Monadelphous Group Limited (8MP.F) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Monadelphous 2020 Full Year Results Presentation. [Operator Instructions] I'd now like to hand the conference over to your first speaker today, Ms. Kristy Glasgow. Thank you. Please go ahead.

Good morning, everyone, and welcome to the 2020 full year results investor and analyst briefing. Presenting this morning from Perth are Monadelphous' Managing Director, Rob Velletri; and Chief Financial Officer, Phil Trueman. Copies of this morning's presentation and associated materials are available on our website at monadelphous.com.au. Throughout this presentation, the speakers will guide you on when to click through to the next slide. I will now hand over to our first presenter this morning, Mr. Rob Velletri, who will start on Slide 2. Please go ahead, Rob.

Thanks, Kristy. So welcome to everyone to our 2020 full year results briefing. So Phil and I will run through our financial and operational performance for the financial year ended 30 June 2020 and provide you some commentary on our outlook. We'll then answer any questions you might have. So moving on to Slide 3, our performance summary. Monadelphous has recorded revenue for the year of $1.65 billion, which was a 2.6% increase on the prior year. The Maintenance and Industrial Services division achieved a record revenue performance for the third consecutive year, exceeding $1 billion for the first time in the company's history. The result reflects strong demand for shutdown and maintenance services across the resources sector, particularly in the first half of the financial year. Our Engineering Construction division reported revenue of $615 million, with a number of large resource construction projects kicking off during the year. Net profit after tax for the period was $36.5 million, with earnings per share of $0.387. Earnings in the second half were significantly impacted by the disruption caused by COVID-19 as well as disappointing levels of profitability experienced in the Water Infrastructure business. In early May, the company made a provision of $14 million before tax for water project underperformance and costs relating to restructuring of the company's Water Infrastructure business. The Board declared a final dividend of $0.13 per share fully franked, taking the total dividend to $0.35 per share for the year. So Monadelphous is continued to be recognized as a leader in its market, securing approximately $1.2 billion in new contracts and contract extensions since the beginning of the financial year, which provides us with a strong pipeline of work for 2021 and beyond. A number of strategic acquisitions were completed during the year, expanding the breadth of services in the coal seam gas and rail sectors as well as overseas in South America. Strong cash flow from operations in the second half of the year strengthened the company's balance sheet, and Phil will talk a bit more about this later on. Subsequent to the year-end, Monadelphous was notified that Rio Tinto had filed a Writ of Summons in the Supreme Court of WA against one of Monadelphous' wholly owned subsidiaries. The claim is in respect of a fire incident which occurred at Rio Tinto's iron ore processing facility at Cape Lambert some 18 months ago in January 2019. The writ has not been served. The company had been performing maintenance shutdown services prior to the fire commencing, and Rio Tinto has alleged that the company was in breach of the maintenance contract, thereby causing the fire. Although the writ does not specify any damages, Rio Tinto has separately informed the company that its claim is for $493 million in loss and damage. This amount comprises $35 million in material damage costs associated with the reconstruction of the Sinter Fines processing facility and $458 million for a temporary operating solution and business interruption losses arising from the alleged inability to process iron ore during the period of reconstruction. The company denies Rio Tinto's allegations and claimed losses, which the company considers have not been substantiated. Further, the contract between Rio Tinto and the company, which governed the work, contains exclusions and limitations of liability, which will be relied upon in defense of any claim. The company has public liability insurance in place with a total limit of $150 million, which provides cover for property damage, claims and associated losses. Monadelphous is unaware of any reason why the insurance policies would not respond to indemnify the company for liability it may have to Rio Tinto. And along with its insurers and their legal representatives, the company intends to fully defend Rio Tinto's legal action. Monadelphous and its insurers are continuing to work with Rio Tinto to seek a satisfactory outcome in this matter. Turning now to Slide 4. As previously indicated to the market, Monadelphous' operations and performance in the second half of the financial year was significantly affected by COVID-19. Measures implemented to prevent the spread of the virus resulted in the delay, suspension, deferral and reduction of services across a broad range of the company's projects and work sites, and the temporary deferral of potential new contract awards. Customers reduced nonessential work and postponed discretionary expenditure with supply chain issues causing delays on several large construction projects. In total, we estimate approximately 10% of Monadelphous' annual revenue has been deferred into subsequent financial periods. With a reduced workload as a result of COVID-19, the company's workforce numbers at year-end had declined around 20% from February 2020. Moving now to a slide which covers our response to COVID-19. We have implemented a significant number of proactive measures to ensure our long-term sustainability and to protect the safety and well-being of our people and communities in which we operate. So far, this has included establishing a dedicated team to monitor and assess the situation to provide guidance to the business. It's also included developing detailed health risk management protocols and implementing alternate working arrangements. In addition, a targeted cost reduction and cash protection plan was launched supported by our Board and executive team, agreeing to salary reductions of up to 30% for a 6-month period. With precautionary measures gradually being lifted by governments in some parts of Australia and demand from our customers steadily improving, the business has seen stabilization and slow recovery over recent months. We will, of course, continue to monitor the situation and adapt our response accordingly. Moving now to Slide 6. As I mentioned earlier, our Engineering Construction division reported revenue of $616 million, in line with the previous period, with some projects experiencing delays in the second half due to COVID-19. The division secured $640 million in new contracts and contract extensions, including approximately $80 million subsequent to year-end. During the year, work continued on 2 major construction contracts at BHP's South Flank project associated with inflow and outflow infrastructure. And Monadelphous secured a further multidisciplinary contract at South Flank with thyssenkrupp for the site assembly of the world's largest ore handling stockyard machines. In addition, Monadelphous was awarded a major contract with Rio Tinto associated with the West Angelas Deposits C and D Project, with work commencing during the period and expected to complete in 2021. Work also commenced on a major construction contract at Albemarle's lithium hydroxide plant in Kemerton in Western Australia. Under the division's BHP iron ore panel agreement, 3 projects were completed and a further 4 projects were started. As announced yesterday, the company also secured a contract with BHP for the Port Availability Improvement Project, providing brownfield modification works to ore handling plant and equipment across the Nelson Point and Finucane Island facilities. After 2 years on-site and with an outstanding safety performance, Monadelphous' work at Rio Tinto's Oyu Tolgoi project in Mongolia was completed in early 2020. This project continues to be strategically important for Monadelphous, with further opportunities expected to come to the market in the near future. Mondium, our EPC joint venture with Lycopodium, secured a strategically important $400 million contract with Rio Tinto for the Western Turner Syncline Phase 2 project, which is its largest contract to date. The Mondium EPC delivery model encompasses full project development and direct execution, significantly reducing interface risks between engineering, procurement and construction disciplines, and provides a more cost-effective solution for customers. Our China-based fabrication business, SinoStruct, delivered several fabrication packages for repeat customers as well as for a number of key Monadelphous and Mondium construction projects. And finally, our renewable energy joint venture, Zenviron, continued to strengthen its position in the renewable energy market, completing work on 4 large utility-scale wind farms and significantly progressing work on a further 2. In addition, subsequent to year-end, Zenviron secured a further contract to deliver the Murra Warra Stage II Wind Farm in regional Victoria. If we move now on to Maintenance and Industrial services. You can see strong demand for maintenance shutdown and sustaining capital services within the resources sector, again, particularly in the first half of the financial year, contributed to the maintenance division achieving a record revenue performance, which was up 5.1% on the previous year to $1.05 billion. The division secured more than $500 million in new contracts and contract extensions, including around $60 million subsequent to year-end. This included being awarded a major 5-year contract at Rio Tinto's coastal iron ore operations in November 2019, the provision of mechanical and electrical fixed plant maintenance and shutdown services, and a 3-year contract with Rio Tinto for maintenance services and minor projects on its Pilbara marine infrastructure in June 2020. The division was also appointed for a further 2 years to BHP's Iron Ore Site Engineering Panel, providing multidisciplinary services at BHP's mine site and port operations in the Pilbara. The company continued to broaden its maintenance services offering with the acquisition of iPipe Services in July 2019. iPipe, which is a specialist provider of coal seam gas, pipeline maintenance and construction solutions, the company also established a stand-alone industrial services team to provide specialist services to our oil and gas customers. Our rail maintenance offering was expanded to the East Coast through the purchase of Harbinger Infrastructure's business and assets, which included a 5-year contract with ARTC for rail maintenance services on its Hunter Valley rail network in New South Wales. And during the period, the division was also awarded -- early in the period, the division was also awarded a 3-year contract with Rio Tinto on its rail network in the Pilbara. This contract has -- also has a further 2 3-year extension options. And finally, the division expanded its geographical footprint overseas with the acquisition of Chile-based maintenance and construction services contractor, Buildtek. So we've entered the Chilean market through an established and well-recognized operator, which has strong relationships with major mining and energy customers and provides us with a strong foundation for growth in Latin America. So now looking at Slide 8, which highlights all the work secured period to date. As I mentioned earlier, we've won around $1.2 billion since the beginning of the financial year. This slide shows all the location and values of these contracts with around $640 million of engineering construction contracts and over $500 million of maintenance contracts. You can see the vast majority of these contracts are within our core resources and energy markets, and a couple of strategically important contract wins in Chile. On to Slide 9, our safety performance. On the 7th of March, we announced, with great sadness, that our teammate, Haydyn Grubb, had been fatally injured following a serious incident in our Kalgoorlie services facility. Since the incident, we've taken a range of measures to understand what happened and have implemented actions to prevent a similar incident in the future. Monadelphous continues to provide support to Haydyn's family, friends and colleagues, and Haydyn will live long in our memory. Overall, our 12-month total recordable injury frequency rate improved by 7.5% to 3.72 incidents per million man-hours worked. Pleasingly, the Engineering Construction division recorded its strongest safety performance in history, achieving 0 recordable injuries in its resources business for 12 consecutive months, extending over more than 3 million hours worked. Monadelphous remains committed to the principle of zero harm. And to support this commitment, during the period, the company undertook a detailed assessment of its safety governance practices, including reviewing its minimum standards for the control of fatal risks and further enhancing our health and safety management standards. Moving now to Slide 10, people. We did experience early, certainly early in the period, strong demand for personnel in the resources sector and continue to implement a number of strategic sourcing initiatives. We reviewed succession planning across our business to ensure we have the critical skills and capabilities required into the future. As I mentioned earlier, our people numbers were impacted by COVID-19. By year-end, our total workforce numbers were 5,689, a decrease of approximately 6% from June 30, 2019. Moving forward, we see that our retention and attraction initiatives will become increasingly more important as we see the labor market tighten across the resources sector, particularly with border restrictions that are still in play. Slide 11 highlights our contribution to society and the communities in which we operate. Our social value activities focus on 4 strategically important areas: diversity, community, education and environment. To support gender diversity and inclusion, we focused on improving female participation, including identifying job and development opportunities. I'm proud to report almost 40% of total appointments in our 2020 Apprenticeship Program were female as well as almost 25% of our 2020 Graduate Program intake. In addition, female employees made up more than 20% of participation -- participants in our key leadership development program throughout the period. Our commitment to diversity resulted in us achieving and maintaining our Aboriginal and Torres Strait Islander employment stretch goal of 3%. This was supported by around 70 indigenous job seekers being employed as part of Monadelphous' participation in the Australian government's Employment Parity Initiative. Planning has commenced for our next stretch, which will be our fourth stretch reconciliation action plan and gender diversity and inclusion plan, which are both due to be launched in 2021. During the year, key stakeholders are engaged to support the development of these important plans. Finally, we continue to proactively identify opportunities to engage and participate in the local communities in which we operate. Throughout the year, dedicated engagement plans were developed for strategic regional locations, which led to Monadelphous supporting more than 50 community initiatives, including supporting the victims of the Australian bushfires earlier in the year. I'll hand over now to Phil, who will give you a bit more detail on our financial performance.

Thanks, Rob, and hi, everyone. Slide 12 shows our financial performance compared to that of the previous year. And as Rob mentioned, our revenue for the year was $1.65 billion. Earnings before interest, tax, depreciation and amortization was $92 million, with earnings for the second half significantly impacted by both the disruption caused by COVID-19 as well as the disappointing levels of profitability within the Water Infrastructure business that Rob mentioned earlier. Our net profit after tax for the period was $36.5 million with earnings per share of $0.387. And the Board declared a final dividend of $0.13 per share fully franked, which takes the full year dividend to $0.35 a share, resulting in a dividend payout ratio in excess of 90%. And the Monadelphous Group Limited Dividend Reinvestment Plan will apply to the final dividend. The group's balance sheet strengthened during the year despite the recent challenging economic and operating conditions, ending the year with a solid cash balance of $208 million. The company's disciplined and prudent financial management practices resulted in a strong cash flow from operations of $119 million, with a cash flow conversion rate of 151%. Our balance sheet remains very healthy and provides substantial capacity to invest in suitable new business opportunities as they arrive. And I'll now hand you back to Rob to provide you with an overview of the outlook for the business.

Thanks, Phil. Slide 13 shows the relevant current and forecast Australian market conditions for our business. As you can see, pretty much all sectors, resources, energy and infrastructure or our infrastructure sectors and maintenance are all expected to improve or to remain stable over coming years. If you look at our Slide 14 outlook slide. While the global economic outlook in the wake of COVID-19 remains uncertain, the resources sector is expected to provide a steady flow of opportunities for Monadelphous over the coming years. The strong iron ore price and demand from China are actively ramping back up. The outlook for Australian iron ore investment remains solid. The resumption of a number of Chilean copper projects, which were suspended or deferred due to the outbreak of COVID-19, are expected to provide opportunities for the company to grow its position in the South American market. The effect of declining global demand on the oil and gas sector has resulted in delays in development of new LNG projects, with customers reducing operating costs and deferring nonessential work in the short term. The long-term outlook for renewable projects is positive. However, investment in the sector has eased for now as the industry focuses on the development of improved grid access and transmission capacity. Maintenance activity is expected to recover slowly from the effects of COVID-19, particularly in the oil and gas sector. In the long term, demand for maintenance services is expected to grow on the back of aging assets and customers deferring nonessential work in prior periods. Now Monadelphous has entered the new financial year with a solid forward workload. Nevertheless, the short- to medium-term financial performance of our business will be dependent on the extent and duration of the impacts of COVID-19. Our reputation as a leader in our markets, our long-standing commitment to the delivery of safe, reliable and cost competitive service solutions as well as our swift and decisive response to the outbreak of COVID-19, means we're well positioned to capitalize on the opportunities and to deal with the challenges that may lay ahead. In closing, I would like to thank our stakeholders for their ongoing support, including our shareholders and customers. I would also like to commend our team who's shown great understanding, resilience and loyalty throughout the COVID-19 pandemic. Even in these uncertain times, our team has proven collectively we deliver what we promise. That's all from me. Thanks. I'll hand over to the operator for any questions.

[Operator Instructions] Our first question comes from Alex Karpos from Goldman Sachs.

Just a couple on my end. First, on that maintenance outlook commentary. If you're kind of mapping out a recovery here, would you say it's more dependent on COVID restrictions easing? Or you touched on oil and gas, the oil price backdrop improving. Is that really the big driver of this work picking up? Or what kind of swing factors, I guess, should we watch for that recovery to ramp up?

Well I think -- yes, I think the oil and gas story is related to both. Clearly, the oil price outlook is putting pressure on costs, et cetera. So that's a driving factor. But as well certainly, we -- a lot of our work is offshore, and the distancing and issues around rostering and protecting people from COVID-19 is also a factor. So hopefully, over time, both those things improve. But more broadly, I guess, yes, I think the maintenance story is, we took a big hit with COVID in March, April, and things are slowly improving. Otherwise, as these restrictions are lifted, what we are seeing is kind of probably more key restrictions around -- or the travel restrictions and border closures are more having an impact than anything else.

Got it. And on the water side, can you maybe just give us a little more color, I guess, what went wrong with these projects? And as far as the shutdown of the offices and consolidation, is that largely done at this point?

Yes. No, it is largely done. Look, I think that the sector has -- we've had a few projects after we've sort of looked at the profitability in -- of the business. At that time, we were doing -- we were reviewing how much have we been in this business. We found -- we certainly did discover some underperformance that, I guess, is part of a sort of broader strategy to try and improve the quality of our business. We've -- well I guess, we're pulling back on jobs we think have greater risk and trying to improve the selection of work in that sector. But the restructure as such is pretty well done.

Perfect. And one quick one, just going back to the oil and gas side. On the LNG project outlook, you mentioned delays there. Any insight on how long these could be? We've heard roughly a year from some other industry participants. Any views on your end about how far out these delays could go?

No, I'm hearing what you're hearing. No, I don't have any more insight.

Our next question comes from Michael Aspinall from Jefferies.

Rob and Phil, a couple from me. Firstly, just a couple on the long-term oil and gas contracts in the maintenance business. The initial terms of those 3, the INPEX, Shell and Woodside, start to come up over the next few years. Are the options for the additional contract tenure exercisable and the customer's sole discretion? I just want to understand how that [ works ].

Yes. Look, yes, I'm pretty sure that that's the case, yes.

Okay. And have you had conversations with customers about how that might look? And how are you seeing that offshore and onshore oil and gas maintenance market?

No. I mean, we've got long-term contracts. There's sort of nothing -- yes, whilst there's obviously pressure on costs, et cetera, I mean in terms of the requirement for the work, it's still there and it's going to be there into the future. And as contracts come up for either renewal or option periods, I think we just go through the normal course of the cost processing in renewing or rebidding those -- that work.

Yes. And has the performance of those contracts been as you would have expected over the last 3 or 4 years?

Yes, pretty much. Yes. Yes.

Okay. And then a technical one on those. I'm guessing that the unsatisfied performance obligations that you disclosed doesn't include the extension options. Is that right?

No, they don't.

Okay. Cool. And then just one on that point again. I just wanted to understand how work under the panel agreements like the BHP West Australian Iron Ore and Hunter Valley water panels work with the unsatisfied performance obligations.

So for the construction side of the business, so the examples that you gave there, we only include the contracts that we have been awarded.

Okay. So nothing of what might be upcoming in the -- under the panels?

No. We don't take an estimate of how much we think we're going to get or anything. It's just the contracts we actually have in hand.

Okay. Great. And then 2 more for me. SinoStruct's workshop in Houston was closed at the end of the financial year. How material is that revenue stream?

No, not material. No, not at all.

And then just the last one. Your last guidance was if work continued at the same level, revenue would be flat this year. The eventual outcome's up 50 or so, and the employee number chart looks like a slow but sustained recovery from April. How would you categorize the improving activity levels since April? And then any comments on July or August?

No. I think it's -- this is probably -- I mean, there's been a steady ramp-up. Yes. Certainly, things continuing to improve.

And if so, would that chart look similar in -- has a similar trajectory in July and August as you put in the presentation?

Yes. Which chart?

On Page 4, that employee numbers chart by month, looks like.

Page 4. Oh, that one. Yes. Certainly, yes, maybe even better than that, better than that.

Our next question comes from James Byrne from Citi.

I just wanted to have a quick conversation about the maintenance segment. It seems to me that there's a more concerted effort by some of your competitors to win market share in maintenance. And I'm interested in hearing your views on competition at the moment and in particular, whether you're seeing any impact to margins for new work at all. Perhaps the growth in this segment overall is large enough to accommodate that without a margin impact. But just some color, I think, would be quite helpful.

Yes. Look, in terms of the major sort of Tier 1-type work, I think the competitive landscape's pretty -- hasn't really changed too much over the recent period. I mean, everybody -- it's an attractive sector for everybody who wants to be in it. But in terms of Tier 1s, I wouldn't think there are any more than there were or had been. Not really seeing a difference.

Okay. Yes. Right. I'll leave that one there then. On the Rio case, look, I'm not going to debate with you about whether you should -- deserve to win or lose the case. But I guess, if I think about the downside risk here, how do you think the balance sheet is equipped to deal with paying out those damages? And in the instance that you did have to do that and draw down in your liquidity, how does that then implicate capital allocation opportunities that you otherwise would have pursued?

We all understand the details of the claim, and Rob gave a very good summary of the position and where we're at earlier. To answer your question, to be honest, we've got to go through a process here. And we haven't really thought that far ahead in terms of, to answer your question. Yes, we -- just to remind everybody, we have -- Rio invited us to continue discussions with them, and we have had a number of discussions with them over the last fortnight, and we are continuing to meet with them on a regular basis to work through this issue with them.

We -- I mean, by the sound of it, it feels like it probably gets settled. Would that be a fair assessment?

Yes. I think the announcement says everything, that puts forward our view on the position here.

Okay. That's fine. I won't press you on that one then. So last question for me is, I'm interested in understanding how a higher iron ore price may or may not be benefiting you as a contractor. I guess some of the pushback that I get from yourself and peers is, why don't I just invest in the underlying commodity grid producer as opposed to taking the risk of the contractor? So I'm interested in understanding whether in iron ore, in particular, are you seeing more add-ons in existing contracts that is contributing to your revenue at all? And whether you think that the higher commodity price could, in fact, lead to any material increase in CapEx and therefore, contract opportunities for you?

Yes. I don't -- I'm not sure the absolute iron ore price doesn't really matter too much as long as -- I mean, even at whatever lower levels, it's -- the Australian sector is very, very competitive. And I think the buoyancy in iron ore in terms of work volumes is very much related to the huge rate of production that needs to be sustained. And that requires just a lot of work. Forget about expansions, just to maintain whatever it is, 1 billion tons a year of production requires significant number of new mines, to mining kind of developments and mines to get built on an annual basis. Just there's a lot of work on an ongoing basis. It's sustaining capital, most of it.

Yes, but if you have a high commodity price, I guess the question is, a producer may feel more incentivized to have bells and whistles that effectively leads to higher revenue opportunities for you if there are add-ons or new contracts.

Yes, maybe. I don't see it that way, but maybe.

Our next question comes from Matthew Nicholas from Crédit Suisse.

Just a couple from me. A lot of mine have been asked, but just on the social distancing issues, particularly around construction. Can we get a sense on how that's impacting your construction business now? And what are the implications for, say, the delivery of Western Turner Syncline? And how should we expect the sequencing of that over the next 18 to 24 months?

Yes. I guess the restrictions in WA have been relaxed over recent months. There's no community case of transmission here for a long time. So initially, there were changes in rosters to accommodate the COVID sort of restrictions, but they've all gone back to normal now. So there isn't a significant impact at the moment to productivity in terms of -- certainly in WA.

Right. And just a follow-up in general. I mean, you spoke about clearly, the iron ore market is strong at the moment. And as you say, a lot of the stuff that's out there is very independent of the iron ore price. It has to happen. But I think what's happened in the last 4 or 5 months has pushed a few things out to the right. Can we just get a sense on your upcoming key opportunities, both here and also you've mentioned Chile there. Is that more of a new type of thing? Or is that something we should be looking for in '21?

Sorry, I didn't quite understand your question.

So it's more around pipeline and what opportunities are out there, both in the Australian market and secondly, Chile. And in terms of Chilean stuff, what -- would you see that more a 2021 thing?

No. Yes, the Chilean stuff is early days. It's early days. I think -- but yes, there's obviously opportunity there over time, particularly -- I mean, Chilean mines are all copper mines, and the copper price is good and the outlook is good. And I think that long term provides us with some confidence around the opportunity to grow there. And in terms of iron ore opportunities, without sort of spelling them out, I don't know what the number is, but there is a number of new mines that Rio need to develop and a long pipeline of sustaining capital optimization projects for BHP in the pipeline. Without being specific, there's plenty there.

Okay. And just the last one for me. One of the things that hasn't been covered yet is margin, which I know is almost a never-ending question for you guys. But I think if you look at the second half and ignore that this is a big impairment in that number, I mean your first half margin was at just over the 6.5% at the EBITDA level if you exclude AASB. Yes, as we go into a recovery over the short term, which you've had, do you see maybe from the second half this year margins normalizing at that level? Or are you seeing competition and such, whereby, the path that, that level you're at in the first half is probably a bit more longer dated?

Look, I mean, we'd be -- yes, we'd be happy to continue at that sort of level. Which really, again, it's a difficult question because it's a question of how well we perform on existing construction contracts we have, and that's the key -- that's probably the key factor. But I think the comment around margin is more looking at the workflow and the amount of work available, it's pretty solid. So -- and we've got a very strong position in the market competitively with clients. I think I'd be disappointed if we couldn't continue that into the future.

Our next question comes from Ben Brownette from CLSA.

Phil, I just wanted to ask on the gross margin. If you want to back out the loss that you took, that $14 million loss, should you just add $14 million to that second half gross profit number to have a think about gross margin?

Yes.

Okay. So if I do that, it was, say, 9.2% in the second half, down from 10.4%. I mean, so that's obviously not terrible. But what's the key driver in that? Is that just the revenue coming down? Or is there anything else?

Probably, there's 2 things: I think the lower activity levels in the last quarter of the financial year; and obviously, we had -- as Rob mentioned earlier, we had some impacts to our productivity as a result of the social distancing practices and a myriad of other things that occurred specifically in sort of March, April, May and probably even into June a bit as well.

Okay. And then when we discussed this previously, you were talking about some delays to site and having to carry some overheads and those types of things. So they shouldn't repeat going forward. And then with respect to looking at around that 10% gross margin that you've done recently, is there any reason to suspect that should be any lower if you're cycling out of that lower productivity in the fourth quarter?

I guess it's a bit dependent on the rate of ramp-up going into this new financial year, how quickly we get back to normal operating levels and what they may be. But I mean, as Rob mentioned, it's -- our gross margins are primarily dependent on our project execution.

Yes. And then just on that -- and Rob, on that project execution, I mean, I see in your WIP, your WIP looks pretty good. So I guess, there was always a risk when things are slowing down that some companies might be throwing some claims and change of scopes. You haven't done that. Is there no opportunity in your mind to be able to seek any kind of scope adjustments given the disruption?

Not sure. I mean, where we've got contract terms that allow us to make whatever claims around changes, we -- that's what we do. So I mean, there's nothing new here, although some of the claims will relate to the changes in laws and restrictions that were applied during that COVID period. So there is that element in terms of recovery of -- a potential recovery of some costs. But that's all accounted for in our numbers.

Our next question comes from John Purtell from Macquarie Group.

Look, just had a few questions, please. Look, in terms of -- Rob, you mentioned some of the opportunities with BHP and Rio moving forward. Obviously, we've talked about in the past Fortescue as well in terms of North Star and Robe Valley. Are you still seeing potential project opportunities there?

Yes. Yes, we are.

And I suppose the timing, I suppose, notoriously, does tend to sort of drift for these project awards. But any indication on timing of those types of awards? Is it sort of shifting into next calendar now?

No. Well there's no -- I think the Robe Valley work, I think you -- someone made an announcement about that. So that's been awarded. There's still FMG work to be awarded. I don't know, do we expect that over the next 6 or so months, something like that. And there are other projects in the Rio Tinto area as well. I was -- maybe I can or can't speak about, but I can -- there is some other mine developments coming up in the next year or 2.

And just to clarify your outlook comments there. First, particularly on the maintenance side. So essentially, you're expecting productivity impact to persist in the first half of '21 by the sounds, and that particularly is in relation to maintenance rather than construction?

Well yes, it's a function of the volume -- kind of -- a sort of ramp-up on, particularly on the work -- on our shutdown work because that's where we've had the biggest impact. So our -- so the ramp-up of that work, it's a question of how quick that ramps back up again. It is ramping back up, by the way. It's just a case of how long it sort of takes to get to what, I guess, how we -- what we set up to do. So -- and we're confident it will, at present.

Yes. On the basis that it needs to be done, that type of work.

Yes. Well yes, everybody's planning to do a lot of work that they didn't do before. Everyone will do it all at once, and we want to have the people for it. My anecdotes.

Just a question for Phil in terms of the cash flow, very much seem to be sort of driven by a big reduction in receivables there in the second half. Just in terms of what actually drove that, Phil? And do you see that as a sustainable level? Or does it move higher from here?

I think the lower activity levels in the last quarter obviously led to the unwinding of some of our working capital. Hell, I'd like to keep it at that level, that will be wonderful. But I expect as the activity levels increase, you'll see working capital being taken up again as we go through this next half is what I would suspect.

Yes. And just the last one, you may not be able to comment, but it comes back to the Rio claim as well. Is there any sort of indication you can provide on timing for potential resolution?

No.

No.

Our next question comes from Wei-Weng Chen from JPMorgan.

A couple of questions on my end. So just the first one was, just wanted to reconcile the comments around a solid order book and the 20% reduction in staffing levels. Is the expectation that you're going to need to ramp up hiring pretty aggressively in the near term? Or is the solid outlook in reference to, I guess, your new staffing levels?

No, the expectation is that we -- our work will ramp up. That's the expectation. So numbers should increase. We've had a lot of -- we've said, 10% of our revenue last year is being pushed into next year. And most of the restrictions at present are certainly for our work in WA, Queensland is -- have been lifted. So unless they come back again, which is a different story, then we have an expectation that -- we have strong expectation that work levels, people requirements will go up -- are increasing. We know that they are.

Okay. Great. And then just a question on that 10% of revenue being deferred. Is the expectation that this is deferred entirely into the first half or over the full year next year and building up over a multiyear period?

Yes. I can't -- it's hard to say, but I mean probably 12 months, I would have thought, something like that.

Okay. Right. And then just on profitability, EBITDA margins, I know there was a question asked previously about sort of the second half and how to think about FY '21. So your EBITDA margins have sort of -- if you sort of adjust for the water losses there, then I assume these go away in '21. And you're saying COVID impacts are no longer impacting the business at the moment. How should we think about sort of margins into '21 with reference to, say, the first half? Will they be directionally lower still as you recover? Or are you expecting to sort of recover that level of margin?

Don't know. Don't know. It should be better than the second half of last year, that's for sure, hopefully, as good as the first half. Yes, there should be nothing dragging, I'll put it that way.

Okay. But water issues are done, yes?

Yes. Yes. And any drag -- sorry, I sort of always qualify that like -- always qualify those questions around margin. Any drag will be a point of around sort of competitiveness in oil. Oil and gas customers are going to want to cut costs or find ways of reducing costs, et cetera, which may or may not impact margin. But they're probably the only drags. Otherwise, more broadly, activity should increase, which should be positive, but then it's a case of how well we perform.

Yes. Great. And then just on cash. Obviously, it was an outstanding performance in the second half. And you called out the, I guess, lower activity levels and that natural working capital sort of unwind. Was there anything else there to call out? Was there any sort of cash that might have been brought forward from otherwise being collected in the first half '21?

No. The only other sort of the big item would be, we took advantage of the concessions in terms of the timing of payments for some of our GST and a little bit of payroll tax, probably somewhere between around $10 million to $15 million mark. That's probably the only thing pushed out until September that would ordinarily have been paid in the second half of this last financial year.

Our next question comes from Nathan Reilly from UBS.

Quick question just around those staff numbers. You disclosed there in a chart that you had around 5,500 at the end of June. Where does that sit today? Or where was that end of July?

Probably a little bit better, maybe. A little bit better. I don't know the number, but it's definitely increasing.

Okay. And I guess just, Rob, circling back on this claim issue, not asking about the specific claim itself. I'm just wondering, just the nature of this issue, has it kind of changed the way you're thinking about how you price your maintenance contracts going forward?

No. Not really. No, it hasn't.

And then just as a follow-on from that. I'm just wondering, are your maintenance customers or customers in the industry in general asking contractors to carry higher levels of insurance?

No, not really. No. That's not a factor.

Our final question comes from Steven Anastasiou from Bell Potter.

Most of my questions have obviously been asked being the last one, but just a couple of things. The oil and gas maintenance revenue, obviously, it was impacted in the second half. But the activity levels still look like they were pretty healthy in that second half. So we think they're going to at least hit that level again in the first half '20 and potentially exceed what was seen in the second half?

I think you'll see an improvement, a steady improvement, yes.

Yes. The Buildtek employees on Page 10 of the slide, it looks like there was a lot fewer employees at the end of FY '20. I imagine that business might have been particularly impacted by COVID over there in South America. Or...

Yes, much more of an impact there than it has been in Australia.

Does that change any of your initial thoughts or justification to purchase that business, the long term, medium-term outlook still positive?

No, no, no. Yes, still positive. Yes. Yes. Sorry, things have been improving over recent weeks.

Great. Last one, you might not want to touch on it, but just the legal claim, you mentioned having some exclusions and liability limitations in the contract. I assume that might cover things like the consequential losses that are being claimed?

Look, I can't answer that. I can't answer that. Okay. Thank you.

Thank you for your participation today. That now concludes our briefing.

Thank you.

Thanks, guys. Cheers.