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Edited Transcript of SSM.AX earnings conference call or presentation 5-Feb-20 10:00pm GMT

Half Year 2020 Service Stream Ltd Earnings Call

Victoria Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Service Stream Ltd earnings conference call or presentation Wednesday, February 5, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Leigh MacKender

Service Stream Limited - MD & Director

* Robert Grant

Service Stream Limited - CFO

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Conference Call Participants

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* Jules Cooper

Ord Minnett Limited, Research Division - Senior Research Analyst

* Matthew Johnston

Macquarie Research - Analyst

* Shane Bannan

Bligh Capital Pty Ltd, Research Division - Head of Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Service Stream Limited half year results conference call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Mr. Leigh MacKender. Thank you, please go ahead.

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Leigh MacKender, Service Stream Limited - MD & Director [2]

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Thank you, moderator. Good morning, ladies and gentlemen, and welcome to Service Stream's half year results presentation for the FY '20 financial year. As per the introduction, my name is Leigh MacKender, the Managing Director of Service Stream; and I'm joined today, as per usual, by our Chief Financial Officer, Bob Grant.

We are recording this session today via webcast. It's open to all Service Stream shareholders, and we have a number of institutional investors and analysts either here in person or on the conference bridge and who are welcome to ask questions at the conclusion of the presentation.

As per the content page outlined on Slide 2, today, we'll provide -- touch on the company profile, providing a very brief overview of the business for those not familiar with the operating structure and the services that we provide; walk through the performance highlights throughout the year; and then move into some greater detail with respect to the group's financial and operational performance, both at the group and divisional level. And finally, we'll move through group outlook and touch on some of the priorities for second half FY '20. And as per my earlier comments, at the end of the presentation, happy to take questions from those joining us here or on the conference bridge.

I expect this session to probably take 30 to 45 minutes, including time for questions.

Okay. Moving on to the company profile on Slide 3, as I said earlier, for those not familiar with Service Stream or the services the group provides, the business is a utility and telecommunications service provider. The services provided are associated with the design and construction, D&C, or operations and maintenance, O&M, of essential infrastructure that works on behalf of our clients. Business has moved to 2 reporting segments at the last half, reflecting telecommunications and utilities, and each division still retains 2 operating segments, reflecting those that many of you are familiar with and depicted on the graphic in the middle of Slide 3 there.

The operating segments within telecommunications: Fixed Communications, that's our network operations, maintenance and minor works across the telco sector; and Network Engineering, which is engineering, design and construction of both fixed and wireless network infrastructure.

Clients across that segment include nbn, Telstra and wireless network operators, including, again, Telstra, Optus, the New South Wales Telco and Vodafone.

And the segments within our utility division is Energy & Water, that's a utility asset installation, inspection and maintenance services; and Comdain Infrastructure, which provides network engineering, design and construction operations. Key clients across our utility division would include gas, water and electricity asset owners, operators, retail service providers and local government authorities.

The business continues to work on consolidating these operating segments under each division to streamline the provision of our end-to-end services that we provide to our clients and support future cross-sell opportunities across each market. Importantly, we still retain a high level of disclosure with regards to the group results, and that's included in the back of the pack and outlined in a series of appendices.

Okay. Moving across to Slide 4 and performance highlights, we have an overview of some of the key highlights in relation to our financial, operational and strategic performance throughout the first half of this year. I'm pleased with the performance of the group over the first half of FY '20. Particular aspects to note would be strong performance across our telecommunications division, and I'll understandably go through that in greater detail. But we're successfully managing quite a shift in revenue with some of our design and construction operations associated with nbn reaching their natural conclusion, whilst other works continue to expand and that again particularly in a role of connections and maintenance for the nbn network. And our utility division has been a positive period, marked by a number of new contracts which had been secured, and they will provide a solid platform for future growth. And I'll talk to those in greater detail.

As per the last presentation, you will note that these results, we have referenced financial profitability to reflect both EBITDA from operations and that being the underlying business' performance as prior to accounting for the costs associated with engaging -- engagement of third-party experts, which have assisted with undertaking due diligence across some large opportunities that came to market during the first 6 months, and we thought it was important to separate and call that out. And also the minor impact of Comdain Infrastructure integration costs, that was largely minimal as the works were completed in the last half. And we have provided specific detail on the breakdown of those 2 amounts, and we'll go further into that. And of course, we have our statutory reported profitability metrics.

If we look at the financial performance, the business reported another period of strong double-digit growth with regards to revenue, profit and increased dividends, obviously compared to the prior corresponding period or pcp. Headlines include that all profitability measures are up on the first half of FY '19. First half EBITDA from operations was $58.1 million, a significant increase, resulting in a 50% improvement on pcp, again aided through the acquisition of Comdain Infrastructure, which occurred in the early 2019 calendar year.

I'm pleased to see that this is the 13th consecutive period in which the business has grown EBITDA, one of our key metrics that we talk often, and albeit that it is assisted by the adoption of the new lease accounting standard, AASB 16, which Bob will walk through in greater detail.

Group cash flow performance, measured by EBITDA to OCFBIT, was in line with expectations. We've previously spoken at the AGM and throughout the year on what we expected will be a natural unwind of cash associated with the DCMA operations and how this has impacted the group. But also in taking the financial and broader business performance into account, the Board are pleased to announce an increased interim dividend to our shareholders of $0.04 a share, fully franked, and that reflects an increase of about 14% on pcp. So again, pleased with the financial performance a little bit across the first half of the year with regards to profitability, and I will dive into those numbers in greater detail across each division.

Moving to the middle section of the page here on the operational highlights. At a high level, we continue to experience really solid demand for nbn services over the half year. Many would have noted and queried a revision by nbn to their FY '20 activation targets during the year, but as you'll see from the information included, we certainly had very strong volume completed.

Pleasingly, another major highlight was the business secured 2 new long-term agreements over the last period, both within the Comdain Infrastructure business unit. The first of which is Sydney Water, a consortium for which we are a member, called D4C, direct for customers (sic) [Delivering for Customers]. And that was announced on the 19th of December, and we're awarded a 10-year agreement with Sydney Water for the provision of asset management services, a great milestone and a really key pillar to our growth plans across Comdain's operations throughout the East Coast.

The second contract was with Queensland Urban Utilities and securing a 2.5-year agreement to support the modernization of their electrical and control system infrastructure known as the SCADA network. That contract is estimated at $40 million in value over those initial terms.

Both those contracts -- after all those contracts wins, sorry, we're pleased with the performance of the nearly completed DCMA, or design and construction, operations with nbn, and our wireless operations are performing well on those initial 5G work allocations.

Finally, and most important, the group continues to deliver really solid performance across our HSE metrics, and I'll walk through that in greater detail in a moment's time.

If we look at the strategic performance over the period. One of the key priorities we've talked about over the last 12 months has been to support the successful integration of Comdain Infrastructure into the wider group following the acquisition in 2019. I'm pleased to report that there's been very good progress made over the last 6 months and the business continues to make solid progress in consolidating our utility operations. I've got a specific slide that we'll walk through and provide a detailed update on that.

The voluntary points there really relate or are associated with growth and is 1 of our 5 strategic pillars. Growth has and will always remain a strong focus for the group. Really pleasing to see we've secured some of those organic opportunities that I've talked through, 2 of those major contracts. But we continue to have a solid pipeline of other opportunities across telco and utilities. And finally, the business, over the last 6 months, did undertake extensive DD across a select number of opportunities which came to market. Whilst that didn't result in a transaction proceeding, we needed to ensure that we appropriately assess those opportunities against our strict criteria and under a disciplined approach.

As we progress in the second half, we continue to assess additional opportunities. They are associated with the utility sector as part of our diversification strategy, focusing on known markets and a familiar client base.

If I can direct you now to Slide 6 and look at the financial highlights, delving a little bit further into some of the metrics. Firstly, I will again mention that you'll note these results have referenced financial profitability with regards to EBITDA from operations, the underlying business performance prior to accounting for the impact of those external experts that are engaged to assist with DD and the Comdain Infrastructure integration and the statutory reported profitability metrics also. And Bob will talk through those in greater detail in a moment.

Turning to the highlights there. Our business generated revenue of just a tick under $500 million, an increase of 43% or $149 million on the first half FY '19. $147 million of that was obviously attributable to Comdain's operations that weren't included in the prior corresponding period. EBITDA from operations, you can see, $58.1 million, reflecting, again, a strong increase, 50% on pcp, again largely due to the Comdain Infrastructure acquisition.

Moving further down the line, net profit or adjusted NPAT was $32.3 million, reflecting a 28% improvement on that prior period. And we note the difference between adjusted NPAT and the statutory number is really the amortization of customer contracts from TechSafe and more so now Comdain Infrastructure business. We take a conservative approach towards increasing goodwill on the balance sheet instead of to amortize customer contracts over their natural life. And we have included details of the amortization schedule described under Appendix 2 on Page 24.

The business delivered solid double-digit growth in terms of earnings per share. Adjusted EPS was $0.0796, up 14% on the prior period. And as I said earlier, as a result of the positive performance over the year, the Board declared a further increase in the company's interim dividend to $0.04, and that reflects a payout ratio of 59%. Dividends then paid on the 19th of March this year.

Turning now to Slide 7, the key financial measures scorecard. I've already spoken to many of the metrics outlined here. Green arrows on the right-hand side, they're pointing in the right direction, representing that solid incremental improvement.

Worthwhile to talk to you about cash flow and capital management, the only area there with some red arrows. OCFBIT was in line with our expectations. And over the course of the past 12 months, Bob and I have been advising to expect approximate unwind of about $20 million associated with advanced payments from our DCMA and MIMA operations as they're nearly complete.

The other point to note is the group reported net debt of $4 million from what was previously a small net profit as of 31 December. That's reflective of the fact that the business has increased its tax and dividend payments over the past 6 months, and again, Bob will talk to that in greater detail as we walk through the segment results, cash flow and capital management.

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Robert Grant, Service Stream Limited - CFO [3]

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Thanks, Leigh, and good morning, everyone. If I could direct you to Slide 8 of the presentation pack entitled Segment Results. Before I dive into the detail on this slide, there's a few high-level things that I should mention. Firstly, you'll note that the segment results for the half year are presented on the basis of the new reportable segments that the company adopted last year, namely telecommunications and utilities.

Secondly, the results for the half year reflect the first-time adoption of the new accounting standard for leases, AASB 16. In this regard, you'll notice a couple of new rows in the segment results table, and I'll provide a summary of the changes arising from adoption of this standard in a subsequent slide.

And lastly, the comparatives for the first half of last year have been restated to align with the new reportable segments, but have not been restated for the adoption of AASB 16, which is permitted by the standard.

Now let me walk you down the table in more detail. Telecommunications revenue for the first half is flat with pcp at about $300 million, with a substantial increase in revenue from nbn operations and maintenance activities, offsetting a decline in revenue from nbn D&C activities and from wireless as we previously guided. Notwithstanding flat revenue, telecommunications EBITDA is up by more than $9 million on pcp on the back of a substantial increase in margin to 15.2%. And Leigh will talk in more detail about the changes in segment margins at subsequent slides.

If we move on to utilities. Revenue for the half is up nearly $150 million on pcp due to the inclusion of revenue from Comdain Infrastructure, which was acquired in January last year. On the back of that revenue inclusion and notwithstanding the dilutionary impact of the Comdain acquisition on overall margins, utilities EBITDA is up $10 million on pcp as well. Our unallocated corporate costs of $2.7 million for the half remain very much in line with pcp. And Leigh's already mentioned the nonoperational costs totaling $1.7 million that we've called out and added back to arrive at EBITDA from operations for the half of $58.1 million, which is up $19.4 million or 50% on pcp.

Below EBITDA, we see D&A, excluding the amortization of customer contracts of $5.7 million, which is higher than pcp primarily due to the inclusion of depreciation on the assets that were acquired with Comdain. We're seeing a new row entitled depreciation ROULA, which stands for right-of-use leased assets, which arises from the new lease accounting standard. Our financing cost is $1.3 million compared to a financing benefit in the pcp, and this is due to an increase in the size of the group's banking facility and the drawdown of borrowings to partly fund the Comdain acquisition. We see another new row entitled financing cost - leases, which also arises from the new accounting standard. Our tax expense reflects our usual effective tax rate of about 30%. And all that leads to an adjusted NPAT outcome of $32.3 million, which is $7.2 million or nearly 30% up on pcp.

And before I leave this slide, let me just remind you that you can find a detailed reconciliation of these adjusted profitability measures back to their statutory or IFRS equivalents in Appendix 2 on Slide 25 of the results pack. And you can also find a detailed revenue breakdown for each of telecommunications and utilities in Appendix 3.

Now on to cash flow results on Slide 9. The first thing to note is that our primary cash flow measure, OCFBIT, of $32.8 million for the half is up $6.4 million or 24% on pcp. The EBITDA and OCFBIT conversion rate for the half is 58%. And whilst that's down slightly on pcp, it's largely in line with management's expectations given the unwind of income and advance on the DCMA program that Leigh mentioned and also some reclassification noise that arises from the adoption of AASB 16.

Below OCFBIT, the 2 rows that I'll call out for a particular comment are tax paid and dividends. You'll see that tax paid for the half year of $20.6 million is up substantially from the $8.6 million paid in pcp. There's 3 reasons for this. Firstly, there was a tax true-up amount paid in December following lodgment of the FY '19 tax return, which obviously related to the group's record earnings of that year. Secondly, and as a consequence of those record earnings, the amount of monthly tax installments pertaining to FY '20 is therefore up substantially on the corresponding period. And thirdly, we paid during the half what's known as the stub tax return for Comdain Infrastructure, which relates to the 6 months of earnings prior to the acquisition date, and we were financially compensated for that last year as an offset to the purchase consideration that we paid.

As for dividends, you'll see outflows of $21 million for the half, and this relates to payment of last year's final dividend of $0.055 per share compared to $0.045 per share on 40 million fewer shares paid in pcp.

All up, there was a net decrease in cash over the period of $14.7 million.

So that all segues nicely into capital management, and if I can now direct you on to Slide 10. The key takeout from this slide is that the Board has continued with its recent practice of increasing dividends in line with the group's progressive dividend policy and has declared a fully franked interim dividend for the year of $0.04 compared to $0.035 declared last year. The backdrop to this, of course, is the group maintaining its working capital at a highly efficient less than 1.5% of annualized revenue as well as the maintenance of a conservative approach to leverage, with net debt at period end of only $4 million.

And lastly for me, if I could direct you to Slide 11, which looks at AASB 16, don't go to sleep here. As we've mentioned a number of times, these half year results reflect the first-time adoption of the new accounting standard for leases, AASB 16. Whilst results prepared under this new standard will become the norm going forward, I thought it worthwhile to provide you with the summary of how the new standard has impacted the various measures in the P&L for the half just gone.

In short, the new standard impacts how we account for Service Stream's operating leases, which we have in respect of offices, warehouses, motor vehicles and other items of plant and equipment. Instead of the lease payments simply going to the P&L as an expense under the old rules, the new approach requires a leased asset to be capitalized onto the balance sheet along with a corresponding lease liability. The leased asset is then depreciated over its useful life. And as lease payments are made each month, the interest component of the payment is charged to the P&L as a financing cost.

You'll see there on Slide 11, the -- for the half year reporting period, the new accounting approach resulted in an increase in EBITDA of about $5 million. And this resulted in an increase in EBITDA margin of about 1 percentage point. There was also an increase in depreciation charge of about $4.5 million and an increase in interest expense of $0.5 million. And therefore, that all largely washes out with the next-to-no change of the NPAT and the EPS levels, but it does introduce a bit of noise in the P&L, unfortunately.

Good thing, it's all pretty much in line with the guidance that we were giving in the notes to last year's financial statements.

Well, that's all for me. So I'll now hand back to Leigh to take you through the balance of the pack.

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Leigh MacKender, Service Stream Limited - MD & Director [4]

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Thank you, Mr. Grant. Okay. Moving now on to the operational performance of the group, and I'll work through each of the reporting segments. As per our normal general, I'll firstly start with the group HSE performance, which is outlined on Slide 13. As I've previously stated, HSE performance remains the #1 priority for our business, and Service Stream is really committed to ensuring that the safety of our people, customers and the community with whom we engage with while we're executing our services are safe at all times. Previously referenced was in excess of approximately 35 million property visits the business undertakes each year and the significant size of the workforce that we have across the organization, with more than 2,200 employees and a skilled pool of 3,500 contractors. Therefore, I'm very pleased to see the business retain its leading safety performance over the half, as you can see from the performance graphs that we've outlined on the page there, some of the performance across those key metrics. Total recordable injury rates decreased, reaching an all-time low frequency rate just above 2. Medical treatment injuries was steady, with the full year position at 1.7. And finally, lost time injuries reached a new ultra-low level, just below 0.3 at the end of this half period. I'm personally very proud of the group's performance during the first 6 months of FY '20 and the strong safety culture, which is embedded across the organization.

Moving into the 2 segments. Slide 15 provides an update firstly on our telecommunications division. If you look at the financials over the period, we saw segment revenue of $298 million and EBITDA just above $45 million over the period. If we drill into that revenue line a little deeper, the business has seen an increase in activations or connections for customers migrating across to the nbn network, and we're seeing solid levels of assurance or maintenance services associated with that expanding network. That was offset by the expected decrease in nbn design and construction works under our MIMA and DCMA programs, both of which are near complete. They delivered just over $40 million in revenue over the half, which was ahead of our guidance. We thought it was probably going to deliver closer to $25 million, but we do expect those programs to finish this half. We have about 3 of them remaining and the works completed are scheduled to conclude in March or April this year.

Performance of our wireless operations was in line with our guidance and prior comments, where we expected to see lower revenues associated with a slow ramp-up of 5G-related expenditure by network owners as they commence their initial 5G deployment programs. Very pleasing to see that margins across the telecommunications division, as Bob pointed out earlier, improved across the period, reaching a new high of over 15%, improvements attributable to a range of factors, including the impact of adopting those wonderful AASB 16 lease standards, profitable wind-up of nbn design and construction revenues that I just discussed and a favorable work mix across the operations. Very pleased to see, as you can see in the graphs on the bottom right-hand slide, that this division now has delivered more than 8 half periods of above 10% EBITDA margins.

Looking at some of the operational highlights in telecommunications on Slide 16. First to note is the solid completion rate of customer activations falling under our OMMA agreement with nbn, and the business was able to retain a very strong market share. You'll note we've again included some of the graphs on the bottom of the slide, which depict our volumes of work completed over the prior 6 months. So there's a few important aspects to point out here. Firstly, the business completed approximately 468,000 activations or connections, reflecting an increase of 46% on pcp. We saw an increase in assurance or maintenance works over this -- as the size of the network expands, but it's not clearly evident by the graphs we've included, and some of the orders we're now receiving have multiple property visits included and this will require the business to start to rethink how we present this graph, any information and what level of detail we might drill into in the future.

We expect maintenance to continue as the size of the network expands and more customers are connected or migrated across from Telstra's leasing network over to the nbn.

Finally, related to the OMMA and NMRA agreements, both were successfully resecured during the last period, with extensions to OMMA until December 2020 and NMRA to June the following year. Per that result, we are incredibly proud of the role we play in supporting nbn and the performance that the business delivers across the nbn operations.

Outside of nbn, it's worth to note that our Optus operations we announced last year have commenced mobilizing, and we are working to a time line to expect to receive initial orders in March or April of 2020.

Moving on to our utility division. Now I direct you to Slide 18, and we'll first touch on some of the financial metrics over that first half. We've discussed the revenue of $199 million and EBITDA of $15.5 million over the period and that resulted in EBITDA margin of 7.8%; increase in revenue, reflecting a 288% increase on pcp due to the Comdain Infrastructure acquisition, which wasn't included in the prior period.

Comdain generated $147.3 million, whilst Energy & Water, which is our existing metering services operations, generated just under $52 million over the same period.

We've called out that Comdain's revenue was negatively impacted during this most recent half by deferred spend with a few customers, which undertook major tendering operations. This seems concluded, and that's often what we find happens when clients go out to the market for work. We've also seen a minor slowdown of new estates work in Victoria over that period. It's directly linked to the housing demand, although we are starting to see this now pick back up.

In relation to the division's EBITDA margins, that was really in line with our prior comments, we indicated recently and as recent as the AGM that we had expected EBITDA margins across the utilities segment to be around 8% as Comdain's services are traditionally lower-margin operations, 27%, and therefore would dilute the underlying Energy & Water operations. Ended the period at 7.8%, but we do know that they were also impacted by onetime bid and establishment costs for the Sydney Water opportunity, both responding to the RFT and establishing the JV, and the need to retain staff across those operations and experience those lower work volumes.

Moving on to Slide 19. We look at some of the operational highlights and commentary for the utility division. As I've said at the opening comments, a particular highlight over the past 6 months was the 10-year contract awarded by Sydney Water to our D4C or direct for customers consortium, with a worth of approximately $200 million per annum. The D4C consortium takes the form of an unincorporated joint venture, comprises of Comdain Infrastructure and John Holland and Lendlease Services and WSP, with Comdain holding a 30% participating interest.

Sydney Water consolidated their large network into 3 regions as part of this process. And D4C was awarded the southern region, where the services provided are associated with the design, construction, maintenance and facility management of all treatment and network assets across that region.

Our New South Wales team is doing a great job in supporting the mobilization program, which is currently underway and will take place over a 6-month period. We expect to commence responsibility to the operations and maintenance works as of 1 July 2020, and the renewal and upgrade programs or capital works will ramp progressively from that point forward.

The second contract I mentioned in my opening comments was the new 2.5-year agreement with Queensland Urban Utilities to support the upgrade and modernization of their SCADA and telemetry systems, again being delivered under the Comdain Infrastructure business unit. Contract does provide for additional opportunities to both extend the term and take on additional works.

We also note, in the last presentation, the business confirmed that Comdain also secured a new 2 plus 3-year agreement with South East Water, supporting the renewal of their water and wastewater assets. Very pleased to confirm the operations have been successfully mobilized and they're performing well. The business area is not -- certainly not standing still. And over the last 12 months, we've been specifically working to broaden our service offering and developing a new spiral technology system, which supports the realignment of large diameter water and wastewater piping assets without the need for costly excavation. It's being developed in-house with the assistance of some external experts and is due to be tested in the field later this month. That reflects a new capability that the group can provide, not only in support of South East Water's operations, but across the wider client base throughout the country.

And finally, the comment there reflecting that TechSafe also continues to expand its services. And the business has been appointed as playing a key role in the provision of inspection services in support of Victorian state government's solar and battery installation programs.

Moving on to the last section now, group strategy and outlook, and direct you to Slide 21. The first slide here focuses on one of the key areas that the business has been discussing over the last few months, and that is supporting the successful integration of Comdain. Really pleased with the progress the integration program continues to make under the direction of our Steering Committee and the small integration team. Focus over the past 6 months has been on supporting the alignment of the business' existing -- supporting alignment with our existing utility operations, our Energy & Water division, and supporting them into the wider Service Stream business. It does include moving to a common management team, and that will support the expansion of our services and geography. The business identified a number of quick wins, some of which were implemented in the first half FY '20, and there's additional areas and initiatives that are going to be implemented over the current half.

The migration of Comdain onto Service Stream's ERP application, IFS, remains on track, on budget. It's the fourth phase of the program that we've deployed over the last 3 years. We expect it to conclude in the end of the financial year, in line with the schedule we've previously outlined, and that's a key pillar again to supporting the future growth across that division.

And we're also working obviously through a number of new business opportunities, some of which I've already discussed, the new pipelining technology, and looking to broaden our service offerings and growth across that attractive section of the utilities market.

And finally, Slide 22 looks at the outlook for FY '20. During the second half of FY '20, the group expects EBITDA from operations to be in line with that reported in the first half, but of course, is subject to prevailing market conditions. But drilling a little deeper, we expect to see stronger revenue in half 2 from our wireless operations, Comdain Infrastructure and the nbn maintenance activities. We expect only a small contribution, as per my prior comments, for revenues associated with nbn design and construction as that will successfully conclude in the coming months.

Key priorities have been outlined on the bottom of the page there, supporting the final organizational alignment and integration of Comdain, ensuring the business successfully mobilizes those 2 new contracts with Sydney Water and Queensland Urban Utilities. We will recommence the assessment of external growth and diversification opportunities, now linked to our utility operations, and we have a number of those which we are now working through.

And we'll note, the business resecured extensions in the last half for our NMRA and OMMA operations, and we'll, of course, work with nbn on their time line to take part in the contract renewal process.

Ultimately, a good start to FY '20, with the second half outlook reflecting what will be approximately 15% increase in terms of EBITDA compared to that delivered in FY '19.

That concludes the formal aspects of the results presentation. I'll hand back to the moderator, who will take any questions from those joining us here today.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from the line of Matt Johnston from Macquarie.

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Matthew Johnston, Macquarie Research - Analyst [2]

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Can you hear me?

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Leigh MacKender, Service Stream Limited - MD & Director [3]

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Yes, we can, Matt.

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Matthew Johnston, Macquarie Research - Analyst [4]

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So just firstly, quickly for me, just on the revenue deferrals, I'm assuming that that's probably all done and dusted and there's no rollover into second half '19?

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Leigh MacKender, Service Stream Limited - MD & Director [5]

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Yes, we're not expecting to see any impact. As I said earlier, we expect to see revenue increase to come down in the second half. So we're expecting that those works now will start to flow through, that were previously sort of tied up or slowed through client RFT processes.

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Matthew Johnston, Macquarie Research - Analyst [6]

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Okay. And just from your comments, I'm assuming that, obviously, with some onetime costs from the bid and the setup and some lower-margin work, that the margin could potentially be stronger for utilities in the second half.

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Leigh MacKender, Service Stream Limited - MD & Director [7]

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Yes, I think that's certainly always our aim. As I said, we did guide that we thought 8% was where the group would land. We're in line with that. But yes, certainly, some of the initiatives we're trying to generate should hopefully support an improved margin.

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Matthew Johnston, Macquarie Research - Analyst [8]

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Okay. And just secondly, on the pipeline, like you sort of talked to this, so I was just wondering if you could give a bit more insight into how you see the business now and 12 months on from Comdain. Have you seen an uptick in new sort of project pipeline work?

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Leigh MacKender, Service Stream Limited - MD & Director [9]

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Two of the major pieces that we've been focusing on with Comdain are the 2 contracts that we secured. They were major opportunities. There are still a number of other opportunities across the Comdain business unit. It's just BAU, really, in terms of their responses to those. We've got a solid base of contracts. We don't have anything major coming up for renewal over that period.

Outside of utilities, telco has got a number of opportunities associated with wireless and also fixed line activities that we'll be trying to secure over the second half.

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Matthew Johnston, Macquarie Research - Analyst [10]

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Okay. Great. And then just on the maintenance tickets, the average ticket size. Obviously, you sort of talked around what you might do. I'm assuming that the trends that you saw in the first half, are you sort of expecting that to continue, i.e., more property visits and higher-average tickets?

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Leigh MacKender, Service Stream Limited - MD & Director [11]

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In terms of more property visits under a single order, so that clouds the graphic that we previously provided. I think that will continue. We're starting to see larger numbers of properties delivered under a single order. In terms of the average ticket size, I think that it would be fair to say it's probably looking to hold at this current level.

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Matthew Johnston, Macquarie Research - Analyst [12]

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Okay. Great. And just one last one for me, just around cash flow. Just trying to get a sense of what are sort of the working capital requirements in the second half. I'm assuming they're probably less than the first half.

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Robert Grant, Service Stream Limited - CFO [13]

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Rather than talk of working capital requirements, we usually speak about our targeted conversion of EBITDA to OCFBIT. And there's been an abnormal relationship there during this half that we explained. Going forward, as long as the revenue line doesn't consume additional working capital, we would be certainly targeting 80%-plus conversion from profit to cash.

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Operator [14]

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(Operator Instructions) Your next question comes from the line of Shane Bannan from Bligh Capital.

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Shane Bannan, Bligh Capital Pty Ltd, Research Division - Head of Research [15]

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Maybe I'll just ask, well, 2 questions, really. One, let me just ask you to chance your arm a little bit and just give us a sense as to the dynamic of the margin going forward, as you quite rightly pointed out, nearly double over the course of the last few years. We're now going from construction to a maintenance sort of regime within the telco side, if I can understand the implications on that for the margin on a 2- to 3-year view.

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Leigh MacKender, Service Stream Limited - MD & Director [16]

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On the telco division, Shane?

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Shane Bannan, Bligh Capital Pty Ltd, Research Division - Head of Research [17]

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Yes, please.

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Leigh MacKender, Service Stream Limited - MD & Director [18]

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So telco probably had a couple of points that benefited this margin comparison to pcp. We've called those out. That was the lease standards, the profit wind-up of nbn and the favorable work mix. So it's probably maybe 2% to 3% that's been added across those areas. We're not expecting to see outside of that though, any sort of change across our margin.

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Shane Bannan, Bligh Capital Pty Ltd, Research Division - Head of Research [19]

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Right. So really, if I can put a line to that. So you've just gone from -- going from about 15% at present point in time under the new standard. We might see, what, 1% or 2% coming off that over the course of the next little while as we transition from design and constructing to the maintenance space?

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Leigh MacKender, Service Stream Limited - MD & Director [20]

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Yes, the AASB, the lease standard, has probably accounted for 1.5% there in terms of their margin. So that's got that impact. Yes, the D&C operations, the favorable one, that's maybe added another 1% there. So you'll probably see that 1% come back out, Shane.

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Shane Bannan, Bligh Capital Pty Ltd, Research Division - Head of Research [21]

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Great. And secondly, it sounds like you've been fairly busy appraising acquisition opportunities over the course of the last 6 months or so. Could I get a sense as to what sort of targets you're looking at there? I know you mentioned utilities and trying to ramp up the service offering there, but just in terms of quantum, the sort of issues of what you're looking at, why they failed. And I think you had mentioned there's another pipeline coming forward in terms of new opportunities, I presume.

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Leigh MacKender, Service Stream Limited - MD & Director [22]

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Yes, and absolutely. You read the AFR. They often are pretty good at mentioning our name, on who says and what we are or are not looking at. But yes, so specifically, as I said, we have been focusing on the utilities area. And the key focus for us is really diversification. In the telco market, there's 5 key clients, and we've got solid work with all of those. Utilities is a much broader and larger market for us, a known customer base, so really, that's the area where we see a lot of opportunities to expand.

We've looked at businesses that have had a range of services across those areas. Pipe-realigning technology was one that we have assessed, and we've ultimately decided to go through that organically ourselves. We've looked at businesses that provide other services around electrical assets, maintenance of overhead and other services. So it's something that's complementary to what we currently provide. We don't want to have any overlapping operations. Happy if something has a small amount of telco services included as part of a larger business, but primarily, for us, it's about utility operations. The criteria we're looking at is we generally like to see 50%, if possible, of annuity-style or maintenance-style revenues. It can be -- we certainly have some design and construction. We think there needs to be that solid base of annuity revenues there. So there are some other opportunities that we are starting to look through now after the Christmas break and we'll -- obviously, with the market now if anything should progress forward.

The reason -- the last point, the reason why some of those failed, there's a range of reasons why we decided to not move forward with them. We've got a very disciplined approach and understand the risks associated with completing M&A and don't want the business, given the positive position we're in, to do something that may detract from what is otherwise a well-performing operation.

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Shane Bannan, Bligh Capital Pty Ltd, Research Division - Head of Research [23]

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And Leigh, associated with this, I mean this sort of scale that you're looking at here range from bolt-ons right through to something the size of a Comdain.

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Leigh MacKender, Service Stream Limited - MD & Director [24]

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Yes, that's right. Look, I'd say, at the lower end, you're talking $100 million of rev and several times that at the higher end. But yes, certainly, so when we say bolt-ons, they are still quite substantial in size, particularly given the revenue of our utility operations currently.

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Operator [25]

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Your next question comes from the line of Jules Cooper from Ord.

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Jules Cooper, Ord Minnett Limited, Research Division - Senior Research Analyst [26]

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Just a quick one for me. We were surprised a little bit by the CapEx spending. And if I just sort of group together plant and equipment and sort of intangible assets or the IT spend, we were just probably thinking that maybe with Comdain, that number would have started to grow. And I just wonder whether that is something we should expect in the second half as you get ready for Sydney Water. And maybe if you could just maybe provide some sort of rough numbers around where you sort of see CapEx and capitalized development through '21, '22, just as a sort of go-forward good number to use.

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Robert Grant, Service Stream Limited - CFO [27]

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It's Bob here. You would note historically, Service Stream's CapEx has been predominantly related to the development of IT applications. By far, that's been our biggest spend area, followed by office fit-outs and specialized plant and equipment. With Comdain's introduction, sure, they come with a bit of specialized plant and equipment, but we've moved them onto our leasing approach for motor vehicles and mobile plant. That's just being our preferred financing and maintenance regime for that.

So that answers your question about why the kick-up probably isn't more than you may have thought. For the balance of the year, or certainly the second half, the predominant spend will be on completing the ERP rollout that Leigh mentioned. And then going forward, I think we've been sort of guiding around the -- maybe the $10 million to $11 million as a go-forward reasonable number, would obviously swing around a bit year-on-year depending on specific IT applications that were under development, but that would be a reasonable rule of thumb.

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Operator [28]

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(Operator Instructions) There are no further questions at this time. I would now like to hand the conference back to today's presenters. Please continue.

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Leigh MacKender, Service Stream Limited - MD & Director [29]

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That's all from ourselves. I want to thank everyone for joining us today for the results presentation and look forward to speaking to you again in a couple of months' time, full year. Thank you.

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Operator [30]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.