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Edited Transcript of MND.AX earnings conference call or presentation 19-Feb-19 2:00am GMT

Half Year 2019 Monadelphous Group Ltd Earnings Presentation

Applecross, Western Australia Jun 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Monadelphous Group Ltd earnings conference call or presentation Tuesday, February 19, 2019 at 2:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kristy Glasgow

Monadelphous Group Limited - Company Secretary

* Philip Trueman

Monadelphous Group Limited - CFO & Company Secretary

* Robert Velletri

Monadelphous Group Limited - MD & Executive Director

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Conference Call Participants

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* Craig Wong-Pan

Deutsche Bank AG, Research Division - Research Analyst

* Daniel Porter

Wilsons Advisory and Stockbroking Limited, Research Division - Senior Resources Analyst

* David Rosenbloom

ARCO Investment Management Pty Ltd - Senior Investment Analyst

* John Purtell

Macquarie Research - Analyst

* Jolyon Sinclaire Wellington

JP Morgan Chase & Co, Research Division - Analyst

* Michael R. Aspinall

CLSA Limited, Research Division - Research Analyst

* Nathan Reilly

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

* Piers Flanagan

Baillieu Holst Ltd, Research Division - Research Associate

* Rohan Sundram

MST Marquee - Gaming and Contractors Analyst

* Siraj Ahmed

Citigroup Inc, Research Division - Associate

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Presentation

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Kristy Glasgow, Monadelphous Group Limited - Company Secretary [1]

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Good morning, everyone, and welcome to the 2019 half year results investor and analyst briefing. Presenting this morning from Perth are Monadelphous' Managing Director, Rob Velletri; and Chief Financial Officer, Phil Trueman. Copies of this morning's presentation and associated materials are available on our website at www.monadelphous.com.au. Throughout this presentation, the speakers will guide you on when to click through to the next slide.

I'll now hand you over to our first presenter this morning, Mr. Rob Velletri, who will start on Slide 2. Please go ahead, Rob.

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [2]

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Thanks, Kristy, and welcome to our 2019 half year results briefing. Today, Phil and I will run through our financial and operational performance for the period ending 31 December 2019 before taking a look at our outlook and answering any questions you might have. We structured this morning's presentation a little differently than in the past with some further detail about the work we undertook during the first half noted in the appendices for your information.

Moving now to Slide 3, group performance and the highlights. For the 6 months ended 31 December 2018, Monadelphous recorded revenue of $830.5 million, which is a decrease of 5% on the previous corresponding period and in line with guidance that we provided in our AGM. The result reflected a significant increase in maintenance revenues and a growing contribution from infrastructure. This was offset by a reduction in construction revenues following the completion of the Ichthys Project and timing associated with new resource construction opportunities.

As I just mentioned, our maintenance division performed exceptionally well, recorded 25% increase in revenue compared to the first half of the previous financial year, which represents a record 6 months performance for the division. The result can be attributed to increasing levels in our offshore oil and gas contracts and growing demands of services throughout the resources sector.

Net profit after tax attributable to members was $30.7 million, and earnings per share was $0.327. The board declared an interim dividend of $0.25 per share, fully franked. In total, we have secured new contracts and contract extensions valued at around $770 million since the beginning of the financial year, including a significant number in the renewable energy and water and irrigation sectors as well as a major contract with BHP at the South Flank Project that we announced yesterday. In addition, we continue to experience high levels of tendering activity for an increasingly large number of major resource construction projects coming to market.

Turning now to Slide 4. Our Engineering Construction division, which reported revenues of $331.6 million, successfully completed work on our largest ever project, the Ichthys onshore LNG facilities. Our strong performance on this project resulted in the award of additional work and continue to broaden our proven capability in the oil and gas market. During the period, the division also completed a number of projects at BHP's iron ore operations in the Pilbara region of WA under our panel contract arrangement.

We continue to make good progress on 2 packages of work being undertaken at the Oyu Tolgoi Underground Project in Mongolia, which significantly ramped up during the period. There were about 1,500 people working on the scopes of work by the end of the half year.

As I mentioned before, we continue to increase our presence in the infrastructure market, securing a number of new contracts and additional work in both the renewable energy and water and irrigation sectors. Zenviron, our renewable energy joint venture, continued to build on its strong performance, securing 2 new wind farm contracts during the period including the southern section of the Moorabool wind farm and the Dundonnell Wind Farm, both located in Victoria. Subsequent to the half year-end, it secured a further contract for the Cherry Tree Wind Farm, which brings the total value of contracts awarded to Zenviron since April 2018 to around $390 million.

On the back of our solid performance in water and irrigation market, we were appointed to the Hunter Valley corporation design and construct panel in New South Wales in a -- for a 4-year period. We secured our first contract under the agreement at the Dungog water treatment plant. We also commenced work on our pipe irrigation scheme for Kurow Duntroon Irrigation Company in the South Island of New Zealand.

Our heavy lift business experienced an increase in activity, securing new work through an existing contract to provide crane services to several sites for Woodside. As mentioned earlier, the division continued to see high levels of tendering activity for a number of major resource construction projects.

Moving now to our maintenance division. Our maintenance division, as I said, achieved record revenue for the half year of $503.2 million, which is up 25%. This was due to a significant ramp-up of activity on our oil and gas contracts as well as an increase in demand for sustaining capital works and shutdown services right across the resources sector. During the period, the division secured a major contract with BHP which is valued at approximately $240 million over a 3-year period, the provision of maintenance services at its iron ore operations, again, in the Pilbara region of WA.

We continue to offer an ever-broadening range of services to new and existing customers and diversify into new geographical locations. As a result of significant growth from recent years, the maintenance division undertook a review of its organizational structure during the period in order to support our future growth plans for this division.

Now moving to Slide 6, contracts secured. As I mentioned, in total, we secured new contracts and additional work valued at around $770 million since the beginning of the financial year. This includes $250 million worth of contracts subsequent to the end of the period. This slide summarizes location and value of each of these contracts. You see a large portion of these contracts are infrastructure projects, highlighting significant projects we're making on our markets and growth strategy. More recently, we secured a major construction contract with BHP's South Flank Project associated with the project's outflow infrastructure as well as the supply, fabricate and construct project at the Jimblebar Mine. In addition, overseas in Mongolia, we picked up a supply and fabrication contract of structural steelwork at the Oyu Tolgoi project.

Moving now to Slide 7, our safety performance. As you can see from the slide, our 12-month total case injury frequency rate shows an increase to 4.17 incidents per million man-hours worked in the half year. This is impacted by rapid ramp-up of maintenance activity levels. We've implemented a number of initiatives to address this performance, including rolling out a renewed safety leadership development program and optimizing our leadership resources, cost of maintenance division through the restructure that I touched on earlier.

Moving now to Slide 8, people. As you can see on this graph, our total workforce numbers, which now includes both employee and subcontractors, steadily increased over recent years. The strategic diversification of our business into the infrastructure sector as well as overseas has seen a substantial increase in engagement of subcontractor labor to supplement our capability in these markets. By the end of the period, our direct employee numbers were 5,378. However, our total workforce numbers, which provides a better representation of our workforce, were over 7,500.

As market conditions continue to improve and the employment market tightens, people development, attraction and key talent retention will remain a major focus for us. I'm also pleased to announce that we launched our formal Gender Diversity and Inclusion Plan during the period, which formalizes our long-standing commitment to increasing female participation levels across the company.

I'll now hand you over to Phil, who will give you a bit more of an in-depth look at our financial performance.

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [3]

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Thanks, Rob, and good morning, everyone. Slide 9 shows our financial performance for the half year compared to that of the previous corresponding period. We recorded revenue for the 6 months of $830.5 million, down 5% on the same period last year. And our earnings before interest, tax, depreciation and amortization was $55.8 million, which equates to an EBITDA margin of 6.7%. An increase in the depreciation charge resulting from our recent plant and equipment fleet renewal process and a reduction in net interest earned contributed to net profit after tax of $30.7 million, an 18% reduction on the prior corresponding period. Earnings per share was $0.327, and the board declared an interim dividend of $0.25 per share fully franked.

We ended the period with a healthy cash balance of $193.5 million with cash flow from operations for the period of $15.5 million. This resulted in a cash flow conversion rate of 72%, which was impacted by the significant level of employee entitlement payouts on a number of large, multiyear projects which demobilized during the period. Our strong balance sheet provides us with substantial capacity to invest in new business opportunities as they arise, with the company having a net cash position at the end of the period of $166.4 million.

So that concludes our look at the financials, and I'll now hand it back over to Rob.

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [4]

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Thanks, Phil. Slide 10 shows the relevant current and forecast Australian market conditions for our business. As you can see, the resources and energy sectors are experiencing strengthening operating conditions as a number of global and domestic customers commit to capital investments. In the resources sector, project development activity is increasing with the pipeline of construction opportunities gaining in number, particularly in iron ore and lithium. Activity in the energy market has increased with offshore developments entering production and a number of debottlenecking and brownfields growth projects progressing through feasibility studies.

The demand for maintenance services is expected to strengthen as resources production in Australia remains at record levels. Ongoing maintenance and support of aging resources assets continue to increase, and LNG assets ramp up production. Investment in infrastructure is healthy with prospects continuing in water and irrigation, while activity in the Australian renewables sector is buoyant as construction continues on a large volume of projects.

Moving now to our outlook. We continue to experience high levels of tendering activity in our core markets, and we're well placed to secure new work on major resource construction projects, which are expected to generate significant revenue opportunities in the 2020 financial year and beyond. As highlighted in our 2018 full year report, lower construction revenues are forecast for the 2019 financial year as a result of the expected timing of resource construction opportunities and the large revenue contribution earned from Ichthys in the prior period. Total revenue for this financial year is forecast to be around 10% less than the prior corresponding period.

Productivity improvements will remain a priority as customers continue to focus on innovation and cost competitive solutions. Similarly, the attraction -- as I said earlier, the attraction and retention of labor will continue to demand our attention as activity -- industry activity levels increase and the employment market tightens. A strong balance sheet ensures we've got the capacity to invest in the right opportunities and enables us to continue to progress our markets and growth strategy.

So in closing, I'd like to thank our team for their ongoing loyalty and outstanding contribution. I also wish to sincerely thank our shareholders and other stakeholders for their support.

Thanks. I'll now hand you over to the operator for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Michael Aspinall.

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Michael R. Aspinall, CLSA Limited, Research Division - Research Analyst [2]

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Just a few for me. First, on the pipeline in lithium. Civmec won a contract last week at Albemarle. Is there more work to be awarded there? And can you just run through the opportunities in that sector?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [3]

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Yes, there is more work. This is the Albemarle project in Kemerton, is it?

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Michael R. Aspinall, CLSA Limited, Research Division - Research Analyst [4]

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Yes, correct.

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [5]

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Yes, no, there is -- my understanding is that's not all the work. There's some more packages to be let on that project. As well as that, I guess, is the work -- other work available in the shorter term certainly is this work going on at Greenbushes, and there's also a couple of other sodium -- sorry, lithium hydroxide plants mooted in Western Australia that we have on our radar.

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Michael R. Aspinall, CLSA Limited, Research Division - Research Analyst [6]

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Okay. Great. On cash conversion, just a couple. Firstly, it was impacted by high cash tax payable, and I noticed that there's now a tax asset on the balance sheet whereas previously, there was a liability. Is this just a timing issue and should it reverse in the second half? Or is it a bit longer-dated than that?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [7]

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No, it's a timing issue that we expect to reverse in the second half.

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Michael R. Aspinall, CLSA Limited, Research Division - Research Analyst [8]

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Okay. Great. And finally, thanks for the disclosure on employee entitlement is affecting the cash conversion. Can you quantify what the impact that had in the first half '19?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [9]

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It was around $20 million.

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Michael R. Aspinall, CLSA Limited, Research Division - Research Analyst [10]

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$20 million. And on that, is that related to amounts accrued in prior periods? Or is that in just the first half '19?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [11]

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No, that's the amount that has been accrued over many years on big projects that were just paid out upon demobilization of those projects during the 6 months.

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Operator [12]

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Your next question comes from Siraj Ahmed from Citi.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [13]

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Just a question on the full year outlook and the guidance, just thinking about this on a half-on-half basis. I mean, you're looking at -- you're guiding to a second half revenue decline of 15%. How should we think about that? I mean, you're about $100 million of revenue in oil and gas construction. Does that completely come off? Or is there a bit more -- is there a run rate of revenue there?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [14]

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Well, we're still doing a few smaller oil and gas-associated works in our E&C division, if this is finished. Our infrastructure revenue is likely to increase per year. We're coming off a [big job] at Ichthys in our resource. So infrastructure maintenance is growing for us. The resources construction is -- I mean, we just announced South Flank and there are a number of new opportunities that we're bidding and also coming to market in the next few months, which really provide us with some confidence that we'll see revenue growth from resource opportunities in construction over the next couple of years.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [15]

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Sure. And so just on the maintenance side, I mean, there's close to about $500 million of revenue in the first half. I mean, is there any one-offs in that? I mean, the question is do you expect that to decline on a half-on-half basis? I mean, typically, you have grown this. Just trying to understand that.

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [16]

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I don't think there were any particular one-offs during the period.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [17]

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Okay. So you expect that to grow on a half-on-half, especially given [the one-offs] as well?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [18]

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Well, yes, we'll have to wait and see, really depends on the volumes and the timing that's been -- it's a big business. There's a lot of -- a lot of clients in that business really depends on the demand volume. There's never ever one particular influence on -- unless we're, clearly on some cases, we have contracts -- term contracts coming to an end, some that are starting. So yes.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [19]

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Sure. Okay. Just a couple more. There's a $38 million decline in provisions on the balance sheet. Is that related to the employee entitlements? Or...

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [20]

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Yes, it is.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [21]

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So $20 million was employee entitlement and the rest would be -- is that similar as well? Or...

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [22]

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Yes. There was -- there can be changes in the assessment of provisions. There can be people that leave during the period. So that $20 million that we spoke about is just the one big project that demobilized, but there's always ups and downs in a period. But predominantly, it has to do with employee entitlement.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [23]

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Okay. Just last one, just in South Flank. So you announced a win yesterday, $108 million. I think you previously mentioned the opportunity there is around $500 million from each iron ore project. Just keen to understand the other -- just in South Flank. Is the rest of the opportunities gone? Or have you lost them? Or is there still more work that you can win at South Flank?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [24]

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Yes, not all the work's been awarded on that -- well, not only SMP [and iron] works being awarded. There's still another package to be awarded. We have to wait and see.

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

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Okay. So there's still one more package in South Flank?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [26]

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Right. I think 2 have been awarded and 1 yet to be awarded.

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

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Okay. And do you have any indication of timing for that work?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [28]

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I wouldn't think it'd be too far down the track, next month or so.

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

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Okay. And any update on Eliwana and Koodaideri as well? That's pretty helpful.

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [30]

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No, I think -- I'm not sure. Timing-wise, Eliwana is in the market. Expect us to be awarded an award in the next few months. And Koodaideri is not quite in the market yet. I think it will be coming to market towards the middle of this year.

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Operator [31]

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Your next question comes from Craig Wong-Pan from Deutsche Bank.

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Craig Wong-Pan, Deutsche Bank AG, Research Division - Research Analyst [32]

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Just one more question on South Flank. That last package, can you say that's similar size to what you've been awarded?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [33]

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Order of magnitude, yes. Yes.

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Craig Wong-Pan, Deutsche Bank AG, Research Division - Research Analyst [34]

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Okay. And then on your sustaining capital business, I mean, that's very strong performance there. I was wondering if you can comment on whether much of that was from a catch-up of activity. Or is that mostly kind of new contracts or a higher base level of activity?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [35]

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You mean -- did you say sustaining capital?

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Craig Wong-Pan, Deutsche Bank AG, Research Division - Research Analyst [36]

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Yes. Yes. That kind of -- your sort of maintenance services business, that's strong with 25% growth. Is that...

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [37]

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[Is that?]

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Craig Wong-Pan, Deutsche Bank AG, Research Division - Research Analyst [38]

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[Is many of that] catchup?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [39]

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No, I don't think so. No. It's just a lot of volume going through the market at, well, at the moment. It's just a lot of -- the prices are good, so that's good, and a lot of opportunities to extract further marginal or whatever gains in production. So people are -- so clients are focused on sustaining capital expenditure.

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Craig Wong-Pan, Deutsche Bank AG, Research Division - Research Analyst [40]

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Okay. So it sounds as if that sort of growth type rate could be kind of held around those levels?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [41]

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I think it's pretty good. I'm not sure we -- this is all organic growth. I'm not sure we could sustain that sort of level of growth. I think it's -- yes. I mean, I certainly wouldn't factoring that on an ongoing basis.

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Craig Wong-Pan, Deutsche Bank AG, Research Division - Research Analyst [42]

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Okay. And then just my last question, you had -- if you look at your second half margin to now there was a bit of margin expansion despite your maintenance business being a greater proportion of your revenues, does that suggest that pricing or terms are getting better with clients?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [43]

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[Look, a one-off] 6 months. I wouldn't draw too much conclusion there in terms of it showing some sort of trend, just the variability in the margin that comes from finishing jobs and starting new ones.

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Operator [44]

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Your next question comes from John Purtell from Macquarie.

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John Purtell, Macquarie Research - Analyst [45]

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Just had a couple of questions. So just on the margin piece again. I mean, it would appear that sort of margins are stabilized around these levels. Are you sort of able to sort of provide some comfort if that's the case? I mean, I'm cognizant that does move around, Rob, but we're seeing sort of 2 years of decline and margins appear to be stabilizing. Do you think that's fair?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [46]

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Probably a fair comment, John. Yes. Hopefully -- I always had this question, so I'm not -- really does depend on project to project and what it looks like and how the outcome on projects turns out. But yes, we have a more diversified portfolio. We've got more recurring revenue. So we've got a market that is improving. So I mean, that's probably a fair assessment to say there's some sort of reasonable stability there.

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John Purtell, Macquarie Research - Analyst [47]

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And I suppose the main sort of mix effect was sort of Ichthys having only a small revenue impact this period. So it would appear that Ichthys was actually dilutive for your margin mix. So your margin mix improves as you wind off Ichthys? I'm pretty sure that's not probably as simple as that, but was that a factor in terms of what we're seeing?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [48]

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Yes, it's not as simple as that. Yes.

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John Purtell, Macquarie Research - Analyst [49]

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I just got 2 more. Just as an add-on to the earlier question just around what you're seeing in the broader market, I mean, there seems to be less competitors out there and certainly seems to be more of a focus on risk management on both sides and getting good execution, which is good for the customer and the provider. What are you seeing out there? Have you seen any change in sort of customer behavior in the last 6 to 12 months?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [50]

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Yes, look, there's more work around the -- so the competitive landscape's reasonable. So with that -- with those sorts of conditions, I guess, we're getting -- yes, we are seeing sort of more level playing field in terms of supply and demand and customers certainly understanding that need to secure resources for this work and therefore, I guess, behaving a bit more, I guess, sensibly, I suppose.

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John Purtell, Macquarie Research - Analyst [51]

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Got it. Just last one if I can, just coming back to employee numbers. Historically, revenue and employees have moved pretty closely together. So you sort of flagged employees here including subcontractors, but you've got revenue down 10%. So it sort of implies that some lower-value work's being undertaken. Just trying to understand the difference between those 2?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [52]

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Probably the big factor there is we've put numbers there that included subcontractors. We've got a lot of people in Mongolia like that and the rates are much less. So you're getting a dilution because of the difference in labor cost. Does that make sense?

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John Purtell, Macquarie Research - Analyst [53]

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Yes, so there's a lower -- there's a sort of lower revenue per employee, upper EBIT or lower cost base as well?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [54]

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Yes.

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Operator [55]

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Your next question comes from Piers Flanagan from Baillieu Holst.

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Piers Flanagan, Baillieu Holst Ltd, Research Division - Research Associate [56]

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Just a follow-up question on the labor market. I mean, if you win some of the tenders out there at the moment, how do you see the market and sort of labor tightening? Could that be an issue going forward?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [57]

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Yes, it is -- I mean, it is -- I mean, it's a -- it will be a challenge for us because I think the market's definitely tightening. The availability of people is much tighter now than it was a year ago or 18 months ago. If you look at the forecast for construction activity, demand's going to increase. Maintenance demand is not going to decrease. I think that will continue to increase as well. So clearly, the biggest challenge is, for us, is to make sure we can manage resourcing and increasing volume of work.

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Piers Flanagan, Baillieu Holst Ltd, Research Division - Research Associate [58]

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And is there anything you can do to help improve that or ensure you do get the workers?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [59]

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I guess we're always -- there is a -- there's more competition for labor. So the better jobs -- the larger jobs, longer duration, again, will be more attractive, and that's the sort of work that we focus on, on winning. So it puts us in a more favorable position. But clearly, yes. I mean, we're reaching out as much as we can in terms of recruiting people from a broader sources, et cetera. But also making ourselves an attractive place to work and have the best jobs.

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Piers Flanagan, Baillieu Holst Ltd, Research Division - Research Associate [60]

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Sure. And then just finally on the CapEx. It was a little bit down this half. I mean, how should we think of that in the second half and then also looking forward to '20?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [61]

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I think the -- if you have a look in the notes, we have got some capital expenditure commitments that are out there at the moment on top of the CapEx that we've incurred in the first half. So probably somewhere in the region of some of those 2 and what we spent last year, I would say, somewhere between $30 million and $40 million, I would think.

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Operator [62]

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Your next question comes from Daniel Porter from Wilsons.

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Daniel Porter, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Resources Analyst [63]

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Just 2 for [me], just provisions. Those fell quite dramatically to $56 million. And apologies if I missed this earlier, but what was driving that decrease there?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [64]

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We had a couple of big projects that demobilized during the period that have been ongoing for a number of years. We had good retention rates on those projects. And once you come to the end of those projects, the employees have built up some sizable employee entitlements which are paid out upon demobilization. So that is the majority of that movement.

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Daniel Porter, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Resources Analyst [65]

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Okay. Okay. That makes sense. And then just in terms of your inventory decline there as well, I appreciate the change in tax -- or change in the accounting standards. But it looks like there was a little bit more that came out. Is that the right way to interpret that? What sort of happened on that accounting line as well?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [66]

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Yes, the -- I think you have to really consider the current contract assets, the inventory and the long-term contract assets, aggregate those and compare that to the inventory number from 30 June. If you add it up, it's not a material move -- if you take those into consideration, it's not a material movement. And you're right, the reallocation of that number has been impacted by the change in accounting standards.

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Daniel Porter, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Resources Analyst [67]

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Yes. Okay. Okay. That makes sense. Does that -- the [employee] rate, was there a write-down in there? Is that why you've now got the income tax receivable in current assets?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [68]

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Sorry, I didn't hear the first part of that question. Was there a write-down in...

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Daniel Porter, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Resources Analyst [69]

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Just within that inventory number, is that why you've now got a income tax receivable there? So [sorry about the] granularity, but...

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [70]

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No, no, they're not connected at all. The income tax receivable is purely due to the timing of payments that were made, and we expect that to unwind in the second half of the year.

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Operator [71]

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Your next question comes from Jolyon Wellington from JPMorgan.

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Jolyon Sinclaire Wellington, JP Morgan Chase & Co, Research Division - Analyst [72]

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First question just on -- just talking about the labor markets being much tightened now than they were 18 months ago. I'm just wondering whether you're seeing this as an opportunity to push through some price increases to your customers or whether this is a risk on some of the longer-term maintenance contracts to margins.

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [73]

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Well, yes, I guess, that's the name of the game, isn't it, to make sure that we can recover any increased cost through contracts that we have and through our pricing going forward. That's the nature of the business. We're just very aware of the risk of a rising labor cost market and ensuring many of our contracts have rise and fall clauses, et cetera. And obviously, when we're pricing work going forward, we need to factor in those forecast increases.

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Jolyon Sinclaire Wellington, JP Morgan Chase & Co, Research Division - Analyst [74]

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And do you think -- on a competitive standpoint, do you think your competitors are also pushing through price increases? Or are they being a bit more aggressive?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [75]

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It's a market issue. Yes. Absolutely. This is not just us. This is the markets doing is clearly seeing that. Pricing is different today than it was 6 months ago, 12 months ago, yes.

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Jolyon Sinclaire Wellington, JP Morgan Chase & Co, Research Division - Analyst [76]

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Okay. And then just on the JV Zenviron, there was an increase in revenue coming through and you recognized some profit from that in the P&L. Just wondering if you can just touch on the performance of that business, what kind of margins you're expecting to make there. And is the plan for that business to stop paying a dividend back to Monadelphous at some point?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [77]

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Well, I get it. I suppose it's a reasonable question. I mean, it's early days with Zenviron. I mean, I think what we were up to, we have a good portfolio of projects that we've secured. We -- that's only been built up over the last 6 to 12 months. We -- we'll see how we go in terms of margin. We'll just have to -- I guess time will tell, but we're certainly very happy with the performance today and the work that we've done today and the -- what we've achieved in terms of a couple of 2 -- a couple projects we've completed and the rate of progress on our current portfolio of work. And we're also seeing opportunities out into the future. Hopefully, we can at least maintain just the ramp-up -- with significant ramp-up we've seen over the last 6 months. All these projects are all wind projects.

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Jolyon Sinclaire Wellington, JP Morgan Chase & Co, Research Division - Analyst [78]

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And then just onto the iron ore contracts. So clearly, you announced the South Flank contract yesterday, just a bit over $100 million, and then there was -- you said that there was another central package of work out there and there's obviously the other iron ore contracts that are out there as well that's still awaiting to be awarded. Previously, you sort of talked about a figure of sort of $500 million for each of those sort of large mines. I'm just wondering, do you think the opportunity perhaps is a little bit less? Or is it just sort of a case of this is just one contract and some of the others that will be awarded may be for larger sizes?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [79]

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Well, there are 3 packages on South Flank. So that's only 1. And I guess the other factor here is really the scope of the work that's available through the contracting strategy of each of the various companies, whether they're supplies, whether it's the installation and that will be -- that will vary. But order of magnitude in terms of total available work, at the end of the day, I think the number is reasonable. When the work's completed, that number's very reasonable.

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Jolyon Sinclaire Wellington, JP Morgan Chase & Co, Research Division - Analyst [80]

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Okay. And then just finally just on tax. Do you expect the full year tax rate to be similar to the first half? Or do you think you might pay a little bit of a lower tax rate and P&L basis in the full year -- sorry, in the second half?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [81]

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No, I expect it to be similar to what it was in the first half.

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Operator [82]

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Your next question comes from Siraj Ahmed from Citi.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [83]

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Just on the competition front. I mean, one of your competitors in the renewable energy space, RCR, is no longer there. Just trying to see -- I mean, are you seeing more opportunities there because of that? Or can you just comment on that, please?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [84]

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Clearly, we are. They're a player in our market and a competitor and they're not -- it's not -- they're not there. So it certainly can only be positive for that competitive landscape. I'm sure someone else will pop up over time.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [85]

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Sure. And just on -- I mean, you mentioned you're picking up more work in wind. Any views in solar? Are you looking at opportunities there or...

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [86]

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Yes, we are. We've had -- yes, Zenviron does -- is also -- has bid in solar projects. I mean, we haven't secured any major work in that space really because we haven't been able to come to terms in terms of proper allocation of risks on that work. But we -- so we're very prudent in terms of some of those EPC risks that exist in those contracts. But over time, maybe those risks will change and we'll see something different happen. We are -- but we are, as a business, have the capability to do solar projects.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [87]

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Okay. So it sounds like the risk allocation conversation has not changed because -- I mean, Downer was mentioning the same thing as well that they're trying to remove the connection risk. But from your comment, it sounds like that, that conversation has not progressed enough yet.

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [88]

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Well, I don't know. We'll see what happens with the market. But I think a lot of people have been burned, and so that could mean that there's a lot of lessons being learned. And for that work to be done in a way that everybody can get a benefit out of, I think that risk allocation has to change. So we'll have to see what happens in the next 6 to 12 months on some of those projects.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [89]

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Sure. And just on the maintenance division, I mean, just [talking] sort of first half, you did win the BHP maintenance contract of around $240 million. Was there much of that in the first half? Is that more weighted to the second half?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [90]

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No. No. I mean, that's -- well, yes, there was some of it because we were doing work for BHP. But the contract itself started 1st of July -- 1st of January.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [91]

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Okay. So but there's more work in the second half?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [92]

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Maybe.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [93]

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Sure. Sure. And just on, I think, on the accounting change, AASB 15, it looks like there's a $6 million or close to $6 million write-off on the inventory work in progress. Can you just give us some further color on that?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [94]

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Yes, there is a -- one of the principles within the new accounting standard has raised the bar around the assessment as being probable versus -- which is the old standard, to highly probable now for the recognition of revenue. And with that assessment, that led us to the adjustment on transition, as simple as that.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [95]

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Okay. But you still expect payments for that to come through?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [96]

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Yes.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [97]

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Okay. And just last one, just on the divisional restructure and maintenance, could you just give some further color as to what was done and how you're pushing for the future? Can you [help us] understand a bit more?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [98]

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Sorry, I didn't quite...

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [99]

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The divisional restructure and maintenance where you said you did a review of the division and you have to change it, what exactly has been changed then?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [100]

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Yes, well, the division runs in terms of how it's organized on a number of business units are set up. Essentially, the simple answer is we've increased the number of those units to deal with the increased volume and to also, I guess, to be better prepared for any further growth that occurs in that market. So yes, where we've broken our business up, we have an eastern region and then we have a sort of west -- an eastern, sorry, mining and minerals. We have a western mining and minerals. We have an oil and gas business unit. We now have -- so we had 3. Now we have 4 business units. We have a mining and minerals in the northwest of WA, one in the south, one in the east and an oil and gas division. Is that...

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [101]

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Sure. And is that just to be, I'm just trying to understand, just to be -- given the amount of work, [are you just trying to push yourself, prepare for] more closure? Or just...

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [102]

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Correct. Correct. Yes. Yes, we're increasing the management structure to deal with an increased volume of work and to give us proper control of growth going forward.

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Operator [103]

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Your next question comes from Rohan Sundram from MST Financial.

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Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [104]

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I just had the one question and it's on margins. I take onboard your comments earlier around potential stability in margins. But historically, we've seen a stronger margin in the first half to the second half. I just wanted to confirm, and maybe just as a reminder, is there any seasonality we should be thinking about within the business that would suggest that? Or is it just purely coincidental based on completions?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [105]

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No, there is no seasonality that we make a bit of margin in the summer than we do in winter. It's just -- no, no.

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [106]

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(inaudible)

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [107]

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No, I mean, that's just -- it's the timing of, as I've said before, timing of when jobs finish, when they start, the confidence we have around completion, cash cost, et cetera. That changes over time depending on the work.

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Operator [108]

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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 [109]

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Just on the oil and gas Engineering Construction contribution in the first half. Looks like there's about $100 million of revenue. How much of that was Ichthys?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [110]

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Probably -- I was going to say the majority? Maybe something more than half.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [111]

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Okay. And just reading your outlook comments, you talked to, I guess, firming -- oil and gas Engineering Construction prospects firming. It's looking like maybe FY '21 is the period that sort of might materialize in terms of revenue contribution just based on some of your slides here in terms of market outlook and whatnot. Can you just talk through what projects are out there on your radar at the moment?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [112]

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Well, I think we'd expect to see some -- this is quite a few -- some major Woodside -- major work in the northwest (inaudible) and Pluto too. There's also -- I think most people are forecasting increases in likelihood of extra trains on Train 4 at Gorgon maybe. There's also a couple of methanol plants mooted for the northwest. Methanex is one of them. But there's -- this is northwest of WA, and there's also opportunities in PNG LNG (inaudible) PNG. I think that -- and yes, you're right. I think the timing of those is probably another 12 months beyond next year.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [113]

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Okay. And just on that other minerals piece in your construction business. You have some pretty good volumes there in the first half, certainly stronger than the pcp and I think it was stronger than FY '18. But I'm guessing that's the ramp-up of Oyu Tolgoi in there. So where are we in that ramp? We should be expecting a higher level of contribution in terms of revenues in the second half for that piece?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [114]

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I think the answer would be yes to that, but I don't know that it will be like significant, I think. But we -- I think we said we had -- we've got 1,500 people at the end of the year, and that was ramping up and we're expected to sort of see that project through most of the second half. So I guess the answer is -- it'd be my guess that it will increase, yes.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [115]

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And just in terms of your visibility, is that giving you visibility out to sort of FY '20 on that project or a little bit further?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [116]

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Well, I think that one will get completed in this calendar year, but there are other opportunities there. There are 4 packages of work to be let in the next 12 months.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [117]

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And I'm guessing the lithium opportunity mentioned earlier would be incremental to that as well?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [118]

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Yes, no, there's a few of them around, yes.

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

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Okay. And just one other, just around the iron ore maintenance business. I think you mentioned there that you have about -- had a little bit of a step-up there in sort of rail maintenance. Has that been a meaningful contributor to revenues this half?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [120]

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Depends what you mean by meaningful. It's a -- yes, it's certainly contributing. It's not -- yes, I mean, we -- we're doing that work. Hopefully we can keep doing it. But it's not significant -- I mean, maintenance is made up of lots of $10 million here, $10 million there of revenue with different customers in different services. So it's another one of those.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [121]

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Got it. And just final question just around the coal maintenance volumes. Looks like that market's finally started to turn. Do you think you can sort of sustain those volumes to the second half and beyond?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [122]

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Yes, no, that's definitely more buoyant. The conditions in coal are much better, and we've got -- we've actually got a stronger position than we had probably way down. So yes, that's in the positive. It's pretty hard to see any part of that maintenance business or any sector that's not sort of on the improve, but encouraging.

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Operator [123]

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Your next question comes from David Rosenbloom from ARCO Investment Management.

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David Rosenbloom, ARCO Investment Management Pty Ltd - Senior Investment Analyst [124]

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If I could just ask you to take a step back from the detail for a second. I guess the share price today is imputing a lot of growth, which is fair enough because of your reputation, the size of the opportunities you put on Slide 10 and your balance sheet and all those good things. On the other hand, you talked about constraints from a management and from a labor perspective. All the details, great stuff. But I'm just trying to dimension what the size of this opportunity is, what it looks like in 2, 3, 4 years' time? I guess you peaked out at around $2.6 billion in revenue in 2013, I guess. Is that the kind of thing we should be thinking about? Not necessarily a forecast, but could the company be a lot bigger than that? Or is that an unrealistic kind of thing? I'm just trying to dimension. Anything you could do to help us on that in the medium term would be great.

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [125]

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Well, yes, I think the -- a major factor in this question is really the bricks of this business. I mean, when we were doing $2.6 billion, whenever it was, 6, 7 years ago or more, it was a narrower business in terms of markets. And the work that we were doing is, even though it's a lot of work, it was a lot of work in only a couple of sectors, if you like. The business is broader now. So I think we -- there's no reason why we couldn't get to that -- back to that sort of number and beyond, but it would be with a broader based business servicing more sectors and more geographies. I think we're not -- it is a good question around capacity and the ability to get the right resources -- sufficient resources to deal with the volume. But we're in probably a better competitive position in our core markets than on the way down. So that's positive. We're a broader business. So we get our sources of revenue much broader and different to what they were before. And the other point to be made in here is we're not likely -- sorry, whilst there's a lot of work, we'll not likely to see the massive amount of investment. We're likely to see good, strong investment that's a bit more normal, a little less of those steep incline, probably a more steadier incline and a bit more sustainable.

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David Rosenbloom, ARCO Investment Management Pty Ltd - Senior Investment Analyst [126]

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So basically, more market share than, you'd say, than the boom?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [127]

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Well, I think our position -- yes, we were very strong then. It's very hard to compare then to now. There isn't the volume of work, but it does appear to be -- we do appear to be in a good, still as strong, if not even stronger, in a broader range of markets.

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Operator [128]

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There are no further questions at this time. I'll now hand back for closing remarks.

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Kristy Glasgow, Monadelphous Group Limited - Company Secretary [129]

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Thank you very much for your participation today. That now concludes our briefing.