have now trailed off quite significantly.

We also, in the first half, we -- as we discussed at the first half results announcement, we also had a difficult project in Orbost. Now -- and that's a quite significant thing in their own right. But what's happened is that, for the most part, that has been offset by a very, very strong result in asset services, right? So that business has increased its revenue by around 40%, its earnings by around 100% during that period, almost to offset it, and we're expecting more growth in it. And that is where we want to grow our business.

So whilst from the surface, it might look as if it's poor and those problem projects -- problem project has not further continued into the second half. In fact, it's been quite good in the second half.

So I'm very pleased with where the EC&M is pushing into financial year '20, John.

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John Purtell, Macquarie Research - Analyst [4]

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And just the last question, if I can. And obviously, you mentioned the strategic review there with the focus on mining. [You have to sort of] provide any color about whether it's going to be broader than that over time as far as a sort of narrowing of the mix of different businesses.

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

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We've been talking about this for a while. Look, we are focusing in particular areas and we won't rehash all of that. So we are looking for long-term positions in services businesses that are relatively capital-light.

So we're taking that into the review and the one that's in focus right now will be mining, and I think we will stick to that for the moment. I think if that changes, then we'll talk to you about it.

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Operator [6]

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Your next question comes from Nathan Reilly from UBS.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [7]

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My first question is just in relation to the Royal Adelaide Hospital resolution.

Grant, you've indicated there that there is a path to that project becoming profitable and I think you also mentioned that the impact on the provision which you've raised against future losses on that contract would likely be reduced in 1H '20.

So am I right to assume therefore -- that I guess, that contract out to that FY '22 reprice point, is still loss-making? It's just post resolution, it's less loss-making?

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Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [8]

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Yes. So look, the way I describe it is that the total contract, we think, is now profitable but there are 2 sides to this. One is more the soft services or reviewable services and the other is the lifecycle. Right. So the benefits on the cash flow and the lifecycle are relatively backdated or in-dated in the contract, whereas the cash impact on the soft services are more forward-dated, right? So if we look at -- if we think in accounting sense, the totality of that looks positive. However, those cash losses on the front end have been reduced quite significantly as a result of the increase in the service payment.

We also have a path to further efficiency. So we've -- as part of the arrangement that we've organized with both Celsus and the state, that we are focusing in on a list of initiatives to reduce cost, right? So we're very hopeful that [better] -- between now and 2022 will also drive dividends for us in reducing our cost base.

So on the provision, we'll be looking at just exactly what we do with the provision and how far we reduce it over the course of the first half of 2020. We'll come and talk to you about that at the time. So that's in our sights as we speak.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [9]

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And therefore, the implication to the FY '20 earnings guidance you've just provided, does that include any reversal on that provision?

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Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [10]

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No, there's nothing included in the $365 million.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [11]

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Okay. So when you do get some line of sight over the impact on that provision, you'll call that out separately and you'll mark that as an adjustment?

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Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [12]

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Yes.

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Michael James Ferguson, Downer EDI Limited - CFO [13]

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Yes.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [14]

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Okay. Very good. Now the second question -- the second topic, really.

Just in relation to the Murra Warra situation, I guess, in conjunction with some of the challenges you've faced in the renewable energy sector recently, right, can I just get you to give us a bit of an overview on your, I guess, your explanation and how you've sort of ended up in this situation?

Could you just give us an idea on, I guess, the risk management control processes around the bids on these types of contracts and any tightening, which you might have introduced post some of these situations arising?

And I guess, the final point on that. I'm just curious to get a bit of an understanding on your fixed-price contract exposure and your work-in-hand at the moment.

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Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [15]

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Yes, sure. So if we think of it -- if we just talk about Murra Warra for the moment. So what we've entered into there is -- our scope of work was balance of plant, Senvion's scope of work was to manufacture, erect and commission and take the risk on the power curves, et cetera, on the wind towers.

Unfortunately, what we did was we were joint and several on that, which we had covered through a bank guarantee. It was something that the customer required. We thought we've covered it on a bank guarantee, but it wasn't sufficient. And when we look back through it, it's plainly obvious to us that we should have understood that should there be an issue with Senvion that it would be rather difficult to replicate the manufacturer of the equipment. So that's a bit of a kick in the tail for us, and we should never been in the spot.

In wind, up until a couple of jobs ago, we'd never taken joint and several on that and we've been investigating as to how we did get to this position. And of course, as you would expect, that's not the position going forward. We've just included another wind job recently. And we've pushed back to the customer and we're not taking joint and several on that. We're taking liability just for the balance of plant which is our scope. So there's learnings in this. Business like ours and people in the sector, you do take joint and several, but the learning here is don't take it where you can't replicate the technology that you require to do the job.

The risk in this is not really one of wind or renewables, this is around credit risk and then your ability to replicate the technology. So we've learned a bit on this. As we have -- each time we have one of these issues, we improve.

So our book, I was speaking to Michael yesterday, and my view of the book is that it is very clean, in fact, despite us having now Murra Warra to address, but the rest of the book is very clean.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [16]

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And just in terms of the -- I guess, the level of fixed-price contract work within that order book at present?

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Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [17]

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Look, I couldn't give you an exact number because a lot of it's service-oriented. Might have to come back to you on exactly what the amount of fixed price is.. We

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [18]

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And then is the strategy to...

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Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [19]

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We're much more concerned about fixed price construction contracts, on hard dollar construction contracts. They're our focus.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [20]

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And is the strategy still to reduce the exposure to that type of work going forward, in terms of your pivot towards infrastructure services?

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

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Yes, it is. It's -- but it's all risk-rated, right? So we -- as you would have seen a number of months ago, we announced that we were selected with VINCI, our partners, to undertake the largest infrastructure job that's ever been done in New Zealand. Now [you could say], that doesn't really align with what you've been talking about, but it does because we are -- it is a true alliance job, right? So the risk on that job is limited to your profit.

We've spent a lot of time making sure that the alliance worked so that we're not just there to make up the numbers here, we're actually going to make money on that job, and we won't be losing money. So it depends on the risk allocation. Technically, construction is very much within our grasp. But we are very careful with risk positions, which is why we have largely avoided the issues that have really struck many of the civil contractors in the country.

With the infrastructure burn that's going on, there's a few people that are making money in there. I'm going to say we are one of the companies that are.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [22]

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Okay. I appreciate your thoughts on that one. And final question, Michael. The amortization add-back in the FY '19 NPATA calc, looks like it's about $49 million. Can you give us a guide for what that number would look like for F '20 -- just relative to your FY '20 guidance, please?

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Michael James Ferguson, Downer EDI Limited - CFO [23]

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It's not far off. It winds down slightly as some of the contracts -- the customer contracts were in the book at the time of acquisition, within $5 million of that number.

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Operator [24]

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(Operator Instructions) Your next question comes from Siraj Ahmed from Citigroup.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [25]

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Just a couple of questions.

Grant, just firstly on the guidance. How should we think about -- I mean, you're guiding to 7% growth. But clearly, you've got a few one-offs in -- especially in first half '19 with a few problem contracts. Just trying to understand from a segmental perspective how we should think of the guidance?

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

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Yes. We think 7% growth rolling forward is going to be a pretty good comparison to the market, Siraj. I'd say that as a start.

We don't split up our guidance into the individual businesses. But look, we're seeing positive numbers in most of our business units, all right? So again, it's because we're not particularly reliant on anyone. And we're not particularly reliant on any single customer or any single, large infrastructure job, right?

So that probably doesn't answer exactly your question, right? But that's probably as good as I can go.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [27]

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So maybe just specifically, I mean the transport margins which you mentioned in second half was really strong. But is that expected to continue? I mean, I know there's a skew in that business, but just trying to understand if there is margin improvement year-on-year.

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

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Look, yes, it's a pretty good margin where it is. We -- look, just generally, overall, we think there's a job to be done in the business to lift our group margins. And as we look at it, we say look, we're probably a little heavy in our overhead base and that's not just at the corporate side but also in the divisions and we're looking at that. So I think, as I said in the presentation, we are doing a job on our -- on trying to get our margins up, and you'll see that as we roll through into Investor Day. We'll have more to say at about that.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [29]

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Sure. But just clarifying that margin improvement or the work that you're doing, that's not as big from an FY '20 guidance perspective or is there a bit of it?

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

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No, there's elements of it. Yes, it can't all be done at once, mate, there's elements of that in there.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [31]

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Got it. Secondly, just on -- there's been some discussion about the Melbourne trains, the growth project, probably a little bit delayed. I think it's pretty public as well. Just trying to understand, what's Downer's exposure to it, if you could just give some color on that?

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

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Yes, so Downers -- so CRRC, their scope is around the design, the construction, the testing and commissioning, and basically the sale of those trains into the network.

So in terms of delayed position into the Melbourne network, they are delayed. They're somewhere towards 12 months, I think, and I'll just say what's been reported on television. Let's assume that's right. That's CRRC's risk. Now we're working with them to try and help them address that. We're very hopeful that we will have a train or trains on the network before Christmas, but that's what we're working towards.

So our exposure, well, we don't have the exposure there. It's CRRC that's got the exposure. But of course, we earn service revenue off trying to get them there. And of course, we run the through-life support, so that gets delayed when the trains don't come into service. Obviously, that gets delayed by a period. So that's our exposure.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [33]

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Okay. Okay. So perfect. All right. And just one thing for Michael. Just on the corporate costs listed during the call. There's pretty big increase, I think, especially in the first half as well. Could you just talk through what happened there?

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

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Yes, the majority of it is we finished our systems implementations. So I think we've talked in previous periods about rolling out sort of consistent ERPs and payroll platforms across the group, that's led to an increase in our noncash amortization as those things are now in and working. And then we also had some restructure related costs in the second half as well.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [35]

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Just looking forward, this assume similar or is like, should it be more?

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Michael James Ferguson, Downer EDI Limited - CFO [36]

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Probably. The restructuring costs are about $7 million of that number and then the balance of the increase from the prior year is the amortization.

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Operator [37]

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Your question comes from James Redfern from Merrill Lynch.

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James Redfern, BofA Merrill Lynch, Research Division - VP [38]

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Just a quick question on the potential sales of the mine division. So I assume...

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

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Sorry. Sorry, mate. Say that again?

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James Redfern, BofA Merrill Lynch, Research Division - VP [40]

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Yes. Sorry, sorry. Yes, James Redfern here. Quick question on the potential sale of the mine division as part of the strategic review. My understanding is that Downer received a couple of unsolicited offers in last 6, 12 months. They were unacceptable to Downer. So do you think that the market has improved and that you -- the potential offers that you might receive will be higher than those received, say, 6 months ago? Or have your lowered your expectations relative to the book value of -- I think it's roughly $550 million.

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

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Yes. Look, I'm not going to get into price discussions here, but what I would say is this is an exceptional business. It's been very good for us and should we come to the conclusion that we want to exit that business then I'm sure that there's an owner out there with the ability to grow this business strongly. But we think this business is a very good business and when we've had incoming, it's not really value that's been the issue.

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Operator [42]

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Your next question comes from Scott Ryall from Rimor Equity Research.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [43]

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Grant, just wanted to take John's question in the transport division a little bit further, please. Your revenue, similar to your first half revenue is flat, but EBITDA is up with a strong increase in margin, probably stronger in the second half and ROFE looking pretty good. So clearly that division, with some of those contracts rolling off that you mentioned in your disclosures has been successful in areas that are higher margins, higher return on capital. Could you just elaborate a little bit more around what -- broadly speaking, what those attractive areas are, please? And why are you able to win those? Presumably, that's something where you've got competitive advantage or intellectual property.

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Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [44]

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Yes, sure. There's a lot in that question. Yes, and I'll certainly answer it just on the revenue side there. But also within that business, we have our infrastructure projects area, which is doing transport-related civil and building works for rail, et cetera. So that business is a little more volatile. And in this period, it's been a little less revenue in there. So when you look at the revenue, that's what's going on there. But on our business model around -- when you say transport, what you really mean is, I think, roads, because rolling stock is relatively easy to understand. But if you think about roads, we have a very significant position. If we start at the top of the tree, we either are or would be very close to the largest network manager of roads in the world. And when I say network manager, I don't mean a business that has a whole heap of trucks that gets told by the government to go and fill potholes. I mean, actually fully managing the assets of very large road networks. And although we do that just in New Zealand and Australia, we have a very, very large-scale business and a lot of IP and smarts that sit within that, right, world-class, and the people in there as well.

On our -- there was a recent trip for investors and sell-side analysts out to some of our facilities and you would see that we range from network management through to actual maintenance of the road, to producing the products that go into the maintenance on the road, doing the research around those products.

In some cases, those products are repurposed from our recycling business. That's both asphalt, roads sweepings, and it's other things. So we have a very strong vertical chain into the market and the market ranges from, in New Zealand's case, national agencies down through to councils, down through to individuals that are working in redevelopments. And in Australia, it's really state governments through down to councils, and we have a very strong network. We have a geographical scale with asphalt plants and capability that is unmatched by anyone also. So look, I've done my best there, mate. Does that answer the question?

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [45]

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Yes, it does.

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Operator [46]

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Your next question comes from Siraj Ahmed from Citigroup.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [47]

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Just something on the cash flow. It looks like Spotless conversion has reduced in the second half. Could you just give us some color on that, Michael?

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Michael James Ferguson, Downer EDI Limited - CFO [48]

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Yes. It's just a reflection, I think, of the sort of performance in the second half versus first half. Yes, I'm not exactly sure of the reasons or the specific reasons, but we look at it in aggregate, and we think the full year performance has been very good. So.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [49]

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Okay. And just trying to understand this -- the settlement regarding Royal Adelaide, would expect -- I mean, from a P&L perspective, obviously, you've provisioned for it. So we shouldn't be expecting an improvement next year, but would the cash flow conversion has to increase in from the big figure in cash flow, so now it's supposed to be lower?

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Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [50]

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It's been adjusted. The adjusted cash flow will improve it.

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Michael James Ferguson, Downer EDI Limited - CFO [51]

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Yes. So we called out the adjusted cash flow and the actual cash flow and then the extra service fees all bridge some of that gap.

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Operator [52]

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Your next question comes from Alex Karpos from Goldman Sachs.

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Alexander George Philip Karpos, Goldman Sachs Group Inc., Research Division - Equity Analyst [53]

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Just one question here for me. Looking at the work in hand, it looks like facilities has gone back a bit since the 1H '19 results. Can you parse that out by Spotless and Hawkins? And just trying to get a sense of how the core Spotless kind of work-in-hand that's tracked over the past 6 months? And are there any major Spotless contracts and renewals coming up that we need to be aware of?

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Grant Anthony Fenn, Downer EDI Limited - MD, CEO & Director [54]

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Yes. I'm not sure. I don't have the split here for you. So Michael might be able to give it to you later. Look, Spotless has continued to win its share, as you know, in these types of businesses because they're also very long-dated as you roll off and it's the same in the mining business. You will see movements in work in hand for those typical businesses that will go down and then you win a contract and it goes up significantly. So we're just in that cycle. And Michael will have to deal with the -- Michael Sharp, I mean, will have to deal with the split.

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Alexander George Philip Karpos, Goldman Sachs Group Inc., Research Division - Equity Analyst [55]

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Got it. And no major renewals we need to be aware over the next 6 months?

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

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None that I'm -- there's a very large expansion -- potential expansion of a contract in Western Australia with BHP. But no, other than that, we've -- I think we've done very well in the laundries renewals. And that's all of major note.

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Operator [57]

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We have no further questions at this stage. We are now going to close the question-and-answer session. I'll hand back to Mr. Fenn the closing remarks.

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

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Okay. Look, thank you very much for your effort to get here. I know you're very busy with results and for those investors on the line, know that I'll see you over the course of the next few days. Thank you very much.