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

Good morning, and welcome to the Monadelphous 2021 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. [Operator Instructions] I will now hand you over to our first presenter this morning, Mr. Rob Velletri, who will start on Slide 2. Please go ahead, Rob.

Thank you, Kristy, and welcome to everyone to our 2021 full year results briefing. So today, Phil and I will present our financial and operational performance for the period ending 30 June 2021, as well as have a good look at our outlook. We'll then answer any questions you might have. The structure of this morning's presentation will be similar to previous presentations with some further detail provided as appendices. Looking now at Slide 3, our group performance and highlights. Monadelphous recorded revenue of $1.95 billion, which was up approximately 18% on the prior corresponding period. The result reflects an increase in demand for the company's services as the industry recovered from the initial phases of COVID-19 with customers looking to capitalize on strong commodity prices, especially in the iron ore sector. The Engineering Construction division's revenue surged 59% to $979 million, reflecting the significant progress made on our large portfolio of major construction projects. The Maintenance and Industrial Services division reported revenue of $977 million, which was down 7%. Demand for maintenance services within the iron ore sector was particularly strong with reduced levels of activity in the oil and gas sector. The period saw high levels of construction activity across the industry, particularly in Western Australia. Increasing demand, coupled with measures taken by governments to control the spread of COVID-19, including international and interstate border restrictions resulted in an unprecedented shortfall of skilled resources with consequent labor cost and productivity pressures felt right across the industry. Fly-in-fly-out operations in the Pilbara region of WA were particularly impacted. Since the beginning of the financial year, Monadelphous secured approximately $950 million of new contracts and extensions, again, largely in the iron ore sector. I'm extremely pleased to report a substantial improvement in our safety performance with our total recordable injury frequency rate down 39% from last year. And I'll talk a bit more about this later. Net profit after tax for the period was $47.1 million, an increase of 29%, representing earnings per share of $0.497. The Board declared a final dividend of $0.21 per share fully franked taking the total full year dividend to $0.45 per share. Monadelphous ended the year with a strong cash balance of around $176 million, and Phil will talk a little bit more about this later in the presentation. Looking at Slide 4, Engineering Construction highlights. As I mentioned, the Engineering Construction division surged 59% on the previous corresponding period to $979 million, and this was the division's largest revenue since 2015. The result does reflect a significant execution progress made on the company's large portfolio of major construction contracts. Since the beginning of the financial year, new construction contracts were secured within the resources, energy and infrastructure sectors, totaling approximately $480 million. This included a 5-year $150 million crane services contract with Fortescue Metals Group. The division also secured a number of packages of work for BHP under panel agreements for West Australia iron ore operations in the Pilbara as well as for the Olympic Dam -- their Olympic Dam operations in South Australia. Mondium, the company's engineering procurement and construction joint venture with Lycopodium, made good progress on a strategically important $400 million contract with Rio Tinto, the Western Turner Syncline Phase 2 project. The project is due to be completed later this year in 2021. During the years, Zenviron, the company's renewable energy joint venture continued to perform strongly with the award of and commencement of work on the Murra Warra Stage 2 wind farm in Victoria. In addition, it completed works at the Dundonnell wind farm also in Victoria and significantly progressed works on the Crudine Ridge wind farm in New South Wales. Our China fabrication business, SinoStruct, established its own fabrication facility in Tianjin, improving its capability to support customers through the self-performance of fabrication and assembly works. Now moving now to our maintenance division. Slide 5. The Maintenance and Industrial Services division recorded revenue of $977 million, as I said earlier, and down around 7%. During the period, the division completed a significant amount of work in the iron ore sector with customers seeking to optimize production levels and capitalize on the strong iron ore price as well as manage a maintenance deficit created during the early stages of COVID-19. Although improving steadily, the division experienced lower demand for maintenance and turnaround services within the oil and gas sector. The division has been awarded around $470 million in new contracts and contract extensions since the beginning of the financial year. Major contract awards within the iron ore sector included 3-year master services contracts with Rio Tinto for sustaining capital projects across various mine sites and port operations as well as a number of contracts with BHP under the division's WA iron ore site engineering panel agreement. Within the oil and gas sector, Monadelphous continued to provide maintenance services under its existing contracts performing major turnarounds during the period for both Woodside and INPEX. Planning has also commenced for a major turnaround scheduled across Woodside, Shell and INPEX operated facilities over the next couple of years. Company's Chile-based Maintenance and Construction Services business, Buildtek, performed strongly, securing approximately $100 million of new contracts with major copper producers since the beginning of the financial year. Monadelphous remains committed to strengthening its position in South America and is currently reviewing further growth opportunities in the region. The division continued to grow its rail portfolio, particularly on the East Coast of Australia. The company is now providing general rail maintenance services to multiple customers on the East Coast and in the Pilbara as well as performing underground rail maintenance at BHP's Olympic Dam mine site in South Australia. During the period, the company continued to invest in specialist plant and equipment to support the growth of its industrial services and civil capabilities. These investments will provide opportunities for expanding our services across the existing major long-term contracts as well as with new customers in the mining and oil and gas sectors. Turning now to Slide 6, contracts secured. You can see in total Monadelphous has secured $950 million of new contracts since the beginning of the year, including around $200 million announced last week. The slide shows values and locations of each contract. Around half of this new work is in the iron ore sector in WA with around 25% in the copper sector with a few big contracts, Olympic Dam in South Australia as well as overseas in Chile. Moving to Slide 7, our safety performance. As I mentioned, we achieved a 12-month total recordable injury frequency rate of 2.26 incidents per million hours worked, which was a 39% improvement on last year. It's a very pleasing result given the extraordinary high levels of recruitment activity. During the period, we implemented a number of key health and safety initiatives to reinforce controls around line-of-fire fatal risks, including a new fatal risk standard and life-saving rule relating to the use of mobile plant and equipment. We also released an updated supervisor safety leadership program and completed further training for our Delivering the Safe Way behavior framework. We continue to maintain focus on the mental health and well-being of our employees, implementing and participating in a range of initiatives in the areas of resilience, development and improving mental health awareness. Looking at Slide 8, our people. You can see on the graph here, Monadelphous ended the year with a total workforce, including subcontractors of around 7,800, which was a 37% increase from 12 months prior. During the year, our direct employee numbers peaked at over 7,600, which is our largest employee base since May 2013. As I mentioned previously, high levels of industry activity in an already tight labor market, combined with the COVID-19-related travel restrictions and border closures place significant pressure on our ability to attract and retain labor. In response, we undertook a number of initiatives to bolster employee engagement and attraction of new employees. This included upgrading our employee development and performance management processes to support our strong pipeline of key talent, and we also reviewed our benefit and reward programs to ensure they remain competitive. Acknowledging the important role workplace flexibility plays in improving employee well-being and job satisfaction, we formally established a workplace flexibility policy and implemented improvements to our parental leave policy. We also progressed a number of attraction initiatives, including launching an updated employer branding program and advancing the implementation of our new and improved recruitment, onboarding and talent management system. Fair bit of work going on in that space. Looking at Slide 9, social value. At Monadelphous, we're committed to making a positive contribution to the communities in which we operate. And our efforts are focused around key areas of diversity, community support and education. During the year, we continued to make significant progress on our reconciliation journey, which is underpinned by our Stretch Reconciliation Action Plan. Pleased to report we achieved more than 3% indigenous employment for the second year running. In addition, as part of the Australian government's employment parity initiative, we employed more than 190 indigenous job seekers and upskilled more than 50 indigenous members of our workforce. During the year, we're proud to launch a 3-year indigenous employment pathways program in partnership with Rio Tinto showcasing our joint commitment to creating meaningful and sustainable employment for Aboriginal and Torres Strait Islander peoples. Supported by dedicated coaching and mentoring, the program aims to increase the number of skilled and tertiary Aboriginal and Torres Strait Islander peoples in the resources industry and will be open to prospective apprentices, trainees and tertiary cadets in a range of fields. Our fourth Reconciliation Action Plan will come into effect in the first half of the 2022 financial year. Plan places a renewed focus on engagement with indigenous businesses, maintaining a minimum of 3% indigenous employment and improving mentoring and support for existing and new indigenous employees. In line with our continued focus on gender diversity and inclusion, we successfully maintained female participation in excess of our 20% target for graduate and vacation programs and retained more than 90% of our female talent over the course of the financial year. We also announced the appointment of our first female operational General Manager. During the year, we commenced a consultation process for our second Gender Diversity and Inclusion Plan, which will focus on ensuring a safe work environment for women, removing gender-based barriers, offering opportunities for women to enter trade roles and extending targets for female candidates in our vacation and graduate programs. The new plan will be launched in the first half of this financial year. Finally, across our operations, we took part in around 70 community events and initiatives throughout the year in support of the local communities in which we operate. I'll now hand over to Phil, who will provide you with some more detail on our financial performance.

Thanks, Rob, and good morning, everybody. So now on Slide 10, which shows our financial performance and compare that to the previous period. So as Rob has mentioned, our revenue increased substantially compared to last year, driven by significant growth in Engineering Construction work. Our earnings before interest, tax, depreciation and amortization was $108.7 million, an 18% improvement on the prior period. Net profit after tax was $47.1 million, representing earnings per share of $0.497. In the second half of the year, we reinstated a provision relating to the refund of R&D tax incentives, which we had reversed in the first half, while we continue to work through the matter with the ATO. The Board declared a final dividend of $0.21 per share, taking the full year dividend to $0.45 per share fully franked and this equates to a payout ratio in excess of 90% of reported net profit after tax. And our dividend reinvestment plan will apply to the final dividend. We ended the year with a strong cash balance of $175.7 million. We experienced vastly different cash flow conversion rates over the last 2 financial years. This was primarily as a result of the initial impact of COVID-19 when materially reduced operating activity levels experienced in the months leading up to 30 June 2020 significantly reduced the working capital requirements of the business at that time. And the improvement in the operating environment post 30 June 2020 has returned the company's working capital to more normal levels. The average cash flow conversion rate for the 2 financial years was a solid 87%. And the strength of Monadelphous' balance sheet has and will continue to provide the company with a financial capacity required to effectively deal with the unpredictable and volatile effects of the pandemic as well as take advantage of any potential investment opportunities that may arise. I'll now hand back to Rob to provide you with an overview of the outlook for the business.

Thanks, Phil. Looking at Slide 11. We can see the relevant current and forecast Australian market conditions for our business. As you can see, buoyant economic conditions forecast for the sectors we operate in, the resources, energy and infrastructure sectors in the coming years are expected to provide us with a strong pipeline of opportunities. Moving now to the outlook. In the resources sector, the outlook for the Australian iron ore industry remains positive, with ongoing significant levels of capital and operating expenditures expected to sustain high levels of production driving strong demand. Maintenance activity is expected to grow steadily on the back of aging assets and customers deferring work in prior periods. Strong commodity prices are contributing to a positive outlook for developments in lithium, gold, copper and nickel. And these markets will continue to provide opportunities for Monadelphous in Australia as well as overseas in South America, Mongolia and Papua New Guinea. After unprecedented demand disruption during the height of the pandemic, conditions in the oil and gas sector are improving with construction opportunities from the development of new LNG projects expected to emerge in the next year or so. Australia's transition towards clean energy continues to gain momentum, with a portfolio of new wind farms coming to market in the next few years expected to provide opportunities for Zenviron, particularly as electrical grid access improves in New South Wales and Victoria. Rapid development of the hydrogen sector will also provide opportunities for us in the coming years. Now this year has seen an extraordinary surge in construction activity after the initial impact of COVID-19, with several large construction projects all completing in the next 6 months. Full year 2022 revenues are likely to be lower than the previous year due to the timing of award and commencement of new major projects. Construction activity is forecast to be stronger in the 2023 financial year. The performance of the business will be dependent on the unpredictable nature of the COVID-19 pandemic and its impact on the company's operations. As I mentioned, the shortage of skilled labor will continue to be a major challenge for the company's operations in Australia. The impacts are particularly acute for fly-in fly-out work in the resource and energy sectors where restrictions in the mobility of personnel due to the unpredictable interstate border restrictions are impeding labor mobilization and operational productivity. In response, the company is focusing on initiatives to enhance the attraction, retention of people, taking a more strategic approach to targeting new work and continuing to work collaboratively with customers. Our reputation as a leader in our markets and as an employer of choice, together with our long-standing commitment to delivering safe, reliable and cost competitive solutions place us in a strong position to capitalize on the opportunities and deal with the challenges ahead. So in conclusion, I'd like to take this opportunity to thank our loyal and talented team. I would also like to extend my appreciation to our shareholders, customers and other stakeholders for their ongoing support during these difficult and unusual times. Thanks. I'll hand over now to the operator for any questions.

[Operator Instructions] And our first question comes from the line of Rohan Sundram from MST Financial.

Just a couple for me. Just keen to understand, of course, around the labor markets, to what extent the issues are driven by the state closures versus the international closures? And just a reminder of how reliant were you pre-COVID on international FIFO labor, if at all?

Yes. Well, I mean, the way I sort of describe the impacts here, I think the international borders, which have been closed for a prolonged period, for 18 months or so. We're just not getting skilled migration into the country, which is normal on a sort of macro basis. So clearly, we're left with whatever is in Australia. And then on the state borders, where, I guess, significant amount of our work is in the Pilbara is fly-in fly-out, we would probably typically in construction work, access 40% to 50% of our workforce from states other than WA. So that's clearly -- it's a combination of those 2 factors, but the state restrictions clearly, I mean, we're just -- there's just no -- very little mobility of labor across the country, which fly-in fly-out operations just rely on.

Okay. So...

What was -- you had 2 questions, what was the other one?

No, I think you partly answered it. But I was just curious, if you do see that easing up in the state border restrictions, does that -- is that a workable position for you at least?

Well, the problem, of course, is it's unpredictable. I mean, if we knew they were going to stay open and every knew they were going to stay open, then there's confidence in mobility and people themselves would be comfortable doing it. But fact that it's so unpredictable and given the more recent restrictions over the last couple of months, it's clear that there's not a lot of motivation for people to want to work their fly-in fly-out when they can't -- when either they're going to be stuck or they can't rely on that as their form of income. So I don't know. Yes.

Actually last one for me is, has the tight pressures in the market, has it impacted your ability to commence new work and/or complete work on time?

Well, it's definitely -- so it's -- I mean, those 2 factors, yes, clearly, it's increased costs in terms of wages, et cetera, and it's put a lot of pressure on productivity and yes, pressure around being able to complete works when they're supposed to be complete. So yes, all those things. It's -- yes, it's as you would expect, given the nature of what we're talking about.

And the next question comes from the line of...

Sorry. Sorry, just to -- your other question was about is it preventing us from starting new work. I guess, the answer to that is clearly that's a decision point for us around what work we take on and being comfortable that we can do it and complete it. And also the risks around the contracting arrangements, et cetera, that just taking that restriction into account.

The next question comes from the line of Michael Aspinall from Jefferies.

Robert, Phil, just 2 for me. I mean just kicking up from where you finished up there. How are the contracting arrangements that you are seeing for the new or for the current operating environment?

Sorry, I didn't quite catch the last bit of your question.

Yes. Are you seeing contracts incorporate additional provisions or changing the structure of what risk you're willing to take on given the current environment?

Well, yes, I guess the normal -- yes, we are being a lot more mindful of the risks clearly in contracting in this environment and therefore, either not making prices fixed or putting sufficient qualifications, et cetera, and making sure that those risks are properly accounted for.

Yes. And you mentioned strategic targeting of new work. Does that kind of imply in combination with those comments that that's not being done across the industry from all participants? Or is everyone kind of adjusting the way that their pricing work to [Indiscernible]?

Yes. Well, I think everybody will be adjusting, they've got no choice to adjust. But yes, I mean the point is just making sure that we're matching up our resources and capacity with the available work and making sure that we're selecting work that is best for us strategically and in the long term.

Yes. Okay. And we've seen some commentary from some other industry participants that are now claiming additional costs incurred from customers. What's your experience been? Or have you incorporated much of that into the numbers you're reporting today?

Well, yes, look, that's -- the answer to that is it depends on contracts and where we can, we are. But it's not universal. It depends on sort of -- it depends on contract conditions.

Okay. And then in maintenance in the past, you've talked about the mechanism of changes to wages within that kind of style of work has been negotiated with customers. Is that working as expected?

Well, I guess in the maintenance world there's probably a lot of negotiation goes on with clients to match pay rates with availability of labor and there's fair bit of that that's going on. But that's always a challenge, clearly. So yes, I mean it's less of a -- probably a bit less of an impact in maintenance than it is in construction.

Yes. Okay. And I mean, just another kind of angle to that question. You might be able to negotiate kind of the pay rates you need to pay to keep employees on the sites for the maintenance work. But are there any kind of protections there for any kind of step-up being turnover?

Not particularly. Not necessarily, no...

And that would be an impact then?

Yes. Probably, yes, to some extent, just recruitment costs have gone up, no question about that. We've seen the turnover go up. So that's definitely another impact.

Okay. Cool. And last one for me. Sorry for badgering on. You've mentioned that activity in '22 is going to be lower due to the timing of new major projects. I know it's probably a bit too early in the piece, but can you talk to any kind of estimates as when you think those projects come through. And I just wanted to see if you could give us a sense of if most of that was iron ore work or if there was a large part that was oil and gas too.

No. It's a more general comment around the fact that we have had -- I mean the period this year, we have had a surge in activity. Remember, we had probably I think we quoted last year something like $100 million or $150 million come from last year into this year. So if you normalize the year, it's more like about 1.8%, I suppose. But the point is that we've got a lot of work coming off. And whilst there's plenty of opportunities around, I don't think the timing will certainly match or the -- it won't match the year past. But it's highly dependent on timing, highly dependent on timing.

And your next question comes from the line of Wei-Weng Chen from JPMorgan.

Just a quick one on labor. So where are the most -- where are the pressures most acute? Is there a certain segment or a type of work where you're seeing more issues? Or is it just across the board?

It's definitely in the skilled area. So I mean, electricians, mechanical fitters. I mean in the sort of bulk numbers, it's in that skilled area and even some of the semi-skilled scaffolders, et cetera. [Indiscernible]

Yes. Okay. And then just a question on -- can Mona get to a situation where you start to cycle higher labor costs and you get to reprice future projects? Or does higher competition kind of prevent you from repricing work too much up?

Well, I mean, you've always got competition, but I think the general movement in the market will be upwards. We certainly -- it just has to be -- it's a more competitive in terms of labor. So really, that is going to push rates up. But I mean, we're still competing with others, so both on the labor side. So I would expect we're all doing the same thing.

Yes. Okay. Great. And then just last one for me. Just at this stage, how should we think about the quantum of sort of revenue declines in '22? I'm sure you're working hard to replace the revenue. But at this stage, I guess, how much is rolling off from FY '21 levels? And then when you say FY '23 is expecting stronger activity, do you mean relative to the year just been? Or do you mean relative to FY '22?

I mean relative to FY '22. Yes. I think if you kind of look at the profile of some of the large contracts that are going come about over the next 2 years, most of them are going to impact the second year, not the first year. And no, I can't really give you a number, it's too hard.

And your next question comes from the line of John Purtell from Macquarie Group.

Just had a few questions, just picking up some of the points. Rob, we've previously talked about pre-COVID EBITDA margins of 7%. I mean is that the type of -- is that still the type of margin that you would expect to bid on new work? And when would you expect that to flow through to your book?

No idea. The answer is probably somewhere around there, yes. But I mean you got to deliver. And it's going to be a question of how well you can perform on contracts. I mean, that's just the way it is. I mean, that's normal. But it's certainly more challenging now, although clearly, new work is going to be bid with all those risks in mind. So all things being the same, I guess the answer is yes. But I couldn't tell you when.

Yes. And I appreciate there's a range of moving parts. But so the question is whether you think the second half of '21 represents your likely margin trough. I suppose the theory sort of is or was that you're completing, obviously peak sort of iron ore work and incurring additional costs to get that done. So as that sort of eases off provide some form of relief. So just interested in your thoughts around whether this is the trough for you.

Well, I could only say I hope so. What happens in the future, unfortunately, at the moment is pretty uncertain. So the positive is that we know what the risks are. We know when we're negotiating new contracts, et cetera. But other than that, I'm not sure what else I could tell you.

Okay. Just got a couple of others, if I can. Just in terms of staff numbers, Rob, they've obviously sort of continued to move higher. Do you expect them to sort of come off this type of level now consistent with your sort of revenues? Or do you sort of looking to try and retain that labor?

Yes, look, the labor goes with the work. So it's going to go -- it's going to fluctuate with the work. But clearly, we'll be trying to maintain those levels. I don't think we'll take a dive. We can probably, at this stage, we are in a situation where we could probably -- well, we're looking for people. So in the short term, I think the numbers will be maintained.

And this probably dovetails into the final question just around your bidding pipeline. Rob, can you flesh out the sort of major opportunities over the next 6 months?

Yes. I guess, well, there's -- the iron ore work is just there all the time. The major opportunities in iron ore will probably feature more the following year as in new developments like Western Ridge or Western Ridge for BHP and Western Range for Rio. But there nevertheless, there's significant ongoing sustaining capital, 0 to $50 million type contracts. Plenty of other work, but the big jobs will come a bit later. Same with copper, work at Olympic Dam. Mongolia, Oyu Tolgoi has got to get going again. It will get going again in the next -- within the next few months. Covalent Lithium is probably a sort of nearer-term first half opportunity of scale as a new lithium hydroxide plant here in WA. There's wind farms available in the short term that we're hopeful of. Otherwise, there's work more generally in Nickel West. There's work in other lithium opportunities for Talison. Albemarle is still going, but there's another 2 trains possible there. They're probably the more significant ones.

And your next question comes from the line of Steven Anastasiou from Bell Potter.

Well done on delivering that revenue increase in such a difficult operating environment, but sort of just touching on that and the margin piece, is it enough to expect margins to start to normalize sort of from that second half '22 period once all your pre-COVID work, construction work starts to complete? Or do you think you're really going to have to see a normalization in borders as well?

No, probably the former rather than the latter. Because most of the work that we've had on is all pre-COVID. Most of it was work won before COVID even existed. So it's been through that. Yes, we've had those restrictions impact that work. And I guess, hopefully, we'll be able to manage those risks better now that we know about them going forward. I think the key risk to margin is more about volume than it is. If you get what I'm saying.

Yes, yes. Yes. No, that makes perfect sense. So once you start to cycle that work from first half '22 as things complete, hopefully, it's onwards and upwards from there, but subject to your level of volume.

Yes, correct.

Yes. The other one, I had a question on -- there was a sort of quite a big increase in the contract asset position. Does that sort of reflect difficult environment and some higher than historical claims? Or is it just maintenance work that was completed near the half year-end that was yet to be billed or perhaps a bit of both?

I don't know. I think it's a bit of both. We've got large volume of work in the final stage of completion. So you're going to see that number go up because of that timing.

And how are your negotiations going with customers more generally? They obviously are well aware of the issues that are plaguing the industry. Are they pretty good in terms of your claim negotiations and the like?

Yes, it could always be better. But yes, it's a mixed bag, depends on what job with who. But yes, there's certainly -- it's certainly -- what's the word for it? It's not terribly easy.

Yes. Yes. Not terribly easy, but at the same time, it doesn't look like there's going to be any sort of major blow up or not blow up, but any sort of major difficulties with customers, by and large, you're still able to manage things well enough.

Well, I think that's what we've forecast here.

And your next question comes from the line of Shaurya Visen from Goldman Sachs.

I have one on margins. You have provided some very good commentary around the rising labor costs and shortages. Can you give us a sense of your current order book, what proportion of contracts would be fixed price so that we can think about margins going forward?

What? Sorry, what's the actual question? What proportion of fixed...

Current order book.

Of current...

What proportion of your order book -- yes. Yes, of your order book would be -- current order book would be fixed price contracts?

Well, the vast majority of our construction contracts would be fixed price or sort of thereabouts fixed. Yes. 80%.

That would be 80%. Okay.

Yes.

[Operator Instructions] And your next question comes from the line of James Wilson from Jarden Australia.

Just 3 from me today. My first question is, in your outlook, you've called out steady growth for maintenance. So given that some of the Pilbara and E&C jobs will roll off over FY '21, do you expect the business mix to swing back towards maintenance especially as some deferred oil and gas maintenance operations come back online? And if that swing occurs, will it occur more in the first half or the second half, do you think?

Well, I think it might -- I think the answer is yes to that. It's just the extent to which the mix changes because the volume of construction drops off. But yes, on the maintenance side, there's -- yes, there is continued opportunity. We probably haven't seen the oil and gas revenue quite returned back where it was pre-COVID. There's probably some opportunity there.

Great. No, continue sorry. I thought you finished.

No, no. I'm sorry, was there more questions?

Yes. My second question is, is your guidance of stronger construction performance in FY '23. Is that purely driven by contract timing of currently signed contracts or something else? Just interested to know what underpins that, especially given the tougher recent commodity pricing in iron ore.

Well, just when I look ahead and look at the pipeline of projects that we are pretty confident will be available to us. The timing is such that there's a lot more of that work in the FY '23 year than FY '22. Just timing of -- timing, it's not work that we have. It's work that we have -- it's work that's available for us to secure.

Yes. Okay. That makes sense. And my final question is, can you run us through briefly the step-up that you guys saw in right-of-use asset depreciation over the second half of '21?

The right-of-use assets are our -- basically our rental properties, James. So also, it's pretty dependent on when you have renewed leases during the period. And we did have a couple of leases that we renewed for a bit longer. We also took on at least at -- in China for the SinoStruct business as well, and that's what would have contributed to the step up in that depreciation.

[Operator Instructions] And your next question comes from the line of Nathan Reilly from UBS.

I was just going to ask around this margin decline. Just trying to get a bit of, I guess, a bit of understanding around that second half margin decline versus the first half. So 5.1% down versus the 6% at an EBITDA level. Just so I'm clear, that decline, is that all increased turnover and labor cost inflation?

In the second half probably it is, yes.

Yes. Okay. So with that, can you maybe speak to your pass-through mechanisms around labor cost inflation. Notwithstanding this is, I guess, an industry-wide issue. Is this a factor that you just given -- is it the COVID situation that just don't have COVID clauses or pandemic clauses in contracts? Or is the whole industry kind of taking an approach where they just need to share this issue?

Now it's not just labor cost. Labor cost is one factor. It's also just availability of labor and not having quality labor, it's also productivity impacts -- so not being able to do the work in the necessary time, et cetera. Do you know what I mean?

Yes.

It's a whole -- there are a bunch of impacts. It's a labor costs, there's productivity as in having the right number of people or the quality of people for that matter for the work and increased costs around recruitment because of high turnover levels, et cetera, it's a combination of all those factors.

Yes. So I guess this is now the -- this is the reality of delivering [Indiscernible] in the Pilbara and in Western Australia at the moment. So with the new work, which you secured more recently. And I think that's going to be contributing pretty significantly to the first half of FY '22. Have you been able to address some of those challenges? And they have...

Yes. The prices are much more expensive. Plus we've -- yes, there's clearer conditions around being able to recover impacts, et cetera.

Yes. And another question I have...

Because as I said to you -- as I said earlier on, most of the work we're talking about is work that was won pre-COVID.

Yes. Yes. I'm just trying to get a sense of what's rolling off and what's rolling up and new work...

Well, you've still got stuff rolling off. We've still got a few jobs that are going to finish in the first half. And then you've got some work maybe that we've announced more recently that's new work that would be -- we wouldn't be concerned about. And there's some work that we've taken on that's reimbursable.

Yes, because there's also a shift in mix here, isn't it? So with some of the new work which is going into the iron ore market, what -- it looks like there's a big reduction in those bigger, large projects and the big mine replacement projects. And in terms of what you've added, there's quite a lot going on in that smaller sustaining capital projects work 0 to $100 million size...

Spot on. Yes. Spot on. Yes, there's a lot more, which is what we'd feel more comfortable about.

Would you want to give me an idea of the mix there? In terms of the new work which you've secured in this new environment in the iron ore space, what the mix is between the larger sustaining capital projects versus the smaller...

It's mainly been the small -- all of it has been the smaller one, I think. All of it has been the smaller...

And is that where you can -- where you can sort of price this a little bit more efficiently?

A lot of it does. Some does, depends on the scale of it. Some of it's a little bit bigger. I mean there's -- yes, but yes, it's more generally at the lower end across maintenance and also in the construction division.

Right. So with these -- just so I'm clear, these new iron ore projects, which are mainly skewed to smaller sustaining capital projects, are they done on schedule of rates in terms of price?

They can be. They can be. Some of them are lump sum or some of them are, yes, particularly if they're kind of difficult to scope, they're more reimbursable.

Okay. And then in terms of the labor intensity, I mean, you've got a very big workforce at the moment. And you said earlier that you're looking to add. But just given the context of your revenue or your lower revenue outlook for the full year, does that suggest you're going to be quite busy through to December, January, and then you're expecting it to kind of roll over for the second half of the year and then pick up again in '23?

With what we know or what we know now, that's probably a fair assumption, yes.

Okay. I guess...

No, I say that because -- sorry, I say it that way because it's pretty -- it's not that easy to forecast too accurately 6 months down the track and -- yes. And I think the other factor is it's probably more labor intensive than some of our projects where we had quite a bit of -- previously we did have more supply involved in those contracts perhaps. We're doing large shutdowns that are heavily people-intensive.

Okay. So just -- maybe just finally, just so I'm clear. Can you give an example of what your turnover rates were over the last 6 months? And also, what was your average cost inflation that you saw from a labor point of view?

Well, the labor wise, it's probably around 10% maybe 5% to 10%, but there's things like retention bonuses and other schemes that have been put in place to try to keep people to finish jobs, et cetera. So it could be as much as 10%, but it will vary depending on the job, but overall between 5% and 10%. And then turnover-wise, it's probably doubled. So it's just sort of a doubling of -- which really pushes up your recruitment costs as you find more people. And just to -- you have to find people to replace people. There's a fair bit of churn. Sorry?

What's the normal turnover rate?

I wish I could give you one number for one workforce. That's why I'm saying it's probably doubled. Yes.

And sorry, last question, I've asked probably too many there, but just last question around [Indiscernible] rate. This looks like some work, which you've secured sort of later on in the piece in terms of delivery of that project. Does your pricing reflect that, I guess, the current circumstances in terms of trying to deliver that project towards a time frame?

Yes, definitely. Most definitely. I mean, yes...

That will support the first half of '22.

It will, yes.

As there were no further questions at this time, speakers, you may continue.

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

Thanks, everyone.

And that does conclude our conference for today. Thank you for participating. You may all now disconnect.