Downer EDI Limited (DOW) Earnings Call Transcript & Summary

Well, good morning, ladies and gentlemen. My name is Mike Harding, and I'm the Chairman of Downer EDI Limited. I would like to begin by acknowledging the traditional owners of the land in which we meet today, which in Sydney is the Gadigal people of the Eora Nation, and pay my respects to their elders, past and present. I would now like to officially open our Annual General Meeting. As you're aware, this year's meeting is being conducted virtually via the Lumi platform. And therefore, there are some housekeeping matters I would like to mention. As usual, voting on all the resolutions will be by a poll. Once I declare the poll open, a voting icon, it looks like a bar graph, will appear on your screen or navigation bar. When you click this icon, the resolutions will appear and you can select a voting option. You can vote at any time during the meeting until I declare the poll closed. I will make it clear later in the meeting, when the polls are about to close. Only verified shareholders or their proxies, attorneys or representatives are permitted to ask questions. We've received some questions in advance of the meeting, which I will answer at the appropriate time during the meeting. [Operator Instructions] Based on the number of verified voting members who have joined the meeting, I declare a quorum for this meeting. I would now like to introduce my fellow directors. Joining us from Brisbane are Teresa Handicott and Nicole Hollows. Peter Watson is joining us from Melbourne.

Good morning.

Here with me in Sydney are Philip Garling; as well as our CEO, Grant Fenn; and Company Secretary, Robert Regan; our Chief Financial Officer, Michael Ferguson; and also in attendance is Cameron Slapp, representing our auditors, KPMG. 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. The meeting will consider the items of business outlined in the notice of the meeting sent to all shareholders on the 1st of October 2020. As I've already mentioned, shareholders can submit questions online. Only those persons who have been verified as a shareholder or their proxy representatives are eligible to ask questions, and questions will be confined to the formal business of the meeting. Any undirected proxies in my favor as Chairman will be voted in favor of the relevant resolution. Prior to the formal business of the meeting, I will present a brief report on behalf of the Board, and then our Chief Executive Officer, Grant Fenn, will give an update on the business. We will now proceed with today's formal business. Given that the notice of the meeting has been sent to all registered members, I move that the notice of the meeting being taken as read. The minutes of the previous Annual General Meeting have been approved and signed in accordance with the Corporation Act. 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 we've received on that item will be displayed as part of the presentation. As I mentioned earlier, all resolutions will be decided by a poll, which will be opened after the CEO's report. Item #1 is to consider and receive the financial report, the director's report and the independent auditor's report for the year ending 30th of June 2020. The annual report has been made available to shareholders, and with it, the notice of the meeting, which has been held by members in excess of the minimum period. The annual report is available on Downer's website. Before opening item #1 for discussion, I will present the Chairman's address. And following that, I will invite your Chief Executive Officer, Grant Fenn, to provide an update on the group's operations. Ladies and gentlemen, 2020 has been a truly extraordinary year for all of us, and COVID-19 continues to disrupt our lives, though in different ways depending on where you live. Downer's strong governance models are guiding the company through these challenging times, and I'm proud of the way our organization and people are responding and adapting. Downer has complied with all the government regulations and advice in relation to COVID-19 in both Australia and New Zealand, and we have robust business continuity plans in place, which we've implemented a range of control measures across our sites to minimize the risk of COVID-19 transmission. You can find detailed information about our response to COVID-19 on the Downer website and throughout our sustainability report. The vast majority of the group has been resilient to -- the vast majority of the group has proven to be resilient. Our Urban Services business, which mostly worked with the government customers, performed very well during the year. Our New Zealand business was affected substantially by Level 4 restrictions introduced there, but virtually all our operations returned to normal levels when those restrictions were eased. Our hospitality business in Australia has been the worst-affected part of the Downer Group, and it remains in hibernation as we review the options for its future. In July this year, we announced a range of initiatives to reshape Downer as a focused Urban Services business with a stronger platform for longer-term sustainable growth. This included an equity raising of $400 million, which was supported strongly by institutional investors, who took up 90% of their entitlements. Grant Fenn will have more to say about these strategic initiatives in his report. We continue to improve our sustainability performance, and I encourage you to read our sustainability report, which is available on the website and includes many case studies as well as full details of our performance across the group. Last year, we announced the long-term greenhouse gas emissions reduction targets that align with the 2015 Paris Agreement goals to pursue efforts to limit the temperature increase by 1.5% by the end of the century. In February of this year, we announced we would shift our focus from high capital-intensive activities to lower capital-intensive and carbon activities in line with our urban services strategy. This strategic shift will support Downer's decarbonization pathway. Ladies and gentlemen, Grant Thorne retired as a Director of Downer in July this year after a decade's service. Grant provided a leadership on the Zero Harm Committee, including as Chairman for a significant period. He was a member of several of the committees and the long-term chair of the Tender Risk Evaluation Committee. On behalf of the Board, I thank Grant for his contribution to Downer and wish him well for the future. I would like to thank Grant Fenn, his executive team and our people for their efforts during what has been a very difficult year. And I would also like to thank you, our shareholders, for your support. I will now hand over to Grant before I return to run us through the resolutions that will be put to the meeting.

Thanks very much, Mike. Ladies and gentlemen, the 2020 financial year has tested the resilience of our business and brought out the best in our people. I'm very proud of the way our people have adapted and responded to all of the challenges in 2020, and I take this opportunity to thank them for their considerable efforts. Last month, Spotless also experienced a cybersecurity incident, an increasingly frequent and sophisticated threat for Australian organizations and governments. We've dedicated significant resources to this challenge, and once again, our people and our organization have proven to be very resourceful and resilient. Importantly, we've been able to continue our services for our customers and maintain operations so that it's not expected to have a material impact on the Downer business or its operations. Ladies and gentlemen, a key reason for Downer's strength and resilience during these turbulent times is our urban services strategy. On 21 July this year, we announced a number of initiatives to create a stronger Downer. The first was to take 100% ownership of Spotless. On 12 August, we launched an offer for all the remaining shares in Spotless, around 12%. And on 7th of October, we announced that we had completed the offer successfully and now owned 100% of Spotless. We're now implementing a number of measures to enable us to realize the full benefits of this acquisition including refinancing Spotless debt at a lower cost to the group. Second, we announced the exiting of noncore businesses as we reshape the Downer of portfolio in line with our Urban Services strategy. We're well progressed in exiting high-risk construction markets in both Downer and Spotless, while the sale of our most capital-intensive businesses, mining and laundries, remain a key short-term objective. We received expressions of interest for all the various parts of the mining portfolio and our discussions continue in relation to the sale of laundries. We will, of course, keep the market informed of all significant developments. The third initiative was the rightsizing of our cost base. This involves reducing management layers and headcount as well as our property footprint, systems costs and discretionary expenditure. There's been a lot of activity in these areas over the past 4 months, which will continue for the foreseeable future. The fourth initiative we announced in July was an equity raising of $400 million to fund the purchase of the remaining stake in Spotless, the rightsizing of the cost base and further investment in our core Urban Services. And as Mike mentioned earlier, this raising was completed successfully and very strongly supported by our shareholders. Ladies and gentlemen, our core Urban Services portfolio, which comprises transport, utilities, facilities and asset services businesses is the future of Downer. Throughout 2020 and despite the impact of COVID-19, these businesses have demonstrated their strength and resilience. They have leading market positions, and these essential services are provided predominantly to governments or through government-related contracts as well as to blue chip industrial companies. Our Urban Services strategy is based on a capital-light business model that generates lower risk and long term predictable revenues and cash flows. It leverages Downer's expertise in operations, maintenance, servicing and supply. The strength and resilience of our Urban Services portfolio is highlighted by the fact that despite all of COVID-19, the underlying EBITDA for those businesses in financial year '20 was comparable to the previous year. That is $511 million in financial year '20 versus $525 million in 2019. Demand for these Urban Services, particularly in roads, rail, power and gas, water, defense, health, education and other government sectors remain strong throughout the year, and in some cases, increased. We expect demand for Transport Services, that's roads, rolling stock and infrastructure, to remain strong as governments look to stimulate the economy and create jobs. Last month, the federal government's budget included a number of shovel-ready projects in these sectors, and we're well placed to win our share of that work. We also expect demand for utility services to remain strong. We've won a number of significant contracts in power, gas and water over the past year. And on March 31, we asked -- we would continue to be a major partner with NBN across a range of services in Western Australia, South Australia and Northern Territory. Furthermore, in late September, the federal government announced a $4.5 billion upgrade to the NBN over the next 3 years. And once again, we're well placed to win our share of this new work. Our core facility services continued largely unabated in financial year '20, and we expect demand for these services to continue. And this includes FM and building services for defense, government housing, health, education and transport across Australia and New Zealand. This year is the first time we've disclosed the performance of asset services as a separate business. This business has grown significantly over the past few years, delivering specialized turnaround, shutdown and maintenance services to the oil and gas, power generation and industrial sectors. I would again like to thank our people right across the Downer group for their contribution to our performance in this extraordinary year. I also thank you, our shareholders, for your continued support. Mike, I'll now hand the meeting back to you.

Thank you, Grant. We will now open the polls. And I invite the company secretary, Robert Regan, to advise the poll procedure.

Thank you, Chairman. Martine Lefebvre of Computershare Investment Services (sic) [ Computershare Investor Services ] has been appointed returning officer of this meeting, and I'm satisfied as to Computershare's independence. If there's any person who believes they're entitled to vote who have not yet registered, please send a message by the meeting platform. Every member in attendance or in attendance by proxy, representative or attorney is entitled to 1 vote for each share held. The resolutions on which you are required to vote by poll are items 2, 3 and 4 as set out in the notice of meeting. 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, and 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 their duly appointed representatives or proxies are permitted to ask questions. I will now address questions from shareholders. Michael Sharp, Downer's Head of Corporate Affairs and Investor Relations, will read the questions to me and I will decide whether to respond myself or refer it to one of my colleagues.

Thank you, Chairman. The first question in relation to item 1 has been submitted by Mr. [ Richard Wilkins. ] His question is, "The intangibles figure is very large and, in fact, exceeds the value of shareholders' funds. This indicates that a lot of Downer's business growth has been bought rather than grown organically. What is the Board's view of organic growth versus acquisitions for the future?"

Well, thank you, [ Richard, ] and welcome back I. Hope you're online. We can't have a little chat like we normally do. But thanks for coming back. Yes, you're correct. And the large intangible figures are due to acquisitions, mostly recently by Spotless, but also, for example, Tenix a few years ago. We expect all our core Urban Services business to grow organically, and I do not expect to make any major acquisitions in the near future, although we'll consider strategic bolt-on acquisitions for our core businesses.

Chairman, Mr. [ Wilkins ] also notes that after achieving cash conversion of 89% in FY '19, cash conversion was poor in FY '20, although it did recover to 74% in the second half of the year. He asks, "Does Downer expect the cash conversion in FY '21 will match the 74% level?"

Yes, we do, [ Richard. ] Although this could be affected if there was a high level of COVID-19 lockdown, which was imposed upon us between now and the end of the year.

A third question from Mr. [ Wilkins ] relates to the 5-year tables on Page 28 of the annual report. He asks, "If it would be possible to include a 5-year table of underlying EPS in future to make it easier to interpret in conjunction with the helpful figures on pages 10 and 11?"

Yes. Thank you, again, [ Richard, ] for that. You always come along with good ideas. So we'll consider it.

Chairman, the next question comes from the Australian Shareholders' Association. With Alsco withdrawing its bid for the laundries business, they ask what will happen now? And they also ask what progress is being made on selling the various parts of the mining business.

Well, as Grant said in his report, the process of selling laundries is continuing and we'll make an announcement as soon as appropriate to do so. As for the mining portfolio, we've sold Snowden consulting Business as well as our share of RTL joint venture. And we are in discussions with a number of interested partners now in relation to the remaining parts of the portfolio, which includes open cut mining, underground mining, blasting and Otraco, a tire management business. And again, we'll make an announcement when it's appropriate to do so.

The Australian Shareholders' Association also asks if Downer has been able to identify any particular wins from the federal budget last month?

Well, also, as Grant mentioned in his report, the federal budget outline plans to spend money in the areas where Downer has a strong position, for example, roads, rail and water. So we believe the federal budget initiatives are quite positive for Downer.

Chairman, another question from Mr. Wilkins. He knows that Downer can be proud of its ethical standards and sustainability approach, however, also that reputational risk can arise through our partners. Could you comment on the disturbing allegations of forced Uyghur labor in our Chinese partners' workshops?

Thank you for the question, and thank you for observing that Downer has high ethical standards and that we can be proud of in our approach to sustainability. I agree with you and think it is something everybody in Downer can be proud of. I'm now going to ask Grant, our CEO, to respond to this question.

Yes. Thanks, Mike. Look, Downer's strong position on modern slavery is highlighted in our Sustainability Report on Page 30, under Labor Practices and Modern Slavery. We do take this very seriously. Our standards of business conduct are very clear. Our procurement framework, inductions and our training is very clear. Our supplier prequalification procedures, international supply standards and modern slavery due diligence procedures are very clear. Just for some background on this particular claim. Look, on 28th of February, the Australian Strategic Policy Institute released a report claiming that 27 factories in 9 Chinese provinces were using exploited Uyghur labor. The report highlighted 82 very well-known global brands that use products from these factories in their supply chains. And included in those global brands were the likes of Amazon, Google, Apple, BMW, Toshiba, Land Rover, General Motors and many more, lot of clothing companies, footwear providers and electronics providers. But there were also a number of international train manufacturers, including Bombardier, Alstom, Siemens, Hitachi and CRRC. And as many of you would know, CRRC has been a delivery and joint venture partner with Downer in our Waratah trains in Sydney and HCMT or the C -- HCMT trains in Melbourne. The basis of claim on CRRC relate to their purchase of train gangways from a company called KTK, KTK export gangway systems across the international train manufacturing sector very extensively. I've got to say there are no KTK products on any Waratah series trains. But the HCMT trains in Melbourne do use KTK gangways through the CRRC supply chain. So what have we done? Well, immediately after the report was published, Downer engaged CRRC in relation to the claims, as you would expect. CRRC and KTK have both responded strongly, denying the claims. KTK have engaged an Australian legal firm and independent certifiers to support their position. We're currently reviewing this independent validation. KTK and CRRC have provided their HR and employment policies for review. While stakeholders, including financiers, review the position, payments to KTK have been placed on hold. Back to you, Mike.

Okay. Thanks, Grant. We've had two more questions. I understand it, Michael.

Yes, we've had some questions submitted online. One is -- the first is from [ Natasha Lee. ] While it is good to have 100% of Spotless, I worry there may be some regret. What strategies have or are in place to ensure we did not pay too much of a premium for Spotless, given the downturn in the economy?

Grant, I'll ask you to address that one.

Yes. Thanks, Mike. Well, of course, when you're acquiring businesses, it would be great to have the crystal balls that could perhaps envisage COVID-19 and some of the other issues. But of course, COVID-19 has been the biggest impact on the Spotless business through its hospitality particular area. Look, at the time when we did our business case, we had very good support for our view of value. It's been more difficult than we would have liked, particularly only owning 88% of Spotless up until very recently. Look, we now believe with 100% of the company, we have now the opportunity to fully take the opportunities which Spotless provides, which is a very key part of our Urban Services strategy in the Facilities area. And Spotless is the major player in both Australia and New Zealand in that space. So it's a very important strategic acquisition for us. It's now up to us to make that work for us. There are many, many parts of Spotless business, which are really adding depth to the Downer business. So we're working very hard on doing the things that very recently we spoke to shareholders about, around the 100% take of the full shareholding, around refinancing Spotless debt that will give us significant benefits on our interest costs and also the ability to further integrate Spotless into our business.