Kelsian Group Limited (KLS.AX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Kelsian Group FY '25 Full Year Results Webinar. [Operator Instructions] I would now like to hand the conference over to Graeme Legh, Group CEO. Please go ahead.

Thank you, Ashley, and good morning, everyone, and welcome to the full year results presentation for Kelsian Group Limited for the 12 months ended 30 June 2025. I'm Graeme Legh, Kelsian Group's CEO, and I'm joined this morning by Andrew Muir, Kelsian Group CFO. I took over the role of group CEO on the first of April of this year, having spent the last couple of years based in the U.S.A. as CEO of our U.S. motor coach business, AAAHI. My journey with what is now the Kelsian Group started back in 2009 and prior to my time in the U.S., our work in Transit Systems, now our Australian bus division, SeaLink and in Kelsian with responsibility for leading the various growth initiatives of our operations over this period. I took over the range from Clint Feuerherdt, who has led the business since 2020 and I have the privilege of working closely with for over 15 years. The transition has gone well and the broader leadership team and I continue to benefit from Clint's knowledge and insights through his ongoing role as a strategic adviser. I would like to start today by recognizing for his dedication and leadership of trans systems and Kelsian. Clint was instrumental in building the global transportation business we are today and importantly, as CEO for the majority of FY '25, a lot of the credit for the record results we are delivering today since with Clint.. I've been fortunate to step into this role at a very exciting time for our company with our operating divisions continue to perform strongly and well positioned to capitalize on the significant growth opportunities in front of them. At the group level, we have delivered on a number of strategic priorities this year, including setting clear targets for our capital management, and we continue to progress the open strategic initiatives that will shape the future direction of the group, including the potential divestment of our Australian tourism portfolio from within our Marine and Tourism division. Moving now to the presentation detailing Kelsian's results for FY '25. Today, I will start by providing an overview of the financial results as well as the strategic and operational highlights from last financial year. I'll then hand over to Andrew, who will provide a detailed run-through of the group's financial statements. and the performance of each of our 3 operating divisions before we provide our outlook for the financial year ahead. Turning to Slide 3 of the presentation. Kelsian delivered a solid financial result in FY '25. The results are in line with our expectations with underlying EBITDA of $285 million, falling within the guidance range provided at our full year results last August. Importantly, and as I've already mentioned, all operating divisions continue to perform strongly with growth in revenue, EBITDA and EBIT delivered by each of the 3 divisions. Our business' ongoing commitment to operational excellence, combined with their established market positions and strong reputation has underpinned the high renewal rate of existing contracts driving the organic growth across all divisions. Pleasingly, the FY '25 result was achieved despite the ongoing inflationary environment. The result reflects the fact that most of our public transport contracts include revenue indexation mechanisms, which protect the business from fluctuations in the cost base of our key cost inputs, including wages, fuel and spare parts. These indexation mechanisms provide a natural hedge against the inflationary pressures we have witnessed over the last few years. These contract revenue indication mechanisms, combined with new and retained contracts allowed the group to deliver record revenues in FY '25, up 9.5% to $2.2 billion. Underlying EBITDA was up 7.4% to $285 million. As [ at ] last year, the expected stronger second half earnings contribution was delivered despite the one-off impact of Cyclone Alfred in Queensland this February. The strong second half reflected the full period of our Bankstown rail replacement service in Sydney, along with the rebound and continued growth of important industrial sector contracts in the U.S. At the EBIT line, the group and NPATA was $94.8 million, up 2.4%. One of the most pleasing elements of the result was a record net operating cash flow of over $200 million, which, together with the fact that we are nearing the end of our peak capital investment program resulting in leverage of 2.7x underlying EBITDA, down from a peak of 3.2x reported at the first half results. The positive financial results from each of the divisions were combined with the operational excellence that defines our reputation, provides an extremely strong foundation for us to capitalize on the growth opportunities that are presenting themselves across our global platform. Moving to Slide 4 and an overview of our operational and strategic highlights from FY '25. There were several notable highlights across the group during the period. Firstly, our U.S. operations had a strong second half off the back of services returning to normal for a large industrial sector contract that was temporarily impacted by the bankruptcy and restructure of the project head contractor. In addition, the excellent contract renewal rate across our used business continued, and we finished the year announcing 2 significant new contract wins. AAAHI represents a highly scalable platform for Kelsian's ongoing growth, and I'm delighted to have handed over the AAAHI leadership to a safe pair of hands in Brent Mainland, our new AAAHI CEO. Brent commenced with us last year enjoyed AAAHI with the benefit of a long and successful career in the U.S. motor coach industry. Brent has hit the ground running and is already proven to be a valuable addition to our leadership team. Turning to our Australian bus operations. Our Region 6 bus contract in Sydney is the group's largest contract and is due to expire on 30 June 2026. During the second half of FY '25, we have been engaged in discussions with transport for New South Wales regarding a possible 2-year extension to the contract. In June, we were advised that TF&SW was seeking government approval to proceed with the 2-year extension on improved contract terms. This extension comes at the back of the region 6 operations being 1 of the best-performing bus contract in Metropolitan Sydney for service punctuality and reliability. Staying in Sydney, in September 2024, we commenced operating bus services to replace trains for the Bankstown rail line. This contract contributed strongly in FY '25 and will continue to be a material contributor in FY '26. In Singapore, the reliable and continued operational excellence delivered by our Tower Transit team saw the business achieve performance incentives during FY '25. The team also made significant strides in driver recruitment achieving robust staffing levels that enable them to deliver a high proportion of in-service revenue mileage. This ability to attract and retain talent puts us in a strong position to start current and future contracts and reinforces our inclusion in the list of Singapore's best employers 2025. In recognition of this strong performance, we were granted 2-year contract extensions for each of our existing public transport contracts and awarded several new serve routes by the Land Transport Authority further expanding our critical role in Singapore's public bus network. Finally, the record financial result from the Marine and Tourism division was a result of delivering on operational efficiencies, improved asset utilization. Alongside these businesses taking advantage of their inherent operating leverage as Patris numbers continue to improve. Turning now to our strategic achievements during FY '25. In February, we completed and announced a comprehensive capital management and allocation framework, establishing clear targets and priorities for our future capital management and investment returns. Under the framework, we made a modest revision to the target dividend payout range to 40% to 60% of underlying NPATA. We also set a leverage target of between 2 and 2.5x underlying EBITDA, and we expect to continue to track towards the target range by the end of FY '20 and before the benefit of any potential asset or business sales. During the year, we undertook a detailed analysis of future CapEx spend and confirmed annual net sustaining CapEx of approximately $85 million per annum over the investment cycle. Finally, for returns and specifically return on invested capital, we set a target of 200 basis points above our pretax weighted average cost of capital to be delivered over the medium term. The Board has also revised management's remuneration structure to align incentives with these targets and delivering appropriate returns to our shareholders. Having set the capital management targets, we then undertook a thorough strategic review of every business unit in the group to identify potential opportunities to improve returns. This was an exhaustive process and the outcome was that a number of bus depots were identified to be sold and leased back and the potential divestment of a portfolio of tourism assets for within the Marine and Tourism division would be pursued. In the event of a successful sale of the tourism portfolio, the remaining Kelsian business will be a more focused infrastructure like commuter and contracted business delivering essential passenger journeys through our bus, motor coach and marine operations. This will further increase the predictability of the group's earnings base and will lower the future capital intensity of our operations. In the U.K., we closed on the acquisition of the third largest bus operator in Liverpool heightened travel. While a small acquisition, this was strategically important to give us a foothold in the Liverpool region. This region, like many others across regional U.K. is in the midst of structurally changing the way public transport bus services are delivered through the introduction of bus franchising. Our specialists in helping governments around the world successfully deliver this type of structural change the heighten acquisition positions us as an incumbent operator in this market at the time these changes are being implemented. Finally, I wanted to again highlight Kelsian's strong track record of delivering organic growth over an extended period. This growth is underpinned by a majority of defensive long-term service contracts and in FY '25, 93% of group revenues were contracted or nondiscretionary inmates. Before I hand over to Andrew, on Slide 5, I wanted to update you on our focus on safety and sustainability for our workforce, our customers and our communities. Each of Kelsian's businesses at its core, is a people business. We employ over 12,800 people and provided 383 million essential journeys for our customers over the last 12 months. The 3 core pillars of our sustainability effort reflects the people-focused nature of our business. Firstly, for our teams. We are committed to creating safe, healthy and inclusive workplaces. The safety of our people and passengers accord to everything we do, and I'm happy to report a 12% reduction in the frequency of total recordable workplace injuries in FY '25. Of note in this area, it was very pleasing to see our Singapore operations be awarded the operational and Workplace Safety awards at this year's Singapore Public Transport awards. Unfortunately, our lost time injury frequency rate increased slightly during the period, which meant we did not meet our group-wide target to reduce lost time matures. This has resulted in several new initiatives being planned for FY '26 to promote an injury prevention culture from the top of the organization right through to front lines. Secondly, as one of Australia's largest operators of public transport with a significant international presence, we want to be an enabler of smarter, cleaner transport for the communities we operate within. By collaborating with governments, we continue to support mode shift on to public transport and the move from higher emissions to low or 0 engine public transport assets. In combination, these 2 changes will play an important role in reducing the carbon intensity of the transportation sector. Kelsian is at the forefront of 0 emission vehicle technology with an impressive 204 zero-emission buses in operation and ongoing bus depot electrification works underway across 3 Australian states. And lastly, we take our role as the essential transport link for the many communities we serve very seriously. We value and are a key component of the communities we operate within and we want to do our part to drive positive change in these communities. Our connections with many important community organization demonstrates this commitment. Some highlights in this area include our formal partnerships with the Royal Flying Doctor Service and the Quanta Foundation. However, the real contribution in this area comes to countless hours invested by our teams is directly supporting the initiatives that matter for their local community. I would now like to hand over to Andrew, who will present the detailed run-through of the group's financial results for FY '25 and our divisional performance.

Thanks, Graeme, and good morning, everyone. Kelsian has delivered a very pleasing financial results for the 12-month period ending 30 June 2025, and our results are in line with the earnings guidance we provided at this time last year. We've seen good revenue growth and margin improvement across the portfolio on a first half, second half basis. The business has delivered an additional $20 million of EBITDA in the second half and $17.9 million more than the same half last year, reflecting evidence of the returns being generated from our recent capital investments in bank down rail replacement buses and motor coaches in the U.S.A. in particular. I'll now step through the results in a little more detail over the next few slides. Slide 7 provides a high-level comparison of the consolidated FY '25 underlying results versus the prior year. The revenue increase of just under 10% was achieved through a combination of the contract indexation mechanisms we have in the majority of our Australian bus contracts, a full period of the Bankstown replacement project in Sydney the ramp-up of a number of contracts in the U.S.A. and growth in the Marine and Tourism business. Underlying EBITDA and EBIT increased by 7.4% and 11.4%, respectively, compared to the prior year. Underlying EBITDA has been adjusted for several one-off or significant nonrecurring items incurred in the period, which combined totaled $7.8 million on a pretax basis. These included acquisition and due diligence costs, our property-related costs relating to the unsuccessful Melbourne bus franchising tender and costs associated with the upgrade of our finance and HR systems that we flagged at the half. Overall, I'm pleased to report that the portfolio performed either in line with or better than expectations with the exception of K'gari Fraser Island, where demand remains soft throughout the period and our Region 6 bus contract in Sydney, which continues to face challenging operating conditions, but it is now in its final contracted year under these terms. Higher interest compared to the prior year reflects the higher levels of borrowings supporting the recent peak CapEx program and also higher line fees associated with our larger unsecured borrowing limits. The low effective tax rate was driven by lower tax rates in overseas jurisdictions and the ongoing benefits associated with marine training incentives, which satisfied the requisite eligibility criteria including eligible training programs. The strong second half performance sees our full year underlying net profit after tax and before amortization, up 2.4% to $94.8 million. Earnings per share and before amortization improved despite the impact of higher depreciation and interest in the period. We've maintained a fully franked dividend of $0.095 per share, which is the same as last year, and we continue to offer a dividend reinvestment plan for shareholders but with no discounts, the same as the interim dividend. Statutory net profit after tax for the period was $54.5 million compared to $58 million last year. To the cash flow on Slide 8. The business continues to generate strong operating cash flows underpinned by contracted and nondiscretionary revenues across the portfolio. Gross operating cash flow of $290.8 million was a record, and cash conversion was just under 87%. The decline from the first half, which was over 9% related to some changes in payment team from several large clients in the U.S.A. as contracts were renewed and were normalized in time. During the year, we invested $165.1 million in new and replacement assets, including vessels, buses, motor coaches and land and buildings. All of this was in line with our previously announced capital program and in line with prior guidance. Proceeds from the sale of assets included $20.3 million from the sale of 3 depots in Western Australia and $7.6 million was realized from the sale of assets. At period end, we finished with cash of just under $183 million. Slide 9 provides a summary of the balance sheet. At period end, we had net debt of $623 million compared with $707 million at 31 December. This excludes the limited recourse SPV financing of $87 million we have on the balance sheet relating to government-backed contracted assets, more on that shortly. I'm pleased to report that from a leverage perspective, we finished the year with pro forma leverage at 2.7x, down from 3.2x at December excluding SPV government-backed contracted assets. During the period, we proactively reduced the undrawn limits on some of our bank facilities, both performance bonds and unsecured debt lines so we were not paying line fees on those available undrawn limits, which we did not need. All bank covenants were comfortably met, and we remain on track to meet our leverage target guidance range of between 2 and 2.5x by the end of FY '26 excluding any proceeds from the proposed sale of tourism assets. The main changes to the balance sheet during the period relate to addition of the assets acquired as part of our capital program. accounting disclosure changes in right-of-use assets and liabilities associated firstly with the Hoxton Park bus depot in Sydney, which we acquired and was previously leased; and secondly, the sale and leaseback of 3 bus depos in Western Australia. Finally, we continue to hold $36 million of government-backed contracted assets on our balance sheet, which haven't yet moved into a ring-fenced SPV structure. Had we been able to move into an SPV structure before 30 June, our leverage would have reduced to 2.6x. We anticipate these will move into SPV structures at the next contract renewal date for these contracts in 2027 and 2028. In the next slide, I wanted to provide a recap of the special purpose limited recourse ring-fenced financing arrangements we have in place to some government clients. Since July 2023, we have had limited recourse asset financing arrangements in place. whereby Kelsian and warehouses, government-backed contracted bus assets on our balance sheet, along with the corresponding debt for the duration of the relevant government contracts. These SPV facilities provide a cost-effective financing structure and flexibility for governments seeking to improve and upgrade public transport buses and infrastructure. These structures remain of interest to a number of governments in several of our target jurisdictions. Importantly, these limited recourse financing facilities are excluded when we calculate the bank covenants we have with our financiers. In terms of accounting treatment, the asset value and debt profile are matched and amortized over the term of correct and if the contract is not renewed or lost, the assets and corresponding debt revert to government. This means there's no stranded added risk or financial exposure for Kelsian Group perspective. At 30 June 2025, government back contracted assets totaled $124.4 million and compared with $153.3 million at the same time last year. Turning now to Slide 11, which provides an overview of capital expenditures. As we shared previously, FY '25 was a year of record investment in the business and brings to an end a period of heightened CapEx spend over several reporting periods. This reflects the increased scale of the business, the capital investment required in new assets off the back of contract wins and extensions as well as the need to continue to refresh the asset base to underpin growth and strategically to position the business for the future. Major CapEx in the period included expenditure on 2 vessels and landside infrastructure for the new and exclusive 25-year Kangaroo Island service. The strategic acquisition of the HosanPark bus depot in Sydney and the purchase of 16 new buses for the Bankstown replacement project. Offsetting this, we realized $27.6 million from the sale of surplus assets, including 3 depots in WA and the sale of some buses that were replaced in the period. Our guidance in August 24 for FY '21 CapEx was approximately $185 million. In the period, we actually invested $165.1 million with the underspend due to some timing delays in the construction and delivery of the KI and Southeast Queensland vessels. As a consequence, there will be a carryforward amount of approximately $20 million into FY '26. The I should emphasize that there has been no further cost overruns associated with these delays. Looking forward to FY '26, we do not have any major vessel replacements or new build underweight and excluding any growth CapEx, there will be a significant step down in CapEx from this year's record levels. In terms of breakdown, we anticipate net sustaining CapEx for the group in FY '26 to be $85 million. We will have the carryforward of the FY '25 underspend of $20 million, and we have committed to growth CapEx of $23 million for the recently announced LNG contract wins in the U.S.A. related motor coaches and leasehold improvements. all of which meet our investment return criteria. Over the next few slides, I'll provide some comments on the individual performances from both a financial and operational perspective. Starting with the Australian bus business on Slide 13. The division has seen revenue increase by just over 11% and an additional $9 million of EBITDA generated. Although the margins decreased slightly, we've seen an increase in revenue and EBITDA on a half-on-half basis. A key highlight of the period was the Bankstown replacement service in New South Wales, which commenced in September. This project saw us procure 60 new buses and recruit, train and deploy 140 new drivers on time and on budget. This project is performing very well, and at this stage, we anticipate we'll be operating for the majority of FY '26, which is longer than our original expectations. With a further extension, this project is set to materially exceed our return on investment targets for the investment that we have made in the new fleet. Balancing the encouraging contribution from the Bankstown Rail service, several operational factors, primarily in New South Wales continue to impact the overall performance of the bus business. These included delays in getting our proposed service changes to improve network efficiency approved by government. Congestion-related challenges impacting on-road performance that require time table changes also need to be approved by government. Delays in the delivery of government-owned and funded replacement EV buses and persistently high levels of accidents due to congestion and new drivers. To combat these challenges, we focus on a number of efficiency programs, which have had a positive impact. Some of the major contributors, including group-wide procurement savings for fuel oil and lubricants as well as a focus on reducing driver overtime penalties and additional driver training. Our major rail replacement project in Perth is also nearing completion, and this will be replaced in the first half of FY '26 by the bus bridging work we've started for the tram replacement project in Adelaide. This project will run into the new year. On the contract front, during the period, we announced that we'd entered into discussions with transport for New South Wales for a 2-year extension for our Regent contract in Sydney. As many of you would know, this is our largest contract and the one that, from a financial perspective, underperforms the rest of the portfolio. Operationally, though, it's the best performing contract in Sydney. If the contract extension negotiations are successful, we expect to see an improvement in the economics and contribution for any extension term beyond July 2026. We had our Bunbury and Buffoon contracts in Western Australia renewed for a further 10 years, and our National Resources and Charter team continue to work with clients to renew and expand our existing contracts. Finally, from a portfolio perspective and excluding Region 6, it's important to note that we have no material contracts up for renewal until 2028. Turning to Slide 14 and the international bus segments. The division has seen revenue increase by nearly 9% and an additional $8.3 million of EBITDA generated. Nearly all of this additional contribution has come from the business. The slight decline in margin has been a combination of mix of work and the impact of the Channel Islands Jersey contract repricing and the loss of the guarantee contract. As mentioned previously, the AAAHI business performed very well. Throughout the period, we saw the ongoing recovery in the Golden Pass LNG contract that was delayed in FY '24. There was also the ongoing ramp-up of the Port Arthur LNG contract and late in the period, we announced the successful award and commencement of the CP2 and the Louisiana LNG contracts. There was good news on the renewal front at AAAHI with the renewal and expansion of the capital light busting contract we have with the Colorado Department of Transportation, and we also were successful in securing a new contract with Louisiana State University. In the textile space, business activities at levels have stabilized, contracts were repriced, and we have not seen any further reduction in the level of services or frequency to our tech clients in California. In Singapore, our 2 contracts with the LTA were extended for an additional 2 years. In addition, the business secured a number of new service routes and also commenced operating from the new Tinga bus interchange which is an expansion of that scope of our existing Bulim contracts. Late in the period, we announced that we secured a new capital-light contract with the Sentosa Development Corporation to provide bus services on the Island Santos. This contract is for 5 plus 5 years and commences in September 2025. This is a significant milestone for the business as it is our first contract outside of the traditional government route service contract in Singapore. In the U.K., we renewed our contract in Jersey, securing approximately $260 million of revenue over 10 years. And in February, we completed the small acquisition of heightened travel a regional bus operator in Liverpool that provides us with access to buses, drivers, a leasehold depot and a training school. The priority and focus of the U.K. is on the upcoming tenders in Liverpool and the heightened travel acquisition should put us in a good position with the regional U.K. government as the incumbent operator. The Marine and Tourism on Slide 15 . We were really pleased with the record results from the Marine and Tourism division particularly given some of the challenging operating conditions, primarily weather-related and with the backdrop of the divestment process that was announced earlier this year. A number of fare increases were implemented throughout the year, along with several dynamic pricing initiatives, which have delivered improved returns. This assisted in delivering improved margin in the second half. Several markets continue to see very good levels of activity and growth, Southeast Queensland, Kangaroo Island, Glasson and Towne, but others, primarily K'gari Fraser Island did not perform to our expectations. The K'gari business experienced reduced occupancy compared to the prior corresponding period, although room rate and revenue per occupied room is relatively stable. The launch of the alumina lightshow in October was a success, and it is expected to support increased visitation to the island as it grade gains greater awareness. To address performance at K'gari, we undertook a resort management strategic review, which resulted in us appointing 1834 hotels to take over the management of operations of the resorts on our behalf. This engagement commenced on 1 August and the benefits will flow in FY '26. In the Northern Territory, we extended the services funding agreements with the Northern Territory Government for ferry services from Dale into Mandora and Dan with TV Islands for 5 years. The first half was impacted by the total loss of 2 series and the losses we incur as a self-insured operator. The good news is that the business is now benefiting from the new funding arrangement and is trading well. A new Gladstone vessel was delivered during the period to support the recently secured 10-year contract. And in January 2025, the first of 2 new Southern Morton Bay Island vessels were delivered. The remaining investment was anticipated to be delivered in November this year. These new vessels provide increased capacity and will deliver improved operational performance to the services we operate in the region. The construction of the 2 new Kangaroo Island vessels and work to upgrade the landing infrastructure progressed, but the delivery time line has been delayed due to a number of factors, primarily delays in the South Australian government completing its infrastructure works and delays relating to the vessel builder in Indonesia. The first vessel commence sea trials in September and work on the second vessel was ongoing. Whilst the delay is frustrating, there's been no increase in the total cost of the project. We are currently working with the South Australian government in relation to modelization plans and new service commencement dates as the business is fast approaching the business, the busy Christmas holiday period, and we would not want to reach any service disruption given the impact this could have on tourism and local businesses and residents who rely on this service. Finally, corporate on Slide 16. During the period, we commenced work to implement Workday's consolidated platform to manage our global finance and human capital management functions. By consolidated finance and HR onto a single integrated platform, we anticipate enhanced operational efficiencies data accuracy, informed decision-making while driving innovation and cost savings and to provide a globally best-in-class finance and human capital management system to support our current and future workforce. The software will play a number of redundant and legacy systems across the business. The internal and external third-party costs to implement Workday over the next 3 periods -- 3 years are estimated to be approximately $21 million, with $2.3 million was incurred in FY '25. Accounting standards do not allow us to capitalize these costs and amortize them over the expected life of the new system, so that will be expensed as incurred. Once the rollout is complete, Kelsian will be able to retire over 13 outdated legacy systems and the AI-powered Workday will provide our global businesses with real-time information on every aspect of our finance and HR functions. This information is expected to lead to improved decision-making at the local and corporate levels that will combine with process efficiencies to deliver substantial returns on the investments for the project. I'll now hand to Graeme to talk about growth, strategy and outlook.

Thank you, Andrew. To start on Slide 18, I wanted to highlight the important strategic initiatives that have been delivered or commenced in FY '25 that will provide the foundation for our direction and growth in FY '26 and beyond. Several commitments were made at the back of our FY '24 full year result, which have now been completed. We completed and published the capital management elation framework. The strategic review was completed and opposed divestment of the tourism portfolio was announced in April, and the sale process has commenced. We announced that leverage levels would peak in FY '25 and today, we are reporting a step down in leverage compared to what was reported as of December 2024. The important changes have been successfully implemented the senior management team with a change in Group CEO; and Brent Maitland transitioning well into the role of AAAHI CEO. And finally, having identified our international bus division as a key driver of organic growth Singapore has successfully added a new contract and clients and the U.S.A. has delivered several meal contract wins. We set out what we were going to do and have delivered on each of these commitments. The job is not done, but the foundations are now in place for our next chapter. Importantly, we know that to be in a position to capitalize on the opportunities available on the horizon, we must narrow our focus. We can't deliver strategically if we don't deliver operationally. I understand this, and that is why I am laser focused on delivering key operational improvements in FY '26. For the Australian bus division, Sydney is a boring focus with the renegotiation extension of the Region V contract alongside delivering further efficiencies across our Western Sydney contracts being essential for this division's success. For Marine and Tourism, the transition to the new 25-year Kangaroo Island exclusive license will occur in FY '26. The Kangaroo Island service is where it all began for Kelsian 30-odd years ago, and the transition to the new contract will see the preparation, mobilization and ramp-up of operations for the 2 largest vessels ever operated by SeaLink. These vessels will provide the essential transplant link to Kangaroo Island for the next 25 years. I'm also focused on buying efficiencies across our operations. With the potential divestment during the year ahead, the rightsizing and right skilling of our corporate and shared service function will be a focus. A big part of this is having the right systems to efficiently serve our businesses. And as Andrew has detailed, we are in the process of delivering a new transformational finance and HR system for the group. Strategically, we are focused on getting the potential divestment of the tourism portfolio right. As I know, a divestment of this magnitude and of many business units that have been part of the group for a long time, is a complex process and comes with both operational challenges and people risk. On the growth side, we will focus on continuing to deliver organic growth. We're going to do this through a capital-light contract opportunities such as contract extensions, expansions and growth by leveraging existing in-house expertise and expanding relationships with existing customers. There are key structural shifts in target markets like the Southeast Queensland bus market and in regional U.K. that present important opportunities for the group. These opportunities are capital-light in nature, and any contract we will open a new organic growth market for our core public transport business. To give some indication of the scale of 1 of these opportunities, up to 10,000 buses are expected to be franchised across regional U.K. over the next 5 years. We are also looking at entering new markets New Zealand represents an adjacent market with similar characteristics to our Australian business, and there are open contract opportunities for both bus and ferry services. Finally, we expect further growth from existing and new contracts in the U.S., especially contract servicing industrial clients. $23 million growth CapEx has been invested to support the 2 contract wins announced in late FY '25 with opportunities for further growth in this area over FY '26. Where we find opportunities that require incremental CapEx, we'll look at investments in existing geographies, target investments that deliver appropriate returns and then unlock new strategic benefits for the group. On Slide 19, we provide an update on the tourism portfolio divestment, which was announced to the market in April. The potential divestment of the tourism portfolio will enable Kelsian to emerge as a more infrastructure-like commuter and contracted business with lower capital intensity and a more stable earnings base. Our plans to go through the proposed investment portfolio in detail again in this presentation. However, I would like to reiterate that assuming value and terms are attractive and determined to be in the best interest of shareholders. Proceeds from the divestment will be applied in line with our capital management allocation framework to reduce debt and selectively invest in strategic growth opportunities within our bus, motor coach and marine transport businesses. The inbound interest in the tourism portfolio since we now for potential divestment has been encouraging with a mix of both domestic and international parties with interest in both the whole portfolio and certain assets. In terms of the process, we're in the middle of stage 1 of a 2-stage process, and we'll continue to keep the market informed on material developments as the divestment process progresses. Moving to our outlook for FY '26 on Slide 20. There was a positive start to the new financial year with the light trading performance being in line with our expectations across all 3 operating divisions. Some of the key operational drivers for the remainder of the year include the Bankstown Rail place contract in Sydney, which we now expect to run for the majority of FY '26. Also in Sydney, we expect further efficiency to be delivered from the contracts we operate in Western Sydney, especially as part of the bus network are improved ahead of the opening of the new Western Sydney Airport later this year. Elsewhere in the Australian bus division, we have the Adelaide tram replacement bus services, which kicked off earlier this month. For international bus, the new industrial contracts in the U.S.A. will ramp up in FY '26 and be a contributor to ongoing organic growth we continue to expect out of the U.S. As for Kangaroo Island, we're still working with the South Australian government to confirm the exact timing for the mobilization of the new contract. The final mobilization plan will be designed to minimize disruption for residents businesses and tourists, especially as we get close to the peak season for this service, and this will dictate the exact timing of the contract mobilization and transition costs, which will be incurred during FY '26. In terms of our expectations for our financial performance for FY '26, we expect to deliver underlying EBITDA of between $297 million and $310 million. This guidance is provided on the basis of the business today and does not account for any potential divestment of the tourism portfolio during the period. FY '26 CapEx is expected to be $128 million. And as Andrew has previously broken down, this includes the $20 million of CapEx spend on vessels infrastructure, which has been carried over from FY '25 and the $23 million of committed growth CapEx related to new contracts in the U.S. We also set out on the slide, our expectations for the key below-the-line items for FY '26. And again, this guidance is ride on the basis of the business as it stands today. Finally, on Slide 21, we set out the Kelsian investment proposition and what I view as the key strengths of our business. Firstly, we are an operations-focused organization that delivers essential journeys for our customers. Importantly, the potential divestment of the Australian tourism portfolio will further streamline and simplify our operations and make the business more infrastructure like by increasing the predictability of our revenues and cash flows. Our operations are underpinned by predictable long-term contracts with 93% of revenues contracted or nondiscretionary in nature. Our business is truly diversified not only by business type, but also by geography, transport mode, contract type and customer. Our reputation for operational excellence is our biggest asset and has been the driver of our demonstrated track record delivering organic growth through contract renewals and new contract wins. Our incumbent positions and exclusive contracts with natural hedging of our cost base supports our resilient margins. And finally, we are benefiting from several very tangible global tailwinds and including population growth, urbanization and decarbonization that are expected to underpin growth in our core industry over the longer term. That brings us to the end of the formal presentation, and I'll now hand back to Ashley, who will manage any questions you have. Andrew and I on the results released today.

[Operator Instructions] Your first question today comes from Allan Franklin with Canaccord Genuity.

Great to see the clean print. Just a query on Singapore and follow on to the sort of '26 guide, just the extent to which you're sort of comfortably within performance incentives in Singapore and then maybe any additional color you can make on what drives the bottom end or the top end of FY '26 EBITDA?

Yes. Thanks, Allan. FY '25 was pretty good in Singapore, and we saw a rebound in the performance incentives we're generating out of that business through the improved operational performance. Expectations for FY '26 is sort of continued measured growth in those performance incentives, not expecting a huge step up, but we continue to do slightly better over the course of FY '26. And then in terms of the guidance and sort of top and bottom of the range, looking at each of the divisions, probably the key drivers there International bus, really the big one is AAAHI. There's obviously some underlying variability in the AAAHI earnings, but the key driver in terms of what moves the dial there between the top and bottom of the range is really the speed of the ramp-up of the industrial sector client contracts that we operate. including the 2 original contracts and the 2 new contracts we announced in June of FY '25. For Australian bus, big swing factors there are the Bankstown contract. So we don't know exactly how long that's going to run for during FY '26, but we are expecting it to be a contributor for the majority of the year as we stand at the moment. The other stuff, which is a bit less certain is timing of some of the service improvements approvals from government in terms of change to timetables and putting new timetables in place, along with the speed that government can roll out some of the new zero-emission buses. They have planned in our major networks. As those buses come in, the brand-new zero-emission buses clearly come in at a much lower operating cost compared to 20-year old diesel buses that they are placing sort of quickly, we can get those in the quicker we can get some of those benefits. And then the other one, as I called out, is really just overall efficiency of our Western Sydney bus contracts, which we're looking to continue to gain further efficiencies over the period. And in [indiscernible] tourism, similar to last year, the performance of K'gari is a pretty big swing factor depending on how occupancy goes and how the new contract with our new manager 1834 goes for the business K'gari. And then the other big one this year from reintros is the timing of the introduction of the new PI vessels and the transition to the new 25-year license. They're probably the big ones.

Helpful. And just on the U.S., I know you mentioned $23 million of CapEx. If you could just clarify, please, where that is going, if that's more of an existing replacement spend? I'm just trying to layer in how to think about the new contracts, LNG contracts as they roll through the extent to which you might be able to use existing fleets versus expend CapEx into, I guess, $27 million.

Yes. So that -- the $23 million specifically, that is all growth CapEx going directly to the 2 new contracts that we announced in June. So they're not replacement vehicles. They are new additional vehicles designed to service those contracts. That $23 million is over and above the sort of roughly $40 million we expect to spend in international but division on an annual basis. That's part of the sustaining CapEx figure of $85 million that we flagged. That $40 million allows us to replace fleet in the U.S., but it also does provide some capacity to move vehicles out of the charter business. that are replaced new vehicles to move them to service some of our industrial sector clients as well. So that $40 million does buy us some extra capacity to service those industrial sector on tracks that we have as well.

Helpful. Maybe just one other quick one. Just on the provisioning. I noticed that lifted by $14 million, there's a fair chunk of sort of other provisioning in there, but deferred consideration payables. Do you expect those to get paid out over the coming period?

We're not sure on net debt, Allan. It's the certain performance hurdles that need to be met. So that ultimately depends upon the financial performance and the hurdles required for those.

Your next question comes from Aryan Norozi with Barrenjoey.

Just first one for me. Just at bus business margins, they were 11% in the first -- 11.2% in the first half and 11% in the second half. I mean you've had Bankstown ramping up, which is high margin. You've got these efficiencies that you've rolled through in the second half that you didn't have in the first half. So what's the key driver of that? And looking into fiscal '26, should we expect the 17% margin to be the norm until you reprice Region 6? Or do we expect a step change upwards?

Yes. Thanks, Ary. A big driver of that sort of slight margin compression in the second half was primarily related to the aging of our fleet, there's been some delays from government in terms of the speed that they can roll out the new zero-emission buses, which means we're operating some of the older diesel buses longer than we expected while they get through that backlog and that does have a relatively material impact given the cost to keep some of those older buses in the fleet. Now we do expect that to start to normalize over the course of FY '26, we should see that margin profile turn around. So in terms of expectations, looking at FY '26, expecting modest improvement in the Australian bus division compared to where we ended where we ended up in the second half.

Right. So still not at the 12% number that you guys sort of to target or should be an improvement on the 11%.

Yes. So we expect it to modest improvement on where it was in the second half. Don't expect it to get to 12%. The big step change, which gets us to where that 12% figure, which you sort of indicated what we expect out of the division as a whole will really come from the revised Region 6 contracts, which kicks off -- only kicks off on the first of July, 2027 -- 2026, sorry.

All right. So 12%. Yes, you need the Region 6 to get you to 12%. And then within guidance, do you factor the cyclone Alfred impact? I mean there was a $3 million sound Alfred impact quarter in the third quarter. I suspect some of that flow through to the fourth quarter, but it's trial as we know it, do you have that fully unwinding? Or do you have a provision for that in the guidance range?

I mean, the variability of the weather obviously goes to the range that we provided. So we certainly got an allowance that the weather is not going to be perfect for the full financial year, so that we don't hopefully have to call out weather as a reason for not getting there. In saying that, it probably doesn't account for very, very extreme things. This year, we're able to get there on the guidance despite the impact of cyclone output, but those things do have a pretty material impact as we saw this year with the $3 million impact to the EBITDA line from [indiscernible]. So there is some allowance there, but that's said with a bit of caution given the current environment.

Great. And last one, you don't disclose the AAAHI, but is it fair to say that EBITDA in that business grew sort of roughly 8% in FY '24 in [indiscernible] terms.

[indiscernible], Andrew?

Yes.

Yes, that's pretty close, Ary.

Next question comes from James Wilson with Macquarie.

ust a couple from me. Are you able to maybe just talk us through the profile of the return that you're expecting to see from these finance and HR investments. Is that something that we should be thinking about perhaps from the second half of FY '27 onward?

Yes. I mean that's where it will start to take effect. So the go-live for the finance part is not until April next year and then the HR system later in October. So there will be some time before those benefits are start to realize, but there are a lot of efficiencies to be gained around duplication, automation of cars, things that are manual -- and as I said, we're getting rid of effectively 13 legacy systems across the portfolio.

Great. And just on the incorporation of ROIC into your longer-term incentive Am I able to just confirm that, that incentive is set in line with your capital allocation target of ROIC being 200 basis points above pretax WACC. And also, can you maybe just give us some color on what that pretax WACC is that you're using for that calculation?

On the first part of that, that is correct. So the incentives that will see the LTI from this year is aligned with the Capital management and allocation framework in terms of the targeted returns. As we sort of step through in quite a bit of detail when we release the capital management allocation from work. We don't intend on closing the WACC upfront, and that remains our position. But obviously, in terms of the performance over the period for those long-term investments, we will disclose the historic WACC that's used to assess how we have gone over the 3-year period.

Your next question comes from Owen Birrell with RBC.

I guess a bit of a follow-up question with regards to that -- the targeted return on invested capital target of 200 basis points above your pretax WACC you've given to sort of update on how that's been progressing over the last sort of 12 months and acknowledging that the sale of the tourism portfolio will assist that target. I was just wondering if you can give us baseline of, I guess, what the current gap between ROIC and WACC is for the portfolio as we end FY '25?

Yes. So I mean, in the presentation in February, we sort of provided the give calculations of how we're going to calculate ROIC going forward. Now as flagged at the time, we weren't expecting any material increase in ROIC for this financial year given the ongoing CapEx spend on vessels that aren't yet in the water, and that has played out. So overall ROIC under those calculations, for the full year, FY '25 ended up pretty much in line with where it was in FY '24, so no real growth there. In terms of where we stand, relative to WACC as per the previous question, no, we're not going to disclose WACC. So it's a bit hard for us to give specific guidance on that question.

I guess what I am trying to understand is, you've clearly got a tourism portfolio sale in the works, and that's going to materially affect your WACC and your ROIC. Just wondering to, I guess, triangulate when you do make the sale, what the improvement has been at that point. But given we've got no baseline to work off, it makes it very difficult for us to measure you against these targets.

Yes. Also, I mean, I understand the concern, but it's also that goes to one of the reasons we don't want to be sort of getting a running country on WACC because we are expecting the WACC to change if we get the tourism portfolio away. So put us in a difficult position if we've got to provide continuous updates on what we expect or what we think the WACC is. So we don't really want to get in to provide a running commentary on the WACC over the period.

Okay. Understood. And can I ask a second question, if I may. Just on AAAHI, a lot of positive momentum there with the renewals and new contracts. But again, I guess, quite difficult for us to quantify the potential ramp-up as we move into '26. So I just wanted to get a sense as to a broad guide on, I guess, the organic growth coming through that business. Should it be in line with the call it, the 8% to 9% that you've delivered in FY '25. Should we see that same degree of momentum continuing into 26?

Yes. I think that's what we would expect to see from that business for the foreseeable future, especially with the ongoing opportunities in the inductor sector clients with the industrial sector contracts. And there's probably some upside there to do a bit better. The only count of that is to do much better than that is going to require some further growth CapEx in addition to the $23 million we've already spent this year but we do expect that sort of 8%, 9% to be achievable for that business.

Your next question comes from Tim Piper with UBS.

Just a couple of questions. On the depreciation and interest guidance, so starting with interest what you of $59 million, does that kind of assume you move to the top end? I mean, you flagged that you're going to sort of move to within the range, I think, the end of FY '26. Does that kind of assume you get to the top end of that range, middle of the range for gearing. What have you built into that assumption? And then the D&A, I assume is obviously, based on what you've guided to of $128 million of CapEx in '26? Or is there anything else built into that depreciation forecast?

No, that's right insights. It's on the basis as we get to the top end of the range in terms of the interest. And there's nothing else built into depreciation other than the CapEx we've disclosed.

Perfect. Then as we roll to the end of FY '26, obviously, some uncertainty around when Bankstown finishes. But let's say, it's June, July, and then you've got a successful retender in Region 6 at around the same time. What's the kind of balance between those 2 in terms of the earnings banks down dropping out versus Region 6 stepping up. Would that be a net incremental positive to the earnings run rate? Or will Region 6 not fully offset the step-down in Bankstown?