Service Stream Limited (SSM) Earnings Call Transcript & Summary

Thank you all for standing by, and welcome to the Service Stream FY '22 Half Year Results Briefing. [Operator Instructions] Please also be advised this call is being recorded today. And I'd now like to hand the conference over to Managing Director, Leigh MacKender. Thank you. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to Service Stream's FY '22 Half Year Results Presentation. As per the introduction, my name is Leigh MacKender, CEO and Managing Director of Service Stream, and I'm joined today by our Chief Financial Officer, Linda Kow, and our Head of Investor Relations, Chloe George. We first wish to begin today by acknowledging the Wurundjeri people, the traditional custodians of the land in which we meet here in Melbourne and to pay our respects to the elders past and present. We also extend respect to Aboriginal and Torres Strait Islander people here joining us today. We're recording the session today via the webcast. It's open to all registered Service Stream shareholders, and we have a number of institutional investors and analysts on the conference bridge who are welcome to ask questions at the conclusion of the presentation. It's been an exciting 6 months for Service Stream. I'm really pleased to report these results for the half year, which I think reflect solid delivery against the expectations we set for the year when we announced the acquisition of Lendlease Services in July. In particular, I think it's been pleasing after a challenging prior 12 months, which was characterized with the rebasing of works across our telecommunications division, with work volumes and mix changing or aligning to shifts in the market and the business navigating through the initial stages of the COVID pandemic, all whilst ensuring that we maintain that focus on our strategic imperatives and continue to deliver for our valued clients. I'll now direct you to Slide 3, and we'll talk through the key highlights of the presentation. Despite that period being characterized, as I said, with the rebasing of our telecommunication operations, the operational result across our legacy Service Stream business was strong. The group had an exceptional cash flow generation during the period, which equated to an EBITDA to OCFBIT conversion rate of 235% and resulting in the group's net debt position closing of $47.1 million. On the 1st November, 2021, we successfully completed what is a transformational acquisition with Lendlease Services. And in that regard, I'm really pleased to report a couple of key metrics. Firstly, we received strong support from clients for the acquisition and all contractual agreements have now successfully transitioned. The integration program has mobilized and is well underway. And the targeted synergies we announced of $17 million have been validated during the process of being delivered, and 50% of the run rate now is being brought forward 5 months to June 2022, previously November. And the initial profit contribution from Lendlease Services operations has been strong over the period post completion, noting that it's only 2 months being November and December. More broadly, the group has successfully navigated through the COVID pandemic. And whilst there have been some impacts across our operations at a group level, we've not had an overall negative impact on our financial position in relation to what we had forecast. As we look to the future, Service Stream has a strong and exciting pipeline of growth opportunities across each of our sectors. These are strengthened with the additional capabilities that we've acquired through the Lendlease Services acquisition. And we see growth being supported through the continued deployment, renewal and upgrade of essential services, gas, water, electricity assets, upgrade or further deployment of improved wireless and fixed line telecommunication networks. We see increase in public and private investment in improving road transport networks across the country, where we now have a strong capability and assisting our electricity clients with the transition and augmentation of the country's energy networks to a lower carbon footprint, which will utilize an increased portion of renewables and battery technology. So each of our markets are strong. They're benefiting from solid investment from both government and the private sector and will continue to support the group's growth over the next period. Moving on to Slide 4, I'll briefly walk through some of the key financial headlines for the first half, which Linda will expand on further in the presentation. So total group revenue for the half was $566.2 million, reflecting an increase of $156 million or 38% on the prior corresponding period. That was made up of $168 million contributed from the Lendlease Services over those 2 initial months, coupled with growth in infrastructure upgrade works across our legacy Service Stream utility operations with Comdain. The business reported EBITDA from operations of $39.3 million, underpinned by a solid operating result across our legacy Service Stream business and again, a positive contribution from Lendlease Services. The group's EBITDA margin for the first half was 6.9%, with both our EBITDA and the EBITDA margin in line again with those expectations we set in July last year. Adjusted NPAT was $16.4 million, understandably down on the prior corresponding period by 18%. And finally, with respect to dividends, as outlined in our 2021 AGM, the Board has declared not to pay an interim dividend to assist with the funding of the Lendlease Services acquisition. We certainly understand the importance of dividends to our shareholders and a key priority for management and the Board in the second half is to make sure Service Stream is in a position to resume the payment of dividends at the full year. But as I now turn to Slide 5, I will provide an update and further insight into the group's revenue profile. First point to note is the group has a solid order book of $5.6 billion in secured revenue. And under this, I think, it's important to note that, that only reflects the initial term and not the multiyear extension options, which exists across almost all of our long-term agreements. Revenue mix continues to improve as a result of our intentional strategy to diversify the revenue concentration over recent years from what was a dominant focus on telecommunications to now include an extended utility operation, gas for electricity and industrial shutdown and transportation. As outlined earlier, the acquisition of Lendlease Services has further improved the revenue mix and dramatically increased the proportion of annuity-style revenues across the group. Revenue mix continues to improve, and we note again, it's only 2 months of Lendlease Services contribution was evident in this result. So some of the percentages here in terms of our split across gas for electricity and transport will change over the full year. The group has approximately 65% of our revenue secured through government entities and 35% across industrial blue-chip clients. I'll provide some further insight on the major clients across each of our divisional updates later in the presentation. Again, those revenues are supported by long-term multiyear agreements to which the business has a strong history of retaining. 2 final points, I think, is important to make, particularly given the current environment where we're seeing increases in labor and operating costs. Our group's longer-term multiyear agreements generally will include rise and fall or annual review mechanism to support any escalations in labor and/or operating costs. And our shorter-dated project works where the business is upgrading infrastructure assets are being priced by the business taking assumptions on near-term escalations in labor and operating costs. So the business has a number of levers there under our commercial agreements, which can and does utilize to assist in offsetting any dramatic increases in our cost base as we move forward. Moving on to Slide 6, and I'll provide an update in relation to the COVID pandemic. In relation to my prior or in line with my prior comments and update, Service Stream's exposure to essential infrastructure networks continues to position the business well to navigate through that COVID pandemic without material financial impact. Group has not however been totally immune from the COVID impacts, and they've included but not limited to, reduced preventative and discretionary work volumes across our utility operations, some of which have historically delivered higher margins for the division. Some restrictions on movements still continue across state borders, particularly Western Australia as we sit here today. And construction-based lockdowns during Q1 of this year, which impacted the progress of utility project works in New South Wales and Victoria. In terms of specific workforce impacts, I'm really pleased to report that they have often been short-term in nature. Business did experience sporadic workforce absences in early 2022 associated with Omicron variant, either due to illness or quarantine requirements. But importantly, those absent team pressures were short term in nature with the workforce promptly returning within 1 to 2 weeks. There have been no long-term major labor shortages across this period as the business has continued to adopt staggered rostering and utilize our flexible resource base, including our subcontractor network wherever possible. Western Australia, as I outlined earlier, still presents some challenges with border restrictions, making it difficult to move resources in and out of the state, and some operations which utilize a predominant casual workforce have found it challenging given our national border restrictions, but again, they are now easing. The impacts of COVID dissipated and the business has been able to mitigate against any negative impacts through the enhanced portfolio of our works reducing our dependency on any 1 particular market segment. As I outlined earlier, we've got a strong pipeline of contracted works. We developed a range of COVID safe operational practices in conjunction with our clients to support our operations continuing and work to refine flexible rostering and other changes across our resource base to include -- to ensure that we're well supporting operations. Our clients have been very supportive of any short-term challenges we have had associated with the COVID pandemic and particularly Omicron variant. So I'm really proud of how the team has operated across this period and how the business has continued to support our valued clients. Moving on to the next slide, Slide 8, Lendlease Services acquisition. I just thought it would be important to recap on the acquisition, the transaction, and how it's assisted in transforming the business and supporting that future growth. As I've outlined previously, the acquisition marks a significant strategic milestone creating a broader portfolio of operations across the wider infrastructure services market, really complements and deepens our existing capabilities across our utility operations, let's say, gas, water, electricity and supports the business to target a broader share of expenditure as we move forward, but also expand our business into new sectors, transport and industrial services, which represent 2 exciting markets. It's also reduced the group's exposure, as I said, to any 1 particular market segment or reliance on a client or particular program and enables the business to better weather the cyclical nature of infrastructure investment. Assisted in expanding our strong portfolio of blue-chip industrial clients, reflecting major asset owners, operators and a larger portion of work from government and government entities across the country. And we identified significant cost synergies as part of the transaction. Our initial assessment was $17 million and additional synergy opportunities have been identified and will be further assessed during the business integration program as it proceeds. And finally, the transaction will support strong EPS value creation, circa 30%, of course, excluding those onetime transaction and integration costs during that initial period. Outside of the strategic focus, Slide 9 talks in a more granular fashion to the integration update. And I think there's a couple of key points we certainly want to note. Firstly, from the outset, very pleased with the progress the integration program has made in line with our expectations. Post completion, the business successfully mobilized our dedicated program management office to assist with the management and governance of the integration program. We've had strong engagement with staff across the business even despite COVID restrictions being in place. And most importantly, we've maintained our strong client relationships, continue to deliver to support their operations. And again, very pleased to report that all the client contracts held by Lendlease Services have been successfully transitioned across. The restructuring activities are well underway in line with our plan, which focuses primarily or initially in this phase on telecommunication operations and our corporate and support divisions, where there was some duplication in terms of the services provided across each business. Business is working to exit from the transitional services agreement with Lendlease Group, that remains on track and we've got confidence that we'll be able to conclude that agreement by 30 June 2022. And in relation to the delivery and the realization of synergies, as outlined in my initial comments, we've validated the $17 million. We're very confident on it being realized. And the program, I'm actually really pleased to report, is running ahead of schedule and that the 50% run rate target is being brought forward by 5 months from November 2022 to June. So really pleasing to see the progress there. Our initial focus on this 12-month period was to implement much of the organizational restructure and to ensure the business is well positioned to exit from the TSA and start to deliver those targeted synergies, all of which is tracking to plan. And finally, before handing across to Linda, again, we'll go through some more detail in terms of the group financial results. I'll provide an update on each of our reporting segments, and we refer you to the telecommunications section on Slide 11. So over the period, the division generated $234 million in revenue and $21.1 million of EBITDA for the first half. Revenue was up 11% on the prior corresponding period, and that reflected the addition of Lendlease Services telecommunication operations from November. It also included revenue from the mobilization to support nbn's network construction upgrade program and the expanded portfolio of fixed line maintenance and wireless operations with those key clients. Our revenue and margins across that rebased legacy telecommunication operations performed better than anticipated, and that was supported by increased maintenance and upgrade works being evident across the East Coast, particularly. Telecommunications EBITDA margin of 9% reflected the reduction across the rebased historical operations, again, due to changes in our work, volume and mix, as we've previously discussed, and the addition of the lower-margin work from Lendlease Services business. Following the acquisition as we look forward, the telecommunications division has really made significant strides now in expanding the depth and breadth of the services that we deliver across all major clients in that space. We hold an enhanced mix of contracted operations across the key telecommunication clients across fixed and wireless infrastructure. Moving to Slide 12 and provide an update on our utilities area. As you can see on the right-hand side, the utilities division generated revenue of $277 million, representing an increase of $77 million or 39% on the prior corresponding period. EBITDA over the period was $16.3 million, representing an increase of $1.6 million or 10.9% on PCP. That was reflecting the continued growth across our legacy Comdain operations and a positive contribution from Lendlease Services utility and infrastructure division over November and December. Utilities EBITDA margin was 5.9%, reflecting a reduction of 1.5% on PCP. I think it's important to note 2 key factors, which we know we've discussed over the last 12 months. That's driven through growth across our Comdain operations associated with design and construction of infrastructure assets. And whilst that's been growing strongly and it contributes to increased earnings, it's a lower-margin business and lower-margin contracts transitioning from Lendlease Services, I think both of which, again, previously we outlined and provide an opportunity to improve over time. In terms of operational highlights, the business successfully mobilized a new 10-year agreement with SA Water that includes the provision of operations and maintenance services across their distribution network. And we also resecured a multiyear extension with Multinet Gas, again, encompassing operation maintenance and capital works across its Victorian network. Each of those providing strong annuity-style revenues across the utility area. As per my prior comments, there was some impacts across our utility operations associated with COVID, particularly that construction focused lockdown, which was initiated in Victoria and New South Wales during Q1. And we're still not seeing our metering inspection work recover to those pre-COVID levels, although these are continuing to incrementally improve month-on-month. So as we look forward, I think the pipeline for growth remains robust and promising. I'm particularly excited about opportunities that will present across gas and water network upgrades associated with the replacement of aging infrastructure and the expansion of urban networks. The augmentation and upgrade of electricity networks to support that shift towards renewables and our work in supporting industrial service customers with shutdown and maintenance works across their infrastructure networks. And finally, moving to the third division, our transport area on Page 13. Transport division generated revenue of $55 million and EBITDA -- and EBITDA, sorry, of $3.9 million, it equated to a margin of 7.1% over the half. Again, that reflects the contribution when I talked of the half really over 2 months following completion being November and December. In terms of the operational highlights, business successfully mobilized a significant 15-year road infrastructure agreement with Transport for New South Wales. Under that agreement, we provide a range of road maintenance services and the delivery of upgrade works and capital projects. We also saw an increased level of support associated with local government stimulus in WA with a successful delivery of increased road maintenance across our WA networks and our longstanding partner, Main Roads WA. Transport division holds a strong pipeline of work associated with the investment in enhanced road operations, maintenance and particularly the deployment of ITS or smart infrastructure. We've got a fantastic client base, as you can see represented on the slide here, representing a mix of state government and private industry, including VicRoads, Transport for New South Wales and Main Roads WA. I'll pause there and hand over to Linda, who will run through the group financial results in a little more detail.

Thanks, Leigh, and good morning to everybody on the call. With the acquisition of Lendlease Services, we initiated a total revenue metric and adjusted the definition of EBITDA from operations to include our proportionate share of revenue from incorporated joint venture. A number of the Lendlease Services contracts are currently undertaken in JVs and as these operations grow, we believe these adjusted metrics will provide our investors with a better sense of total growth activity as opposed to just recording our share of joint venture distributions. As for normal practice, we've provided a reconciliation of statutory results to our adjusted operational metrics in the appendix to this presentation. Total revenue for the half was $566.2 million, which is $156.3 million or 38.1% above the comparative half. This includes a $168 million contribution from Lendlease Services post acquisition. Revenue from the legacy Service Stream operations was down $11.7 million due to the rebates of telco operations, which was partially offset by continued Comdain growth in the utility segment. EBITDA from operations was $39.3 million, which compares to $40.2 million in the comparative half. This was underpinned by solid results from the legacy Service Stream operations with strong performance in telco offsetting a shortfall in utilities. The new Lendlease Services operations delivered a strong initial 2-month contribution with a minor amount of synergies also realized during the period. EBITDA margin for the half was 6.9% with a reduction from prior year reflective of the rebased historical telco operations, increased mix of construction work in the utility segment and addition of Lendlease Services for the first 2 months. Statutory EBITDA for the half was $30.4 million after that acquisition-related transaction and integration expenses of $8.9 million. Looking at NPAT, the group's adjusted NPAT or NPAT-A for the half was $16.4 million. This compares to a statutory NPAT of $5.3 million, with the difference due to the nonoperational costs excluded from operating EBITDA and the amortization of historical customer contracts of $4.3 million post tax. Depreciation and amortization expense, including amortization on lot of these assets, was $14.6 million, with an increase of $4.9 million largely attributable to the addition of LLS. Slide 16 discusses cash flow for the half with the key highlights being the exceptional OCFBIT conversion rate of 235%. This includes a one-off benefit from the release of some of the working capital built up in Lendlease Services prior to completion from recent project mobilization. It also reflects time benefit from the early receipts from a number of government clients due to year-end shutdowns and/or potentially COVID. The acquisition payment from Lendlease Services was $316.6 million, which comprises of the $310 million purchase price less assumed debt and debt like items of $16.4 million plus an adjustment of working capital of $23 million less net cash acquired of about $3 million. The review of the final completion balance sheet is currently in progress with the final adjustment [ to the window ] pending. As a result of the strong cash flow outcome, net debt at December was $47.1 million and leverage was 0.9x EBITDA on a post-AASB 16 basis. However, I should point out that net debt is expected to increase in coming months with the December timing benefit expected to revert. And by June, we would expect to see the full year OCFBIT from operations normalized in line with historical performance of circa 80% plus. Now moving on to Slide 17, which touches on the group balance sheet and capital management. We've also said here the initial provisionally accounted balance sheet for Lendlease Services, which is included in the December numbers. Noting the acquisition has been provisionally accounted, the value of intangibles arising from the acquisition of $209 million has all been allocated to goodwill in the December accounts. We have engaged advisers to assist with the valuation of assets -- the valuation of assets and intangibles, which will allocate some of the goodwill to customer contracts and relationships and which will be amortized in our future financials. You will also note a significant net working capital acquired of $79 million, which reflective of the contractual agreements acquired plus an increase in working capital investments prior to completion due to a number of recent credit mobilization. With respect to the group's debt facilities, these were upsized to $395 million during the half to undertake the acquisition and provide headroom for further growth. The key commercial terms of the refinance are aligned to the existing SFA terms. In addition to debt funding, the facilities are also used for client bank guarantees. At December, this totaled $136 million, including $87 million in relation to LLS operation. At December, the group maintained significant liquidity headroom, including cash of $205 million with all covenants comfortably met. And finally, as Leigh has already touched on, an interim dividend has not been declared to assist to the acquisition, resumption of dividends is expected for the full year subject to business performance. And that's all for me. So I'll now hand you back to Leigh to take you through the remainder of the presentation pack.

Thanks, Linda. I now direct you on to Slide 19, where we touch on the group outlook before we move to question-and-answer session. First of all, note, we're really pleased that Service Stream maintained its guidance for FY '22 and expects post acquisition pro forma EBITDA from operations of $120 million to $125 million, that's inclusive of a full run rate of synergies of that $17 million. As I've outlined in the presentation, I think the group has made a really positive start to half 2. The Omicron impacts that we've seen have been short term and successfully mitigated across our group portfolio. The LLS integration program is proceeding in accordance with our detailed planning and the realization of synergies is tracking ahead of schedule. Our priorities are outline on the right-hand side of the page there, but they include understandably, reaching about a 60% completion rate in terms of our business integration, exiting the transitional services agreement with Lendlease Group that provides for IT and some back-of-house support services. The delivery of those integration synergies are previously outlined. Attraction and retention of key resource, particularly in the face of changes across the labor market that we're seeing. And as Linda outlined, another priority is certainly the resumption of dividend for the full year, which, of course, is subject to business performance. We really believe the business is well positioned to execute on all of the above and deliver growth into FY '23 and beyond. That concludes the formal part of our presentation. So I'll now hand back to the moderator and ask for questions from those joining on the conference bridge.

[Operator Instructions] Our first question comes from Piers Flanagan at Barrenjoey.

Just a couple for me, if I can. Firstly, just on Lendlease Services, I think you called out there $168 million of revenue contribution for the period. Just sort of looking at that run rate, it seems like it's up sort of strongly on last year's Lendlease Services revenue of $790 million. Can you maybe just talk through sort of the revenue profile there and sort of any recent contracts won?

Revenue profile is quite similar, actually. I went back and had a look with the profile that we shared at the time of the transaction. So I think we've provided that revenue mix at that time. Obviously, we're only talking 3 months and it won't necessarily represent what the full year will look like given the number of the businesses are in mobilization such as the telco construction pace. But it was actually a reasonably, evenly -- a reasonable, evenly split that come to -- reasonably even split across the first 2 months, and we're kind of seeing that across the first 3 months now of acquisition. But I think if you use that sort of pro forma guidance we provided at the time of doing the transaction, that will guide for you in terms of what [indiscernible] might look like.

Sure. And then just on the bringing forward of synergies, does that mean you'll be realizing [indiscernible] to $8.5 million of synergies in FY '22?

Not technically, on a run rate basis. So what we're saying by the time we get to June, we've done enough to have recognized -- or realized or to have delivered the equivalent of a full year's worth of 50% so called $8.5 million, that's not necessarily $8.5 million that we booked into our results over the year. It just means we've done enough by June to get that much.

We're pleased with the performance, Piers, of being able to identify and deliver those, and that will naturally flow through on a full year basis, particularly in the next year as well, but it's being bought forward by 5 months.

Sure. And then just I know you touched on the outlook, but can you just give a bit more color around some of the divisions and sort of potential near-term contracts that you're looking at or that are out there?

Yes. Look, I think, first of all, I said we're really pleased to be able to maintain the guidance we provided in July, and the business performance has been strong. We said our underlying legacy business has been strong in that period, and we've been really pleased with the initial contribution of Lendlease. In terms of opportunities for the second half, it's really -- we've mobilized many of the contracts in our transport and utilities areas that are going to support that delivery through half 2. The one to note in terms of continuing to mobilize is our N2P operations with nbn. So that's sort of upgrading that fiber to the node to fiber to the premise works. And that's one that we'll continue to mobilize throughout each month of this half to support sort of June 30. So that's probably the only major area that is going through a mobilization period over the next 6 months. Growth opportunities outside that. We've got a really strong pipeline. We've been really pleased. We're seeing a steady pipeline of works across the entire business. We certainly have seen, particularly in relation to Lendlease opportunities across the utilities and infrastructure space. Like I talked about earlier, just looking at not only the upgrade of existing assets, but looking at the capabilities we have now within electricity market and the significant shift that is taking place in that sort of transition to renewables, there's a lot of augmentation required across the distribution network, providing opportunity there. We've been engaging with clients that are very interested in us assisting them with that work. So that's a particular area of focus. The industrial services area, we're seeing a lot of opportunities there as well and have a strong pipeline of opportunities sort of coming through in shutdown maintenance and upgrade works there. And transport, as I said, really, what we're seeing that piece is we'll see continued maintenance and operation, but I think we'll also see continued or higher levels of investment, I'd say, throughout sort of '23, '24 around that deployment of smart infrastructure, variable traffic flows, monitoring equipment, et cetera, across all of that clients really nationally.

Sure. And then maybe just 1 final one, just on some of the fixed price contracts that you've got. Just given the current environment with cost inflation, I mean have you got any levers to help mitigate any cost pressures that you're seeing?

Yes. Look, I think -- absolutely. We know that this is going to be an area of topic. So as I said, a lot of our contracts are multiyear contracts that have got a schedule of rates. They have a review mechanism. So we have a generally either an annually or biannually review mechanism to adjust for changes in operating costs and labor costs. Fixed price work, importantly that we do, so we were upgrading infrastructure, saying the Comdain business, et cetera, those are priced on applications. So we've been pricing over the last 5 months. That work will be delivered over the next period. And the team have been taking into account what we forecast it would be sort of changes in that environment. So where we don't have levers to adjust automatically should changes occur with materials, et cetera, we've been forecasting, particularly labor increasing. So we'll see how that sort of pans out, but pretty comfortable in terms of where the group sits to date. Of course, though, it's shifting sands in the market. We just need to continue to watch it carefully.

[Operator Instructions] Our next question comes from Ian Munro at Ord Minnett.

Just with respect to the cash generation and the working capital unwind that you mentioned, Linda, can we just confirm that post balance date, there hasn't been any redeployment of working capital materially that changes that number? And I note your comments around a more normalized cash flow conversion going forward. So just conscious of how much of that unwind we hang on to.

Yes. Look, to be honest with you, Ian, obviously, we can't articulate exactly what is the unwind of the working capital versus what was early payments. Obviously, time will tell what that is. But what we saw was December was a fantastic outcome, and it certainly exceeded our expectations. There was a very strong element of early payments from clients across all the business, not just Lendlease Services, but also across our own historic Service Stream operations. And I think that was very much led by people who just want to go on a break of Christmas, getting things in. But potentially, I think with Omicron at that point in time being topical, I think a lot of the clients also wanted to do the right thing by the service providers and making sure that they will pay it and pay properly. We did see a reversal of some of that in December. So it's going to take a little while to shake out what exactly was release of working capital from mobilizations versus timing. But we're still seeing that there is some stickiness. And so I think that comment still applies. I do have to also mention that some of the businesses from services are still in mobilization phase or building phase. And so we'll continue to need to invest anyway. So there's lots of moving parts, generally really, really positive. But at the moment, internally, we're certainly seeing that -- if you go back to what we said when we did the equity raise, I said we don't want to be referring to that all the time. But we've seen that out of blocks, we were going to be about 1.3x leverage, including the right-of-use liabilities. And 12 months after pro forma so I think in 2 to 4 months' time we're aiming for 1. I will still use that as the guidance at the moment. It's too early to really tell where things move, but I think we're in a really good place.

And just with respect to the proportionate EBITDA from Lendlease, obviously, just under $9 million proportionate EBITDA, can you perhaps give us a sense of what the 100% allocation is and then what the proportional add-backs are within that number?

In terms of the $8.7 million we disclosed in the accounts is what you're referring to?

Correct. Yes.

And -- so that's the equivalent for the 2 months. We didn't allocate a lot to it because -- I mean, obviously, 2 months in, but also they come fully loaded with their own corporate and [ intercompanies ] as well. So I would give that as an indicative. Now they did have a strong December. And so I know the math that you're all doing just taking 2 months in time [indiscernible] by 6. It probably doesn't really apply because we sort of looked at that. I think the guidance again will be in the context of the $120 million to $125 million ticket what we've previously said. And there that sort of $46 million, $45.9 million component.

And then just with respect to the Service Stream contribution, 31 in the first half, so comfortably tracking for the sort of 60 to 62 we've been shooting for. Can you maybe just comment to just the organic growth that you're seeing? I know it's a strong early start to the year. But particularly in telco, and look closely, if you could give us an update on N2P pieces of work that you mentioned. Is this -- is this still in trial phase? Or has this moved to more of mainstream contracts?

Yes. No, no problems at all. So no, in terms of N2P, we are still mobilizing. It's not a trial basis. This is around the upgrade of infrastructure, so transitioning from what is fiber to the node or utilizing part of that copper technology into to fiber to the premise. So that is still mobilizing. There's been initial contribution here through Lendlease, but it does need to continue to mobilize every month as we move forward to sort of June 30 and July and sort of hit a standard run rate. So that's been really positive. I think in terms of an opportunity to see continued growth across the business and at this point it is tracking well. What was your earlier question, sorry, the first part you asked?

Just with respect to the organic outlook in telco, we're sort of hearing about a number of large-scale fiber projects progressing -- yes, just I guess kind of your broader comments on the health of that segment.

Yes. No, look, I think there's lots of opportunities certainly across telecommunications market. Those large-scale fiber networks, to be honest, I'm not sure that they are particularly areas that we'll be targeting. We've got quite a significant portfolio now of both maintenance and construction works. I'm very focused on making sure that we continue to support our clients we're currently contracted to, to deliver that. I said nbn and others are ramping. We also see in the wireless space we've got an expanded portfolio now, which incorporates wireless operations with each of the wireless operators in the market. So Lendlease Services having agreements with nbn and Optus. So we are seeing solid work coming through in that wireless area as well. So I think we've just got to make sure that we continue to focus on delivering our current work and that should support growth into and beyond this next year before we start looking at potentially some of that riskier sort of D&C work. And some of those fiber networks, I'm seeing lots of them coming out across the network, but we'll just continue to watch those as they come out. I'm conscious of making sure we've got the right mix of work and that we're not taking on a risk profile that is outside of what the business would normally undertake in terms of major D&C works. And again, just delivering for existing clients. I think we're going to see solid numbers come across the telecommunications area as we move forward.

[Operator Instructions] Our next question comes from Warren Jeffries at Canaccord.

Well done, good result. Just recapping on that synergy run rate. And I guess, not unreasonable to think that, as you said, Linda, there's probably an $8.5 million embedded run rate on exiting given that, that's likely to come across this next 6-month period is that I think most people would have had a pretty negligible contribution for this year in an absolute sense. But does that sound like there is potential to get sort of half of the half in the 6-month period or something around the $4 million coming through?

Yes, I think that wouldn't be unreasonable, Warren.

Yes. I think we've made really good progress. Well, I think, as we've discussed during the sort of early stages of the transaction and our focus was, given the timing of completion was around November, we really have limited levers that you could pull on leading into Christmas. So we looked at whatever we could deliver in that first period without interrupting the business too much and then came into January and started to make more of those significant changes. So really confident that the positive progress made, particularly over the last 2 months has really positioned us well to meet that sort of 50% run rate, and then we'll look to continue to deliver that into '23.

And just on -- I think you said outside that the nbn work still getting mobilized and you probably hitting the ground running on that in '23, with a lot of the things mobilized in the prior half, and I'm not trying to lead you to guidance, but you sort of always are. Does it give you a better opportunity even if revenues was on a pro forma basis relatively similar? A bit more margin extraction, then is the opportunity in the second half?

Yes. Look, it's a great -- honestly, great question, Warren. Your understanding. I think it's still very early for us. When we announced the acquisition, we called out very clear that some of the services-based contracts were lower-margin operation. We've done a lot of work in trying to integrate those. For example, say, our wireless teams now are really a blend across the business. So we'll see how that benefit takes us forward. A lot of those changes, as I said, just being made in the last sort of 2 months. So I can't commit to margins going up in the telco area. I think we always depended on volume and mix, but I think we've got every opportunity now once we get through this sort of next couple of months with the restructure bedded down, and we start to then look at integrating and consolidating some of their systems and operational sort of delivery models, that provides, I think, opportunity as we move forward.

We have no further questions in queue. [Operator Instructions] Thank you, Leigh. It looks like we have no further questions. So I'll hand back to you for closing comments.

Thank you, everyone, for joining us today. We really appreciate it. We look forward to engaging with you over the next coming days and certainly answering any questions and walking through this in great level of detail. Thank you very much.

Thank you so much. Ladies and gentlemen, that does conclude the call. Thank you all for joining. You may now disconnect.