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Edited Transcript of MND.AX earnings conference call or presentation 20-Aug-19 2:00am GMT

Full Year 2019 Monadelphous Group Ltd Earnings Call

Applecross, Western Australia Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Monadelphous Group Ltd earnings conference call or presentation Tuesday, August 20, 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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* Duncan Simmonds

WaveStone Capital Pty Limited - Senior Investment Analyst

* John Purtell

Macquarie Research - Analyst

* Nathan Reilly

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

* Piers Flanagan

Baillieu Holst Ltd, Research Division - Equity Research 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 Full 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 monadelphous.com.au. Throughout this presentation, the speakers will guide you on when to click through to the next slide.

I will now hand 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. So good day, and welcome to -- everyone to our 2019 full year results briefing. Today, Phil and I will run through our financial and operational performance for the year ended 30 June, 2019, before taking a look at our outlook and answering any questions that you may have. The structure of this morning's presentation is similar to that provided at the half year, with some further detail about the work we undertook during the year provided as appendices in our presentation.

Moving now just to Slide 3, running through our group summary performance and highlights. You can see that for the year ended 30th of June, 2019, Monadelphous recorded revenue of $1.608 billion, a decrease of 9.85% on the previous year and in line with the guidance we provided to the market at the half year. The result reflected the continued growth in Maintenance and infrastructure revenues, offset by a reduction in resources, construction activity, as we foreshadowed at the end of the 2018 financial year.

Our Maintenance and Industrial Services division continued to perform exceptionally well, with another record annual revenue performance as activity levels increased in the iron ore and oil and gas sectors and demand strengthened the services in the resources sector more broadly.

We improved our position in the Infrastructure sector, with revenue growth in both water and renewable energy markets.

As announced in May, our earnings for the year were impacted by a one-off provision of approximately $7 million, resulting from the receipt of amended assessments from the ATO relating to the 2015 and 2016 income years. Phil will talk about this later on in the presentation.

Underlying net profit after tax attributable to members was $57.4 million and underlying earnings per share was $0.61, after excluding the impact of this division.

The Board declared a final dividend of $0.23 per share fully franked, which takes the total dividend to $0.48 per share fully franked for the year.

In total, we've secured new contracts and contract extensions valued at around $1.35 billion since the beginning of the 2018-'19 financial year. This includes over $400 million secured post 30th of June, 2019, which kicks off a promising start to the 2020 financial year.

If we move now to our Engineering and Construction divisional highlights. Our Engineering and Construction division reported revenue of $622.9 million, reflecting lower activity levels in resources construction, again, offset by higher levels in water and renewable energy. With the renewed confidence in the resources sector, we secured 2 major construction contracts with BHP at its South Flank project in the Pilbara. And in addition, after year-end, we secured 2 more contracts, the first -- major contracts, the first at Rio Tinto's West Angelas project valued at more than $100 million, and the contracted Albemarle Lithium's new Kemerton lithium hydroxide plant in the southwest of WA. In total, $500 million of new resources construction work has been secured since the beginning of this calendar year.

Several projects were carried out at BHP's iron ore operations in the Pilbara under our long-term panel arrangement, which does provide us with a strong pipeline of opportunities. We also made good progress on the delivery of our 2 packages of work currently being undertaken at the Oyu Tolgoi Underground Project in Mongolia.

And earlier in the year, we were appointed to the Hunter Water Corporation Complex Capital Works Design and Construct Panel in New South Wales and secured our first package of work under the program. The appointment is for initial term of 4 years.

Zenviron, our renewable energy joint venture, continued to strengthen its position in the renewable energy market in Australia, making good progress on the projects secured in the prior year and securing 3 new wind farm contracts in Victoria valued at approximately $190 million.

Our heavy lift business continued to grow its services and extend its customer base, securing long-term crane services work for several Woodside's gas facilities in the Pilbara.

Moving now to our Maintenance and Industrial Services division highlights on Slide 5. As I mentioned earlier, the Maintenance and Industrial division achieved another record revenue performance during the year with revenue up 19% to $998.4 million. As I've already mentioned, this reflects increased demand for services across all markets as activity levels increased in oil and gas and significant -- and iron ore and significant levels of sustaining capital and additional shutdown works were delivered for customers throughout the resources sector.

During the year, we secured a major contract with BHP for general maintenance services to shutdowns, outages and minor capital works at its Pilbara iron ore mine sites totaling $240 million over a 3- year period with extension options.

We saw growth in our long-term oil and gas maintenance services contracts, onshore and offshore at Shell's Prelude FLNG facility, INPEX's Ichthys LNG project and both onshore and offshore for Woodside's gas production facilities.

We continue to expand our range of services to existing and new customers and build capabilities, support expansion in sustaining capital works, particularly in the Pilbara and to broaden the platform for growth in the brownfields market.

Additional workshop facilities were opened in Newman in WA, Chinchilla in Queensland and Mudgee in New South Wales to support the delivery of services to customers in these key operational locations.

Subsequent to year-end, we completed an agreement to purchase the assets of iPipe Services, a provider of technology solutions and construction and maintenance services to the coal seam gas sector. These specialist services complement Monadelphous' existing services which enables further expansion of our core offering to customers in this sector.

Also post year, we announced the award of a 3-year rail services contract with Rio Tinto on its iron ore rail network in the Pilbara, which is valued at approximately $60 million, and strengthens our position in the rail sector.

As we reported in the half year results, following a substantial increase in activity over recent periods, a restructure of the division was undertaken to position it for future growth.

Moving now to Slide 6, contracts secured. As I mentioned earlier, we secured new contracts and contract extensions totaling approximately $1.35 billion since the beginning of 2019 -- '18-'19 financial year. This slide shows the location and values of these contracts, with around $850 million of new Engineering and Construction contracts and about $500 million of Maintenance contracts. You can see here that these contracts have been secured across an increasingly diversified portfolio of customer and service markets.

On to Slide 7 now, our safety performance. As shown here, our safety performance for the year was somewhat disappointing with our 12-month total recordable injury frequency rate increasing to slightly more than 4 incidents per million man hours. While the company's safety performance in resources construction was particularly strong, the result was impacted by the rapid mobilization of labor required to support the growth in maintenance activity and the increasing number of subcontractors across the business.

A number of steps have been taken to address this performance, including improvements in subcontractor management, a revised safety leadership development program and the launch of a safety behavioral standard framework. As mentioned previously, our major organizational restructure of the Maintenance division will, amongst other things, ensure we continue to focus on the right level of management resources -- sorry, to focus the right level of management resources in the critical area of safety.

Looking at our people slide on Slide 8. First up, I'm pleased to report that in June, Sue Murphy was appointed to the Board as a Non-Executive Director. Sue is a civil engineer with over 35 years of experience in the resources and infrastructure sectors, and most recently, was CEO at the Water Corporation in Western Australia for over a decade. Sue is a welcome addition and brings a wealth of experience to the Board.

The graph on this slide shows our total workforce numbers, which takes in both employees and subcontractors. At the end of the year, we directly employed around 6,000 employees, a slight increase over the previous 12 months and -- or a slight increase over the number at 12 months ago. And our total workforce was just over 7,000.

As you can see, there's been a substantial increase in subcontractor labor overtime as we diversify internationally and further into the infrastructure sector. As always, the attraction and retention of key talent is a priority for us, and it will become even more so as market conditions continue to improve and the employment market tightens.

The other highlight during the year was that we formalized our long-standing commitment to increasing female participation levels across the business, with the launch of our -- of the Monadelphous Gender Diversity and Inclusion Plan. The key elements of the plan include the education and promotion of the value of diversity and promoting STEM as a career path for women.

I'll now hand over to Phil, who will provide you with some more detail on 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 year compared to that of the previous year.

We reported revenue for the year of just over $1.6 billion with continued growth in Maintenance and Infrastructure revenues and, as we predicted, the reduction in resource construction activity levels. Earnings before interest, tax, depreciation and amortization was $106.8 million, resulting in an EBITDA margin of 6.6%, which is similar to last year.

As Rob mentioned earlier, and as we announced to the market in May, we booked a one-off provision of approximately $7 million relating to the receipt of notices of amended assessments from the ATO, which impacted net profit after tax. The amended assessments relate to research and development tax incentives planned in the 2015 and '16 income years, which were prepared and lodged on the company's behalf by independent tax advisers and were subsequently deemed to be ineligible, and we've applied for a review of these findings.

An increase in the depreciation charge resulting from our plant and equipment fleet renewal process over recent years, combined with a reduction in net interest earned, resulted in underlying net profit after tax of $57.4 million and an underlying EPS of $0.61. This is after excluding the impact of the R&D provision that I just mentioned.

Our reported NPAT was $50.6 million and reported EPS was $0.537 per share.

The Board declared a final dividend of $0.23 per share fully franked and the Monadelphous Group Limited dividend reinvestment plan will apply to the final dividend.

Now finished the year with a cash balance of $164 million, with cash flow from operations of $16 million and a cash flow conversion rate of 54%. Our cash reserves were impacted by the increased working capital requirements of the business, especially from the growth in our M&IS division, a significant level of employee entitlement payouts on large multiyear projects which demobilized during the year and the repayment of the R&D incentive.

So in closing, our balance sheet remains strong and provides substantial capacity to invest in suitable new business opportunities which may arise.

So that concludes our look at the financials. And with that, I'll hand you back to Rob.

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

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Thanks, Phil. Now Slide 10 shows the relevant current and forecast Australian market conditions for our sectors -- or for the sectors that our business operates in. And pleasingly, as you can see, all of our sectors, that's resources and energy, Infrastructure and Maintenance, are all showing an improving pipeline of opportunities over the coming years.

And therefore, if we move on to our outlook slide on Slide 11, as I mentioned earlier, there is renewed confidence in the resources sector, with project development activity increasing and a number of resources construction opportunities coming to market, particularly in the iron ore and lithium sectors. Prospects from further development in LNG production are also expected to be positive in the years to come.

Maintenance activity in the resources market, expected to be strong, production -- as production levels in Australia remain at record levels. Customer focus on optimizing production and increasing productivity levels will continue to drive demand for maintenance support and sustaining capital work. Investment in infrastructure remains healthy with prospects continuing in both the water and renewable sectors.

We've been awarded a significant number of new major construction and maintenance contracts since the beginning of the 2019 calendar year. And with our strong reputation across a broadening service offering, we're in a good position to secure further work.

A number of construction opportunities are, however, coming to market and advancing to execution a little later than expected. So while growth prospects over the longer term are positive, revenue for the 2020 financial year will be dependent on the timing of the execution of work recently secured as well as the volume and timing of future awards.

High levels of competition, price sensitivity and customer expectations for cost-competitive delivery will drive demand for productivity improvements and continue to challenge margins. The attraction and retention of labor will become even more important as the expected increase in industry activity leads to further pressure in the employment market.

Overall, Monadelphous remains in good shape to deal with the opportunities and challenges ahead. So in closing, I would like to thank our talented and committed team of people for their loyalty and their highly valued contribution during the year, and our shareholders and other stakeholders for their ongoing support.

Thank you. 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) Our next question in queue is from Siraj Ahmed from Citigroup.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [2]

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Rob, just a question on the FY '20 revenue outlook. I mean you mentioned that project awards have been a bit delayed. Can you just provide an update as to when you expect the awards and which are the key projects you're looking at? I mean you've noted that Civmec has announced a contract at Eliwana. So just wondering whether there's more work there or not.

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

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Yes look, so the comment around, we would have expected. I mean some of the work that we have secured, we just -- the comment there is that we would have expected -- we may -- we expected them to come a little earlier. So work that is still in the pipeline is just coming a bit later than we probably expected 6 to 12 months ago. That's what I'm referring to when I make that comment or clarify on that comment.

There is significant opportunities in front of us, still Rio Tinto iron ore expansions, Koodaideri, Robe Valley. There are also -- there's also North Star so ore FMG. Still sustaining capital opportunities with BHP. There's panel work in coal. There's opportunities down the track potentially at Olympic Dam for BHP. So the pipeline -- or the visibility of the pipeline really hasn't changed. It's just a question of timing.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [4]

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I mean has the pipeline increased definitely and if you -- can you just give us a quantum of what the pipeline could be? Because you earlier mentioned the -- each of the iron ore work could be $500 million each. I mean, I guess, BHP South Flank's being awarded. Is the $500 million still the case for Koodaideri and Eliwana still and the other projects?

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

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I could probably say that the opportunity for iron ore on approved projects coming through is probably $1 billion, something like that.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [6]

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Okay. They're opportunities that still have not been awarded?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [7]

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Yes, correct. That's an overall figure for what we can see in the pipeline for iron ore.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [8]

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And is that expected to be awarded in FY '20? Or...

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [9]

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Yes. The majority of that would be in FY '20.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [10]

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And actual earnings would depend on when the award is done and when the project kicks off?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [11]

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Well, clearly, I mean we're a contracting business. So it depends on when we win if we win, when we win when the revenue comes through. So yes.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [12]

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Yes, sure. And just, I guess, the other part to it is the Maintenance division. I mean that's -- as you said, the demand outlook is pretty good and you had strong growth in that segment. Would it be fair to assume double-digit growth in that -- in the segment going -- in that business going forward?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [13]

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I really couldn't say. We can't -- it depends. I can't say. What I can tell you is that we've got a strong position in that market, and certainly, in terms of the volume of activity in that market, we would expect it to increase. But again, it really depends whether we can hang on to the long-term contracts that we have and whether we can renew contracts going forward.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [14]

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Sure, sure. Maybe I'll just move to margins. Just the outlook on margins, I mean, you have flagged that margins continue to be challenged. So I think at the first half, you sort of indicated that full year '19 could be the trough for margins and margins should improve going forward. Is that still -- should we expect the same thing? Or…

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [15]

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Again, I can't really tell you. The point I'm making is that there is still significant competition. Customers are relenting in their focus around costs. So I wouldn't factor in or be happy to maintain the margins we have at the moment, to be honest. But again, it's a question of what the outcomes are in contracts that we've secured and are likely to secure.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [16]

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Sure. Just last one, maybe one for Phil. Just on the second half cash flow, the cash flow conversion was a bit weaker than expected. Is this individual timing of payments or just the working capital drag? Just trying to understand that.

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [17]

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Yes. Specifically, in terms of the second half, we did see increased working capital requirements of the business, especially from the growth in the Maintenance division. Working capital requirements per dollar of revenue are greater in Maintenance. Remember, it's a more labor-intensive business, and we are paying wages every week, and then we get paid for that sort of 2, 3 months down the line. And then that's just working capital. If you'll see -- if you have a look at the balance sheet, you'll see there's been a, I don't know, $35 million increase, I think it was in debtors from June last year to June now. And probably maybe a $30 million increase in the second half. So it's a lot to do with debtors.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [18]

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Sure. And that should normalize over the course of FY '20, assuming the growth is strengthened then?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [19]

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Yes. We're looking to collect all of those debtors, I can assure you of that.

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Operator [20]

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Our next question in queue is from John Purtell from Macquarie.

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John Purtell, Macquarie Research - Analyst [21]

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I just had a couple here, just as a follow-on. And look, in terms of specifically Koodaideri and Eliwana, expectations, Rob, for timing of those? I think previously, you'd mentioned for the Eliwana was being tendered earlier in the year. So is it sort of at the front end of...

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [22]

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Sorry, sorry. John, Eliwana's been awarded, and we haven't won that. Koodaideri, Koodaideri is still, I guess, in the bid phase. So we would -- we won't -- we would expect some sort of award there later on this calendar year -- late this calendar year. And then there's North Star, a few others coming through, all I would think later on this calendar year or in the first quarter, something like that, next year.

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John Purtell, Macquarie Research - Analyst [23]

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Yes. And Rob, in terms of lithium opportunities, I mean, are they still -- obviously, Albemarle landed probably a little later than expected, but are you still seeing a healthy pipeline there?

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

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Yes. No, there are some other opportunities there, certainly, with sort of -- with some lithium and a couple of other projects in the pipeline, Covalent Lithium and Pilbara Minerals. So there are -- yes, there's a number of others, probably 12-month-ish -- over the next 12 months. We haven't done too badly there. We've won a couple of reasonable size projects.

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John Purtell, Macquarie Research - Analyst [25]

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And just the last one as far as margins, I mean, obviously, you're sort of portrayed a relatively stable picture for margins. Obviously, we're seeing a bit more of a focus on sort of quality and you sort of get what you pay for, if you like, but that's really not flowing through to improving margins from what you're saying.

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

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Well, I mean, realistically, we've only just started winning some work in the resource sector. We don't know what the outcome is going to be until it's done. And as I say, I'm just seeing a market that's still very competitive. Even though we have a strong position in it but time will tell. It's very hard to -- and I'd just caution against sort of everyone thinking everything's going to rebound in 5 minutes, in a short space of time.

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John Purtell, Macquarie Research - Analyst [27]

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And Rob, just one last one, if I can. Just to clarify your outlook comment there. I mean, obviously, you've won a lot of work in the last kind of month or 2. Presumably, that will have some positive -- well, that will have a positive revenue impact in fiscal '20 to drive some form of revenue growth in fiscal '20?

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

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Yes, but we still need to win a bit more through the next 6 months. So it is still dependent on -- so securing further work, which there's a reasonable likelihood of but you know.

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Operator [29]

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Our next question is from Piers Flanagan from Baillieu.

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Piers Flanagan, Baillieu Holst Ltd, Research Division - Equity Research Analyst [30]

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Just a couple for me, if I can, please. Just firstly, on some of those delays, is there any sort of common theme coming through, or are they all just case by case?

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [31]

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No, I don't think it's much of a common theme. It's just things -- I'd say I don't know. Things just seem to be taking a bit longer than we thought to ramp up. That's all. I mean, I can't -- everyone's got its own story so.

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Piers Flanagan, Baillieu Holst Ltd, Research Division - Equity Research Analyst [32]

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Sure. And then just on the labor comment. Are you able to sort of elaborate on that a little bit more? And then I guess just looking forward and winning some new work over the next 6 months, sort of the requirements you'll need in terms of, I guess, total numbers and subcontractors as well?

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

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I guess the -- I made a couple of comments there about, I think, when you look at what is coming down the pipeline, there is a fair bit of work there. This is, in our discipline, the work that we do that will overlap mix later on this year and into the following year. So our expectations are that labor will become tighter as we go forward. Some of this delay is probably brought -- has delayed also that tightness. But we're still planning on and factoring our kind of tactics around labor, attracting labor and retaining labor around that tightness going forward.

I think we are in a good position because I think if we have the quality work, then we're likely to attract the quality people. But yes, it's still to play out. Things are still very busy in the east. And so there isn't a lot of source to come from -- because a lot of this -- most of this work at the moment, certainly, is in the west. But then I think we're -- we have retained the key talent in our business over the last few years. So we're well positioned to take on -- we've got a fair bit of capacity going forward.

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Piers Flanagan, Baillieu Holst Ltd, Research Division - Equity Research Analyst [34]

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Sure. And then just one on the other fleet renewal. Is that coming to sort of the end of that process? Or how should we think of that into '20, the investment there?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [35]

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Well, we've certainly aged our fleet over the sort of the, I don't know, 2013 to 2017 years. We've got a bit of renewal that we've got to do. And obviously, we are mindful of making sure that we invest what we need to invest at the right time. So it's going to -- you would expect it to sort of balance out going forward, I would think. We're still going to keep a -- make sure we invest when we need to, but keep a tight hold on the pursestring.

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Operator [36]

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Our next question is from Nathan Reilly from UBS.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [37]

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Quick question, just in relation to one of the revenue note disclosures. I'm just looking at this disclosure around unsatisfied performance obligations; looks like there's a balance here of $2.5 billion. Looks like a work in hand disclosure. Is that what I'm looking at here?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [38]

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That's a new disclosure that's required under the standard, Nathan. It is new. We have not provided that before. And it is work under contract.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [39]

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Okay, great. So this construction revenue disclosure, $405 million of contracted work, I'm guessing you'd expect to execute most of that in the next 12 months?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [40]

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Yes.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [41]

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Okay. Now...

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [42]

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And we've said that it goes over 1 to 2 years, but most of it will be in the 12 months, yes.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [43]

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Yes. Okay. And I think you've also -- in your commentary, you've also flagged that there's been around $400 million of work awarded post 30 June of '19. Would that number be in this $2.5 billion?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [44]

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No. That will be on top of that.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [45]

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Okay, great, great. Okay, excellent. Now just moving on in terms of, I guess, the Maintenance business, what we've seen in terms of incremental work awarded since year-end is pretty -- or it's high relative to previous periods. So it looks like you're starting FY '20 pretty well so far versus previous periods. I'm just wondering with the Maintenance business, whether there's any work that kind of rolls off that you still need to go and replace or whether the exit rate is actually a decent approximation of what you'd be looking at into next year?

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

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Nathan, yes, there is always roll-off as in term contracts that either come to an end that will either be -- will need to be renewed, so that's a big factor in terms of the revenue roll-off and roll-on. There are new contracts, but then there are existing contracts that will either get re-tendered or option periods need to be exercised or -- so there is a level of uncertainty around retaining contracts. Now I guess our track record is that we have a pretty good retention, but every now and then, we do lose them. We do -- they do come to an end.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [47]

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Okay. So that's typical of your business. I'm just wondering. It doesn't sound like there's any sort of revenue that you're certain you've lost in terms of a hole that you would need to refill?

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

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Well, there is some work, I'm trying to think. The -- some of the life extension work at Woodside. That contract has come to an end. Some of that work has gone into our Maintenance business, but there's probably an element of that, that won't return. Then we've got new work coming on top of work that we had there before, so -- but yes, so -- no, there has been stuff that has come off. Probably that one is the major one.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [49]

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Okay. And margins, picking up your comments here in the outlook commentary. I know that you've been sort of speaking to margin pressure up for some years now. I'm just wondering where you are at this point, having secured a bit more work. Is that margin pressure? Is this increased relative to where you've been before? Is this just, I guess, a constant. It's just this and it's ever-present at this point in time?

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

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Well, I think there's a large degree of uncertainty around outcomes of work. So we know it's been very competitive previously even to win work, there hasn't been much work around, so in that respect, it's less competitive. But the actual turnout margins on new work is really uncertain. And our customers are -- their behavior is such that they're still scrutinizing costs heavily. So the view is it's too early to tell. And, I don't know, I'm very careful about everyone sort of thinking there's some regime going forward that's going to be the same as the regime was in the past. I'm not sure that's the case as in build at all cost type of scenario.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [51]

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Okay. No problems. And...

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

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I'm not helping you there, but that's -- I'm trying to give you the flavor of all the factors here.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [53]

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Okay. I think I hear what you're saying there. And on cash flow, I'm just trying to work out, that R&D tax issue that you had, did you end up sort of putting that through the cash flows in the second half?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [54]

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Yes, yes, that went up in the second half, yes.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [55]

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Okay, so that's in there. I also note, you've got a little bit more -- well, you've invested in SinoStruct in terms of a facility in Houston. Have you put any incremental sort of cash investment into that?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [56]

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No.

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

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No. That's the least of those.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [58]

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Sorry. It was a little bit unclear. Was that -- the investment in SinoStruct in Houston, was that a drag on operating cash flow?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [59]

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No, no. No, the cash flow is impacted by the R&D that you mentioned, the increase in working capital that we spoke about earlier and then we had a -- in the first half of the year, we had a big payout of employee entitlements that had built up over sort of 4 or 5 years on a big project, and that's what impacted the cash flow from operating activities.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [60]

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Okay. And also, just in relation to -- I mean, there's been a step-up or an increase in joint venture profits. Are you seeing that come through the cash flow at this point?

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

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Well, the way we are required to account for our joint ventures, we're required to equity account for them. So the cash flow from operations from joint ventures is not reflected in that number. It will come through when it is paid out because it -- it'll come through the cash flow statement when it is paid out as a dividend.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [62]

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Got it. But it doesn't look like there's been any material return from the joint ventures at this point. Is that what I'm looking at?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [63]

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From a cash perspective, the joint ventures themselves have been market profitable. But from a cash flow perspective, the payouts have not flowed through yet.

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Operator [64]

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And we have another question from Duncan Simmonds from WaveStone Capital.

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Duncan Simmonds, WaveStone Capital Pty Limited - Senior Investment Analyst [65]

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I just wanted to pick up on that cash flow question from Zenviron. Can you just work through how cash gets released from that joint venture? Because I guess going forward, that's going to be an increasing part of the group's profitability. So that was the first question.

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

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Sure. So the cash flow from Zenviron, obviously, the Board of Zenviron looks at the working capital requirement of that business. And at a point in time when it is appropriate, the cash will get paid out to the shareholders in the form of dividends.

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Duncan Simmonds, WaveStone Capital Pty Limited - Senior Investment Analyst [67]

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So would you expect, from a timing perspective, there would be like some -- like would it be a 12-month lag do you think? Would it be more than that? Or how would you -- just can you give guidance on that?

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

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Well, it really just depends on the level of activity in that business, the working capital requirements, what they need to spend on equipment, the profitability of that business, everything. And then the Board will just assess the payment of dividends to shareholders, just as our Board assesses the payment of dividend to shareholders.

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Duncan Simmonds, WaveStone Capital Pty Limited - Senior Investment Analyst [69]

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Okay. Just following up on the unsatisfied performance obligation. Does Zenviron -- Zenviron wouldn't -- its order book wouldn't be included in that, would it?

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

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No.

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Duncan Simmonds, WaveStone Capital Pty Limited - Senior Investment Analyst [71]

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No, okay. Cool. And then the third thing, just on the depreciation there, it looks like a new cost coming in, amortization of deferred contract fulfillment costs. What is that? And how should we think about it?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [72]

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It is to do with the change in revenue standards and how we are required to account for WIP under that standard -- well, what was WIP on the standard. There wouldn't be too much more that I'm expecting to come through over the next couple of years, and it'll be around that number, I would think. What it is, is step-up of contract costs that you're now able to amortize over the length of the contract term.

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Duncan Simmonds, WaveStone Capital Pty Limited - Senior Investment Analyst [73]

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Right, okay. Yes. That would have -- would have before, that would have been in COGS?

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [74]

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Yes.

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Operator [75]

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There's no more further questions from the telephone. So I'd like to hand the call back to the speakers for any closing remarks. Please go ahead.

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Kristy Glasgow, Monadelphous Group Limited - Company Secretary [76]

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

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

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Thanks, folks.

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Operator [78]

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Ladies and gentlemen, thank you all for joining. You may all disconnect.

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Philip Trueman, Monadelphous Group Limited - CFO & Company Secretary [79]

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Thank you.

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Robert Velletri, Monadelphous Group Limited - MD & Executive Director [80]

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Thank you.