Downer EDI Limited (DOW) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Downer Full Year Results. [Operator Instructions] I would now like to hand the conference over to Mr. Peter Tompkins, CEO. Please go ahead.

Good morning, everybody, and thank you for joining the call. With me is Malcolm Ashcroft, our Chief Financial Officer. We've got a lot to cover again today, so I'll get straight into it. I want to start by taking a moment to remind you of our new purpose, which we gave you a preview on at our Investor Day in April enabling communities to thrive since then has formally been launched by our leadership team and is becoming a really important part of the more energetic and impactful narrative that we are building. I've said it before, but few companies can directly connect to the work and services that they deliver with a purpose like this. So for Downer, it is a true reflection of the meaningful and critical role that we can play in energy transition, local industry upskilling and, of course, essential services. Last Thursday, we announced that we expected to report underlying NPATA of $174 million, within our guidance range. There have been no changes to the key financials that we discussed last week, including the statutory NPAT loss of $386 million and the individually significant items, which included the goodwill impairments relating to facilities and utilities. Delivering on this guidance was an important first step in the right direction on our journey. For the year, revenue was up 5.4% to $12.6 billion, and our underlying EBITA was $323.4 million. Pleasingly, we saw that strong improvement in cash conversion in the second half at 110%, taking our full year conversion to around 65%. We've also strengthened the balance sheet by further reducing gearing with the net debt-to-EBITDA 2x, down from 2.3x at December. One of the key focus areas of our transformation is to improve the margins with an EBITA margin target of 4.5%. Our margin in the second half was 2.9% compared to 2.2% in the first half, 2.6% overall, a small step in the right direction, and we'll talk more about that shortly. Also, the Board has declared a final unfranked dividend of $0.08 per share. And of course, Mal will provide more detail on both business unit financials and Group operating cash later on. Our transformation program is 5 months old now. In February, we said there were going to be 3 focus areas: first, resetting the operating model with the merger of Australia and New Zealand and our sector-led approach to the business; second, to continue our focus on simplification in the portfolio; and thirdly, to bring that unrelenting focus on improving margins and ensuring we have the disciplined approach to risk management and contract execution. Now, I really do think we've made some good headway, and in some areas, we're ahead of where we said we would be. On the 1st of July, we commenced our new trans-Tasman operating model that has streamlined operations and removed the duplication. We also announced the 400 FTE role reduction by the end of FY '24 that we now expect to achieve ahead of schedule by the end of this calendar year. In relation to the portfolio simplification, transport projects has been completed. And this morning, we announced the sale of our mechanical and commercial contracting business, which importantly sees our full exit from HVAC and electrical commercial contracting in Australia. Other minor non-core businesses with risk reward profiles that do not meet our requirements will continue to be assessed. Any divestments will be dependent upon market conditions and maximum value. We've made some important changes to strengthen the Board's oversight of governance, risk management and performance. From the 1st of July, the Tender Risk Evaluation Committee evolved into the Project Governance Committee, which has responsibilities expanded from approving tenders to also cover a broader project governance remit. At the Investor Day, we announced that we were in the market to recruit a Chief Risk Officer, and I'm pleased to announce that Ashley Mason has accepted this role and will start with us in September. Ash is a seasoned executive and brings considerable experience to Downer, having held numerous roles at Tier 1 organizations. That team will be responsible for Downer's enterprise risk management framework and associated functions. And critically, we'll be working very closely with our new CFO, Mal Ashcroft, on our control and portfolio improvement. 5 months is a relatively short period, but as you can see, we are creating the foundations for FY '24, which will be an important transition year for Downer, as we set ourselves up for '25 and beyond, and we'll talk some more about these focus areas later on. So looking at our sector in a little bit more detail, starting with transport on Slide 6, which contributed 55% of total revenue. This segment includes our roads businesses in Australia and New Zealand, our rail and transit systems, New Zealand projects, and the now divested Australian transport projects business. Rail had a really strong year. In June, we achieved contract close on QTMP. And as I said before, reinforces our position, as the largest passenger rolling stock maintainer in Australia and New Zealand for the next 30 years. We also achieved a key milestone on Melbourne's HCMT contract with the manufacturing phase nearly completed, and we've actually now delivered 58 out of 70 sets under a highly successful commercial model that also forms the basis of our Queensland model. And importantly, for us, the timing of these 2 projects with their ramp down and ramp up enables us to provide continuity of work for our highly experienced project management teams. In New Zealand, we signed the final agreement for the East Coast Recovery Alliance, and that's now forecast to be a 3-year delivery program to rebuild critical infrastructure following cyclone Gabriel. Not only does it deliver an extensive pipeline of work, but more importantly, is an example of the critical and essential role we play in reconnecting communities and improving New Zealand's resilience to future extreme weather. Now on the topic of wet weather, in February, we said that the weather conditions materially impacted the performance of roads in Australia and New Zealand. And in the second half, the roads business in Australia, in particular, performed in line with forecast and delivered some very strong volumes, as the weather and operating conditions improved. On to Slide 7, utilities had a very difficult year, and this is the key area of focus for us in FY '24 in our turnaround. At the half, we outlined several factors that were impacting the business, and these factors have continued into the second half performance. We've spoken about the losses on the power maintenance contract reported on 8 December, as well as water infrastructure projects and a New Zealand wind farm project, and these are the call -- the key call outs. The New Zealand wind farm project is now substantially complete. We remain focused on the remediation of the power maintenance contract and the commercial reset agreed in April with the customer has helped improve operating losses and efficiencies, and we are now in a second phase process with that customer to agree further changes to the delivery model. And notwithstanding, we still expect the contract to continue to be loss-making in the first half of FY '24. So we are very focused on rebuilding this part of the business, and I am actually confident that we will turn it around. The utilities leadership team has been overhauled with key experienced senior executives joining the business from other Tier 1 organizations in the past 3 months. Now when you look at the reasons for the underperformance, it's very important that the new risk appetite parameters are applied consistently. And that means we are now being very selective about the projects that we pursue, and we're seeing the benefit of this already, where we are prioritizing bidding for jobs that deliver improved margins with customers, who will value the technical capability that we bring to the table. So while overall, utilities is a very disappointing result, I want to emphasize my confidence in this business and its breadth of technical capability, which is highly valuable in the marketplace, and utilities does remain an important part of our portfolio mix. On to facilities, which contributed 27% of revenue. Our portfolio of health and education PPPs is performing strongly. The Royal Adelaide Hospital and Bendigo Hospital are performing to expectations, having renegotiated the reviewable services pricing in July 22. We are now focusing on asset management optimization across the entire social infrastructure and expect to see future benefits from this work. As part of the facilities impairment announced last week, we said that the Defense Strategic Review contained both positives and negatives for Downer. One of the positives, I think, will be the defense major services provider contract, which supports the CASG arm of defense in the master planning and procurement of critical enabling capability of hardware and armament. Downer is only 1 of 3 providers in this area, and our contract has been recently renewed. We are also monitoring the priority areas of defense investment, and we'll be looking for opportunities to expand our partnership that dates back for more than 80 years. And we remain the fourth largest contractor to the Department of Defense across its categories. On the sustainment front, this is where we have seen a decline in spending, and I touched upon some of these areas last week. We've also commenced the rebidding process for our defense [ EMOS State and Garrison project ], which is one of our larger contracts. There is also a strong pipeline of work within our industrial and energy business with customers looking for decommissioning and decarbonizing technical support for their assets. So on to work-in-hand on Slide 9. Our work-in-hand sits at $36.3 billion, which on a like-for-like basis has grown substantially through the year, as a result of the QTMP win. You can see here that our work-in-hand is long-dated, diversified by market and service type and remains 90-plus-percent government or government related. So spending a bit of time again on ESG, I wanted to highlight some of our achievements in the year. We remain strongly committed to sustainability performance and governance, and I think this is evidenced by our external ratings and certifications, which you can see at the top of the slide. This morning, we also published our sustainability report, which is available now on our website and provides a comprehensive overview of our commitments and achievements also the initiatives and targets that we have set ourselves. We also released our first climate change report in November 2022, which you can also find on our website. We're committed to fostering a workplace culture, where our people feel respected, safe and reported -- supported. And in March, we launched our Own Respect campaign, which is designed to stamp out discriminatory conduct, including sex discrimination, harassment and victimization. In June, we announced that we have established Australia's first stand-alone Green syndicated bank guarantee facility to support the delivery of the QTMP project. This new facility complements our sustainability linked loan and reinforces our strong credentials and commitment to providing customers with sustainable products and services supported by Green Finance. Now, I also wanted to come back to the ICAC inquiry that exposed unacceptable behavior with former members of staff at Downer. We still await these findings. And regardless, we have devoted substantial resources to the examination of our control environment, particularly in regard to subcontractor onboarding, and we are implementing a number of improvement areas arising from an independent report that we have commissioned. In the next 12 months, reinforcing business ethics and performance culture is a key focus for us. I'll now hand over to Mal.

Thanks, Peter, and good morning, everyone. I started with the Group in June through a handover period and commence formally in my role in July. And despite starting with some challenging results, some issues that we're talking through today, I'm genuinely excited and honored to be at Downer and have been given the opportunity to support Peter and the Board. Today, I'm going to be discussing a summary of our results, I'll walk through our underlying to statutory bridge, we'll walk through the segment performance, cash flow, debt profile, and I'll wrap up with some comments on our financial priorities for FY '24. So starting with our results, and Peter run through these, I'll step through these quite quickly. We had a statutory net loss after tax of $386 million, which included the individually significant items totaling $551 million before tax that we spoke to last week. That result included $483 million of non-cash goodwill impairment to our facilities in Utilities Australia CGUs and $67.7 million of other items, which I'll cover in some more detail shortly. As Peter mentioned, revenue was up 5.4%. And if we exclude the mining and hospitality businesses divested in the prior corresponding period, revenue increased 9% on a like-for-like basis. So when we start to look at our results, it clearly demonstrates the top line revenue growth and the market opportunity isn't the issue for Downer, but rather our ability to translate through to consistent high-quality cash back margins, which will be our focus going forward. Our underlying EBITA was $323 million, and our underlying NPATA was $174 million, which was down 15% and 18%, respectively, from prior year. Whilst we met our revised profit guidance range, we acknowledge this performance is well below the potential of the businesses going forward. The margin was at 2.6%, up from 2.2% in the first half and was negatively impacted by the underperformance in utilities and an increase in our corporate costs, but offset by some improved performance in the second half in transport that Peter touched on, and I'll go into that in more detail in a moment. The cash conversion for the full year was at 65% and pleasingly improved in the second half to 110%, with considerable focus by the business in this area, and we're absolutely clear that cash back profits are important and will be a key priority focus for Downer going forward. Our balance sheet position has trended positively in the second half with net debt-to-EBITDA of 2x at the end of the period, which decreased down from 2.3x. Net interest expense at $88 million was up by 3% due both to increases in interest rates and a higher average debt balance through part of the year. The effective tax rate at 25.5% was below the Australian statutory rate of 30% due to non-taxable distributions from joint ventures in the lower rate in New Zealand, and the Board has declared an unfranked final dividend of $0.08 per share, taking total dividends for the year to $0.13 per share. So if we move on to the bridge from statutory to underlying, I'll just walk through these bridge items quickly. The first item there is a fair value movement on the Downer contingent share options liability, which arises from the Spotless minority acquisition. That's a non-cash benefit of $10 million that we've adjusted out. We announced the sale of the Australian transport project business in June with a pretax gain on sale of $21 million after adjusting for exit and other costs, Importantly, the transaction structure has 2 limbs, the first limb being completed in June with net cash received of $161 million. The second limb of the sale, which includes a number of customer consents, which remain outstanding, but which we expect to complete by the end of calendar year '23, have $20 million of deferred consideration outstanding, and there are further profits on sale that will be recognized in the first half of '24 once those are completed. The portfolio and restructure costs of $25 million relate to the Group's transformation program, of which $9.7 million related to redundancy and severance costs up to 30 June, and other third-party costs related to setting up the transformation program. We have regulatory and review -- regulatory review and shareholder class action costs of $6.5 million through the period. And as outlined, we have the non-cash goodwill impairment charges totaling $483 million. Moving to the other asset, impairment and write-downs and charges of $67.7 million, just running through each of those. We had some write-downs related to some fixed assets and inventory in the rail business, that was $20 million. We had shut down relocation and consolidation of some asphalt plants in Australia that sum up to $10 million. We had IT and other assets in terms of write-downs there of $28 million that will no longer be utilized or provide future economic benefit. And then we had rationalization of office space associated with the changes of $8 million, which are now surplus to our requirements. So that's the bridge. Moving on to segment performance results and starting with transport. After a soft first half, as Peter mentioned, with some weather issues that referenced, we delivered a pleasing result in the second half with a total revenue of $6.9 billion and an EBITA of $288.9 million, an increase of 10.3% and 7.2%, respectively. The roads business delivered an uplift in performance in line with our expectations for the second half, as operating conditions relating to weather improved with some really strong production volumes running into year-end. The rail and transit systems result was solid attributable to the performance on long-term rail contracts and the final delivery phase of HCMT, and the now divested Australian transport projects business also supported the increase in earnings with above-average margins during the second half of '23. The Utilities business underperformance continued in the second half, which led to a full year margin loss in the segment of $10.3 million. Revenue was $2.3 billion, up 11.2%. The underperformance was driven by the power maintenance contract issue previously reported, water construction projects in Australia and a mine -- and a wind farm contract in New Zealand and underperformance in our meter reading business. The drivers of our underperformance relate to a combination of workforce challenges, costs associated with delays and some of the underlying commercial terms that Peter referenced in his discussion. Whilst we have taken positions on each of these underperforming contracts to reflect our current view, ongoing performance risk exists, and we're focused on driving recovery plans to stabilize and improve our financial position and the outcomes delivered for our clients. To end on a positive, the bright spot in the Utilities portfolio was the telco business, which is performing strongly, both in Australia and New Zealand. I move on to facilities, revenue was $3.4 billion, up 4.9% and EBITA was $162 million, which was flat year-on-year. As Peter mentioned, the government and health and education portfolios are performing strongly. This was offset by a slowdown in minor capital work spending in the defense business and a contract loss in the industrial and energy business to a -- due to a subcontractor default. We also took some provisions against a mineral technology claim position in the second half that remains unresolved that we're working through at the moment. Moving on to corporate costs during the year, corporate costs increased by [ $17 million ] or 16.7% to $117 million. This cost uplift included a legal claim settlement of $10.5 million with the balance of the increase attributable to additional investment in IT projects of $5.6 million and general inflationary impacts. The benefit of the cost out program is expected to start in FY '24 with our staff reduction programs implemented in June. I move on to the cash flow performance, and I've just outlined a bridge between opening and closing cash. As discussed, we've indicated our cash conversion was 65% for the year and 110% for the second half. Just speaking to the second half and referencing back to some of our discussions at the first half, this did, in part, reflect an unwind of working capital adjustments discussed at our first half results, which had a positive impact of approximately 10% on that second half conversion rate. So if we adjusted for that unwind that we'd previously flagged, the 110% on an adjusted basis would be at 100%. Net CapEx for the period was $205 million, which compares to $144 million in the prior period. The gross CapEx year-on-year is broadly in line with the delta really relating to differences in proceeds from sales in each period. Maintenance CapEx continues to be broadly consistent with D&A, and growth CapEx during the year primarily related to asphalt plant replacement in Australia and an investment in specialized plant in New Zealand. We had the divestment proceeds on the first stage of the Australian transport projects divestment of $161 million, and we expect to receive additional proceeds of $20 million relating to contracts once those outstanding consents are received. Closing cash of $889 million and drawn debt of $1.59 billion meant that the net debt, excluding lease liabilities at the end of the period was $704 million, which compares to $620 million in the prior corresponding period. However, it is important to highlight that the net debt was $937 million at the end of the first half, and this reduced by $233 million in the second half. So the trend there during the year is positive. I'll move on to our Group debt profile. Downer is prioritizing the maintenance of our investment-grade credit rating with Fitch, and so balance sheet strength and prudence around our gearing levels will remain important, whilst we undertake the turnaround until we get some further progress on our performance through the year. We are compliant with all of our covenants and have headroom against key measures. Turning to our debt profile. The Group's weighted average debt duration is 3 years with the maturity profile shown on the graph. And we're targeting to refinance some of our debt facilities during FY '24 to further optimize our debt maturity profile and manage and appropriately spread our refinancing activities. The Group has total liquidity of $1.9 billion through undrawn debt facilities and available cash. And so finally, I just wanted to wrap up with some comments around our financial priorities in the year ahead. Our first priority is to continue to strengthen the balance sheet and maintain a conservative approach with an appropriate level of gearing and flexibility until we have further progress in our turnaround. And as I mentioned, the maintenance of our investment-grade credit rating, which is currently on negative watch with Fitch remains a key priority. The next priority is improving the consistency and quality of our earnings. Downer needs to get back to delivering consistent strong back -- cash-backed earnings. In considering the nature of some of the issues experienced and the variability of our performance over time, it's clear our focus areas need to continue to be to build a stronger performance culture across the Group and embed more robust and transparent performance management frameworks to drive timely identification of risks and opportunities and ultimately accountability for performance. That will be a key focus area. In relation to our $100 million cost out targets, as Peter said, we've made good progress on the cost out targets, and we're prioritizing the delivery of the $100 million per annum benefit by '25. Whilst further opportunities will exist, our priority focus will be on executing and delivering the $100 million and delivering on this commitment in the first instance. These benefits will need to be balanced against other underlying cost and performance pressures that exist in '24. And finally, the third focus area is to elevate our capital return focus and disciplines. We've commenced a full potential strategic planning process for each business unit under the Group's new operating model, which will outline the opportunity set inform our capital allocation priorities, our portfolio management parameters, and our operating businesses will have a clearer focus on the cost of capital employed and returns expected. We will have more to say in relation to our capital management framework during the year. With that, I'll hand back to Peter.

Thanks, Mal, and I'll now turn to the outlook and some of our priorities for the next 12 months. So you've seen that we've done a lot and kicked off a lot of programs of improvement in the second half of '23 and '24 is another really big year for us. It's a very important one in our transition to set the foundations for long-term profitable growth. And we've spoken about some of the cost out initiatives, but I wanted to come back a little bit to some of the strategy and planning that we're doing to unlock our full potential because whilst we're doing the necessary work around cost base and risk management, we have to do the work around our full potential and this is underway. And this work will drive our portfolio and investment decision-making parameters moving forward. And on the portfolio front, we will continue to assess this portfolio to ensure we have exposure to the right sectors, customers and commercial risk characteristics, and there may be more minor divestments of non-core businesses that do not match this profile. We have an outstanding portfolio of businesses with market-leading positions and exposure to sector tailwinds. Our focus is now to optimize the performance of these businesses to ensure we convert our pipeline of opportunities and become an organization that's resilient or more resilient to the external factors with more discipline in our delivery and ultimately, the profitability that we're setting targets on. Operational excellence and risk management will continue to be our focus area and making enhancements to our Group performance monitoring framework that our new Chief Risk Officer will oversee. It's very much a back-to-basics approach, and I think it's working so far. So in relation to our path to 4.5% EBITA, that is the right target for the Group. And having this visible target is changing the way our business leaders are assessing bid margins, project performance and overheads that are the key drivers to this target. And we're already seeing this performance shift in our business through having this very visible, clear target for our leadership groups. So you can see on this graph here, there are several factors that are key. We've spoken about the cost out element and also the runoff of the low-margin and loss-making projects. We are improving the bidding margins, so securing these opportunities and then driving the enhanced margins through the delivery of projects is the other important element. We are carefully selecting bidding and work targets and exiting smaller businesses that do not meet our strategic risk management and margin contribution requirements. The revenue potential is not questioned. However, in the short term, our revised approach will impact some revenue sources to set us up with the right operating disciplines for sustainable growth. Slide 21 outlines the progress we've made on our cost out since we first announced the program in February. A large portion of this will come from the optimization of our operating model and automation. And we've already spoken about our progress against the 400 FTE headcount reduction. And as you can see, we are ahead of schedule on this element. Business cases for automation opportunities across the Group are being developed, and this will be the next area of focus. And the third area of focus is around the consolidation of property and fleet overheads, and we've started to rationalize our property lease footprint. And also across our fleet -- plant equipment and light vehicles, there is opportunity here, and we have set targets across the business to be more efficient in this area. These areas will be a significant part of our focus in '24, and our level of confidence to achieve our target around the cost out program in '25. So if we look at what's ahead of us, we will reinforce our new business conduct and performance culture. The issues that impacted us over the last 12 months did highlight the need for the cultural reset, and we are implementing the key changes that will lead to better performance, improve margins and consistency. We will improve the performance of our utilities business. This won't be straightforward, but I am confident that we have the right people in place, and the strategies to achieve it. We will focus on our $100 million cost out target. And as outlined previously, we have a really clear line of sight on these initiatives. We will mobilize QTMP. This is critically important for the Group and that to do this mobilization to ensure that the project is a strong contributor to earnings from FY '25 onwards. We will improve capital management discipline, as Mal outlined and further strengthen the balance sheet, and we're very committed to this. And finally, we will develop our full potential strategic plan. We have done the necessary foundational work required through the first phase of our transformation program, and we have to have our line of sight now on growth orientation and to be in a position to achieve growth, we have to have our strategic planning completed this financial year. So lastly onto outlook. '24 is a really important transition year for us in our turnaround program, as we establish the foundations for long-term profitable growth across our business and realize our full potential. The external market conditions that have impact us -- impacted us over the past 12 months to 18 months appear to be stabilizing, but they've not subsided and the challenges remained. The first half of '24 will be affected by the runoff of that -- of the low-margin contracts. And as we have outlined, the utilities recovery will be ongoing, but we are targeting higher earnings in the second half. I believe our performance in the second half of FY '23 has created the momentum that we need and that we start the year with a high percentage of secured revenue and a high level of confidence that our back-to-basics approach is working. We will give a further update at the AGM in November. And now I open the call up to questions that you may have for either Mal or myself. Thanks very much.

[Operator Instructions] Your first question comes from Nathan Reilly from UBS.

[ Just a quick one ] to clarify around the FY '25 margin target of 4.5%, just -- and just to be very clear on that one, that's your average target for the year? Or is that a sort of a good run rate that you're anticipating there?

Yes. Nathan, as you know, we've had a chat about this one before, it will be in '25. We've set out the areas of focus that will help us get there. So in '25, if it's -- it may be an exit rate, but it will be in '25 is our target.

I'm trying to just get an update in terms of the phasing on the cost out program in terms of the expectation around benefits rolling into '24 and '25. And if you got any update -- just an update around the cost to deliver?

Yes. Nathan, it's Mal here. I'll take that. So if you look at the update we've given today, certainly, we break down the transformation program into an initial restructuring component that has people out. And then obviously, the -- and that's probably about 2/3 of the benefit profile. The remaining 1/3 really relates to the areas that Peter talked around in terms of the automation, the process improvement and some of the plant and property-related elements to sort of give you a sense of that. So we would say that in terms of the execution, we've either executed or in the process of executing, as we go into Q1, that first sort of component of the 2/3. But as you'll see on the slide that Peter put up, that the planning that we've got around Phase 2 and 3 of that $100 million is very much -- still very much in an early stage of planning. And so if you think about how that sort of phases through '24, the first part there that we've either completed or are in the process of wrapping up in the first quarter gives us in year '24 benefit, and that tail is probably getting more towards the back end of the year, as we start to execute, which really looks to give us that runway benefit into '25. So that's the way I would think about it. In terms of the final part of your question just around cost to implement, certainly, the people-related components, a good part of that's in the result to '23, but we certainly still have more of that to come through '24.

Can I just get a little bit more detail just in terms of, I guess, the performance of the facilities business, just looking at that to first half, second half split, how substantial drop in revenues in the second half versus the first half. Can I just get an update in terms of what we're seeing there, and [ I obviously understand ] you've taken the benefits in terms of [indiscernible] outlook, but just some more granularity around what we've seen in terms of first half versus second half performance, please.

Yes. So if you look at -- you touched on revenue, so I'll start there first. You would certainly be pointed to the comments that we made last week and Peter sort of talked to today in some of those defense areas that have certainly -- we've seen some softer pieces. The other bit that's reasonably significant, though, the sale that we announced today of [ AD&S ] has also been sort of in a form of wind down over the last couple of years. And so, we certainly saw revenue in that business. It had a revenue base, I think, of circa $200 million for '23, but that has certainly come back during '23. So that would be the 2 components that I would speak to in relation to revenue. In terms of how that sort of flows through to margin, the other bit that's relevant is the comments we made on the I&E business, where we had the contract loss relating to the subcontracted default and the additional provisions we took there around the mineral tax position. So they're sort of the pieces I'd call out there.

And final question. Can you just give me an update in terms of the ATP EBITA contribution in FY '23, please?

Yes. So you'll see we've got footnote in materials there. It had revenue of $1.1 billion for the period. And I think it was mid- to high [ 30s ] in terms of margin contribution. And the point we made there is that, that margin contribution was ahead of sort of historical average contributions that we've seen. So you'll see that detail in the pack.

Your next question comes from Anthony Longo from JPMorgan.

Just a quick one for me. Just additional clarity with respect to guidance that you do have for FY '24. I just want to get a sense as to how we should be thinking about the relative progression of those periods. So are you saying that you're expecting -- notwithstanding some of the challenges you are to face, do you still expect first half '24 to be up on second half '23 and then earnings growth on first half, do you also expect that to be sequential growth? Or how should we be thinking about that?

Yes. Anthony, we won't go into comparison to the prior period. I think though, the commentary we've provided is very much around the Utilities performance and the work that we need to do around the improvement and the wind off of the lower margin and loss-making work. What we do have a high level of confidence, though, is the target around higher earnings in the second half. So I hope that directionally gives you a feel for where we're coming from.

In terms of -- you [ haven't ] been speaking about portfolio decisions and thinking about simplification of the business, but how do we think about Downer from here in terms of the work that you'll be looking to bid on, what sort of profitability, and I do note your margin targets out there. But in terms of a return on capital perspective, are you able to give additional clarity, as to how you're thinking about the type of work that you are doing. And then what sort of impact does this lower margin work actually have within your existing revenue base?

Yes. Look, it's a great question. I think the first one is, we're really confident in the utilities, facilities and transport focus that we have. And within each of those sectors, we have businesses, which, I guess, are comparable to the Australian mechanical, electrical business that we spoke about in the divestment slide today. They're then -- they're what you would call the no regrets because fundamentally, you've got sector, customer and risk profiles and in the relative scheme of Downer not material. So that -- they are the no-brainers that we will continue to look at. But in relation to the important point around return on capital, that's actually what we've commenced in our full growth potential planning and the work that the teams are doing right now around [indiscernible] markets and the work that we've already done on our 4.5% margin and how we think about the portfolio in the medium term. We'll come back to you on that probably next calendar year sometime, but it is underway.

A quick modeling question. With respect to some of the debt refinancing, I mean, how should we then be thinking about sort of what you're thinking about maturity going forward? And then what impact that may have on your net interest costs heading into next year?

Yes. So look, I think in terms of the debt refinancing work, we'll be looking to lengthen the maturity profile. It's currently at [ 3 ]. You can kind of expect that to push out to sort of [ mid-3s ] is kind of where I'll be targeting. The other piece in the current market, you'd expect, as we go through that processes, the costs associated with those debt facilities will increase. So we will have some cost uptick there. I'm sort of not in a position at the moment, where I'm going to be giving interest guidance at this point. But directionally, there should be an upbeat in terms of the interest cost. In the grand scheme of all the things we're looking at here, it's certainly not a major driver in the end, but it will tick up.

[indiscernible] that was just long giving a sense as to whether or not you're replacing cheaper debt with more expensive, but that's [ all good ]. And then the final one for me is just culturally. I mean, I do take a point that you're doing a lot of work to reset the culture, and I think everything you're saying sounds like it's -- you're saying all the right things, I guess, but acknowledging that cultures are hard to change and long-standing habits hard to change, like what gives you confidence that you can ultimately reset the business? And what sort of incentives are there from a workforce perspective, from a contracting perspective to ensure that, no, it's different this time around such that you can really execute on those targets that you're setting for the business?

Yes. This is a question that we spend a lot of time discussing around our leadership table. And I think the fundamental starting point is the people -- the extended leadership team that are really getting behind this, and how we engage all of the people in a very large organization around some of the macro themes, and that's why I started with that enabling communities to thrive piece because you have to give people purpose around why we turn up to work every day. That's a really big part of this for me because in prior roles, when you're responsible for very large members of frontline workforces, you have to have that connection. And I think we're on to the right way of engaging with that group. We -- very early went off and did a couple of very detailed culture surveys. And what that has led to is some more work around actually defining what is a performance-orientated culture and the things that matter. The portfolio performance framework that we've spoken about, that puts the hard edge on what people turn up to work to do, particularly those people in the senior and operational management teams, and that combines with that very sort of simple message around back-to-basics. We want to make sure that we're keeping our people safe. We're working ethically, and honestly and we're being really transparent around the performance of our projects. And then, you overlay that with the Downer standard. And that is really the pathway here for our people. And we're very fortunate to have the Downer standard. We just have to make sure that it is more consistently applied, and we have the leadership teams that are true believers. And I do feel confident that we're building that cohort of true believers.

I'll let someone else go. Appreciate your time.

Your next question comes from Rohan Sundram from MST Financial.

Peter and Mal, I had a question around the utilities problem projects. In the first half, you called out the impacts separately, which totaled about $40 million. I was just hoping to get a bit more color on how did that progress through to the full year, and with the residual impacts you're talking about for the runoff in the first half, how does that compare to the full year position. If we can just get some color on that would be great?

Yes. So look, I think what you'll see when you get time to look at first half versus second half is the segment loss [ 5 ] in the first half and it lost [ 5 ] again in the second half. I think when you look at the projects that were called out in the first half, the evolution of that will be that we're really only talking to the same projects, plus the water projects that we spoke to at the Investor Day in April. So nothing new in relation to those. And the meter reading business, probably less significant in the overall scheme of things, but still below, where we think it should be in terms of its potential. So in trying to contextualize the result first half to second half, there's certainly ongoing underperformance across those projects, but we're not sort of calling out anything significantly new that we haven't previously talked about.

Okay. But would the residual impact be a lot less than what you saw in '23? Is that what you're saying?

What I would say in relation to that question, Rohan, is that we've got the plans, and we've factored that into the way we think about the year ahead. And we've said the year ahead, we'll have the impacts of the runoff of these projects and turnaround in the first half, and we expect to be more clear of those in the second.

And just last one for me. I appreciate the reliance on third-party contractors have been elevated throughout this period. Is there any color you're able to provide just on how you're seeing the labor market? And do you expect that reliance to decrease throughout FY '24?

Look, I don't think it will change dramatically in '24. I spoke before about some stabilization. So we're seeing more predictable pricing in our supply chain and some of the -- some of the issues that we had with subcontract validity periods and not being able to give price certainty to customers. What I'm seeing now is still elevated positions in supply chain and still the same level of reliance perhaps. But we're getting a more coherent response from the [ subcontractor ] market, particularly, as in some trades, they may be also wanting to ensure that they have secure revenue moving into more uncertain economic conditions. So I think that's the way that I would describe it directionally, Rohan.

Your next question comes from John Purtell from Macquarie.

Peter, and Mal, just had a couple of questions, please. Just in terms of revenue, you mentioned that you're being more selective through the work that you're taking on. I mean does that imply or mean that revenues likely to shrink or reduce in the near term? Or do you think you can still grow the revenue line? And I'm talking about excluding asset sale impacts there?

Yes. Look, let me answer that in the -- not just with your eyes on '24. I think what we believe is that we can and will grow revenue through that medium term because we have a really clear view of what the pipeline is. In the shorter term, no, I did say that in some spaces that will pull back a bit and utilities is probably the example of that, where it just does not make sense for us to go into some of this mega lump sum construction work that perhaps others are testing at the moment. And we'll remain really disciplined around that under our new operating model. And notwithstanding the opportunities that fit our technical profile, the existing customers, where we are doing ongoing work and have done ongoing work for many decades with key infrastructure owners in the high-voltage and distribution sides of the power business, we see a lot of opportunity. We just have to be really careful about which ones.

Got it. And just in relation to utilities and appreciate the color you've given, but just trying to understand the sort of improvement that you're expecting there in the second half of '24. So are you sort of assuming that you're able to improve margins, as contracts come up for renewal. You've obviously got some reset there that you've talked about on the power maintenance contract in Victoria there. But is it -- as contracts come up for renewal, you look to improve terms? Or is it an exit of work as well?

Look, it's a combination of all of those things, John. So the beauty of having a portfolio of long-dated distribution and network maintenance contracts is that you get the chance to turn up every day and improve the performance and work out with the customer what the priority areas are and optimize the operations from within. And I think that hasn't been done as well as it should have previously. But a large part of the improvement is around optimizing from within existing contracts and relationships. There are projects that lump sum type projects, which will come to completion in '24, and we've spoken a little bit about that, particularly in that water portfolio space. And then, the other side of that and very importantly, is being selective about what we bid and then ensuring that we are bidding into the market with customers that value our expertise, and they are the 3 elements that we're focused on.

And just the final question. I appreciate the comments you've made on utilities and defense there. But Peter, just in terms of the demand environment for services more generally, how would you characterize that? Obviously, we've seen some or are seeing some deferrals of infrastructure work at the big ticket end. Is there any flow-through to services of that? And indeed, from obviously what sort of slowing economic growth more generally here?

Yes. Look, I think this is a really fascinating time. I would expect to see those deferrals that you're talking about in that transport infrastructure space in Australia. I think that would be a logical assumption. And we're obviously not as exposed to that any longer. I think interestingly, in New Zealand, the election that's upcoming, both sides of the political spectrum there are talking about ongoing spend and catch-up of infrastructure deficits. It's just one party is more focused on public transport; the other is focused on more road network infrastructure. So on the New Zealand front, it feels like it will be -- there probably won't be as much deferral there. And then, I think the reason why simplistically, we're seeing that deferral of transport infrastructure is because of Commonwealth money going into other places and state government agencies realizing they've got to spend considerable amounts of money to catch up on the deficit in relation to energy transition and you're seeing that not just in high voltage, but you're seeing it in relation to existing what you would call conventional generation assets that need to be prolonged because of changes in the transition period. You're seeing it in the high-voltage space, you're seeing it in the tie-ins to the renewable energy zones and into the substations, and there's a lot of money going into those spaces. And therefore, a lot of technical capability and interest from the contractor market as well.

Your next question comes from Scott Ryall from Rimor Equity Research.

Firstly, congrats on the circumstances for getting your results out earlier in reporting season rather than later, and I suspect you've got teams that have worked their [ butts off ] to get that done, so congratulations. My first question, Mal, I was wondering if you could just talk a little bit about the -- your focus on cash conversion. You've obviously done this [ trial ] in other places, and I was wondering if you could talk to your initial observations about what are the levers or disciplines to make sure that you improve cash conversion on a sustainable basis, yes, it's more regular, I guess, as opposed to volatile?

Yes. Happy to talk to that, Scott. I think look, it's an interesting point with businesses like ours, as you'd appreciate, when you look across the portfolio, it can be quite lumpy and choppy, particularly around the awarding of large long-term contracts, where you might get mobilization upfront payments. So I think as a principle, and having your incentive structures tied into cash back profits is really critical, and we do. The second part then, obviously, if you break up your business simplistically between your tendering disciplines on the commercial side and into the delivery side, I think the commercial side is relatively straightforward in terms of making sure that you've got those disciplines upfront to make sure you're in overclaim positions, as you go forward. And we have those -- those structures through our tendering processes set up. It's probably more coming into the delivery side, and the delivery side, I guess, in my experience, going back to previous [ lives ], particularly as you're going into new markets, where there can be complexity around scope change, around delays, around things that ultimately drive cost and your commercial disciplines around how you manage through those change cycles is really key. For us, that is going to be all about our disciplines around our management of WIP, our management and understanding of our underclaim positions and our risk and opportunity overlay, as we look at those and to make sure contract management and our disciplines from a commercial perspective to timely both communication and intervention with customers is managed in a timely manner. So that's probably the sort of headlines that I'd sort of talk to, certainly, lessons from past lives. And what I can see coming into Downer, and I've obviously only joined at the back end was a really strong focus by the management team running into year-end, which is really, I guess, sits behind that sort of stronger second half conversion. But we will be looking to drive those disciplines, particularly into WIP management and underclaims into our routines and cycles.

And then just -- I'm just trying to get a sense of some timing milestones over the next couple of years. So I was wondering, you've talked about sometime next year, you'll talk about the capital management framework and some full potential strategic plan? And then, Peter, just further to Nathan's question, even though your statement is that 4.5% [ EBITA ] targeting fiscal '25 right through the deck, you're talking about an exit rate potentially. Could I -- could you just clarify just a little bit more around the timing, and I don't mind if it's within a 6-month period, so first half '24, second half '24, first half '25, whatever -- whatever you want to use, but just be a little bit more specific with dates on those things, please?

I think the way Nathan describes it as an exit rate, I think that's a fair way to look at it. We've got a lot of work to do. We've set our targets. We know the programs that have to be executed. We want to be able to say in '25 that we've done all of those things. And logic says and the basis upon, which we have planned that in '25, you will -- you should start to see significant improvement in margins. So you can understand, I hope why you don't want to pin yourself to a point in the year. The way we talk about it internally, though, is that in FY '25, we want to be considerably ahead of where we are now, and we think 4.5% is the right target for our business.

I'm just trying to figure out, is that in the last month, that's an exit rate [ for ] me is the last month. So I'm just trying to get a sense of that could be considerably lower for the rest of the year and then jump up in the last month, which we'll never see in numbers so.

I'm happy for you to call it an exit rate. All I'm saying is that we are targeting 4.5% in '25, and that's how our business plans have been put for the period.

Okay. Well, I'll just say I don't understand that. It's not very clear to me. But anyway, the timeline then on capital management and your full strategic plan?

So Scott, if we sort of come back to the 4.5% and sort of at least and with a target to exceed 4.5% in '25, I guess, what we're really talking to there is that we're expecting the margin trajectory to be progressively increasing between now and the end of '25. And I guess, what Peter is really talking to there is that we get to the end of '25 in a position that we're at least at 4.5% or greater, as we head forward from that position. I think given where we're starting from right now, and if you think about the road map that we've talked through today to 4.5%, we've got the first sort of limb of that margin enhancement, which has pinned off the $100 million of cost out, and we've given some updates today about the progress that we've made there. The other elements, though, if you simplify it, really come back to core operational margin delivery and improvement through that period. As you start to look at that and think about that, one of the things you'll no doubt look at is our work-in-hand slide and the profile of work-in-hand and how it runs off, and that will give you a bit of a guide for the opportunity that we see, as we pick up on the point Peter was talking to around our tender disciplines, the opportunities in those addressable markets, but also more broadly, if you think about the constraints in the market that exists now around the skill sets and the technical capabilities that we have. We've got a good confidence level that as we retender and build that work-in-hand profile and not just driven by revenue growth, but driven by quality of what we're actually tendering, but you can see how that operational margin and improvement can come through, but it is certainly weighted into back end of '24 into '25, which, for us, at this point, it still gives us a level of imprecision around exactly that timing into '25. But I think what Peter is really clearly saying is 4.5% at or above is absolutely where we expect to be, and that's what we're targeting.

Our next question comes from Reinhardt van der Walt from Bank of America.

Peter and Mal, my first question is just on the FY '24 outlook statement. So you mentioned that labor cost is stabilizing, supply chain pricing, you've got better visibility. We've kind of uncovered some of the issues in the utilities business now, weather is clearing, cost out is progressing. Can I just understand what the factor was that prevented you from giving us a quantitative FY '24 guidance number, given that the outlook seems to be probably becoming clearer?

Look, the way I feel about things is that I'm certainly a lot more confident around the outlook on those variables that you've called out, and we've called them out as well. But I think in the circumstances, where we've come from, where those external factors currently sit, they are still at elevated levels. So what we're really clear on here is focusing on the turnaround program, where we see directionally the business improving first half to second half and also being really clear on the utilities recovery and the work that we have to do to put a higher level of consistency and predictability into the business. So there's a lot going on at the moment. And so I feel where we've landed here and talking about the variables and giving a level of confidence that it's certainly going to be better than '23, as you've outlined. So I'm very comfortable in the outlook that we've provided.

And when you were putting together your business case for hitting this 4.5% EBITA margin, can you maybe just walk us through the -- just the key risks that you see, specifically in Phase 2 and Phase 3?

Well, we are in an environment, where your -- we are contractors, and we're subject to all sorts of externalities, as you would understand. Really having set the targets, it's around pipeline, our ability to achieve our plans in the optimization of our projects and ensuring that we've got the pipeline of activity to support it. So I think they're just the -- what you would call the customary factors that you would consider as assumptions when setting targets like this for a business.

Yes. Sure. I appreciate that impacts the overall 4.5% margin. I meant, more in terms of execution on Phases 2 and 3 things that are more in your control?

Look. I think the beauty is that the cost out program is absolutely in our control, and that was a very important first enabling step, and to get that discipline into the business was key. And then the rest of that diagram on Page 20, they're not sequential. All of these things are happening now, and I hope we've given you a good level of color around the effort and focus that the management team has on each of those areas. So it's -- yes, I think that improvement and the discontinuance and the runoff, they are all factors that we're working through at the moment.

And just on cash conversion. The Queensland trains cash flow profile, specifically around mobilization. Can you maybe just give us an indication around is there any -- sort of any lumpiness we should expect from a net working capital point of view on that contract? And maybe are there any other big net working capital lines that we should be conscious of over the next year or 2?

Yes. Look, I think the best way to think about that project is that when we bid them, we bid them to ensure that we don't have the gap risk with our supply partners. So certainly factoring in good cash flow when we bid it, and that is the planning that we've put in place for the delivery of that through to manufacturing phase. So confident that we've got the cash flows and phasings there at a positive level.

And maybe just one final one. The -- you're obviously going through a little bit of a refi base now. I presume you're already speaking to creditors, have they changed the way that they're looking at your 2x to 2.5x net debt-to-EBITDA target given that we've had some issues with cash conversion over the -- for a couple of years now. Do you think that maybe that target range could get revised down a little bit?

Yes. Look, I'll be frank that whilst I've had some preliminary meetings in my first couple of weeks here, I've probably got more time to spend with the banking groups to sort of give color to that. Directionally, I would expect that we would be heading to the more conservative end of those ranges and possibly a little further south of that, that's sort of where my mindset is. But I'm still personally at an early stage of working through that. But directionally, I think the way you've spoken to it is the right order of magnitude.

There are no further questions at this time. I will now hand back to Mr. Tompkins for closing remarks.

Look, thank you, everybody, for joining the call. We have a lot of work to do. I appreciate your support and your time with us this morning, and we will be back in touch at our AGM in November. Thank you very much.