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Edited Transcript of KLR.L earnings conference call or presentation 29-Jul-19 9:00am GMT

Half Year 2019 Keller Group PLC Earnings Presentation

London Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Keller Group PLC earnings conference call or presentation Monday, July 29, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alain Michaelis

Keller Group plc - CEO & Executive Director

* Michael J. Speakman

Keller Group plc - CFO & Director

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Conference Call Participants

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* Christen David Hjorth

Numis Securities Limited, Research Division - Analyst

* Gavin Jago

Peel Hunt LLP, Research Division - Analyst

* James Edward Allen

Liberum Capital Limited, Research Division - Research Analyst

* Kellie McAvoy

Investec Bank plc, Research Division - Research Analyst

* Saravana Bala

Jefferies LLC, Research Division - Equity Associate

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Presentation

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Alain Michaelis, Keller Group plc - CEO & Executive Director [1]

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Good morning. Welcome to Keller interims results, July '19. Standard running order, I'll summarize. I'm going to hand over to Mike for the financials, and I'll come back and talk business update and outlook, and then we'll go to Q&A.

So summary. We had a strong second quarter, offsetting a weak first quarter, meaning results for the first half are in line with expectations. The year-on-year profit decrease primarily driven by the completion of 2 large EMEA projects in 2018 which had GBP 11 million effect on our profit line. Net debt, decreased by GBP 33 million, representing 2.1x net debt on an IAS 17 basis. Our restructuring program has progressed well; we'll talk more about that in future slides. And we have also announced the reorganization of our North American businesses, effective in January 2020.

Full year expectations unchanged, and certainly a stronger second half anticipated.

Let's just summarize the management actions that we will touch on in more detail and some of them are later in the presentation. So in ASEAN, we were faced in 2018 with tough markets and poor project performance, we announced a significant restructuring alliance with new business leadership. We exited product lines in the Heavy Foundations segment and focused on ground improvement. And it's been pleasing to see that we have returned to profit in H1.

In Waterway, we similarly had difficult market conditions, but we've not noticed in 2019 first half an improvement in the quality of contract awards and as a result, we've extended the restructuring and announced that we will be ceasing operations in Waterway from October this year.

Brazil and Franki Africa are still tough markets despite good actions on capacity reduction in 2018. These remain under watch and further cost-reduction actions are potentially required in H2 of this year. In Suncoast, we had a margin compression as a result of steel increases in 2018, and that is now being passed through broadly entirely to the customer base and margins have recovered.

The large project pipeline, as I mentioned, is down in EMEA. EMEA on an underlying basis continues to improve, and we're actively engaged in large projects prospects around the globe for 2020. But 2019 will be a large project lull year.

And then North American foundation businesses, we have the potential to bring these companies together, strengthen our market position and align on to a common platform, and we've essentially announced that in the last month that, that is the structure we're going to be moving into as of January 2020, and I'll talking little bit more about that later on.

I'll hand over to Mike for a walk through the financials.

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Michael J. Speakman, Keller Group plc - CFO & Director [2]

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Thank you, Alain. It's my privilege to be presenting the financials today for our interim results. We will be following a similar format today format we followed at the year-end. The exception will be that as a result of the introduction of IAS 16 -- sorry, IFRS 16, we will be presenting the P&L statement both under the IAS 17 format, which we use for most of our comparatives given that, that's what the prior year was developed in, and I suspect this the one most of you developed your models using and also IFRS 16.

So moving on with the interims -- the income statement. This is a direct extract from the statement we issued this morning. For the first time we've -- it's been subject to a review by our external auditors. This is one of several initiatives which we've taken to actually improve the control regime of the company.

You'll notice it's a 5-column format in terms of the current year. This really takes you from the IAS 17 basis, which is the one which we'll do the comparatives to as I talked to earlier. With the second column showing the effective IFRS 16, the third column, which will become from next year onwards the comparative basis, which we actually talked to is a combination of both of those. So it's effectively the underlying business with IFRS 16 applied. We then have the underlying -- sorry, the non-underlying items, and then finally, on the left -- right-hand side, the statutory basis.

So moving on to the underlying trading. In terms of revenue, revenues increased slightly to just under GBP 1.1 billion. And that total increase of 2% overall is made up of an organic shrinkage of 5%, which is related primarily to phase specific, which we'll come onto a little bit later, offset slightly by the acquisition of Moretrench and the full annualization of that, which gives you the constant currency growth of minus 2%. Thus given a bit of a tailwind by foreign exchange, which then runs you out to the nominal growth of 2.5%.

In terms of operating profit, similarly, there is a quite significant shrinkage there on organic basis, 36% and more of that in a moment when I take you through the operating profit bridge. Again, there is an uplift from the Moretrench acquisition giving you a constant currency shrinkage of 29%. Again, there is a tailwind from foreign exchange giving an overall reduction of 24% year-on-year.

In terms of the operating margin, that's decreased slightly from 4.6% to down to 3.4%. Net financing costs, this is slightly increased due to really the fact that you're carrying 3 months extra burden of the cost of the acquisition of Moretrench in terms of debt. And additionally, there is a little bit more weight in terms of the margin and the borrowing rate.

In terms of taxation. Taxation merit of GBP 8.1 million is effective tax rate of 28% in line with I think our guideline and indeed in line with the previous years. And then down to dividend, dividend now 12.6p, growth year-on-year of 5%, which is our progressive norm covered by earnings about 3.3x.

I'll now present you the operating profit bridge between half 1 2018 and half 1 2019. I would say that of all the slides I'm presenting today, this is one of the 2 which I think is most important and indeed most informative.

We have -- we are trying to continue our progress in terms of making this transparent as possible and getting across to you the characteristics of the business and this slide, I think, is one of the most useful ways of doing that.

Starting with the profit from last year, GBP 49.1 million. We mentioned earlier on the tailwind from foreign exchange, that's the GBP 3.5 million, and then you've got 4 elements there which make up the movement in the North American profit, which is slightly down by GBP 1.5 million.

First one now is the Moretrench annualization, which I talked to previously, and then second one is the reversal, normalization, if you will, of the Suncoast margin, which I mentioned to you last time we all got together here.

There'll be more of that in the second half, if you recall, last year it was a GBP 7 million decrease year-on-year for the full year, and of course, you're getting more or less half of that back in the first half.

Items 3 and 4, and again this is bit of replay of the prelims. These could be just treated together, but again, I separate it out to give you some insight. If you recall last time, data centers was a positive for us as it grew year-on-year. This time it's abated somewhat, so particularly nice seam of business. This is something which we place to our strengths, but unfortunately at the moment, there's just been less activity in that particular area.

Another area where there's been less activities with some of the higher-margin type work, example, is some of the emergency work I'm sure Alain will talk to that, a little bit later.

Moving onto EMEA. This has been dominated by the reduction year-on-year of large projects, which we referred to previously, this time it's a GBP 11.3 million decrease year -- half-on-half, and on this -- you can see that this has been slightly supplemented by an uplift elsewhere of just under GBP 1 million.

Moving on to Asia-Pacific. Good news story with respect to the ASEAN recovery there. I think the team have done a great job in actually restructuring our business and turning it around in terms of trading, and that is performing particularly well half-on-half, offset by softening in the Australian market and some business issues there, which, again, Alain will talk to a little bit later.

We've got a small central moment there. Then overall under the IAS 17, a profit of GBP 37.5 million. For the sake of completeness, I've put in there the impact of IFRS 16, and that would take us through an overall profit of GBP 38.3 million as we move into next year.

In terms of the impact of IFRS 16, here you've got a benefit to operating profit of GBP 0.8 million, just under GBP 1 million. This is really the offsetting the decrease in depreciation charge as in relation to the operating lease expense.

Further down the P&L, you've got the impact of the imputed lease charge, and all of that being tax affected by the time you get down to the profit and loss for the period.

Overall, you can expect that this overall effect will be more or less doubled in terms of the full year. So the operating profit will be impacted by about GBP 1.5 million, the interest by about GBP 4.5 million. So that by the time you get to PBTs, net-net about GBP 3 million, and that would impute roughly a 3p impact on the earnings per share.

Moving on to the underlying items -- sorry, the non-underlying items. The most significant of these relates to the restructuring program at a group level. You will see first of all that the GBP 11 million there relating to the expanded restructuring in Waterway, which will cease trading in the autumn. This you must think of primarily as a non-cash charge. What we have there is a lot of asset impairments, and the proceeds from those will more or less offset the cash that we will incur in terms of redundancies and other restructuring activities. So overall I expect that to be more or less cash neutral.

We have a gain there from the successful restructuring, which will be taking place in ASEAN. This isn't quite complete yet, but we've have made very, very good progress there, and the team have actually managed to settle a lot of things on better terms than we anticipated and overall the net restructuring charge is just less than GBP 7 million.

We have some rolled over acquisition costs. So overall, the non-underlying operating cost there about GBP 7.5 million.

Various elements in terms of amortization, GBP 1.7 million, and you've also got some net income of GBP 3.5 million there from relating to reduced cost with respect to Avonmouth.

Further down, you have the GBP 10 million there in terms of taxation. That relates to the writing-off of a deferred tax asset in Australia. This has in fact been triggered a reassessment because of the Waterway restructuring and being that we stay on the prudent side of events on these sorts of things, we took the decision to actually write that off on this occasion.

Moving on to the cash flow. This I think is the second most important slide that I present to you today. And I'm not going to go through every single line item here, but if you look at it overall, it does continue to demonstrate the strong cash-generating capabilities of the business. If you think about it and you analyze this carefully, despite being GBP 11 million, GBP 12 million lower in operating profit, we have produced GBP 11 million more in terms of free cash flow half year on half year. And when you examine why, it's because we're simply doing what we said we'd do. We're containing our CapEx spend, which is still tightly focused on what we need to do. And we're also focusing on working capital. This is seasonally an outflow, as it is every year, but year-on-year we're getting better at it, hence the fact that we've produced some better cash -- free cash flow than we did last year. I'd also point that there is no acquisitions at all in the year, and the net debt decreased by GBP 33.5 million, and we're confident that we remain on track for our position of being within the 1 to 1.5 leverage range by the year-end.

Last thing I draw your attention to is the closing net debt under the IFRS 16 basis. This, as you'll see in a moment, is increased by the burden of leases, and then the leverage ratio there, 2.5x is the new leverage that we quoted under the new standard.

Moving on to the balance sheet. The balance sheet is essentially pretty unremarkable. I've split out here simply the impact of IFRS 16. You can see the tangible assets, the fact that you've got GBP 84 million, GBP 85 million worth of addition there, the right-of-use assets and a similar number in terms of lease liabilities increasing the net debt from GBP 333.5 million up to the GBP 420 million there. Other than that, nothing much really to talk about with respect to year-on-year movements.

Moving on to net debt. I think many people found this particular slide quite useful at the preliminary results so we thought to repeat it here and just basically roll it forward. Some good characteristics can be shown from that, I mean essentially it's pretty flat overall. In the beginning of last year's term, you can see that pickup in March when we bought Moretrench. So there's a bit of a pickup there, but essentially aside from that in the payment of dividends it has got a reasonably consistent profile.

We do take a dip for the line towards the end of the year, and indeed if you're looking backwards that seems to be pretty typical for Keller. We are very well supported by our banks, and indeed on Thursday we'll go through a very similar presentation to this with all of our banks together, we'll cover the -- both the shareholder results but also some treasury items, and we do continue to enjoy a very good support from them.

And from that point of view, we are well, well within all of the facilities which we have.

In terms of moving forward to looking ahead, this slide is basically a slight build of the one, again, I showed you at the preliminary results. The first 3 columns are exactly the same, and the final column really just gives you a bit of an update as to where we are. And you'll notice straight away that many of the items there are just labeled unchanged, and indeed that is indeed the case. I've also iterated there what you would expect in terms of the Moretrench acquisition, slightly up. The Suncoast pricing return, we've got GBP 4 million of the GBP 7 million back and in terms of the large projects we've got, the bulk of the GBP 16 million has indeed occurred in the first half.

The only other thing I'd draw your attention to is the slight upward pressure in terms of the tax rate, and that's principally by virtue of the geographical distribution of profits around the group.

In terms of the cash flow there, I reiterate the fact that we will continue to contain our CapEx spending, working capital, I do anticipate that will be -- at worst it will be flat or thereabouts and acquisitions, we have no intention to do any material acquisitions at this point and again, we fully anticipate to be within the guidance range for debt at the year-end.

I would reiterate that the -- as far our covenants are concerned, like most companies I think our covenants are grandfathered into the IFRS -- pre-IFRS 16 terms.

Finally, phasing. Whilst we had a very good half 1, clearly, there is a reasonable amount to do in half 2. And I've gotten 3, I hope you'll find, useful charts up there in terms of our historical phasing for revenue, profit and indeed margins.

The only real exception to the trends really is last year, 2018, which I regard as an anomaly because you've got the benefit of the EMEA projects in the first half, and you've got the burden of the APAC costs in the second half. If you strip those out, then it follows a pretty similar profile to the previous 9 years.

My rough rule of thumb of 1/3, 2/3, I think is very clearly supported by the chart in the top right-hand side there. So overall, what we're advocating this year is not out of guilt with what you've seen in previous results for Keller.

Now why do you think we get there? What are the drivers of the H2 performance? Well, really first point to bring out is the fact we do have a very strong order book, especially in the North American area, we have it all in our hand in terms of what we need to execute. This is not large -- not market dependent in that regard. We do need to sustain the strong momentum we built in Q2, especially in North America. Slightly more volume to come through, but the margin profile, we just need to hit the same as we've already done in that quarter.

There are a couple of specific contracts, which we need to land and to begin to execute in Australia, and Alain may talk about that a little bit later on a.

And then finally, we just need to continue with the success of our restructuring program, which to-date has gone very well, and I think we will continue to do so as we move forward.

And with that said, I will hand you back to Alain.

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Alain Michaelis, Keller Group plc - CEO & Executive Director [3]

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Thanks, Mike. Okay. A few business updates for you. Firstly, I'd like to start with safety. We had another step forwards in our accident frequency rate in the first half, which is pleasing. We are not complacent though even though we see a 30% reduction year-on-year and a 70% reduction over 5 years. You can see the long-run graph is even more impressive than that, and that compares against a U.S. industry norm of 0.6. So we're running considerably below U.S. industry average on a global basis.

We are running this under our well-trialed Think Save tag, and we have another generation of quite perceptive actions that we want to drive under that umbrella, and that's all being configured and launched in the second half. We also think that the safety is such an important criteria for the business in general terms, but clearly the ethics and the realities of keeping our people safe, but also it's a hugely important barometer in other senses. So a safe work site is generally one that's well-organized, it's generally one that has good quality attainment and is generally one that has good productivity. So we see it very much as a blended metric that talks about the future health of the company. So we will continue to push this forwards as an organization.

Another big barometer of health of the company is how our customers view us and clearly the order book is a sign of great comfort to us. We are growing strongly in North America that is a like-for-like number, clearly the Moretrench acquisition was in the compared to last year. And we have declined in APAC; a lot of that is self-restructuring, and some of that is weakness in the Australian market, but we expect that to recover in the second half.

So ongoing strong order book around the world. And of course, that is a reflection of how our customers view us. Our customer reputation out in the field is very strong, and continues to be built on, and we do that primarily through executing projects well on their behalves. We are running at about 7,000 projects a year, and you could see a selection of projects around the world, both in geographic scope as well as type of project.

And it is an important part of our core capability, most of our business improvement initiatives are driven squarely at getting better at customer projects. So if you think about project life cycle, management that we talked about in the full year, we talked about control sharpening, technology and our global product teams, our lean efforts, digital journey, procurement and safety, they're all squarely focused at this capability. And we expect to make ongoing strides in making sure we retain our customer-leading position in the industry in the years ahead.

Let's talk a little bit about each of the divisions. North America, as we mentioned, went forwards on revenue that is primarily as a result of the Moretrench acquisition; like-for-like, we were broadly flat. The margin decline was driven by a mix of different issues. Weather was certainly a factor. It was an extremely cold and very wet period. The U.S. rainfall amounts were the highest in recorded history in the last 12 months and that, of course, has caused some related inefficiencies but we also had negative mix as we mentioned, data centers work last year as well as strong emergency work last year that didn't recover.

Our foundation businesses were broadly disappointing, especially in Case which particularly suffered from the weather effects, particularly in the first quarter although momentum has improved in Q2, which is encouraging for the outlook. We remain pleased with Moretrench as an acquisition. It's blended well culturally and integration has gone extremely well. We are very pleased in general that acquisition is ahead of our internal business case. Margin improvement, as predicted, came back at Suncoast with the customer adverse material cost inflation being reversed in 2019, and Canada still not quite at potential. We think Canada has got some further steps to take going forward so the market looks reasonably healthy there as well as the U.S. construction market remaining stable. So strong order book gives us confidence in North America in the second half.

Let me talk a little bit about the reorganization that we announced last month. We are -- perhaps look at the right-hand side of the graphic for the visual. So we are taking our existing brands, which are well-known brands in the market. They are the brands we acquired in the last 2 decades, and we are putting them into an umbrella under Keller, but it is not just a branding exercise. We are reconfiguring the businesses, which are broadly geographical and product line into a full product line, unified platform so that in any one U.S. or Canadian city, you will be able to access as a customer the full range of Keller products and services. So it gives us a much stronger and simpler platform with which to engage with the customer base.

We are working to put this in place for January. We've announced it in advance so that we can carry out a sensible, smooth program-managed transition, and we think in broad terms the benefits of this will be related to growth in the market.

So it's a -- it's very much a revenue-generational move, but that will be a midterm affect. In the short-term, there will be some project costs between GBP 2.5 million and GBP 4 million through '19 and '20, which we expect to absorb in the run rate of the business. And there will be some medium-term cost and efficiency benefits around twice that order that will come through in the midterm.

So we feel very excited about this project. It's an important step for us strategically as an organization, but materially in the short-term financially it is not as significant as one would perhaps imagine.

Let's move to EMEA. EMEA had a underlying revenue growth. Of course, we mentioned the 2 large projects, which were completed in 2018, GBP 11 million of effect as we discussed. Excluding these, revenue was up 11%, profit was up 4%. South East Europe performed really well, very strong business unit and Germany as well is busy. We had, however, reasonably tough market backdrops in U.K., Poland, Middle East, and South Africa and Brazil continue to face tough market conditions. However, we do see underlying operating performance momentum improving in the second quarter, and so we believe EMEA is going to have a solid second half.

One of the big question marks in EMEA for 2020 is around HS2. We thought it would be sensible to give you some color on where we're positioned on HS2 as an organization. As you know, it is a significant upside to the U.K. market. If it goes, if you look at the bottom bullet there, we think it is around 1/3 of the U.K. market spread over 3 years so quite significant, about GBP 1 billion of revenue.

We are well positioned. We are working on 3 of the 7 sections. There we are engaged with Professional Services Agreements to support the consortia going forward, and we have some advance trial piling already happening on C1. On C1, we're in a joint venture with Intrafor, part of the V Group, and C2 C3 we're with Bauer in joint venture. So you do the maths, roughly what sort of revenue that would represent for Keller going forwards. I think the important thing to say is, it is not in our order book today. It is certainly upside for us in 2020, and we would be disappointed if it didn't go forwards, but it's not a critical part of our year, but we're certainly planning for success and the team are well positioned.

Let's talk about APAC. Revenue declined partially as a result of softness in Australia and partially our own actions to reduce capacity, both in Australia as well as ASEAN. We are very pleased with the ASEAN turnaround which I'll touch on briefly, but Australia has had a quite a tough first half. We've had delays related to mining projects in the Pilbara, notably 2 cyclones; federal election clearly was not helpful in terms of continuity of awards; and we also noticed no improvement in the outlook for Waterway, and overall our 3 Australian business units all had significant revenue year-over-year declines.

As a result of the lack of improvement in the outlook for Waterway, we took the decision to cease trading as of October, which I'll come to shortly. However, tendering activity in Australia does look stronger as we speak. We are expecting it to return to more normal levels going forwards, and we have targeted specific contracts to win and partially execute in H2. And we remain confident overall that APAC would, as a division, return to profitability in the second half.

Let's talk briefly about ASEAN. As a remainder, we exited the Heavy Foundations side of this business. That was a decision we made in November 2018, and the team have been working hard to execute that. We have broadly exited most of those contracts with cease to perform those contracts, although there are some, should we say, spillover items that in terms of cash collection, which we are still working on, but we believe we are well positioned.

We have been able to return to profit in the first half, which was a great spring back. Lower restructuring cost, but also, we've been fortunate to win some very good high quality ground improvement work, which all goes as well for a healthy H2. So good progress in ASEAN.

Waterway. We have a long track record of delivering good quality infrastructure work along the East Coast in Australia, but the market dynamics have in the last year shifted away from us. We -- despite our best efforts to restructure the business, we've not been able to conclude that we had a healthy profitable future in Waterway, and therefore we took the regrettable but necessary decision to cease operations as of October.

We have reported that we had a GBP 4 million H1 loss in Waterway, which will obviously not repeat next year, and we have taken a restructuring charge of GBP 11 million and as Mike mentioned, broadly non-cash.

Let's turn to outlook. So these are the statements we made at the full year results, and they are all absolutely still standing as we look into the second half. I'm encouraged by the progress that the organization has made around these points, but it is very much work in progress, and we expect more from them in the second half and no change in our stance.

Our outlook is that we reiterate full year guidance. Our market fundamentals all remain broadly healthy in our main markets, our order book over GBP 1 billion is good quality. We expect to maintain Q2 momentum in North America. We have specific project wins in Australia, which we're targeting as we mentioned, and we will continue to deliver the benefits from our restructuring program.

Our expectations are the revenue will be broadly flat for the full year, we will increase profit through margin improvement, we will have a strong cash generative year, and our net debt on an IAS 17 basis will drop to 1x to 1.5x.

So that concludes the formal presentation. We will move to everybody's favorite part, questions.

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Questions and Answers

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Kellie McAvoy, Investec Bank plc, Research Division - Research Analyst [1]

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It's Kellie McAvoy at Investec. I had a couple of questions. I guess, the first one around the U.S. reorg, the numbers you've quoted in the presentation in the [R&F], can I just confirm these are just the cost benefit, and that doesn't include revenue synergies? And I just wondered if you might provide some more color as to where you see the best opportunity for the revenue synergies? And on Australia, I'd be interested in a little bit more color on the couple of contracts that you are sort of banking on securing and starting. Are they big government contracts, are they mining-related? That would be useful. And then I guess, the last question, when we were sitting here for the full year results for last year, I think there was a conversation around how 2018 had been a fallow year in terms of claims versus 2017, which had been quite good. I wondered what your outlook is assuming this year in terms of claims performance and what you have seen so far in this year?

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Alain Michaelis, Keller Group plc - CEO & Executive Director [2]

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Thank you, Kellie. So your first question is around North American benefits of the reorganization plan. Firstly, yes, you are correct. We only listed numerically the benefits associated with efficiencies and cost, which was roughly double the cost to do the project in the first place, but again, they were medium term. We don't expect them to come through immediately.

And the main purpose is revenue gain. And that has not been listed as a specific numeric target, but again will be midterm. Let me just describe it a little bit how that happens. So today, we have an overlapping footprint of capabilities and business units in North America, which means that in some cities we have multiple branches, and they will be serving different products, and in other cities we'll have only one branch doing only a specific part of the portfolio.

So in the Ohio Valley, for example, we will have -- we have quite strong piling capability, but we don't do much in terms of ground improvement. In the Northeast, we would have strong ground improvement, but not very much heavy foundation capability.

And then you have other areas, which are whitespaces where we don't have the critical mass of any one of our companies to go in and approach that mid-sized city, okay?

So what this reorganization will do for us is over time to allow each branch in your city to offer the full range of product, and that will drive revenue growth. But the reason it takes a while to develop is that we need to train up our people and second people into that location for that to happen for us to be able to offer that in the market.

And in other areas we'll be able to get some efficiencies because we'll be bringing the branches together and making sure that we cut down on the odd costs or office cost. That's essentially the driver, but we, again, believe the revenue gain in the 3-year timeframe is the bigger opportunity than the cost efficiencies. Okay.

I think your second question was around contract wins in Australia. Notably they are in the mining, initial marine space. Our Austral business is very well placed in that market, but it's had a fairly fallow H1, but has tendered a lot of work, and that's the basis for our confidence that we are going to be coming back in terms of revenue and therefore profits in Australia.

Mike, do you want to talk about the claims question?

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Michael J. Speakman, Keller Group plc - CFO & Director [3]

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Yes. The claims question is quite an interesting one because it's actually quite difficult to get your head around in terms of the way we go forward because when these claims do come through, the quantum is negotiated typically, and their timing can be elastic. So in terms of our expectation to what comes through, when we're forecasting and when we're planning for the future, we do not build any of them in because they're not in our control.

And when they do come through, there is a sort of an inflow of these sort of events, and in fairness there is also sometimes leakage you don't sort of plan for fairly much either. So the 2 tend to offset each other over time. I think, in terms of looking forward to the rest of this year, the guys are actually getting better in terms of their operational control performance, but I'm not planning for much of that. Similarly, we're not planning for any of the upside of having any significant claims settled either. What I would say is that from a management point of view, and indeed from the Board's point of view, it is an area which we are putting increased scrutiny to because a, we want to understand all the ebbs and flows much like you just reasoned there. But also we want to make sure that we're getting the best value out of all of them, and it is something, which we just need to be little bit more sensitized to.

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Christen David Hjorth, Numis Securities Limited, Research Division - Analyst [4]

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Christen Hjorth from Numis. Just 3 from me if that's okay. Just -- again on the U.S. reorganization, maybe slightly from the other side, just talking through the key risks that you view in regards to that project and perhaps the mitigation you've got to deal with those risks. Secondly, HS2, you clearly brought out pretty significant potential in 2020. If it is canceled, do you feel do you have the ability to replace it with other work around Europe or indeed the world? And then just finally, in Australia, ex-Waterways, those are the businesses were they loss-making in the first half?

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Michael J. Speakman, Keller Group plc - CFO & Director [5]

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Why don't you answer the first one?

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Alain Michaelis, Keller Group plc - CEO & Executive Director [6]

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The first one with respect to the North American reorganization.

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Michael J. Speakman, Keller Group plc - CFO & Director [7]

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Okay, go for that.

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Alain Michaelis, Keller Group plc - CEO & Executive Director [8]

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The Board -- when we were considering this particular project, indeed, the local management were very alert to making sure that from a risk management point of view, they are at the top of their game, and indeed we commissioned an external independent review of the project readiness of the project, which in the round came out pretty good. There was a few things as you always expect that we need to address and just hone and pick up on a little bit.

But there was nothing there that was a really big howler. And frankly, the team is pretty good at actually picking up any import from anywhere to actually make that project work more efficiently and more effectively, and frankly, less risky. There is a considerable amount of change with that, but nonetheless, as best as they can I think that they've actually worked their way through it. There will be, I do not doubt, unknown unknowns and there will be things which James and team will have to face as they go through execution, and they'll have to address as they unveil themselves. That's the nature of reorganization events; you can't avoid that. But so far, so good.

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Michael J. Speakman, Keller Group plc - CFO & Director [9]

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Yes, I agree with all that. To add to that, we have been working on mitigation for this project for some time. So a lot of the risk sits within the hearts and minds of Keller employees, their loyalty to their brands versus the future brand and some of the work we've been doing to connect up Keller, rebrand to make sure that people are working on cross business teams, all of the functional work we've been doing a lot here has helped.

And the initial response from the employee base has been encouraging in that respect that most people are keen to get on with it. Obviously, there will be a range of different views around that. And I think we've also -- the other big mitigation factor is that we have got a very strong program management capability that will sell up about it. We take the change on with great respect, but so far the initial signs are all encouraging. And I fully expect the customers, once they fully absorb the change, will be very supportive because for them, obviously it's a step in the absolute right direction in terms of making Keller simpler to deal with.

Your second question around HS2 being canceled. Again, we look at it as broadly upside, team well positioned, but we're not taking it for granted. Firstly, I think we have a relatively easy way to re-deploy capacity because we haven't really put a lot of capacity on the project yet. We are mainly working on Professional Services Agreements. So there's more designers and quantity surveyors rather than a lot of crews on the ground. And -- so that's helpful. In terms of replacing it, obviously, it's a big project. So they're not easily replaced, but around the world, we are engaging in a number of different larger projects for 2020. I can point to some of the mining projects in Australia or some of the LNG projects around the world, and in the U.S. there are a number of big infrastructure projects, but nothing we can really put down at this moment and say we're going to talk about publicly.

Third question was around what was Australia broadly ex-Waterway, and those 2 businesses were broadly breakeven.

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Christen David Hjorth, Numis Securities Limited, Research Division - Analyst [10]

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One follow-up, sir, on the footprint rationalization -- sorry, the reorganization in the U.S. I think you guys have previously said there is 2 ways to run a business, basically you either go 1 product very efficient in a city or you do the full shebang. And I suppose what you're saying now is you're going towards the second in every city?

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Michael J. Speakman, Keller Group plc - CFO & Director [11]

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The full shebang, so to speak.

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Alain Michaelis, Keller Group plc - CEO & Executive Director [12]

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Yes. Look, I think we take that factor about strictness and quality of really focused offer quite seriously, and it is a clear advantage. So in Miami, for example, we always talked about it being a really strong 1 type of pile environment and we did that very well. So we want to retain absolutely that. But I think as we see good potential to retain the purity of an offer within a branch network because you can call it out in the structure inside a branch to make sure you retain that. And some of the work we do around global product teams that compare and contrast the way we do things around the world are helpful, and the other big trend will be the digitization that we're building a platform for. So we'll be very, very much sharper in terms of being able to make sure that we've got common high standards in a certain product lines throughout the world. So I think, there is mitigating factors around that, but we definitely take that seriously as a potential risks of the project. That having been said, we see the global trend going more and more to a mix of solutions of different products as opposed to single-product businesses being the winning formula.

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Saravana Bala, Jefferies LLC, Research Division - Equity Associate [13]

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Saravana here from Jefferies. Just 2 questions for me, please. I was wondering if you can give a bit more color on the annualized benefit to earnings from exiting Waterway in October, just to get an idea of the estimated benefit from 2020 going forward. By the way, we can simply extrapolate the GBP 4 million loss somehow in H1. The second question is you've had some high-quality project wins in ASEAN, going on from Kellie's question, I was wondering if you can expand upon whether this is part of some kind of underlying market trends, whether you're seeing more of these high-quality products coming through? Or are there more one-offs that you are seeing?

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Alain Michaelis, Keller Group plc - CEO & Executive Director [14]

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Can you do the first one, Mike, around Waterway benefits, extrapolating?

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Michael J. Speakman, Keller Group plc - CFO & Director [15]

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I mean I hate to be drawn on extensively going through all of the different business units' profitabilities. But I think it's fair to say that last year Waterway struggled at a rate which is not dissimilar to the first half of this year. And therefore if you take that as a proxy, you'll get more or less in the right direction.

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Alain Michaelis, Keller Group plc - CEO & Executive Director [16]

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Yes. I mean, there's always -- there's always a lot of mix shifting around projects and relative mix between business units. But on a pure Waterway basis, I think you can safely say we're not going to have GBP 4 million losses next year, that's helpful.

On your second question, around ASEAN product wins, is this a trend. I think as there is probably an element within the wins that is around an internal Keller focus perspective. So with the leadership changes we've made and the exit from Heavy Foundations which were absorbing quite a lot of management time, I think we've been able to focus more effectively internally and making sure those are won and well executed.

And I think that is clearly a trend in that respect. Having said that, I think the wins we've had in Singapore, notably, are not necessarily a long-run trend. I think there's a lumpiness to them. I wouldn't like to predict that, that next year is just as good. Let's see how it develops. But I, certainly, don't think in terms of team capability and focus, we're very much better positioned than we were last year because of the distraction factor.

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Michael J. Speakman, Keller Group plc - CFO & Director [17]

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I think from my perspective, I think that, that's doubly good in the first half because they still have been tidying up and executing restructuring plan, they're still executing asset sales, they're still trying to recover debts from major projects from last year, they're still trying to close all of those things out and restructure the business. And at the same time, they have turned it around, and they're actually making a very good inroads in terms of (inaudible).

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Alain Michaelis, Keller Group plc - CEO & Executive Director [18]

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We think the ASEAN region, in general, is a really high-growth and offers good opportunities for ground improvement, and Keller is a strong name. So we should have a pretty successful future.

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Gavin Jago, Peel Hunt LLP, Research Division - Analyst [19]

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It's Gavin Jago from Peel Hunt. Just a couple if I could please. The first one was just around North American reorg, again. I think, Alain, you've been talking about some cross-selling opportunities for some time. Just in terms of what's driven, I guess, the decision to do the re-branding. Have you seen some cross-selling kind of opportunities and this is going to supercharge what you've been trying to do and it wasn't really working underneath the different existing brands, if you like? And the second was just around APAC in second half, obviously, given what happened last year. Where do the risks lie or the key risk lie in terms of return to profitability in the second half?

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Alain Michaelis, Keller Group plc - CEO & Executive Director [20]

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Okay. Thank you. North American reorg. So yes, one of the things we had been doing, as you rightly pointed out, was using multiple Keller companies to come together combining forces on the specific job site and forming what is called internal joint ventures. And that was very effective and something we pushed in many, many regions of North America. And broadly I think it's been the right step and in many ways was the mitigation for all the teams to learn to work together to put solutions together. So typically one of the examples we talked about in the past was the Miami basement where HJ would provide the piling, and Hayward Baker would provide the earth retention solutions.

But there comes a time where internal joint ventures is a little bit cumbersome, and we felt that this was the right time. Having matured over 2 to 3 years of good work of internal joint ventures as well as other things we were doing, as I mentioned, to bring the organizations together to take the next step because clearly is a more efficient model and it is easier for our customers because our customers [gladly] understood that these 2 companies are working as a Keller -- Keller connected arrangement. It wasn't quite the same as dealing with one company. So I think it's in the right interests of the customers to do.

Do you want to start APAC risks?

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Michael J. Speakman, Keller Group plc - CFO & Director [21]

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APAC is -- I think is much more -- is certainly from my perspective is a much better place now than it was, certainly, when I joined the company almost a year ago. India, I think, is taking longer, and I think they've got very good management there, and they are in control and what they're doing. There is a few contract wins they've got to get towards the tail end of the year, but they're there or thereabouts right now. ASEAN, I think, we've talked about, I mean [Deepak] and [Martin], the team, they're well on top of their game and [Dr. Leon] is getting some good volume prospects to go after. So that I think thing is working very well, and I'm pretty confident that both of those businesses will do well through the second half.

I think Keller Australia has got some business to close out. But I think the key challenge for me is the closing out of the restructuring in Waterway and making sure that's executed to plan which so far the guys have been very good at, and they're going through that plan very, very well, they've planned it well, and they're executing it well. But you have to work through these things, and as I said earlier, on, sometimes you hit the odd road bump. And then finally I think, this is the -- probably the most significant risk is there's elements of it which are outside our control and that is that there are certain contract wins which we're got to land, we think we are well placed for, but we've got to land and we've got to start executing them. But that to me is the only swing factor. Do you share that view?

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Alain Michaelis, Keller Group plc - CEO & Executive Director [22]

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Yes, I agree. Nothing to add.

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James Edward Allen, Liberum Capital Limited, Research Division - Research Analyst [23]

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James Allen from Liberum. I can say that you mentioned further cost actions potentially required in H2 in Brazil and Africa. I was wondering whether you can provide a bit more details on those and whether those would be expected to be material if they were to happen.

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Alain Michaelis, Keller Group plc - CEO & Executive Director [24]

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Yes, I mean, I think the -- those markets remain tough to predict, as usual with our businesses' lumpiness to the contracts we win, but the overall market health in Brazil has not picked up as had been expected. There is still a lot of political stasis so we don't expect things to turn around quickly in Brazil. And therefore, we, as usual, will have to adjust our capacity accordingly.

And the same really applies very similar, very parallel in South Africa. The difference in Africa is that there are some reasonably decent prospect in sub-Saharan Africa, which may help, but South Africa itself remains weak. So we're really just flagging that, that is very much on our radar. In terms of quantum, I don't expect them to be that significant, but we haven't yet worked through it. And -- so we can't really give you a specific answer.

Okay. No more questions. Well. Thank you, everybody for coming along today, and we will see you in 6 months' time. Thank you.