Downer EDI Limited (DOW) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Downer 1H '26 results. [Operator Instructions] I would now like to hand the conference over to Mr. Peter Tompkins, CEO. Please go ahead.

Thank you, Asha, and good morning, and thank you for joining our 2026 half year results presentation. I'm here today with our Group CFO, Mal Ashcroft. And following our prepared remarks, Mal and I will be pleased to take your questions. Turning to Slide 2 and the Downer advantage. We are a leading provider of integrated services across Australia and New Zealand. We plan, deliver and maintain essential infrastructure that enables our communities to thrive. Our differentiators, sovereign capability, scale and leadership positions with good growth potential are aided by 4 key tailwinds. The first tailwind, energy, where our 50-plus years of experience in power and high-voltage electrical engineering is being deployed into the grid transformation that's underway. And we're seeing opportunities convert after several years of planning with a solid outlook for growth. Second, defense. We've been a trusted private sector delivery partner to defense for more than 80 years and today have around $4 billion of secured work across the life cycle of defense assets. Third, population growth and a sociocultural evolution that's increasing reliance on public services requiring improvements to existing assets and driving higher expectations of end users, particularly in metropolitan areas. With more than 90% of our revenue government-related, supporting social infrastructure outcomes in housing, education and health, this is a strong demand driver. And this all links to the final tailwind being reindustrialization. We have sophisticated supply chains, delivering local content and integrating international technology. On the topic of technology, we are seeing more opportunity with AI to make our back office more efficient and to assist both our white collar and field workforce in gaining deeper insights from data on our customers' assets to drive higher performance and value for money through optimized planning. And in terms of the value proposition of our business model, we don't see AI as a threat to how we engage with our customers and provide value. Now turning to our key messages on Slide 3. And the headline is we continue to deliver consistent year-on-year improvement, and we are on track to exceed our management target of greater than 4.5% EBITA margin across FY '25 and FY '26. We are growing earnings through the disciplined delivery of projects governed by a mature risk management framework, winning good quality work that is increasing work in hand, and we are seeing that the diversification and balance across our portfolio provides good earnings resilience. At the same time, we see ongoing opportunity for improvement to further enhance contract margins and reduce cost to serve going forward. Turning to Slide 4. The EBITA margin for the second half was 4.6%, an improvement of 90 basis points from the prior period. Underlying NPATA increased 7% to $136 million, while statutory NPAT rose 30% to $98 million. Underlying EBITA grew 11% to $227 million, driven by higher earnings across all 3 operating segments and lower corporate costs. And this was supported by strong cash delivery with normalized conversion above 90%. Our balance sheet continues to strengthen with net debt to EBITDA of 0.8x, supported by the proceeds collected from the divestment of Keolis Downer in December. The interim dividend of $0.129 per share, 100% franked, represents a 19% increase on first half '25 and a payout ratio of 65%. Now turning to Slide 5. We are committed to our disciplined approach to project selection and our focus on quality of revenue, which is a key driver of margin expansion that we are achieving. Excluding divested businesses, first half underlying revenue was slightly lower compared to first half '25 pro forma, down 3.6%, which was broadly aligned with expectations. As the waterfall shows, revenue here reductions in Transport and Energy & Utilities were partially offset by growth in Facilities. In Transport, the decline reflected softness in Australian Transport Agency spend impacting roads, the application of our risk guardrails in Hawkins and the planned completion of successful projects, including the City Rail Link in Auckland and the high-capacity Metro Trains project in Victoria. In Energy & Utilities, strong growth in Power Projects was offset by the previously signaled decline in telco and the timing of several new water contracts, which are expected to generate their planned volumes in the second half. We also note that the FX translation of our New Zealand-based revenues were also negatively impacted by the weaker Kiwi dollar. Facilities delivered growth across government, facilities management, health and education and the defense EMOS contract performed well in its final months. Our focus has been on reshaping the portfolio and lifting revenue quality over the past 3 years. And we've exited lower margin, higher risk and noncore businesses. Our goal is that the simplified and disciplined focus on revenue quality will enhance the predictability of our earnings and reduce volatility going forward. That reset largely completes at the end of this financial year. And beyond that, as outlined at our recent Investor Day, we are targeting a shift to sustainable medium-term growth and have set management targets that support these ambitions. On Slide 6, our work-in-hand grew by 8.9% to $38.2 billion, and this gives us confidence that we can sustainably grow our business in the future. The increase was driven by strong growth in Energy & Utilities, which was up 21.6% and Facilities, which was up 20% with new wins, renewals and extensions across power, water, energy, industrial, defense and housing. And this was partially offset by a small work-in-hand decline in our Transport business. However, our work-in-hand number for Transport excludes $1 billion of larger preferred bidder positions comprising the state highway maintenance contracts in New Zealand announced in December and a new Sydney Motorway network maintenance contract, both of which we expect to sign shortly. We've got a robust order book that's long-dated, diversified and resilient, more than 90% government related and approximately 90% services. So Slide 7 illustrates the outcome of our ongoing back to basic strategy with the underlying EBITA margin up to 4.6%, and this is our best performance in over a decade. All 3 operating segments contributed to this improvement, and I'll touch on the main highlights as we move through each segment update. Starting with Transport on Slide 8. EBITA increased 12.4% to $129 million, with margin expanding 80 basis points to 5.3%. We continue to see the benefits of improved operational performance, contract delivery and cost management. In Australia, the Queensland Train Manufacturing program contributed to higher earnings. The prototype train is currently being manufactured in Korea with testing to commence in Australia late in 2026, early '27. The Torbanlea facility is also nearing completion, and this will enable local manufacturing to commence next year. The Australian Road Services business continued to navigate variable transport agency spend. However, we did see improved volumes in Victoria, South Australia and WA, although offset by lower activity in New South Wales and Queensland. We expect a stronger second half, driven largely by the historical seasonality skew and some anticipated improvement in market dynamics. In New Zealand, Hawkins maintained good profitability from a lower revenue base. And in projects, several larger transport contracts are nearing completion, including Auckland City Rail Link, which also accounts for some of the lower revenue compared to the prior period. In August, we announced the award of a New Zealand $311 million State Highway construction project. And in December, we were named preferred contractor for 4 NZTA State Highway maintenance regions. This outcome means we maintain our footprint in the North, which generates the majority of overall maintenance volumes. However, we will be transitioning out of 2 smaller South Island regions ahead of the new contracts commencing in May. At our Investor Day, I said we were close to announcing a senior executive appointment to lead our Transport & Infrastructure business, which we have now finalized. Doug Moss, a highly experienced industry leader, will commence at Downer in April to accelerate our plans to achieve the full potential of our T&I business in Australia and New Zealand, and I look forward to welcoming Doug. Moving to Slide 9 and looking ahead, we remain confident in the medium- and long-term Transport outlook with attractive underlying opportunities and value drivers that align with our integrated value chain. In Australia, we expect transport agency spend to normalize over time, driven by the need to maintain network performance. Our Rail business is targeting significant opportunities with the future fleet program in New South Wales and the MR5 train franchise opportunity in Victoria. In New Zealand, we are well positioned to support national and regional infrastructure programs, including $6 billion of projects, which are coming to market over the next 3 years. Turning to Energy & Utilities on Slide 10. EBITA increased 18% to $58 million, with margin up 110 basis points to 4.4%, driven by a strong performance in Power Projects with the successful delivery of major transmission lines and substations. Our Energy and Industrial business also had improved activity levels, including successful completions of major shutdowns in power generation. The Water business has a strong work in hand position. However, its contribution in the first half was impacted by the timing of new work that has been secured. We are expecting a stronger second half as these contracts and activities ramp up. The result was also impacted by a previously foreshadowed decline in our telco business following the completion of the main construction phase for NBN and a consolidation of delivery partners by the major carriers, which reduced our volumes. This resulted in us resetting our cost base to reflect our view of the future demand profile. During the period, we secured a number of strategically significant contract wins, driving a 21.6% increase in work-in-hand to $6.2 billion. Power Projects was awarded approximately $700 million of new work, including appointments to several panels, including Powerlink and Transgrid, along with new orders relating to battery energy storage systems and renewable grid connections. As we outlined at the Investor Day, the strength and quality of work-in-hand underscores the growth potential for this business, which is led by a high-caliber executive team. Turning to Slide 11 and the market outlook for Energy & Utilities, where we continue to see strong spend in essential energy and water networks. As touched on before, the energy market continues to be reshaped by decarbonization and the need for greater network resilience, driving sustained investment in power transmission storage, connections, stabilization and resilience. At the same time, aging water infrastructure and environmental standards that are increasing drives the need for upgrades and maintenance programs. This is giving a high demand in water services with customers moving to package up individual projects into larger programs for delivery over several years. Moving to Slide 12, Facilities and where we continue to consistently generate steady performance, reinforcing its role as a good contributor to the group and a top quartile market performer. Facilities had a good half with revenue increasing 2.4% to $1.1 billion. EBITA rose 9.4% to $78 million, with EBITA margin expanding to 7%. The result was driven by contributions from government and facilities management, where we mobilized new contracts for Homes New South Wales and the Department of Home Affairs and both performing well. The Defense Estate Management business also had solid volumes on the EMOS contract, which concluded at the end of January and transitioned to the new Property & Asset Services contract or PAS, where margins will reset lower from February '26. The demobilization of the EMOS contract and the mobilization of PAS across Defense's 3 largest regions, New South Wales, ACT and Queensland was a complex transition executed successfully by our team in partnership with the Defence team. You can see here, too, that work-in-hand grew 20% in the period. Looking at the Facilities outlook on Slide 13, and there continues to be plenty of opportunity for integrated facilities management solutions and partnering. In defense, infrastructure investment and capability programs support a solid outlook over the medium term. The focus on sovereign capability and a northern posture underpin demand for defense, estate and facilities services where Downer has a strong footprint. And demographic shifts, including an aging population, continue to drive long-term demand for essential services in health, education and social housing. Slide 14 highlights the consistent improvement we have delivered over the past 3 years across a range of metrics. In September, we commenced a share buyback of approximately 5% of issued capital, complementing fully franked dividend growth and our higher payout ratio target range. And as Mal will cover shortly, we still maintain capacity to invest in growth. Finally, ESG on Slide 15. We continue to invest in programs that make our operations more efficient and also support our commitment to reduce emissions. In the first half, we achieved a 2% reduction in absolute Scope 1 and 2 emissions on first half '25 levels. Tragically, I note that in January of this year, a team member in New Zealand passed away following a workplace incident involving a vehicle. I want to acknowledge this tragic loss and extend my sincerest condolences to the family and workmates of our colleague. I will now hand over to Mal, who will take you through the financial performance in more detail.

Thanks, Peter, and good morning, everyone. This half continues the performance momentum we've been building over the last 2.5 years. The headlines for me are the ongoing consistency of our delivery and our period-on-period improvement with margin expansion, cash back earnings, uplift in our profitability and the strength of our balance sheet. Pleasingly, we're on track to exceed our 4.5% EBITA margin target averaged across FY '25 and '26 and expect further margin expansion in the second half with an improvement on the FY '25 second half margin of 5%. We continue to see the benefit of ongoing operational improvements in contract delivery and cost management reflected in the margins we are delivering. We continue to focus on improving our cost to serve and have a number of programs underway, which will deliver benefits in future periods. As we discussed at our Investor Day in November, we still see a lot of improvement potential in our business, which is motivating for our team and underpins our FY '30 management ambitions. With the portfolio simplification program now largely complete, we anticipate underlying and pro forma revenue to converge in FY '27, simplifying our reporting. For comparability, today, I'm referring to pro forma results, which adjust for the contribution of divested businesses and individually significant items as these present the most relevant and comparable view of our business performance. I expect one of the focus areas of the result will be on our top line performance. So I'll spend some further time on the composition and drivers and our view of the implications for the outlook. We had previously positioned in our outlook statements that we expected underlying revenue to be flat to slightly down on FY '25 pro forma revenue for the full year, and we've updated that today. Underlying revenue and pro forma revenue declined by 3.6% and 4.9% against pro forma first half '25 revenue or 6.9% on a statutory basis, which was broadly in line with our expectations for the half, reflecting our continued focus on quality over volume. We continue to see the benefits of our quality of revenue focus on our EBITA margin improvements delivered with improved project selection disciplines and our adjusted risk appetite and guardrails. And we've seen, as expected, our preferred positions translate into work-in-hand growth, which is up 8.9% with strategic wins across Energy, Water, Defence and Transport, which align with our future areas of targeted growth in our FY '30 management ambitions previously announced. Starting with the positives on our revenue performance. We saw strong performance across several areas of the portfolio. Facilities delivered 2.4% growth driven by Government & Integrated Facilities Management with solid EMOS volumes in the Defence Estate management ahead of the transition to the new PAS contract, which commenced in February '26. In Energy & Utilities, our Power Projects business had a strong double-digit growth as expected, supported by higher activity in transmission line and substation projects alongside solid activity levels in our Energy and Industrial business. In Transport, our Rail business result benefited from strong execution and build progress on the $4.6 billion Queensland Train Manufacturing project, which is 41% complete to date and provided a strong contribution in the period. Our revenue decline was in Energy and Utilities and Transport, which were down 11.5% and 4%, respectively, on a pro forma basis in the period. In Energy & Utilities, we've previously flagged the softening in the Australian telco market as we approach the end of the infrastructure build phase of the NBN and the impact of the consolidation of service providers by NBN and other major carriers, where we've seen heightened competition for a smaller pie impacting margins, work volumes and the risk profile of new work. This has had a significant impact in the period, accounting for just over half of our overall net reduction in group revenue for the period. In response, we have reset the cost base of the business to reflect our forward view of market demand and importantly, expect the revenue impact to rebase and run rate through the second half before stabilizing as we head into '27. Our Water business also had a softer top line in the period, impacted by the timing of new work ramp-ups in Water. Importantly, we're expecting a stronger second half and beyond in Water with a strong work-in-hand position and customer demand profile. In Transport, softer Australian Transport Agency spend continued as expected in the first half with variability in activity levels across the country. Our asphalt volumes were down approximately 3% against the corresponding period with lower activity levels in New South Wales and Queensland road services businesses, which was partially offset by growth in Victoria, South Australia and WA. We're expecting a stronger second half supported by seasonality and an improved opportunity pipeline in regions like Queensland. In New Zealand, we also experienced softer turnover levels with our previously highlighted and deliberate risk reset of our lower-margin Hawkins business impacting revenues and a transition period in our Infrastructure business as we phase from large project completions to our new growth pipeline. Pleasingly, we still delivered bottom line improvement against this backdrop. Foreign exchange also impacted reported revenue with the weaker New Zealand dollar affected translated revenue and earnings. The impact on our revenue in the period was approximately $41 million. EBITA increased 11% on an underlying basis, 18% on a pro forma basis with the underlying EBITA margin lifting to 4.6%, up approximately 90 basis points on the period, and this was 4.5% on a pro forma basis. This positions us well to exceed the greater than 4.5% average EBITA margin target across '25 and '26 with good earnings momentum, and we expect our second half EBITA margin to grow on the 5% margin achieved in FY '25, albeit the rate of margin growth period-on-period will slow. EBITA margin -- EBITA improvement was across the board, underpinned by a 12.4% uplift in Transport despite the market variability, the successful turnaround of the Energy and Utilities business up 18% and another solid contribution from Facilities, up 9% on the prior half. And our corporate costs reduced by $4.6 million or 9.3%. Importantly, the group's margin expansion has been driven by disciplined project selection, improved contract delivery, the benefits of portfolio simplification and reducing low-margin business and contracts and the significant progress in resetting our performance culture and reducing our cost to serve. And we have continued to mature our risk and opportunity management disciplines, including our contingency management for risks in the portfolio. Statutory NPAT increased by 30% to $98 million, and the underlying NPATA was up 7% to $136 million. D&A reduced by 13% to $142 million in the period with benefits from our optimization program, particularly on property and fleet reductions and IT rationalization coming through the results. I expect further benefits to realize in the second half, particularly from IT amortization and leased assets. Our net interest expense reduced by approximately $6 million to $34 million in the period due to lower net debt and reduced lease liabilities, and the effective tax rate returned to historic levels at 29.4%, and we expect the trends to continue in these areas in the second half. Operating cash flow of $312 million when adjusted for interest and tax payments was 6.4% higher half-on-half. We continue to make progress with developing our cash culture, and we've delivered another cashback result with normalized cash conversion of 90.5%, in line with our greater than 90% target. We expect the cash conversion levels to be maintained in the second half. We've provided a reconciliation from pro forma to statutory EBITA. Underlying earnings represent the statutory result adjusted for individually significant items or ISIs. While pro forma is our underlying earnings, excluding contributions from divested businesses to enable a like-for-like comparison between the 2 periods. For this half, we reported $220 million in pro forma EBITA, up 18%. Underlying EBITA for the half was $227 million, up 11%, while statutory EBITA was up 23% to $185 million. The level of non-underlying adjustments is reducing against previous periods as anticipated. This reflected a 22% reduction in ISIs compared to the prior period. ISIs in the half primarily relate to $5.9 million in net loss on divestments and exit costs. This comprised losses on the exit of an Australian cleaning and catering contract and the sale of the New Zealand cleaning businesses, partially offset by gains from the disposal of the remaining interest of Keolis Downer and the transfer and demobilization of the Victorian Power Maintenance Contract. We had $16.1 million in transformation and restructuring costs, including ongoing investment in technology and operating model changes, which are delivering efficiencies supporting our margin improvement. We have $13.9 million of impairments and asset-related charges, of which $10 million related to a rail facility previously impaired in the prior period. $6.3 million of legal and regulatory costs, including ACCC proceedings and the shareholder class action. These items are consistent with previously disclosed categories and reflect the continued execution of our transformation agenda, which continues to support improvements in the underlying business. Moving to our cash result. The operating cash flow of $312 million when adjusted for interest and tax was up 6.4%. Free cash flow of $105 million generated in the half was underpinned by the operating cash flow of $227 million. This was partially impacted by higher tax payments of approximately $20 million, but importantly, these enabled the continuation of our 100% franking and our interest payments were lower, which was another positive. That outcome reflects disciplined execution of our back to basics approach to cash, strong contract delivery, improved billing and collections, resolution of variations in claims and continued capital discipline. Gross CapEx was $56 million in the half, which was down approximately 5% and remained controlled. We continue to be focused on improving asset utilization and disciplined asset sweating. Net CapEx of $53 million was the result in the period. As flagged in November at our Investor Day, we are expecting a return to an investment cycle and with some new contracts coming online in the second half, we expect CapEx to increase in the second half. Lease payments reduced 15% to $63 million, driven by reduced fleet and site footprint as part of our cost-out programs and also impacted by divestments. We returned capital to shareholders spending $64 million on our share buyback program, which was announced in September or commenced in September '25 to buy back up to 5% of shares on issue. This continues to signal our confidence in the business. In addition, we received $77 million in net divestment proceeds, largely from the sale of our interest in Keolis Downer completed in December, further strengthening the balance sheet. We entered the second half in a strong position with over $680 million in cash, $2.3 billion in liquidity, providing significant headroom to fund growth and optimize our shareholder returns. Turning to the balance sheet. We're very well positioned to support our transition to growth. Net debt to EBITDA improved further to 0.8x, down from 0.9x at June '25 and well below our target leverage of around 1.5x. The result was driven by ongoing improvement in our profitability and ongoing reductions in our net debt levels, which reduced 46% year-on-year to $242 million at December, supported in part by the repayment of our USPPs in July and assisted by the proceeds from divestments. This continues to provide us with capital management flexibility and importantly, provides capacity to invest in future growth opportunities while also delivering shareholder returns reflected in the commencement of the buyback and higher dividend payments. We remain well within the thresholds required to comply with all financial covenants and to maintain our Fitch BBB stable investment-grade rating, reflecting improved margins and a stronger balance sheet. Interest cover has strengthened materially, increasing to over 9x, reflecting both stronger earnings and lower debt. We expect our total committed debt to reduce further in FY '26 once our AMTN bridge expires in the second half. Turning to the debt profile. We've simplified and extended maturities. The USPP notes were repaid in July. We're targeting a further extension to our average maturity profile to around 4 years through an issuance of an AMTN in April. As at December, weighted average debt maturity was 3.1 years. Weighted average cost of debt, 5.4%, which is broadly consistent with where we were in the second half last year. Our interest expense was down $6.2 million to $34 million, driven by lower net debt and reduced lease liabilities from our fleet and property initiatives. We're expecting net debt levels to progressively increase due to our expected heightened investment levels and the buyback in the second half. Finally, we retained substantial bonding capacity of around $700 million, which is critical to supporting the opportunity pipeline across core markets. Overall, the balance sheet is in a strong position and ready to support our transition to growth. Moving to capital allocation and our capacity to invest to grow. The capital allocation framework continues to guide disciplined decision-making, balanced reinvestment, strengthening the balance sheet and delivering returns to shareholders. At its core, the framework is simple. Our business are expected to self-fund their share of corporate cost, taxes and their maintenance CapEx, contribute to their share of dividends paid and maintain balance sheet discipline. We govern our investment decision-making through an investment committee where business cases are reviewed, tested and aligned with strategy, cost estimates and risks and achievability of targeted benefits are assessed against minimum return thresholds. We're commencing our transition to sustainable growth and have capacity both from our free cash flow and the balance sheet position and debt capacity to invest in organic and inorganic growth initiatives that are aligned with our strategy. At our Investor Day, we provided detailed insights into our markets and where we see opportunities and drivers of future growth in our core businesses. As we approach delivery of our financial targets and our momentum and performance improvement continues, we now have a clear capacity and flexibility across 3 dimensions: the investment, portfolio optimization and capital returns. Organic and growth CapEx will remain disciplined and aligned to market conditions and outlook, focused on enhancing efficiency, capacity and productivity across the fleet, asphalt plants and operational technology linked to tender outcomes and growth opportunities. CapEx is expected to increase in the second half, reach a gross CapEx of around $170 million in FY '26, trending back towards historical averages, of which $56 million has already been incurred in the first half. Investment will also continue into the next phase of transformation and strategic initiatives. During the period, $26 million was invested towards anticipated $60 million of transformation investment in FY '26. These programs will continue into future periods with further updates to be provided following the completion of our business planning cycle over the next few months. In relation to M&A and capital recycling, the divestment cycle is largely complete with divesting 11 businesses and contracts from FY '23 onwards, freeing up management capacity, simplifying the business, lifting margins and recycling capital. We are and have been selectively considering inorganic opportunities, including asset and business purchases, typically bolt-ons to our core businesses or in logical adjacencies, which align with our strategy and capability sets assessed through a disciplined and balanced risk return lens with a clear focus on shareholder value creation. We will remain disciplined as we consider these opportunities. And finally, capital returns remain a priority. We continue to target our 60% to 70% dividend payout ratio fully franked in FY '26 and our on-market share buyback of up to 5% of issued capital, which is well underway, having executed approximately 25% of the program since it commenced in the first quarter. We continue to monitor the role of our road securities in the capital structure with declines in New Zealand interest rates and comparing cost of funds against other longer-term sources of funds, they remain a cost-effective funding instrument at this time. In summary, the foundations are firmly in place. We have a stronger portfolio, higher margins, cashback earnings and a resilient balance sheet, giving us confidence as we transition from turnaround to sustainable growth towards our FY '30 management ambition targets. I'll now hand back to Peter to close with priorities and outlook.

Thank you, Mal. We're now on Slide 23 and looking at our balanced scorecard. We introduced these at the Investor Day in November. And when we bring it all together, we're targeting underlying EPS CAGR of 9% from FY '25, which is hardwired into our LTI scorecard to be measured in FY '28. We're also targeting revenue growth of 4% to 5% CAGR from FY '26 to FY '30 and at the same time, continued margin expansion towards 6% for the group. And finally, turning to outlook. Our first half performance was in line with our expectations. Our focus continues to be building a high-quality order book with adherence to our risk guardrails and operating discipline. For FY '26, on an underlying basis, we are targeting earnings and EBITA margin improvement and NPATA of $295 million to $315 million. This is assuming no material changes in economic conditions or market demand and no material weather disruptions. We expect underlying revenue for the full year to be slightly lower than FY '25 pro forma revenue. I'll now open the call up to your questions.

[Operator Instructions] First question comes from Rohan Sundram with MST Financial.

Just a quick one on -- you mentioned the opportunities to lift contract margins. Are you -- is that to say you're seeing further opportunities? Or maybe if you can just give us a rehash on where do you see the opportunities across the portfolio?

Yes. Look, it is across the portfolio, just in terms of what we bid, bid less, win more, focusing on those projects that align to our 5Cs and including that where we can work more closely in our partner, provide higher value outcomes and therefore, lift margins over time. That leads into where we see more focus just in the execution of work to optimize our cost base and also to ensure that we continue to reduce our cost to serve through the corporate overhead as well. There have been focus areas since FY '23, '24, and we continue to see more opportunity. Mal mentioned some areas where we will be investing in capability that will continue to drive down the cost to serve, and we're progressing those through this year, and they will help us achieve our end of year targets and into FY '30.

Thank you, Peter. And Mal, a question on the cash conversion. 87% in the first half looks pretty good. It seems higher than historical. Is the first half still a seasonally softer conversion half? Or is the seasonality starting to ease? And are you still looking for full 100% or thereabouts conversion by the end of the year?

Yes. So look, on the cash side, seasonality probably plays less into it, and it does get impacted by some of the larger long-term contracts that have milestone-related mechanisms for payments. So that's the thing that can impact our cash conversion from period to period from a timing perspective. But at the moment, with where we see the portfolio and the forecast, we're targeting for that greater than 90%. And our outlook at the moment is we'll continue to deliver cash back earnings in the second half. So we're quite positive about that.

The next question comes from Megan Kirby-Lewis with Barrenjoey.

My question is just on the work-in-hand conversion to revenue, so up a strong 9% in the period. But if you could just help us with thinking about when that starts to flow through to the top line, that would be great.

Yes. So I think, look, when you look at work-in-hand, it's obviously our forward order book, and it's spread over the term of the contracts that have been won. If you look at the major announcements that we've had, they're actually quite widespread across each of the portfolio areas that we have. So we've seen wins across Energy and Utilities, across Defense, across Facilities. And those projects -- and sorry, I should say, Water as well. We see those projects in mobilization and actually starting to come on board in the second half. So we will see the benefit of that work-in-hand start to contribute through the second half into '27. Equally, as we look at the sort of forward pipeline of opportunity, we mentioned in the materials that we have a couple of preferred positions that we're expecting to announce in the second half, both in the Transport side and the Facility side. But in the Energy and Utility side, we continue to see a very strong pipeline of opportunity, particularly in the Power Projects and around the energy transition-related areas. And on the Water side, the work has actually been won. It's really the mobilizing and ramp-up of the programs that our customers have already in place. So we've got really good confidence levels about that sort of trending up.

That's great. And I guess just on the flip side, just to clarify sort of on the risk guardrail reset, would you expect that to largely be complete by end F '26?

Yes. So one of the things we called out there was the Hawkins business, and that did have an impact in this period. You'll see that run rates out in '26. And then broadly speaking, the other area that we've touched on in this result was the telco impact of those sort of market dynamics. And again, we would expect that run rate out in the second half and stabilizes into '27. So some of the things that are impacting that revenue result in this half or a good number of them run rate out through the second half.

The next question comes from Cameron Needham with Bank of America.

Just firstly, on QTMP, picking up on Slide 33. Are you able to actually give us a little more detail and quantify the FY '27 year-on-year impact you're expecting to see in terms of the phasing of revenues as the project transitions and also how we should think about margins evolving as well as the project transitions to maintenance activities?

Yes. Look, we don't provide the specifics other than that you can see there are 3 distinct phases to the project. And we're now coming towards the end of the maintenance facility and also the manufacturing facility. And I said on the call that we move into prototype testing and then ramp up production of the train sets. And so it takes a period to get into a steady state, high manufacturing cadence. And so we said last time that the peak kind of revenue out of those construction activities were concluding. That's now the case, and we move into a ramp-up again towards higher volume levels in the manufacturing. And we don't talk about individual margin contributions for the project.

Understood. And then just second question, if I can. Just on transformation investment, how should we be thinking about returns on that investment, please?

Yes. So what we sort of talked about at Investor Day, and we haven't sort of talked about specific returns, but we do have minimum hurdle returns for any sort of investment or allocation, and they are risk-adjusted depending on the nature of the investment. If I look at a number of the investments that we're looking at that either have a system modernization or a process automation, sort of adoption of AI and sort of getting some operational efficiency, the payback periods that we're seeing on those sorts of investments tends to be around 2 to 3 years. So they're very strong sort of return profiles for us. And we're having sort of investments in a couple of areas of around $5 million to $10 million parcels. So they're not large investments in the sense that we're doing major IT high-risk transformation. We've got really good confidence levels about the outcomes that we're going to deliver. So very much focused on the front line, focused on business sort of priorities and focused on the sort of customer and people priorities that we have.

The next question comes from Nick Daish with RBC.

Just a couple from me. I'm just curious, the guidance implies a very, very strong second half. Now my impression is that typically, you see Transport -- the Transport division be weighted towards the second half. I just want to understand if there's -- across the other 2 divisions, if there are any contributors or contributors to that seasonality? Or is it wholly the Transport division that is driving that expectation?

The business as a whole generally skews to the second half, and we see the skew to the second half consistent with prior periods, nothing remarkable there to call out other than what you've mentioned there around the seasonality of our Roads and Transport business and also just coinciding with the end of government budget periods as well. So typical skew for the second half across the board.

Got it. If you were to put a number on it, I suppose I could figure that out with the guidance you provided. So nevermind, that's fine. The other one is just around the buyback. I mean, I think you're about $65 million of the way through what is about a $230 million, $260 million buyback. I'm just curious on how much of a priority that is. I know at Investor Day, you were starting to talk about further investment in CapEx into the business. And I'd imagine that is the priority right now, but curious on how you're thinking about that moving forward, please. And then as part of that, I noticed that the gross capital expenditure number has come down to $170 million from what was about $190 million at Investor Day. So just interested in what's driving that, please, as well.

To talk about both. So look, absolutely remain committed to the buyback. We got some good progress, as you mentioned, in the first half. So we're up at about $64 million to 31 December. And so no change to sizing of that. We've got 5% to work through, and our expectation is that we work through that through the second half into early '27. If you sit back to the balance sheet and sort of capital allocation, we're at 0.8x. And so we've got a lot of capacity relative to our target sort of gearing levels of 1.5x. And even after you adjust for completing the share buyback program, there is still quite a lot of capacity in the balance sheet to support growth. And so look, at this stage, we'll revert back to the comments we made at the Investor Day. We see really great growth opportunities in the Energy and Industrial space, particularly around energy transition and Water. We see great opportunity in defense in the Facility space. And we're seeing countercyclical opportunities across Transport, where we're looking at asset purchase opportunities and other things there. So there is an opportunity for organic growth in the pipeline of opportunities we see. And we have started to look at now for some time, inorganic opportunities. You haven't seen us sort of announce anything significant, which I'd sort of suggest reflects some of the discipline we've got around deploying that capital. But we remain very confident that there will be good opportunities on strategy for us to deploy that capital in the coming periods that will be accretive to what we're doing.

Got it. I've just got one more, if I can, please. Defense has been very public about selling property assets in the Southern states and redeploying that into the northern states. You're clearly well positioned in Queensland. That process is relatively early days, but I'm just curious on if you're starting to get inbound questions and queries from defense about different opportunities over and above your responsibilities associated with EMOS, please?

Yes. Just in terms of the consolidation, look, this was a program that defense have been working on through a sort of a detailed audit process for some time in consultation with the estate maintainers. I think first observation about the footprint that we maintain, my assessment is that those locations that are going into the asset recycling program, they are the smaller footprints. And by their nature of being in this audit outcome are underutilized. And so the activities that require the support of estate management and maintenance are relatively small. And as those people are transferred to other estate locations, our people will transfer with those as well. So that's a long way of saying a very small impact, and we've got a program to support defense in realizing those outcomes through getting ready for eventual sale processes.

The next question comes from John Purtell with Macquarie.

I had 2 questions. First one on revenue. Obviously, your first half revenue was down 4%. I appreciate you've said revenue will be down for the full year. But would you expect that the revenue decline in the second half to be less negative than the first? You've obviously called out the ramp-up of Water contracts there? Or do you think the profile is going to be pretty similar?

Look, we are expecting it to be a little bit better than the first half profile for the -- principally because of those ramp-ups that you've identified and a bit of momentum coming into the Roads business as well. So a little bit better is what we are expecting.

And just the second one, sort of in 2 parts. Obviously, we saw at your recent Investor Day, you're very positive on Energy and Utilities in particular. Your work-in-hand was up sort of 21% with this result. But I suppose the question is, when do you expect sort of the contract opportunities to more meaningfully emerge in transmission and substation? Do you expect sort of meaningful opportunities over the next 6 to 12 months, for example? And the second part is related to the risk profile in these areas. Obviously, the sector has had its challenges in some of these segments. So how do you manage the risk around that?

So John, I think first question first. The answer is yes. The more meaningful projects that we are targeting will be awarded in the next 6 months. And what you've seen in our result is a bit of a 2-speed business here where we have been doing a lot of infill work successfully, and that's been our philosophy from the beginning. You have 1 or 2 of those more meaningful projects, and then you have capability that can deliver really successfully around those infill jobs, which could be a $50 million substation job. It could be connection work that's still high voltage, and it gives us the opportunity to scale workforces into these larger projects as they come online. And that really then goes to your second question around risk profiles. The strategy very much is to feed those larger meaningful projects with the infill capability. And it always comes back to our 5Cs capability capacity more fundamentally. And we think we've got a good handle on our pipeline, what we target, the clients we target that work to deliver in partnership with. And as always, we're looking at the commercial risk allocation. And I think as an industry, there are sort of no-go areas for everybody, and it's a fairly coherent and well-understood discussion on what are asset owner risk, what are shared risk and what are contractor risks. And we're very comfortable with the maturity of that risk allocation in the sector.

The next question comes from Nathan Reilly with UBS.

Just wanted to dig a little bit deeper around your F '30 growth ambitions. Just can you remind me plans there to achieve those organically, just noting some of the comments you've made around growth investment going forward. So maybe just help me out what level of growth investments you think you might need to put in to realize those ambitions, whether it's organic or inorganic. Also just keen to understand the play there the transformation investment that you're talking about as well.

Look, I think the first point is we built those targets based off the organic opportunity in the businesses with the new portfolio and the pipeline that we see in the medium term. And then, of course, we -- with our balance sheet position, we're looking to supplement our existing capability with things we don't have, but that's not material in the context of the targets that we've set for ourselves. And then sorry, on the transformation there, Nathan, what was the question?

And that supports those F '30 ambition? Or is that separate?

Certainly supports as we reduce our cost to serve over time and look to invest to realize benefits, that's certainly part of how we see continuing to improve our financial metrics overall.

You got $60 million F '26. Will that be recurring at that sort of level over the next few years beyond '26 to support those margin targets?

It's not a level of investment at the moment that I would expect to recur at that sort of those sorts of levels out to the sort of FY '30 ambition periods, but we are in the process of sort of updating our plans for '27, and there will be a level of ongoing investment through '27. And I think just to give you a reference point, one of the charts that we provided at the Investor Day, I think it's in the appendix to the pack sort of gives you a rough indication of the time line of the projects that we're working on. So there's a range that sort of have 2- to 3-year sort of horizons, and that's where most of them sit at the moment and a couple that have longer tails, but certainly not expecting that the levels will ramp up from where they are.

There are no further questions at this time. I'll hand it back to Mr. Tompkins for closing remarks. Please go ahead.

Thank you. I'd like to thank all of my colleagues at Downer for their hard work in contributing to this result today, and I wish you all a good day for reporting season. Thank you.