Downer EDI Limited (DNERF) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. My name is Mark Menhinnitt, and I'm the Chairman of Downer EDI Limited. I'd like to begin by acknowledging the traditional owners of the land on which we meet today, the Gadigal people of the Eora Nation and pay my respects to elders, past and present. Today is Remembrance Day, a day of national commemoration. On this day at 11:00 a.m., we pause in silence for a minute to remember the bravery and sacrifice of the people who lost their lives while serving Australia and its allies in war, conflicts and peace operations. Before commencing the meeting, in acknowledgment of Remembrance Day, we will take some time to reflect and to silent remember all those who have served and died in war. Thank you. Thank you, ladies and gentlemen.I would now like to officially open our Annual General Meeting for 2025. Based on the number of voting members in attendance, I declare a quorum for this meeting. Before I commence today's proceedings, I would like to draw your attention to the safety procedures for this venue. When notified of an emergency, which will be a beeping alarm through the speakers in this auditorium, please look for Northside staff and follow their direction. Exits are at the rear of the auditorium and the doors you entered the building from. Please make sure that you do not use the lifts. Proceed to the designated external assembly area, which is across the road next to the multistory car park as shown on the diagram on the screen. Do not reenter the building until authorized. I'd now like to introduce my fellow directors. On my far left is Peter Barker, then Sheridan Broadbent, Teresa Handicott, Stephen MacDonald, Adele Howes, Kerry Gleason and Annette Carey. Next is our Company Secretary, Robert Regan. And on my immediate left is your Chief Executive Officer, Peter Tompkins. I'd also like to introduce our Chief Financial Officer, Malcolm Ashcroft, who is in attendance today in the front. I also note that Jane Reilly, representing our auditors, PwC, is here today and will be available to answer questions on the auditor's report later in the meeting. Before beginning the formal business of the meeting, I would like to outline today's procedures and protocols. All resolutions will be decided by a poll, which will open after the CEO's report. The meeting will consider the items of business outlined in the Notice of Meeting sent to all shareholders on 7 October 2025. There will be opportunities for shareholders to ask questions on the resolutions. Questions will be confined to the formal business of the meeting. Only those persons holding a blue or yellow card are eligible to ask questions. Any undirected proxies in favor of the Chair of the meeting will be voted in favor of the relevant resolution. Prior to the formal business of the meeting, I'll present a brief report on behalf of the Board, and then Peter Tompkins will give an update on the business. We will now proceed with today's formal business. Given that the notice of meeting has been sent to all registered members, I move that the notice of meeting be taken as read. We will now move to the business of the meeting, which includes the resolutions to be put to the meeting. Prior to each resolution being discussed, the proxies that have been received on that item will be displayed on the screen. As I mentioned earlier, all resolutions will be decided by a poll. Item #1 is to consider and receive the financial report, the directors' report and the independent auditor's report for the year-end 30 June 2025. The annual report has been made available to shareholders and is also available on Downer's website or on the ASX platform and additional copies are available for those present today. Before opening item 1 for discussion, I'll present the Chairman's address. And following that, I'll invite your Chief Executive Officer, Peter Tompkins, to provide an update on the group's operations. Ladies and gentlemen, financial year 2025 marked a clear step forward in the Downer Group's financial and operational reset. The company delivered another period of consistent performance, driven by disciplined execution and steady improvement in margin expansion, cash generation and shareholder returns. We have continued to make steady progress in our transformation program, implementing changes to simplify our business, improve efficiency and enhance returns for shareholders. The first day of the 2025 financial year saw the launch of the Downer Difference, our high-performance cultural blueprint built on accountability, customer centricity and inclusion, the values and behaviors that define who we are and how we work. Throughout the year, led with passion by our CEO, Peter Tompkins, significant effort went into embedding this culture across the organization. It is being embraced with energy and ownership by our people. On the 21st of August 2025, we announced our intention to undertake an on-market share buyback of up to $230 million or approximately 5% of issued capital. Buyback commenced on 17th September, supported by a strong balance sheet and high operating cash conversion. This decision reflects growing confidence in the company's performance and outlook. It also aligns with our disciplined approach to capital allocation, and we consider to be an effective mechanism to return value to shareholders while preserving the flexibility to support sustainable growth. We also will continue to monitor the role of our road securities in our capital structure. Further, we also increased our dividend payout ratio range to 60% to 70% of underlying NPATA, up from 50% to 60%, and we are targeting fully franked dividends going forward. The final dividend of $0.141 per share is 100% franked and represents an increased payout ratio of 65%. This brings the FY '25 total dividends to $0.249 per share, an increase of 46.5% on the prior year and represents a full year payout ratio of 63% -- the uplift in both franking and the payout ratio reflects the solid financial foundation we have built, one that allows us to return more value to shareholders while continuing to invest with discipline for the future. Risk management remains central to our transformation, and we have continued to strengthen our risk discipline throughout 2025. At a Board level and augmenting the risk focus of the Audit and Risk Committee, the Project Governance Committee is responsible for oversight of key opportunities and contracts to ensure alignment with strategy, capability and capacity to deliver acceptable -- within acceptable risk profiles. At a management level, quarterly business reviews, monthly project reviews continue to drive performance, transparency and accountability. The Board risk appetite standard has been operationalized in each business unit, driving disciplined decision-making when pursuing opportunities. Remuneration remains another important area of focus. Sustainable success relies on structures that are fair, fit for purpose and aligned with both business strategy and shareholder expectations. During the year, we completed a comprehensive review of remuneration frameworks and levels overseen by the Board, People and Culture Committee and supported by independent external advisers. While the overall structure of the FY '26 short-term incentive plan is largely retained, specific measures have been enhanced. The funds from operation metric, FFO, has been replaced with operating cash flow to better reflect our focus on cash generated from operations. People measures incorporate specific employee engagement actions together with an employee engagement score and participation rate measured by an upgraded and more contemporary employee engagement survey. Deferred STI awards will be issued as restricted rights at the start of the deferral period, further aligning incentives with shareholder outcomes. We also refined and simplified the long-term incentive plan for FY '26. It now includes 2 equally weighted measures, earnings per share growth and relative total shareholder return with updated vesting scales. These changes strengthen accountability aligned with market practice and reinforce our strategic priorities as the transformation continues. Ladies and gentlemen, safety remains our highest priority. In FY '25, we continue to embed safety concept grounded in accountability, empowering teams to work smarter, speak up and adapt to changing work conditions. We focused on visible leadership with down as leaders engaging actively engaged with frontline teams across the year, more than 67,000 field safety engages under senior, middle and front line leaders. These interactions led to both immediate infield improvements as well as the development of 12 critical control projects for implementation across the business. Pleasingly, Downer's lagging indicators improved in FY '25. Our lost time injury frequency rate was 0.83, better than target and lower than the FY '24 results. Our total recordable injury frequency rate or TRIFR at 2.04% was materially better than target and again, lower than our 24 results. Downer's commitment to environmental responsibility to strengthen. In FY '25, we achieved a 7.7% reduction in total Scope 1 and 2 emissions, supported by decarbonization initiatives such as plant upgrades, electrification of key plant Astro plant upgrades and efficiencies and fleet rationalization and conversion. We continued our focus on board renewal during the year. In 20 June, we announced the 2 new nonexecutive directors Kerry Gleeson and Cary would join the Board. Karin and that bring diverse experience and expertise and are contributing already to the value of the organization. It was also announced June, that Trees a Handicott, would be retiring at today's Annual General Meeting. Teresa has made a significant contribution to Dana since joining the Board in September 2016, providing a strong voice on operational performance and governance. I thank Theresa for her commitment and contribution and wish to ease all the best in the future. And I'll say a few more words on that prior to the close of our meeting today. Finally, I want to address the Australian Competition consumer matter. On 12 December 2024, the ACCC commenced civil proceedings against down a subsidiary, Spotless Facility Services Proprietary Limited, relating to allegations of historical contraventions of Australian competition law concerning the supply of state management operation services to the Department of Defense. I want to say it very clear that Danicategory denies these allegations and will vigorously defend any proceedings. The downbardaae is taking this matter very seriously. And we have a strong view that neither spot this note 2 Spotless employees referred to by the PC engaged in unlawful conduct. Downer is committed to acting in accordance with the standards that have underpinned along trusted relationship we have with defense. We take compliance with our regulatory obligations very seriously and are confident we have a robust governance framework in place to manage risk and support compliance with the strain competition Spotless file that's defense in the Federal Court of Australia on the second of May 2025 and the matter is tentatively listed for hearing on 30 March 2027. Ladies and gentlemen, while much progress has been made, there is more to do. Our focus remains on delivering Downer's its transformation and creating sustainable value for shareholders, customers and the communities we serve. On behalf of the Board, I want to thank Peter, his executive team, some of which are here with us today and all of our people for their commitment and performance over the past year. Now extend my sincere thanks to our shareholders for your ongoing support and confidence in Downer. I'll now hand over to Peter to address the meeting before returning to present the resolutions. Thank you.

Thank you, Chairman. Ladies and gentlemen, financial year 2025 was a year of solid progress for Downer and builds on a transformation that we commenced about 2.5 years ago with our Back to Basic strategy. Downer is well on the way to being a more consistent and disciplined organization by simplifying our portfolio, focusing on delivery, enhancing our risk management and building a culture of accountability, we now have strong foundations for long-term value creation. As mentioned by our Chairman, Downer's key safety performance indicators improved over the past 12 months. The completion of our 67,000 safety leadership interactions across our business reinforced an unwavering commitment to safety as our #1 priority. And in terms of financial performance, Downer again delivered year-on-year improvement. Our continued focus on quality of earnings and operating discipline saw our underlying EBITA margin grew to 4%, which is up from 3.2% in FY '24. Underlying NPATA rose 33%, and our earnings were backed by strong normalized cash conversion of nearly 100%. Our balance sheet continued to strengthen with net debt-to-EBITDA under 1x, and this provides considerable capital management flexibility going forward. Excluding businesses sold or held for sale, FY '25 revenue decreased by 2.5% on a pro forma basis. This reflects our ongoing strategic focus quality of revenue and the application of our risk guard roles. Our portfolio simplification program was also completed in FY '25, enabling our leaders to focus on growing work in hand in our buckets and setting the business up for sustainable medium-term growth. Our progress was reflected in the operational performance of all our core businesses. Transport recorded an 11.1% increase in earnings at an EBITA margin of 5.2%, which was up 0.5%. This was achieved despite our asphalt business in Australia, continuing to face market challenges. Our transport business in New Zealand is performing well, and the Queensland train manufacturing program is progressing as expected. Energy & Utilities achieved another year-on-year improvement with a 43.9% increase in earnings. The merger of our utilities and industrial and energy teams has strengthened our ability to capture more opportunities with the combined technical capabilities supported by refreshed leadership. Power Projects delivered a strong result with good momentum in key transmission lines and substation projects. And all of the legacy loss-making water projects have been completed. Our Energy & Utilities business is now match fit and has a strong set of addressable markets to focus on. [indiscernible] Remaining stable and EBITDA margin growing to 7%. Integrated FM, defense and government all delivered year-on-year revenue and earnings growth through higher volumes as did our health and education PPP portfolio. In September of the current financial year, the facilities business renewed its estate management and services contract with the Department of Defense, which increases work in hand by over $3 billion and most importantly, reconfirms our position as a trusted sovereign provider of asset management services to the Australian Defense that we commenced more than 80 years ago. Across all segments, we have confidence in our markets. We've got confidence in our capability and our ability to serve our customers with our unique whole-of-life approach to the critical structure. At our FY '25 results presentation in August, we provided an outlook for the FY '26 financial year, where we said we were targeting both underlying earnings and EBITDA margin improvement with underlying revenue forecast for the full year to be flat to slightly lower than FY '25 on a pro forma basis. In the first 4.5 months of this new financial year, Trading has been in line with our expectations and our outlook for the FY '26 financial year remains unchanged. At our Investor Day that's coming up on the 27th of November, we're looking forward to providing an update our strategy, insights into our core markets and our medium-term ambitions for the business. Ladies and gentlemen, I want to thank you, our shareholders, for your ongoing support. FY '25 was an important year of progress and consolidation for Downer. I would also like to thank Teresa Handicott, who retires today and I also welcome both Kerry [indiscernible] and Annette Gary. In closing, I also want to acknowledge our 26,000 employees and 21,000 delivery partners whose commitment, skill and hard work makes everything we achieve possible. Together, we deliver for our customers, and we enabled the communities to thrive every day. Thank you.

Thank you, Peter. So we'll now open the polls. I invite the company's Secretary, Robert Regan, to advise the poll procedure.

Thank you, Chairman. Richard Powell of Computershare Investor Services has been appointed returning officer for this meeting, and I'm satisfied as to Computershare's independence. If there is a person at this meeting who believes that they're entitled to vote but has not yet registered, would you please raise your hand for assistance? Every member present in person or by representative, attorney or proxy, who holds a blue admission card entitled to 1 vote for each share held. The resolutions on which you are required to vote by poll are items 2A, 2B, 2C, 2D, 3, 4 and 5 as set out in the notice of meeting. I by shareholders that the resolutions for items 2A, 2B, 2C, 2D, 3 and 4 are ordinary resolutions and that a simple majority of the votes cast is required for them to be carried. Item 5 is a special resolution and at least 75% of the votes cast is required for it to be carried. Thank you, Chairman.

Thank you, Robert. The financial report, directors' report and the independent auditor's report are now open for discussion. There is no requirement for shareholders to approve these reports. Accordingly, item #1 is for discussion only, and there will not be a vote on this item.

I remind you that only shareholders of the company or the duly appointed representatives, attorneys or proxies are permitted to ask questions. If you do have a question, including any questions for the auditor, please raise your hand, and we will bring a microphone to you. Any questions? Natasha.

Thank you, Mr. Chairman. He did sound like it this morning. attached shareholder Yes. Thank you, our Board and Mr. Chair and the employees that has been an outstanding year. So congratulate you on your performance. On issue of sort of the Downer difference. So just dig a bit deeper about sort of the headline sort of pillars of that strategy I know that there's been a lot of staff changes and the like. I take it that -- there was mention about technology. I think about a lot of -- there are elements of AI driving the processes here. So I just want to confirm to what extent AI is driving these processes and also, yes, I take that, it's more likely to be a particular type of agenetic genetic sorry, and AI? And is the processes or the ability to ratable following fixed procedures is somebody identifies identifies a better way of doing it? How is that incorporated into not necessarily in court. How is that raised and then considered to improve your processes?

Sure. Okay. Thank you for your question. There's a few bits to it, but I'll -- we'll start with the data difference and we'll talk about AI and its use and impact on our business. I think get Peter to talk to the doubt of difference. But obviously, it's not -- the transformation, a big part of it is the cultural reset of the organization, which is our values, our behaviors, where we stand for, why do we exist, why we matter customers. So it was something led very partially by Peter. And so I'll get him to talk to that. But personally, I've attended a number of events with our executives and with our people. And there is a noticeable difference in the way that people are engaging with the organization, engaging the values and behaviors of the company always a lot more to do. Culture is hard to move. -- but there's really, really good signs. So I'll get Peter to say some more words on that in a second. On the AI front, obviously, it's early days. There are opportunities within the organization to adopt AI, we are doing that in terms of improving efficiencies, improving our effectiveness. There's opportunities for how we position ourselves with our customers. Our customers need that. We do a lot of work of important data that relates to customer performance. So there are opportunities in that. It's a very thoughtful step process in terms of the adoption and all of the security that that. But I'll get Peter to talk to both of those.

Yes, I feel like you gave a very good summary of our transformation and I think the way that you articulated the question picks up actually the phasing of what we've been focusing on in the past couple of years. So Phase 1 was setting up the down a difference, which was very much about the values and the behaviors that we wanted to set for our people in working towards a target culture, which was essentially 1 of accountability. At the same time, we framed up the strategy -- and in that phase, we also did a lot of difficult work around reorganizing people and where they work, the structure of the business, some difficult cost-out targets, but Phase 2, which is what you're picking up on is what are those technology-enabled improvement focusing on in the past couple of years. So Phase 1 was setting up the Downer a difference, which was very much about the values and the behaviors that we wanted to set for our people in working towards a target culture, which was essentially 1 of the accountable -- at the same time, we've framed up the strategy. And in that phase, we also did a lot of difficult work around reorganizing people and where they work, the structure of the business. Some some difficult cost out targets. But Phase 2, which is what you're picking up on is what are those technology-enabled improvements to the way we work that enable people to be more efficient more productive for our customers. And so we've got what we call enablers, which include a very key focus on technology. But when you talk about technology it's really technology that is enabling a better way of working. And part of that is AI. Part of that sits in the back office, front office. But for us, it's really about defining and keeping on improving the consistency in the way that we follow our process. And I guess the last point you've raised about how do we keep improving the Downer standard that is a pretty mature way of downward approaching all of the systems and processes we have in the business. That does have an in-built focus and a requirement to look at continuous improvement, and we've got very clear ways for process owners to get feedback. And that sits under our Chief Risk Officer, Ash Mason, who's sitting next to you there. So it's a big topic, and I'm sure he'd like to share some other insights with you over morning to you.

All right. Okay. Talking about some of the disinvestment of some of your business lines and it's great that you're moving to quality rather than quantity. You've mentioned that you allowed some of the projects -- some of the contracts through a guys. What other processes were involved in the divestment of some of the other lines of the business?

So processes?

With their sales and so what was the sale process, if any was sold.

So it's all -- in terms of shaping the portfolio data had a large portfolio of businesses the identification, what's really core, what are the strong cause of the business? What are the areas that are disconnected from the business that are not value adding to the is. So there was a a while ago, a strategic review when Peter first came into his role is to look at the portfolio of the businesses, what was adding value, what was taken away from value, what was core, what was disconnected -- through that process, identified a number of opportunities to divest and to clean up that portfolio. And that's most of the way through. And some of those have been really difficult and have not been taken on in the years gone by, and I won't go through the specifics of those. But to create that opportunity to get the portfolio focused on value-adding businesses that we can be 1 to in our markets strong cars that have good long-term prospects. That's been the process and it hasn't been a short process. It's gone for a while, but thankfully, almost there. So it was a very targeted defined process that we went through to reshape that portfolio to what we have now that we're very happy with.

Okay. That's great. Just a very minor thing is, yes, you mentioned the ACCC proceedings. But there were some reports recently about a spotless electricity meter who was seriously entered. And given that this was 2022, so it is somewhat historic but yes, you've mandator safety record has been good. I take it that, the circumstances around that electricity worker have sort of been examining 2 million processes being rectified and improved.

Yes. I mean the incident you talked about was a media reader in Green Bank in Brisbane, Adobe, tragic Dogan. Corona's inquiry included around that. So obviously, we undertake a process very quickly. The corona takes more time. There's obviously no findings against the organization as such. And -- but the Coroner's report does recommend a number of things in terms of mitigating that. And a lot of that is to do with homeowners and records of who has what. Tragic -- absolutely tragic set of circumstances for sure. Any incident, whether it leads to an outcome as tragic as that or whether it's just a critical potential incident is looked at the same way. So there's an investigation process to look and drill down on what is the root cause. The fact that an outcome has occurred as opposed to an end miss or we like it. We don't -- it's -- they're all treated the same way. So that's part of the downside that Peter mentioned is there's a very rigorous process to look at any incident that occurs in the business, whether it's -- there's a sad outcome or otherwise is dealt with in that same level of discipline.