Kelsian Group Limited (KLS) Earnings Call Transcript & Summary

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Kelsian Group half year results conference call. [Operator Instructions] I'll now hand it over to Clint Feuerherdt, Chief Executive Officer.

Thanks, Chris. Good morning, everyone. Welcome to the half year results presentation for Kelsian Group Limited for the 6 months to 31 December 2022. For those who don't know me, I'm Clint Feuerherdt, Group CEO, and I'm joined today by Andrew Muir, Group CFO. Today, I'll begin by providing an introduction to Kelsian and the key drivers of our business. I will then provide an overview of our financial results and strategic and operational highlights before I hand to Andrew to discuss the group results in more detail. We'll then step through the performance of each of our businesses before I conclude with our current focus areas, trading so far in second half FY '23 and the outlook. Turning now to Slide 3. For those not so familiar with our business, I want to start by presenting the key attributes. As you can see, at 31 December, we had over $1.2 billion in annualized contracted revenues. These predominantly long-term government-backed essential service contracts provide us with a solid base of consistent and predictable earnings. Importantly, the majority of these contracts also offer a natural hedge in today's inflationary environment as they include indexation clauses for fuel prices, wages and CPI. In our marine and tourism business, we are also able to pass on fare increases to offset some of the cost inflation pressures such as fuel and higher wages. As a result of the structure of our contracts, we have a defensive and resilient business model. Over many years of organic growth in M&A, we have established a leadership position that is highly scalable. There are barriers to scale to establish the infrastructure and build the necessary expertise to win what are often complex bus tenders. Our strong management team with deep sector experience and strong track record and delivering growth has successfully built our business to be the largest bus operator in Sydney, following similar parts of success in Perth and Adelaide, something the team is certainly very proud of. One of the drivers of growth has been our leadership position in decarbonization, which has become a key focus, in particular, for governments to deliver sustainable transport solutions. Turning to Slide 4. I want to take a moment to talk about the role of public transport in decarbonization of the transport sector. Firstly, the state of transport in Australia. As many of you know, transport is Australia's third largest source of greenhouse gas emissions with the highest rate of growth. Cars are responsible for roughly half of Australia's transport emissions. Public transportation is the key to transport-related emissions reduction as it produces fewer emissions per person per kilometer than the average Australian car. The infographic on the right-hand side of the slide, while specifically Victoria, highlights the important role of public transport and its capabilities to dramatically reduce greenhouse gas emissions. The balloons illustrated missions on a per person per kilometer basis. The space consumption shown is footprints from the different modes, illustrates that cars are the most space consuming mode of transport on a square meter per person basis. Electric cars, unsurprisingly, are just as problematic as [ Petro-cars ] in this respect. While we are progressively incorporating more zero-emission buses or [ ZBs ] in our fleet, it is still worth noting that even a diesel-powered bus has a significantly smaller footprint than the average car. Turning now to Kelsian's role in reducing transport-related emissions. We are already working with different land transport authorities to help them achieve their Paris Align NetZero goals. Currently, our Australian fleet includes 60 battery-operated buses and 2 hydrogen fuel cell buses, making us the largest zero-emission bus operator in the country. We also have 28 Zero Low machine vehicles in Singapore and recently kicked off a BEV trial in the Channel Islands. Decarbonization will be achieved not just trading at diesel bus for an electric one, but by the deployment of more buses to take more cars off the road. You might like to refer back to the cover of the presentation that illustrates our [ lighthouse us ], which is, in fact, the largest electrified bust in Australia. Now turning to Slide 5. I might just spend a few moments describing our 3 businesses. First of all, our largest business, representing over 60% of group revenues is the Australian bus business with long-term contracted essentials transport services to major cities on behalf of government. These contracts are unique in the way that they include indexation clauses that protect us against inflationary pressures. Fuel and wages naturally represent the majority of our cost base and the remaining costs that support the delivery of our contracted obligations are indexed at CPI. In our public transport businesses, every part of the revenue is indexed. This allows the revenue for the majority of our business to move in line with the market forces while also not being exposed to any demand-driven revenue volatility or farebox risk. So, we are contracted to provide services irrespective of demand, and they are mostly capital-light with government taking ownership of the fleet and necessary investments. Whilst there is no demand-driven risk, it is worth noting that we are able to drive revenue growth, if we add services, for example, in a growth corridor, and we are able to grow margin over the course of the contract as we extract synergies and efficiencies. Our operations in Singapore delivered the same quality attributes as Australia enjoyed the partnership of an extremely strong government and operate largely on the same systems and methodologies as other geographies. There are, of course, local distinction, different businesses but fundamentally, we are contracted by governments to deliver a public service that is essential. When we look at expansion into new geographies, these are the attributes that we are searching for. Our third business is Marine tourism business that provides passenger transport and various tourism experience and accommodation in many of Australia's best holiday destinations, including 19 unique island destinations. For our Marine and Tourism division, some of the operations are contracted in much the same way as the bus business, receiving monthly price indexation from governments or in the absence of that persistent cost base increases are able to be passed on to the end user of the service via their increases. I wanted to call out the long-term nature of our contracts with the remaining contract terms for each of our businesses outlined here. Calculated using revenue weighted average remaining contract term and including contract extension options, we have 5.5 years for the Australian bus business, 5.3 years for the international bus and an impressive 13.3 years of the remaining contractor for our marine and tourism contracts. This is a highly defensive business with a diversified earnings and geographic mix. Now turning to Slide 7 and the first half FY '23 results. All of the key attributes that I've just spoken about translate into a very strong performance, even in an otherwise challenging operating environment. Our contract indexation and very strong marine and tourism results have delivered top line growth of 6.2% to $678.3 million of group revenue for the half. Underlying EBIT and NPAT have increased substantially half-on-half. EBIT rising by nearly 18% to $44.9 million and underlying NPAT rising 21.6% to $26.5 million. Similarly, our cash generation has [ flied ] with gross operating cash flow increasing 11.7% to $67.5 million for the half. The business has been investing heavily in its asset base, which Andrew will touch on later, taking our net debt position to $283.7 million and sees our leverage increase slightly to 2.05x, which reduces to 1.6x when excluding the government back debt component. Understandably, the Board has decided to translate this success into an increased interim dividend to $0.075 per share. I might just highlight before we move on that all of these numbers take into account the accounting treatment change of our Singapore bus leases that was detailed separately in the announcement on the 15th of February, at which Andrew will reiterate later in the presentation. Turning to Slide 8. Our operational and strategic highlights. The Australian bus business has had a period of continuing its 25-year history of delivering substantial organic growth. The Sydney metropolitan bus procurement process has finally come to an end with transit systems emerging as the most successful operator, growing its market share to an impressive 33% of Sydney bus contracts, the largest in the market. This success includes the retention of Region 3 contract region and new contracts on or Regions 2, 13 and 15. To give you an idea of the size of the price, these new contracts combined locking some $1.3 billion of revenue over the course of 7 years. It's important to note that this is as of today, 23rd of February and includes those new tenders in Sydney that we announced last week. To bring in renewed focus to managing this business, I am pleased to have appointed a great new dedicated CEO to manage the Transit Systems business and also manage the transition of these bus services as well as the integration of new tenders and M&A. The international bus division has seen geographic expansion with an acquisition in the Channel Islands. Singapore began to enjoy an improved operating environment with labor shortages now largely resolved. And in London, the transition of our East London bus operations to the new owner was well executed. Of course, the other big standout in this half has been the strong rebound in domestic tourism that I'm sure many on the call would have witnessed firsthand over the summer. This has driven impressive growth in our Marine and Tourism business. As well as strong organic growth, we have also signed 2 new 10-year contracts that secured the contracted revenue of our [ bus ] operations. M&A continues to be a complement to our organic growth strategy. While during the period, we signed agreements to acquire Horizon's West Coach lines, which takes us into the education transportation space and Grand Touring, the largest coach operator in the Northern Territory. The Marina Tourism division undertook the acquisition of the Starship Group, comprising of 2 vessels in berthing infrastructure on Sydney Harbor, further consolidating our leadership position on the harbor at a time that is enjoying the post-Covid rebound. As just mentioned, buses are a vital path to decarbonizing our cities, and Kelsian is proud to be the standout leader in Australia. During the half, placing orders that will see a further doubling of our NetZero machine fleet. I'll now hand over to Andrew to discuss group results in more detail.

Thanks, Clint. The financial results reported in the first half highlight the strong recovery we've seen in domestic travel post Covid, which is reflected in the results for the Marine and Tourism division. In addition, the result reflects the benefits of the cost indexation mechanisms we have in our Australian bus contracts, which provide protection in the highly inflationary environment we are operating in at the present time. So those not familiar with this, in our government public bus contracts, our payments from government are adjusted either monthly or annually to take into account movements in the cost base. Slide 10 provides a high-level comparison of the consolidated December half year result compared with the prior year. Please note, the prior year results have been restated to reflect the change in accounting treatment adopted for the Singapore bus operation. I'll provide a little more detail around the impact of this change later in the presentation. Starting with revenue. The increase of $39.5 million or 6.2% reflects a $49 million increase in revenues contributed from the marine and tourism businesses, 3 months of additional revenue from the first full period contribution of the Sembawang-Yishun contract in Singapore versus the prior corresponding period and the benefit of contract indexation. These were offset by the fact we had no significant [ rail ] replacement projects in this half, mostly due to industry-wide labor shortages that led to nearly all of this work being postponed. We anticipate these projects will be rescheduled when the labor issues are resolved. In addition, we were cycling the loss of the Darwin contract as well as a 50% reduction in our U.K. operations following the divestment to RATP debt, which occurred in December 2021. From an operating cost perspective, the inflationary environment and labor availability challenges have resulted in some cost pressures on the business. A large portion of these cost pressures were offset by the indexation mechanisms in our bus operations as well as our ability to increase fares in most parts of the Marine and Tourism operations. However, labor availability has served to limit some growth opportunities and led to some higher costs as we paid more in overtime and higher casual and agency staff costs to maintain services. Underlying EBITDA of $79.8 million represents an increase of 1.4% or $1.1 million over the prior year and excludes the one-off items I'll discuss in more detail shortly. The lower EBITDA margin was predominantly due to labor shortages as well as the time lag that occurred before the fare increases took effect in the Marine and Tourism business. Inflationary pressure, particularly around fuel were more extreme early in the period and have moderated in the past couple of months. This has seen margins improve late in the half in the Marine and Tourism segment. Depreciation reflects the impact of the changes in depreciable asset base of the business, and amortization reflects the noncash expense associated with the amortization of customer contracts recognized at the acquisition date as part of the purchase price allocation of both Transit Systems and Go West towards. Our borrowing costs continue to be well managed through the interest rate hedges we have in place, which has provided protection against recent interest rate increases. From a tax perspective, we've reported an underlying effective tax rate of approximately 26%. We continue to enjoy the benefits associated with marine training incentives as well as the accelerated tax depreciation benefits associated with the temporary full tax expensing provision. For the full year, we anticipate the effective tax rate to be maintained at broadly the same levels. Overall, underlying net profit after tax and before amortization of $35 million compared with $33.3 million in the prior year, an increase of $1.7 million or 5.1%. Turning to Slide 11. This provides a summary of the impact of the change in accounting treatment for the Singapore bus business that we announced on the 15th of February as well as the one-off abnormal items that were incurred during the half and have been adjusted to give a clearer understanding of underlying earnings. The accounting treatment change in Singapore results in adjustments to noncash items reported in the international bus segment for revenue depreciation, interest and certain right-of-use assets and associated lease liabilities. There's no impact on net profit before tax, net profit after tax, cash flows, net assets, financial covenants or on Kelsian's operations or its prospects. The change in accounting treatment did not arise due to any irregularities concerning Kelsian for the period or prior periods, and there was no need to restate historical results for adjusted accounting treatment for any other businesses. One-off abnormal costs in the period were the cost primarily associated with the unsuccessful attempt to acquire the Go-Ahead Group plc in the U.K. Turning to the cash flow on Page 12. During the period, we've maintained our disciplined approach and focus on cash management. The gross operating cash flow of $67.5 million was 11.7% or $7.1 million higher than the prior year. We received $12 million in proceeds from the incoming operator for our vehicle fleet in Darwin. This is an example of how our contracted vehicle termination payment works in our contracts with government when contracts come to an end and a transition to another operator. During the half, we invested a total of $44.6 million to acquire new assets across the portfolio to improve the asset base of the business. I'd like to specifically highlight in the period, we repaid the final noncontingent deferred consideration payments associated with the Transit Systems Group acquisition, along with first of [ Fed ] consideration payment associated with the Go West Tours business. We also repaid the vendor note associated with the [ SDA ] BusLines acquisition. In summary, we maintained a healthy cash position at the end of the year, and this provides a good liquidity buffer for the business moving forward. As shown on Slide 13, we continue to strengthen our balance sheet with net assets increasing by $4.8 million since June 2022. The increase in our debt facility limits, together with extensions to maturity terms ensures that we can continue to invest in the business as well as pursue small bolt-on opportunities without the need for additional capital. During the period, we utilized some of our cash reserves to meet the deferred acquisition obligations and repayment of the third-party debt I spoke about earlier. Although overall leverage has increased slightly, we continue to have significant headroom in all of our bank covenants. In relation to our borrowings, there's an important point I'd like to explain, which is not directly reflected in the balance sheet or accounts for our Australian Bus contracts with state governments, where we recognize the cost of buses in our books. If for whatever reason we lose a contract or it's not renewed, there's a contractual obligation for government to take and pay us for the buffers that they're written down book value. The Darwin contract I mentioned earlier is an example of this. Whilst this quasi-government receivable is not recognized in our accounts, this is and will continue to be a material sum and it represents a contractual commitment with our government. As of 31 December 22, this quasi-government receivable totaled $70.8 million. If we exclude this receivable to estimate the underlying leverage of the business, our leverage for core debt reduces from just over 2x to just under 1.6x. Overall, our balance sheet and resilient cash flows ensure the business is well placed to continue to deliver on our growth strategy by the 3 core channels being organic growth, diversification into adjacent markets and M&A in our key target markets of U.K., Europe and the U.S.A. Over to Slide 14, which provides an overview of the capital expenditure incurred in the period. We continue to invest in the business to upgrade our fleet of vessels, vehicles, and accommodation. Gross capital expenditure during the period was $44.6 million, up from $21.1 million in the prior year. Approximately 60% of this was invested in marine and tourism businesses, which really highlights the capital-light nature of the public transport bus businesses. The $44.6 million in capital expenditure included investment in new vessels, several new electric buses and associated charging infrastructure at depot and some upgrades to IT infrastructure and software. Going forward, the anticipated CapEx for the second half of FY '23 is approximately $30 million. This incorporates an ongoing investment in marine fleet and new coaches and electric buses in Australia. It is worth noting that the increased investment in electric buses leads to increased contractual payments from governments as well as the operational benefits and savings that are delivered with new buses. We will also continue to seek to take advantage of the temporary full tax expensing provisions for eligible assets purchased in operational by 30 June 2023. By way of conclusion on this result overall, I'd like to highlight the resilient nature of our long-term government-backed essential service contracts, which provide a consistent and predictable earnings base. This defensive earnings base, together with our strong balance sheet, resilient cash flows and disciplined approach to capital deployment combined to ensure we are well placed to deliver on our growth strategy. Clinton will now provide some commentary on the divisional results and performance during the half. Page 16 provides the segment results for the Australian bus division. Whilst the contract indexation mechanisms have been working effectively to offset inflationary pressures, the results have been overshadowed by somewhat an industry-wide shortage of drivers and mechanics. This has resulted in suppressed higher-margin rail replacement and special charter event work, higher overtime and casual wage costs to maintain services, increase driver turnover, recruitment and training costs and KPI penalty for failure to deliver some of the contracted services in some regions. The washup of this has seen an overall margin deterioration, which has been further compounded when comparing with the prior period due to the loss of the Darwin contract and cycling the major rail replacement project in South Australia that was in the first half of FY '22. Despite these challenges, we have continued to focus on operational cost controls around things like repairs and maintenance and the benefits realized from group-wide tendering and procurement initiatives. The business is well placed once labor issues are resolved.

Yes, I think the temporary over time and the effects of the industry-wide skilled choice was well flagged coming into the half and substantial progress has been made, bringing all of the businesses back to full establishment. Alber East, New South Wales and South Australia are now enjoying full employment with good progress ongoing in Adelaide and Sydney. With labor availability comes the ability to revert to targeting rail and charter work, of which there was very [ little ] in this first half. This segment has successfully stepped into parallel segments to open up additional organic growth opportunities, and we are seeing a steady stream of organic growth from Go West in the resources space. And with the recent completion of Horizon's West opens up more opportunities in the contracted education transport sector. The reliable contracted earnings and effective indexation has allowed this division to continue into its strategic plans with several complementary bolt-ons contracted and of course, the substantial success in Sydney as we've already covered.

To the international bus segment on Page 17. The International Bus division results have been restated to reflect the accounting treatment change in Singapore that I discussed earlier in the presentation. In addition to the accounting change, there's been a lot of structural changes that have occurred in this segment, which makes a comparison to the prior year, quite challenging. The prior year comparable results include a full 6-month contribution from the old London operations and 3 months of the new Sembawang-Yishun contract in Singapore, which commenced during late September 2021. Offsetting this, the current year included a full 6 months of Singapore and 3 months from the recently acquired Channel Islands businesses in Guernsey and Jersey, both of which are trading well. We've continued to maintain and carry the cost of a senior management capability and presence in London to support us in pursuing tender and M&A opportunity in U.K. and Europe. We've also kept a management presence in North America for the same reasons. Like Australia, the Singapore results have been impacted by labor shortages, which are now largely resolved. This did negatively impact earnings during the period as the performance objectives and financial incentives we usually achieve were not met. It's pleasing to see that overall, we've achieved an improvement in the underlying EBIT of the International bus division.

As Andrew highlights, this division has undergone a substantial restructure. During this period, the team executed on the transition of the East London and bus operations to the new owner, leaving us with a very well credentialed management team in London with which to manage our joint venture, oversee the Channel Islands and bid in Manchester. The small acquisition in the Channel Islands, placing us as the only operator of contracted bus services in Jersey and Guernsey has been a great complementary addition at the back end of the period. The holding costs of the teams in London and North America are important to our pursuit of growth and evaluation of opportunities in these key markets. The ongoing integration of the Sembawang-Yishun contract in Singapore is going well and with orders open and full labor complement is positioned well to continue the path to optimal performance with 2 additional contracts in the market. There has also been considerable focus on preparing for these tenders and possible further expansion.

Over to Page 18 and the segment results for the Marine and Tourism division. The first half of FY '23 saw a dramatic improvement in the operating environment of the Marine and Tourism division with a resurgent in domestic tourism. We've seen the strongest trading volumes and revenue growth since the Covid pandemic began, and the domestic leisure consumer is proving to be very resilient with minimal impact from the opening up of travel overseas. Staff shortages and inflationary pressures ease as the half progressed, and the fare increases that were implemented throughout the period did not suppress demand, but more importantly, have underpinned the recovery in margins. The overall margin compression compared with the prior year was a result of a few factors, including labor shortages, particularly hospitality roles, resulting in higher casual and overtime costs, a time lag before the introduction and/or approval and implementation of higher fares took effect to offset escalating costs. And finally, some post Covid catch-up of repairs and maintenance spend on several of the larger vessels in the fleet, which were deferred [ through Covid ]. These vessels required their 5-year out of water slipping and compliance certification and the repairs and maintenance costs of these larger vessels was more than $2 million in the period.

We spoke about the increased demand we are seeing in marine tourism as we came into this half year period. It's pleasing to see that this demand has certainly continued to deliver an impressive level of growth. Domestic demand is still the major driver of revenue in this division and our international tourism revenue component only representing about 30% of pre- Covid levels, indicating that there is still some way to go. I would highlight that Covid was spent getting match fit and creating a much more demand responsive operating business. The division is more exposed to cost base increases, but we have used the [ new ] management tools and modest spare increases to combat the inflationary effects and largely maintain the margin. There have been some good contract renewals during the period with the signing of the 10-year lasting contracts and more recently, the signing of a 15-year contract to continue operating a subsidized service to Lane Cove in Sydney. Andrew has already highlighted the significant investment in our fleet during the period with some substantial scheduled maintenance spend flowing into the P&L. The unfortunate flooding of the Murray River saw us suspend cruising in late November, which is expected to resume mid- to late March. Obviously, we are very happy with the trading in this division, but the lift in the quality of the asset base and recontracting of some significant contracts are equally worthy highlights.

Page 19 provides a summary of the corporate cost center for the group. During the period, we made a concerted effort to build scale and invest in the people and systems we need to drive efficiencies and position the business for growth. We need the scale and resources to be able to ensure a successful transition of the recent contract wins in Sydney and the integration of M&A activity. Areas of focus have been to bolster our human resources, IT and digital teams to better manage our people, build more capability in the business development arena and our in-house legal capacity and focus on investing in cyber prevention to manage our cyber risks and the exposures across the business. We've also continued to focus on improving our websites and consumer experience and commenced a rollout of a CRM solution to improve customer loyalty and cross-selling opportunities.

Now turning our mind to the future and turning to Slide 21, I'll speak about our current areas of focus. There's certainly no shortage of activity across the entire business at the moment. No sooner we announced the successful contract retention and new tender wins and work begins to transition the bus contracts and to extract the synergies and efficiencies that are available. Also, throughout the contract term, there are opportunities to grow both revenue and margin. There are several opportunities to win new tenders, both in the local region and overseas. And of course, growth through acquisitions continues to be a core focus for us. While we've been focused on public transport services, we have also recently moved into adjacent sectors such as education and resources where we can apply our expertise. We plan to further the success we have seen with the expansion of our resources-based services and embark on the same path in the contracted education, transport space. We have the balance sheet strength, the management capability and experience as well as leadership in sustainable transport solutions to capitalize on the significant number of opportunities out there, remembering, of course, that we remain very disciplined in our deployment of capital, as evidenced by our decisions to walk away from acquisitions where we don't see value and not alter our proven approach to tendering that has delivered a consistent 2 decades of growth. On to Slide 22. I don't think there's any doubt that Kelsian continues to be the most successful and respected operator of public transport in Australia. Over 2 decades of consistent success has delivered substantial shareholder value in a very capital-light way. With most advanced economies continuing to partner with the private sector to deliver higher-quality transport solutions, the possible pipeline of contracting opportunities is large. The key strengths that underpin our business will facilitate further conversion of these opportunities over the short, medium and longer term. In addition to the parallel sector opportunities that I've already highlighted, our near-term focus will be on tenders in Singapore, U.K. and New Zealand. Now that Region 3 has been recontracted in Sydney, Kelsian will not be required to remit any of its other contracts for several years. The domestic focus will be positioning in Melbourne for possible substantial pipeline of contracts that come to an end from 2025. There is always the possibility of governments taking the step in Queensland, ACT and Tasmania to align with the other states of Australia in targeting higher quality and greater value for money outcomes for their public transport services. Turning to Slide 23 in the trading outlook -- Trading update and outlook. Second half of FY '23 has got off to a great start with the recent tender wins that we announced last week. As I said, the team, now the real work starts to deliver on our KPIs and to maximize the returns from each contract. A huge effort was expanded through the first half to put the businesses in the best possible position following the labor shortfall in the market, and we are now in a stronger position to target more ancillary work. For the 2 outstanding regions, further retention and recruiting initiatives are being deployed. Domestic tourism demand continues and the marine and tourism business will continue to capture as much of this market as possible as international visitation ramps up. As Andrew and I have highlighted, we have the balance sheet strength, cash flows and management strength to continue investing in our asset base and capitalize on the momentum building government's appetite to invest in decarbonization of public transport. Kelsian is at the forefront of this important innovation. On to Slide 24. And finally, before I take your questions, let me try and summarize where I think the group is at today. Coming into this period, Covid has set the scene to illustrate the defensive and resilient nature of the business model and substantially all of our contract services continued throughout the Covid period despite lockdowns and varying passenger demand. This half year result also evidences the embedded inflationary protection in each of the 3 divisions. The business is, therefore, very well placed to navigate the future economic environment and will not be forced to ease up on acting on growth opportunities that present. The recent contract awards also demonstrate the quality and reputation of the group and continues over 2 decades of history delivering the same. We have bolstered our corporate resources and appointed a dedicated CEO for transit systems to support our growth ambitions. We are at the start of some new contracts in high-growth corridors with opportunities to drive efficiency and synergies between contract regions and deliver on our margin expansion objectives. The strength of the balance sheet and predictable operating cash flows, combined with our considerable management experience enables Kelsian to continue to be a leader in decarbonization, and we will deploy our disciplined growth approach to acquisitive growth in new markets that unlock further organic growth opportunities. Thank you for listening, and I'll now hand over to Chris to take some questions.

[Operator Instructions] Our first question is from Marni Lysaght with Macquarie.

Good. Just a few for me. I'd like to understand, is anything else just following what happened last week with the accounting standard change, has anything else being accounted for on a gross stock basis? And now we do expect potentially review the treatment of that in the future?

Yes, Mani. So it was an accounting treatment change on accounting standard change. It is no impact on any part of the business. So it only relates to the Singapore operation, where the Singapore operations are now accounted for on a net basis rather than a gross basis.

Yes, that's clear. But my question is more like, is there anything else being treated on a grossed up basis? And would you be looking to treat it...

There's no change in the accounting treatment for any other aspect of the business. It was a Singapore specific matter.

I think one of the key differences, Marni, is we actually pay a large lease fee for the buses in Singapore, which is ultimately refunded by the government. In Australia, where we use government assets, the government assets are provided on a peppercorn lease, a $1-a-year type arrangement. So, it's not the same situation as a bit of a more market-based lease that's refunded in Singapore.

Okay. So just on Singapore, the nuances of Singapore, is there -- is the reason why it's probably different and then therefore, the rationale to change the accounting treatment. Just on buses, I know it's been a fairly resilient operation, but has there been any adverse impacts of timing with indexation across both Singapore and Australia?

There's no mismatch between fuel indexation. That's delivered monthly in arrears. So it's certainly not in fuel. I think the mismatch that probably doesn't affect our P&L, but probably affects the people on the receiving end is the wage indexation, which is done on a 6 monthly or yearly basis. So as we've explained before, the wage increases embedded within our enterprise agreements perfectly matched the indexation in our revenue. But of course, as inflation increases and wage increases take place across the country, that indexation figure is a little bit lagging. But it doesn't affect the company P&L. It just affects when those pay rises are passed on to the workforce.

Just a final one for me. The value of the government receivable on the contracted assets are about $70 million. [indiscernible] $90 million, $100 million. One is, first of all, what does that reflect? And could you give us some color kind of the journey you've been on with financiers about this almost sort of government receivable and why they're looking at your capital structure and leverage.

Yes. So the amount decreased over time, Marni, a couple of reasons. One is because the assets depreciate and that depreciation is then reflected in the book value and the vehicle termination payments that we would've recognized that asset, but that's how calculated and also the change in the Darwin contract, where we will pay $12 million for those assets that we held on our balance sheet, which really just demonstrates how that mechanism works and works effectively. So yes, we're still exploring some financing options to try and ring-fence and quarantine that so it's easier for you and others to understand what the true underlying leverage of the business is. And we're hopeful to have something concluded on that in the next few months.

The next question is from John O'Shea with Ord Minnett.

Yes, very well, John. Look, I just wondered if you can give some general comments on the trading update. Just in terms of the way we should think about the shape of the second half, I suppose, in terms of any sort of seasonality within the tourism Marine business, first half, second half and how you would expect the shape of the earnings for the bus businesses together look in the second half. Obviously, we've noted the driver impacts and all of those things that you've seen on the cost front and your expectation of the moderation. But based on what you've seen so far in the initial period of the second half how should we thinking about the shape of the second half? Should we be thinking about it the same lower, slightly higher? And just in general terms, how we should think about the shape of the second half.

Thanks, John. I'll have go on a general answer. I think on the bus side of things, we're kind of through the worst of the labor situation and as a highlight so all about Sydney and Adelaide now, still recruiting, but making good progress. So, what that means is, obviously, over time, costs across the business are reducing. We're able to implement annual leave again for staff, which will take kind of provisions on the balance sheet. And we're seeing an increased level of activity in that charter and rail replacement type space that has been deferred from previous periods. So certainly, the Australian bus division is moving forward. The marine and tourism business, I would typically say that the first half or the second half of the financial year is typically quieter than the first half of the financial year. However, there were periods in this half, where we would ordinarily see softness outside of school holidays, for example, or midweek where we weren't seeing any softness. And that sort of continued into the second half. So we're seeing kind of very strong levels of demand continuing at the same sort of level as the first half as we progress through the first month or 2 of the second half.

That gives us good color. So just without pushing to good words in your mouth, obviously, the buses, you wouldn't expect anything worse. And so far, the tourism sort of indicating that it could possibly do what you did in the first half. Is that a fair summary?

Good summary.

The next question is from Elijah Mayr with CLSA.

Just a couple for me. Maybe just firstly, on the international bus segment. Are you able to sort of quantify, I guess, the costs that are still sitting in the U.K. and the U.S. and how that's changed year-on-year?

Elijah, sort of all up, it's getting up towards a couple of million dollars.

And how different is that from the versus last year? I just would have thought that it seems like EBITDA has gone down year-on-year, to there would have been more costs taken out of the U.K. business with the divestment of East London.

Yes, there was some cost removed from that operation, but a part of that business was making a positive contribution, and we've still got 11 people in the U.K., and that reflects also some of the costs that we're incurring to submit these bids, which are not insignificant for the Manchester opportunity, plus the presence will be maintained in the U.S.A.

And then just on the service degradation in Singapore, are you able to sort of quantify that? And maybe give us an outlook that that's going to have more of an impact in the second half of '23?

The worst of the service degradation in Singapore, which was directly correlated with the labor availability in Singapore post the boarders opening has largely been resolved. So the rest of it was certainly in the first half. We would expect most of the second half to be running full services. And the big part of, I guess, the earnings that come from Singapore relate to service level bonuses and delivering all the services and delivering a good on-time service. There's big performance bonuses in those contracts, which obviously gets substantially altered when you're not delivering all the services and you don't have enough people to do that. And so we're seeing a strong comeback in those performance level bonuses as we come into the second half.

That makes sense. So, you'd expect, I guess, that those businesses come back that you should have margin expansion in that International segment. There's no other costs coming into the business?

Yes.

And then maybe just on the marine and tourism side of things. Are you able to sort of call out which parts of the business are still lagging and which ones were the key outperformers?

Yes, they're all performing pretty well, to be honest. But obviously, we've got the Murray Princess tied up at the moment. And so there's substantial fork on revenue until the water in the Murray River resides, but that's going quickly. We're expecting by mid- to- late March to get that vessel back cruising. So that's an obvious one where there's just pure costs, holding costs and no earnings contribution whatsoever. There's further upside out of that asset in the second half for sure. And then we're seeing Sydney Harbor starting to come back. But obviously, that's one of our business units that relies very heavily on international tourism, but it is coming back strongly, and there's a lot of activity in the corporate charter market, which the new acquisition of the Starship Group and the new vessel, the Jackson is capitalizing on. They're probably the 2 kind of stand-outs that have some way to go in the second half to ramp up, but probably the strongest destinations are the ones that have been strong throughout Covid, which is Fraser, North [ Strapcon ] and Kangaroo.

And then maybe just one final one just on the finance charges. There wasn't as much detail in the first half report, but they stayed flat year-on-year. You've had sort of interest rate increases coming through. Can you kind of talk through the mechanics of that and maybe your expectations for interest charges going into the second half?

It'll be pretty much at the same levels Elijah. The interest rate hedging that we've got in place is protected in that front. And also, we called out that we repaid some of the deferred consideration and vendor notes, and they attracted a much higher coupon and been on the balance sheet for some time. So, there was some benefit in paying those out early in the period.

When does the hedging roll off?

For a couple of years.

The next question is from Tim Piper with UBS.

Clint, Andrew. Just first question, operating cash conversion set in the first half, it's sort of down a bit year-on-year. Is there timing still a timing within that? And then can we kind of expect it to revert in the second half and get closer to sort of that 90% to 100% operating cash conversion.

Yes, Tim, we also had the one-off costs for the go-ahead acquisition, so they were paid out in the period as well. But there's no issue from a collections point of view. So that should resume into normal alignment in the second half.

And then just a question on Marine and tourism. That's a strong result in the half. Obviously, a lot of it's been driven by the strong revenue uplift. Margins are down slightly. Can you maybe just talk to where you kind of see EBITDA margins going in the next year or 2 in that business? What are the headwinds holding it back? There might be a new contract or 2 in there that it a bit of [indiscernible] the exact timing around that. But any commentary, I think previously, like a mid-20s EBITDA margin was maybe what we're going for.

Yes. Look, and I think that's still achievable. Tim. Remember, we've got the River City Ferries business that's reported in that segment, which is a much lower margin. It's more akin to a public bus business. But what we're seeing now is that the fare increases that were pushed through during the period, have all start having suppressed demand. We're seeing the cost base ease a little bit. Fuels come down considerably from where it was early on in the period. And we've also got some further increases scheduled to come in, in the next half. I think it's realistic to achieve that sort of mid-20s getting up a little bit higher sort of margins in the longer term, and we're seeing that cycle through in the later period of sort of December through January.

Just a follow-up, sorry, to the last question on interest rate hedging. You said a couple of years. Is that at the same kind of effective level as you've had through the half out for a couple of years?

That's right.

The next question is from Jason Palmer with Taylor Collison.

A couple for me. Can you maybe talk to the sort of run rates you're seeing, maybe at a qualitative level across both the international and the Australian bus businesses relative to sort of exit rates versus entry rates just to sort of help us sort of paint the picture to where it's at. I'm just cognizant that you were talking about some incentive payments in Singapore and whether you get them every month or and staying to Sam already or whether you're going to at the end of the 6-month period.

I mean it's really kind of an extension of my previous answer, which is the labor situation is margin result at the end of the half. And so we're coming into the second half, with all the Adelaide and Sydney at full establishment. And we're only just kind of beginning to start to and capitalize on some of the available rail replacement charter work that's in the market. Certainly, if you're looking at the chart, we'll be on the trough of the cost base in that Australian bus division and on the up. And the same would exist for Singapore to be honest. We've got a couple of effects in Singapore. Obviously, the performance bonuses and overtime effects of low levels of staff kind of through the half, largely result line at the end of December. Performance bonuses starting to come back. The Sembawang-Yishun contract is obviously in that phase of kind of reaching kind of optimal performance. I'd expect both of these businesses to be showing some incremental improvement during the course of the second half.

So one of those Singapore in contracts now is actually getting paid performance bonuses?

Correct.

Okay. And just my last question was just around the marine and terrorism business, so a fantastic outcome and sort of go back to where you were pre-Covid, and I know there's been a couple of contract wins and things come out over the journey. But you're kind of back to where it was. And I think it's maybe a bit of a general question, but I'm just trying to appreciate sort of what you've done with optimizing that business through Covid, so when it comes out the other side, it's a much leaner operation. I'd just note that you made a comment before around the cost base being a bit more exposed in that business. So I'm just trying to marry up the sort of those 2 points.

So I think my point earlier was that there's only part of this portfolio that enjoys kind of the contract indexation like the bus side of things like River City Ferries and Gladstone and some of the other smaller kind of government contracted services in the portfolio, a majority of the business generally enjoys exclusive links to islands where there's an element of nondiscretionary travel but also the discretionary tourism trouble, but because they enjoy that preferred status. Any cost base increases that are experienced in those business generally can be passed on through their increases as Andrew was describing. So the point was not to highlight that it's exposed to cost base increases, but to highlight that it's more protected in the event of cost base increases. So I think what we can see out of this business going forward is, as those costs in the cost base, additional overtime, the staff -- with staff shortages across this part of the business that didn't affect the delivery of services because we're able to cover hundreds of services with over time. That will come out, which obviously translates into margin improvement. But I think the one thing that I would highlight as a result of COVID is the effort that we've put into scaling our business to only deliver services that we know will have demand and pricing those services in a way that maximizes the yield from that demand. And we have invested very heavily in artificial intelligence, demand pricing technology, which is progressively being rolled out across the business, which is translating into high yields. And we're getting better performance out of these assets in some cases than pre COVID.

Okay. Wonderful. So what you're saying is that you're running less services and that you sort of -- and some of the service drops that you could put through during COVID and increase utilization that customers are still accepting that reduced service?

Correct. Yes. So we don't run a service -- well, I mean, the services that we're cutting are obviously not in a lot of demand. But the percentage of the customer base that you're disadvantaged by asking them to catch an alternate service is not a big percentage of the customer base. And between that change and the fare increases, we're not seeing that effect and at all.

We have no further questions at this time, I'll turn it over to Clint Feuerherdt for any closing comments.

Thanks, Chris. So I know it's a busy time. So thanks for everybody for listening and for your questions. I'd just like to take the opportunity to once again acknowledge the team of people at Kelsian who were able to deliver this great result and some impressive contracting success. Thank you all also for your support of the company and my team. Thank you, again, and good morning.