Service Stream Limited (SSM) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Service Stream FY 2023 Full Year Results Conference Call. [Operator Instructions] Please be advice that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Leigh MacKender, Managing Director. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to Service Stream's full year results presentation. As per the introduction, my name is Leigh MacKender, Managing Director of Service Stream. I'm joined today by Linda Kow, our Chief Financial Officer. We're recording the session today via webcast, opened to all registered Service Stream shareholders. And we have a number of institutional investors and analysts on the conference bridge, who we welcome to ask questions at the conclusion of the presentation. I firstly wish to begin by acknowledging the traditional custodians of the land in which we meet today and pay our respects to their elders past, present and emerging. A lot to cover today, so I'll jump straight in. I thought it was important to take a moment to reflect back on how our strategy and the diversification and growth has progressed during FY '23. As announced at the half year, we're really proud to have successfully completed the integration of Lendlease Services during the year. The completion was reached approximately 6 months ahead of our original timeline, and we're pleased to have exceeded the $17 million synergy target that was announced. Diversification has been a major focus for the business in recent years. It's been bolstered by the acquisition. And we've significantly expanded the markets that we operate across as well as the capabilities and service offerings the business provides. As the year has progressed, we've seen improved financial performance. The Telecommunications division continues to deliver strong results, Transport is operating in line with expectations, and importantly, we're seeing initial improvements across our Utilities division, particularly in the second half of the year. And the group's balance sheet has been strengthened and is in a strong position. Over the last 6 months, the group has come together and refreshed our strategy to support improved and consistent results for our shareholders. Our actions are aligned to 3 core strategic pillars, being delivery, optimization and growth. And I look forward to talking to each of these later in the presentation. FY '23 with some respects has been a year of stabilization, whilst we consolidated the group and sought to address some of the specific challenges, most notably across our utility division. As we look forward, we're confident in delivering continued growth into FY '24 and beyond. And I'd like to recognize the hard work and effort being put in place by our entire team of people working right across the country. So moving to Slide 4 and performance highlights. As Linda will talk through the group financial performance in greater detail later in the presentation, I'll touch on some of those key highlights now. Revenue for the full year was $2.15 billion, reflecting a 38% increase on FY '22. The group's underlying EBITDA was $114.1 million and that reflected an increase of 25% on PCP. I believe a standout for FY '23 has been the strong cash flow performance and the improved balance sheet. Underlying operating cash flow of $92.4 million was achieved and that reflected an 81.1% EBITDA to OCFBIT conversion rate. One of our strengths has always been a strong cash flow generation. It relates back to clients, government and major industrial owners, the positive terms under which our commercial arrangements are set as well as our strong internal focus on the importance of cash. And given the business generated 108% conversion rate in FY '22, we guided for 70% over the full year for '23, slightly down our traditional target of 80%. So really pleased to see and report that the business has exceeded this target and delivered a strong result. We announced in June that the business had received a favorable outcome with a tax refund of $50.2 million from the ATO under the temporary loss carryback tax initiative. Group's strong cash flow performance coupled with that refund has reduced net debt from $91.2 million in December to $35.7 million as of June, and this is being further reduced in July this year. On the back of this performance, the Board were confident in announcing a $0.01 full year dividend fully franked, taking total dividends for FY '23 to $0.015 per share. The business resumed dividends in FY '22 following a short pause to support the Lendlease Services transaction. And whilst the business doesn't currently have a formal dividend policy with regards to a specific payout ratio, we have previously adopted a practice which looks to incrementally increase dividends in line with the group's financial results and prior to the Lendlease Services had traditionally adopted a 60% payout ratio. Move to Slide 5. I'll touch on some of the group's operational and strategic highlights over the year. Key focus for any service businesses is the retention of existing contracts as they reach full term as well as securing new growth opportunities. I was really pleased to see that during FY '23, the business successfully re-secured 100% of Service Stream's term contracts that came to the market. In addition to this, the business successfully secured more than $700 million in new works over their respective multi-year terms. What's even more pleasing is that several of these agreements were secured on the back of the enhanced capabilities of the business and the new market segments we operate across contributed to the Lendlease Services transaction. The financial performance of our Queensland utility project remains on track. The prior contract provision we took at June 30 remains sufficient to support the final construction works, which are continuing in line with our expectations. A major focus for this year, which will continue into FY '24 and beyond, has been to drive improved performance across our Utility division. We're pleased to report improving performance during the second half of the year, both in terms of earnings and margin. We've still got a lot of work to do here as the division currently reflects a weakness in terms of our overall group performance. But I think, importantly, it reflects one of the greatest opportunities for future improvement and making a larger financial contribution in the years ahead. And finally, as I've stated many times, safety is a critical priority for Service Stream and a major focus. Strong safety performance is critical to our business given the nature of operations. And during the year, we made substantial improvements across all major lag indicators. Moving on to Slide 6, and that provides a summary of our key financial metrics, revenue, EBITDA and work in hand, aligned to each of the group's current reporting segments. Whilst I'll talk to each of the segment results in a moment, I think this slide provides a really good summary of the improved diversification and the scale that the business has achieved over the last few years. Each of these reporting segments has a strong work in hand balance, with the numbers here only referencing the value of our initial terms and not any of the extension options, which are a key feature of most agreements and often taken up by our clients. If we accounted for those options, this would add approximately 3 billion to working hand numbers that are represented here on the slide. I'll now walk through each of our reporting segments and start with Utilities on Slide 7. As I mentioned just a few moments ago, the Utilities division has pleasingly shown some improved performance with regards to its financial results over the second half of the year. The division has also successfully pivoted its growth strategy away from targeting large-scale design and construction works under fixed-price commercial models, and is having some success in securing new operations and maintenance works which operate under an improved risk profile. Over the FY '23 period, performance was impacted by a number of factors, but most notably the challenging project in Queensland, but also had to deal with labor shortages and inflationary pressures, which impacted across many of our contracts. Revenue for the division was $888.4 million over the full year, which was $191 million or 27.5% higher than the $697 million we delivered in FY '22. More importantly, underlying EBITDA for the full year was $28.4 million, and that reflected an increase of $8.9 million or 45% on FY '22. The division delivered an improved EBITDA margin in half 2, moving from 2.8% for FY '22 to 3.2%, as some of the improvement measures that we've been targeting have started to have an impact. We previously indicated that we didn't expect to see a significant improvement during half 2 of FY '23, but rather incremental improvement from FY '24 onwards, so we're really pleased to see the performance has been positive. I do believe we'll see some further fluctuations over the course of the year whilst we continue to work at improving these margins. In terms of looking forward, the division has got approximately 85% of its FY '24 revenue secured. It's bolstered by new works such as the 5 year agreement with AGL that we announced in June this year. And there are expanded programs across the new energy sector, such as the deployment of smart meters on behalf of Intellihub, which was recently re-signed for a new 3 year term. The Utility division represents our largest division in the group in terms of the markets it operates across, and I believe offers significant opportunities given the unique capabilities and service offerings we hold. There's a good mix of revenue across key market sectors, and these markets are all experiencing significant and unprecedented levels of investment by government entities and the major industrial asset owners. The increase in investment has been driven by ageing assets, population growth and renewable energy transitions we've previously discussed. Continuing on to Utilities on Slide 8, we've provided some further insight into strategic repositioning and the Queensland utility project. And I'll start with that first. I'm really pleased to report that the financial provision taken at the half year remains sufficient. Major construction activities are performing in line and broadly -- sorry, broadly in line with our schedule expectations. Business is confident that we will not need to increase the owner's contract provision. And the bulk of our construction works remains on target for completion by the end of this calendar year. We've still got some minor works to do, including commissioning, quality assurance activities and handover post this date. But in terms of risk, water flowing by the end of this year will mark a major milestone. And pleasingly, the project is expected to have a neutral impact on group cash flow during our remaining works after a net cash outflow of $25 million in FY '23. Moving to the strategic repositioning of the division. In August last year, we announced that the business would pivot away from the growth strategy which was previously targeting large value, long duration design and construction projects which operate under fixed price commercial models. The decision was taken given the risk these types of fixed price projects represent and were in fact heightened given the post-COVID inflation environment, practically full employment across the country, increased insolvencies across the construction sector, as well as challenges with unpredictable weather conditions. We felt the pendulum had swung too far in terms of these and other risks that are often considered normal, and we transitioned away from targeting growth under these fixed price commercial agreements. I think importantly, the business still undertakes and will continue to undertake discrete large construction projects. There's a significant pipeline of works in this area exceeding billions of dollars over the next decade, but importantly the business will only undertake these under low-risk commercial frameworks which operate under cost-reimbursable, alliance, or early contractor involvement commercial models. The team successfully pivoted away from these works early in the financial year and instead focused on utilizing those recently acquired capabilities and service offerings to target lower risk works across the industrial, power generation, electric distribution and transmission sectors. We've had some positive success already, such as the agreement with AGL that I just referenced. We still have a lot of work to do across our Utility operations to drive further financial improvement. And we've got a clear multi-year plan that we are working through. We do expect some fluctuations in performance over the next 12 months as we continue to make decisions about the type of works the business will undertake, driving improved margins through operational excellence. We are undertaking some commercial renegotiations and possibly exiting some low-margin or loss-making contracts. Importantly also, we'll ensure that new works secured is enhancing the profitability of the division and meeting our heightened return thresholds. Moving now to Slide 9, our Telecommunications division. Telecommunications had another really positive period during half 2 and that complemented what's been a really strong and steady performance throughout the entire year. The division generated $970.4 million of revenue, an increase of $330 million or 51% on the prior period. The division achieves significant underlying growth of circa 23% for the year when we exclude the incremental contribution from the Lendlease Services. This reflects the positive attributes that we're seeing with continued investments by clients right across the sector. The revenue converted to $85.5 million of EBITDA, reflecting an increase of $24 million or 39% on FY '22. And the EBITDA margin of 8.8%, whilst down when we report against the prior period of FY '22, was in line with half 1 of FY '23, which delivered a 9% margin. The business was successful in securing 2 major packages of work with nbn, supporting the deployment of additional fiber across the country. These programs are secured across the East Coast and they really complement the program of works already underway, which we're due to conclude around the first quarter of next calendar year. And they'll provide longevity over an additional 18 month to 24 month project duration. Over the course of the year, the division successfully re-secured a number of major agreements which had reached their natural term and complemented those new agreements. And therefore, we enter FY '24 with a full order book. The sector remains buoyant and we see significant investment by our clients across both fixed and wireless networks on the back of that increasing demand for faster speeds and improved reliability. And to round out the reporting segments, I'll touch on Slide 10, which is our Transport. The Transport division generated revenue of $292 million during FY '23, and it was $72.1 million or 32% up on the prior year. The significant revenue growth was attributable to our Connect Sydney JV in New South Wales, which was only just mobilizing when we acquired Lendlease Services. And the division was also successful in being awarded some discrete intelligent transport system projects as well as road upgrade works across WA as we worked to successfully demobilize our contracts with main roads. Full year EBITDA of $14.8 million was up $4.9 million or 50% on FY '22 and the margin of 5.1% was in line with our expectations and prior comments. Whilst Transport represents a small supporting segment and newest sector, we believe there's a lot of positive attributes such as the increasing road maintenance investment, particularly given adverse weather around the country, new road construction projects and increased deployment of those intelligent transport systems. We'll note here that due to the federal government's review of inland rail project, where our consortium was awarded the Kagaru section, which is effectively that of around Toowoomba, we've removed this from our current WIP. I think important to note that has no significant bearing on our business over the short or even medium term as the nature of our role in that JV was to provide maintenance services once the rail infrastructure had been built. The project was already several years behind schedule and Service Stream wouldn't have likely seen any meaningful revenue for at least 6 to 7 years. Taking a step back from the individual reporting segments and onto the group's FY '23 revenue profile. The first graph on the right-hand side depicts the revenue split across our 3 operating segments, and we see that the group has successfully diversified their operations from what was a very telco-biased business only a few years prior, while still maintaining a strong position in that market. The market breakdown graphs show the markets that we're now operating across, which has been a deliberate part of our diversification strategy and has successfully reduced our dependency on any single market, single customer or individual contract. They're attractive sectors that are benefiting and will continue to benefit from increased investment in the years ahead, particularly associated with power generation, industrial maintenance, water and new energy systems. We continue to see the group's revenue dominated by lower risk operations and maintenance works, accounting for approximately 64% of revenue over the last year. Minor capital works, which are often secured under multi-year panel arrangements, also form a significant component and are associated with specific upgrades across the networks, which we often play a role in maintaining into the future on behalf of our clients. These projects are typically small, averaging in sizes of sort of $2 million to $5 million in revenue and are completed over a short-term duration, typically 3 months to 6 months. That short-term nature is critical because it allows the project and the business to price in current market conditions in terms of labor, materials and other factors. The business continues to focus on growing our lower risk work -- sorry, work under our lower risk models. About 75% is being secured under the schedule of rates arrangements, where we have a strong history and pedigree in terms of our people, systems and process. We've also got a number of contracts which operate under a reimbursable or alliance style commercial framework, which again represents another lower risk model. Moving now to Slide 12 and we look ahead at the group's work in hand for FY '24 and beyond. The first point I'd note with regards to work in hand is we've got an attractive, enviable and low risk client base that consists of government entities and major industrial or blue chip clients. These clients are well capitalized, work is generally contracted under a set of reasonable terms and these clients pay their bills on time. The client base has been an attribute which has supported the business to consistently deliver 80% or above in terms of our EBITDA to OCFBIT conversion rate across many years, and writing down profit due to doubtful debts is practically unheard of. Approximately 72% of work in hand as we look forward is either secured with federal or state government entities. And we have about $5 billion of work in hand as of June 30, but as I mentioned earlier, that doesn't include the extension options, which will add another $3 billion to that number. The business has a terrific history of retaining our agreements which do proceed to market at the conclusion of their full term. In terms of contract escalation, this is obviously a really topical area given the macroeconomic challenges and the heightened level of inflationary pressures which have been apparent over the past 12 months. Whilst this is likely to continue over the short term, it does appear to be showing signs of easing from those heightened levels witnessed during FY '23. And importantly, over 90% of our multi-year term contracts held by the business have in-built review mechanisms, and that's certainly assisted to navigate through this challenging period. I'll change track now and cover our sustainability performance and reference Slide 13. We were thrilled this year to execute a new 5 year agreement with AGL for the provision of station maintenance at Loy Yang A. Over recent months, we've successfully mobilized this agreement and we believe this broader market, where we assist large industrial clients with major shutdowns and maintenance activities, represents a really exciting area of growth. We've touched on the 2 programs with nbn that we announced in April and June this year as we continue to support them deploying additional fiber across Victoria, New South Wales and Queensland over coming years. I believe a really important aspect to note is that these works have been secured under those additional capabilities that we sought and secured through the Lendlease transaction. So it's always really pleasing to see the business harnessing those new capabilities and securing new contracts on the back of. And finally, the business is pleased to expand our relationship within Intellihub and execute a 3 year agreement where we'll continue to provide specialist meter exchange services and assist with the upgrade of smart meter infrastructure across New South Wales, Victoria, South Australia and Queensland. Under current national energy market rules, any time an end customer installs solar power or electric vehicle charging infrastructure or battery technology, traditional meters are changed to a smart meter that provides both the retail and the end user with access to improved usage information and better technology. We've been a market leader in the deployment of smart metering technology over the last 15 years and we expect to see additional deployments continuing across the broader utility market in the years to come. I'll now move to Slide 14, which is our sustainability performance and just touch on some of the recent milestones with regards to the business's performance there. Sustainability is understandably a growing area of focus for our business, but like many organizations, we're on a journey of continual improvement. We've developed a very clear framework following consultation with our shareholders over several years, which is tailored to our specific business dynamics. Our framework outlines our strategy under 5 distinct pathways, including health and safety, people, community, environment and governance. And during the year we're pleased to deliver significant improvements in our safety performance, which I'll touch on in the later slide. The business celebrated a major milestone in releasing the group's inaugural innovate reconciliation action plan which was endorsed by Reconciliation Australia and outlined our commitments and planned activities over the next 2 years. And Over the past 12 months, we were proud to have spent over $24 million with indigenous businesses and suppliers. And finally, we're a people business. Our people play a critical role in our success and represent the organization’s greatest asset. We all appreciate the value and the benefit that diverse and inclusive organizational culture brings. And this year our business launched its inaugural diversity, equity and inclusion strategy that outlined our business's strategic priorities and focus areas for the next 2 years. Moving to the next slide and our safety performance. As I've stated many times, the health and safety of our workforce, our clients and the communities in which we operate remains the number one priority for our business. It's not a slogan, it forms a major focus and commitment for all the work within our organization. A lot of work has been undertaken across our safety performance over the past year and I'm really proud to see the progress we've made in terms of driving substantial improvement across our safety lag indicators. Business has achieved a 21% reduction in recordable injury rates, a 46% reduction in high potential incidents and a 6% reduction in lost time injuries. There's substantial improvements over a relatively short period of time, but the business continues to focus on a range of improvement measures which will support our strong safety culture and future improvement in the years ahead. And finally on slide 16, we've included some case studies or success stories in terms of the group's work across our environmental people and community pathways. They're represented in a very small section of what is I think, some really great success stories. I won't go into detail here but remind our shareholders that the group's 2023 sustainability report will be released in early September. I'll now hand across to Linda to walk us through the group's consolidated financial performance.

Thanks, Leigh, and good morning to everyone on this call. I just wanted to start by touching on the key financial headlines for the year. Total revenue for the year was $2.15 billion, an increase of 37.5% on the prior year, and achieving a milestone $2 billion threshold of group revenue for the first time. Normalizing for the incremental 4 months of Lendlease Services ownership, the underlying revenue growth rate was 11.8%, primarily driven by strong growth across the Telco segment. Underlying EBITDA from operations was $114.1 million, an increase of 25.2% from last year, which is a very solid result considering the current inflationary and operating environment. Of note, the result includes a full year contribution from the acquired Lendlease Services business, which has met both our due diligence business case and synergy target assumptions. Adjusted NPAT for the year was $36.8 million, which was an increase of 17.2%. This excludes amounts recognized during the year for acquisition and integration costs of $5.1 million and the $20.1 million recognized at the half year for the Queensland owners contract. Overall integration costs to date have been in line with the $18 million estimate we provided last year. Importantly, the provision for the Queensland project recognized at the half year remains adequate with no further financial impairment required for the full year. The group's full year operating cash flow conversion, OCFBIT, was 81% for the year. As Leigh has noted, this was a stronger than expected result as we had anticipated a greater working capital requirement to support the revenue growth delivered. Net debt closed at $35.7 million, which is a leverage profile of 0.78 times EBITDA from operations on a post-AASB-16 basis. This leverage position is well ahead of the deleveraging profile which we had expected following the acquisition of Lendlease Services where we had targeted to reach a one-time leverage position 24 months post acquisition. In relation to dividends, the directors have declared a full year dividend of $0.01 per share which takes the full year dividend to $0.015 per share. This compares to $0.01 per share declared in the prior year. Now moving on to Slide 19 which is the profit and loss. This slide summarizes our statutory reported results as well as the adjusted profitability metrics normalized for the impact of non-operational items and joint venture accounting. As per usual practice, we have included in the appendix a reconciliation of these metrics for your information. As previously noted, the group achieved total revenue of $2.15 billion or consolidated revenue of $2.05 billion if we exclude joint ventures, which is a growth rate of 35.4% on FY '22. EBITDA from operations for the year was $114.1 million and the group EBITDA margin was 5.3%, which was slightly down on the prior year. Overall, it was a strong result, given the challenging operating environment across many facets. The underperformance in the utility segment was able to be offset through stronger contribution from Telco operations and tight corporate cost discipline during the year. The acquisition of Lendlease Services has been financially successful and this is the first full year contribution from the acquisition. As demonstrated by this year's result, the added earnings diversity from the acquisition has certainly enhanced the overall group's earnings resilience. The synergy program was also very successful, delivering in excess of the $17 million targets again ahead of schedule. The full run rate contribution of these synergies have effectively been realized in the FY '23 results given the realization of these benefits very early in the year. Depreciation and amortization expense has increased by 34% to 52.6% -- to $52.6 million this year. This is primarily due to the full year impact from the acquired and revalued fleet assets. D&A expense this year also includes $6.6 million of software costs for items, which were decommissioned during integration and written-off. The underlying D&A expense for the full year is actually much lower than we had anticipated due to the phasing of new CapEx expense. Interest expense for the year also increased substantially, reflecting a full year of acquisition funding and the impact of interest rate rises over the year. Now onto cash flow, which is on Slide 20. As noted before, we've had a strong cash flow result for the year better than expected with an operating cash flow conversion rate of 81%. The business has continued to drive its strong cash culture to mitigate the expected increase in working capital commensurate with revenue growth. I also note the unwind from the exceptional FY '22 OCFBIT result of 108% was also expected to negatively impact this year's opening conversion rate. Dropping down the cash flow, we have called out non-operational cash flow items of $31.2 million which includes the residual integration and acquisition related costs and outflows associated with the Queensland project. As Leigh has noted in his presentation, the remaining net cash flows in relation to this project is expected to be neutral. The tax refund line of $44.5 million includes the lost carryback refund of $50 million, which arose from the acquisition related deductions. Net of installments paid during the year. We are expecting to resume normal tax installments in FY '24. The $12.9 million final acquisition payment was called out in half, was paid in January this year. Finally, with regards to CapEx and leasing payments, which largely relate to our fleet assets and leasehold properties, the combined CapEx leasing payments for the year were $31 million, or about 1.5% of revenue. This was lower than the group target range of 2% to 2.5% we had expected due primarily to the fleet refresh program being delayed by phasing and equipment availability. And we had also allowed for an increase in IT-related CapEx to support integration, but have instead spent the majority of FY '23 systems costs due to the nature of work undertaken. I do note that we are currently undertaking a strategic review of our IT landscape, which will require IT CapEx investment in FY '24 and FY '25, and we continue to consolidate and align our systems architecture. Now, moving on to the balance sheet, Slide 21. We have a couple of movements across the balance sheet worth noting. Firstly, net working capital, excluding amounts related to the Queensland project, have increased by $14 million, which is reflective of revenue growth. Overall net working capital as a percentage of revenue has increased slightly to 4.1% of LTM revenue, with the exchange reflective of the mix of contracts. We had expected to see this trend up post-acquisition due to the Lendlease contracts carrying a higher net working capital requirement relative to the legacy business. You can see on the balance sheet a swing between debtors and accrued revenue which simply reflects the timing of billings. It's worth noting that the vast majority, greater than 95% of debtors, are aged less than 30 days, so no concerns here on recoverability. Income in advance has also increased substantially compared to PCP to $95 million. This simply reflects contract billing milestones where we've received cash in advance of work being completed. The deferred tax liabilities have increased this last year by $35 million to $73 million. This largely relates to the monetization of the tax loss refund, which were previously recognized as a deferred tax asset within this balance. Finally, on the balance sheet, as we've noted previously in our accounts, there is limited headroom on the goodwill carrying value on the utility CGU. This can be traced back to good will associated with the legacy operations due to changes in WACC performance and changing business strategy away from large-scale D&C works. The impairment assessment does assume a continued improvement in the CGU in FY '24, followed by modest group growth thereafter. With regards to our financing facilities, we extended our existing facilities of $395 million for a further 2 year term to December 2025 during the year. There were no material changes to commercial terms of facilities as part of that refinance. Closing net debt was $35.7 million or 0.78 times leverage, which is significantly ahead of the deleveraging profile we had planned for post-acquisition. This leaves the balance sheet in extremely strong position and also demonstrates the ability of the business to generate strong cash flows. And finally, all of our financial covenants for the period have been comfortably met. And that's all for me, so I'll now hand you back to Leigh to take you through the rest of this presentation.

Thanks, Linda. Okay. We're nearing the end of the formal presentation but I'll move to cover the group strategy and outlook and direct you to Slide 23. So as per my earlier comments, during the year, the business has come together and refreshed our group strategy which centres around 3 core strategic pillars, being delivery, optimisation and growth. Delivery focuses on the business providing superior service outcomes for our clients, consistent results and delivery excellence. It covers initiatives and action areas which are critical for any service business, including the provision of industry leading safety performance, delivering client focused solutions and maintaining long-term relationships. It also incorporates a strong focus on delivering improved and incremental financial performance, supporting improved results to flow to our shareholders and broader stakeholders. The optimisation is a critical pillar and covers a range of programs and initiatives which are designed to simplify and enhance our delivery model. They not only provide a stronger and more efficient base from where the business will continue to grow. But we'll support margin improvement and enhanced earnings in the years ahead. Our optimisation program has identified and already commenced work across 8 streams. These include areas such as consolidating and simplifying our IT architecture, standardizing business processes and reducing our overheads. We'll expand the use of data analytics to drive more improved business decisions and we'll look to realize efficiencies and performance across our fleet of vehicles and other assets. We'll continue to consolidate our property profile and look to achieve ongoing savings from group procurement. We'll initially invest up to $4 million over FY '24 to drive and realize improvements across these areas, but in turn expect to deliver a benefit of between $4 million and $8 million in improved earnings and savings over the coming years, as well as improving our business's delivery model. And the third and final pillar is focused on growth and delivering profitable growth and supporting further diversification. This first focus is on ensuring that any new opportunities being targeted across the business meet our elevated minimum financial return thresholds. They've been set and are regulated by a business development committee, which is already underway. In addition, the business will be investing to enhance our capabilities and support growth and expansion across adjacent sectors. Whilst our current markets are all experiencing strong investment and provide significant opportunities for growth, we've been conscious that this can change over time and we therefore made a conscious strategic decision to invest and enhance our current facility management capabilities provided across many of our contracts to target opportunities across the defence and social infrastructure sectors. We have a really clear strategy that's going to guide our work in this area, which has been developed over the last 12 months. And during FY '24, we'll invest approximately $5 million to enhance these capabilities and the business to position it well to secure new opportunities that are coming to market. Slide 24 provides some insight into the group's core markets, which as per my prior comments, continue to see increased maintenance related expenditure, which is driven by an unprecedented level of investment by government, private asset owners and network operators. That trend is being driven by the increased use of technology and digital transition, ageing infrastructure requiring increased maintenance and upgrade works, population growth and the expansion across regional areas of Australia, and the renewable energy transition, both in terms of the deployment of new technology and the upgrade of existing electricity networks. As I just outlined, we'll continue to make measured investments to support expanding our profile of works across adjacent sectors as we look to increase the portion of works from the Australian maintenance market which is more than $50 billion in FY '24. And turning now to Slide 25 in our group outlook. So in terms of market conditions and group outlook, we continue to see improvements in the labour market. Constraints have been limited to isolated resource skill sets and select geographies. The long life cycle of infrastructure investment is expected to provide ongoing growth and won't be negatively impacted by the current economic environment. The optimisation program under our group strategy is now underway and that will support earning resilience and improve financial performance over the next few years. We believe the investment to enhance our internal capabilities will provide significant benefit. The business is confident in delivering further profit growth in FY '24. It's going to be supported by that continued infrastructure investment, but a steadfast and laser focus on improving our operating margins. We'll continue to provide an update during the course of the year, including at the AGM in October. The priorities for '24 are to continue delivering strong safety performance, investing in the group strategy to support improved and consistent results for our shareholders, particularly around improved financial performance across our utility division, and as I stated earlier, investing in some of those growth opportunities across adjacent markets such as defence and social infrastructure. That concludes the formal aspects of the presentation. So I'll hand back to the moderator and happy to take questions from those joining us on the call.

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

Morning, Leigh and Linda. Just a couple from me. Firstly, just on the order book visibility, 100% of Telco and 85% in utilities, can you maybe just talk to how that compares to prior periods and also what the tender pipeline across the divisions looks like?

Yeah, no, thanks Piers. Look, from Telco, I think it's certainly an improved result. We've previously talked about challenges across certain programs, particularly in wireless, and only having 3 months to 6 months visibility, but that has certainly improved over the last couple of months. So, Telco really has a full order book on the back of that improved visibility, but also re-signing a number of major agreements through the year and that work was secured with nbn, those 2 programs. So, Telco really well positioned. I think utilities has also improved. 85% forward is a really strong position there. And on the back of us pivoting away from those large construction projects, the division's done a really good job in identifying operations and maintenance agreements, securing some of those, and that's provided that improved visibility in terms of utilities as well.

I think, Peter, just to add to that. I mean, in past years, when we had more of that D&C focus, particularly around the legacy Comdain operations, we went to every year knowing that we still had to find work for that year. So certainly, where we stand right now, 85% plus actually, is a much enhanced position and quality relative to where we've been previously.

Sure, And then just on margins within utilities, maybe just talk sort of between the first and the second half expectations around that margin as you pivot away from some of these price contracts and then also sort of longer term expectations around what that utility's margin can get to?

Absolutely, Piers. It's very topical in an area, like I said before, we are confident we'll see continued improvement. So I think first of all we were pleased to see some improvement in the second half. We guided for and didn't expect to see any sort of significant improvement in the second half of the year, but we were really pleased to see that occur. So delivering that 3.2% margin. I think we will have some fluctuations throughout the year. I know we only measured in sort of 2 Grand Finals, but we've got a range of initiatives to sort of drive further improvement. We expect some minor improvement throughout this year. Certainly, that will be something that will continue into '25 as well. We're targeting in terms of our mid-term outlook to sort of get to an EBITDA margin here of certainly mid single-digits around that sort of 5% mark. So we'll make some steady improvements throughout the course of this year. We will have some fluctuations like I said. We'll look to go through a range of improvements to drive the margins across our operations. We're in the process of undertaking some commercial renegotiations and there's 1 or 2 contracts, like I said, that if we don't receive favorable outcomes, we may choose to demobilize or exit from. So all those things will enhance the profitability over the course of the next 12 months and we'll continue to look on this for the next couple of years. We certainly need to see some improvement there. I think we've made really good progress though and are ahead of our expectations that we set last half.

Just final one on the new opportunities that you're targeting. Can you talk to sort of how you're thinking about entry into these markets, obviously the ATO tax refunds giving you a bit of financial flexibility, so is it organic or by inorganic opportunities? And perhaps, whether it's '24 or '25?

Yes. No, it's a great question. And you're absolutely right, I think that the strong OCFBIT conversion rate coupled with the ATO outcome has really positioned the business well with a strong balance sheet. So the way in which we're thinking about this, Piers is really under a 3 stage approach. We provide a lot of FM related services as part of many of our agreements. So the first stage of this is to really draw from that experience across the business and refocus it on specific hard focus sort of FM services that exist in the market. We know a number of these are either currently in train and going through a market process and there's several more to come up throughout the next 12 to 18 months. And they are primarily focused around the defence, social infrastructure, health, education, et cetera where we're maintaining a lot of the critical infrastructure that we do today across our 3 divisions. So the first stage is to pull and leverage those capabilities we've got organically in the business. We'll start to drive some positive transition there and start to secure, I'm confident we'll start to secure some results in the next 12 months. So we're expecting to see some contribution in FY '25. There's always the opportunity then as a third stage to look at potentially looking at acquisition targets. It's not something we're currently spending a lot of time on because we think we've got a lot of strong organic capabilities that we want to first harness. But it's a pretty exciting market. It's an area where we don't have a single dollar of revenue that's focused purely on FM. A lot of opportunities there, a lot of clients in this space talking about wanting to have more providers come into the market and we think we've got a really unique proposition to offer on the back of our current service offerings.

Our next question, we have Ian Munro from Ord Minnett.

Ian Munro here from Ord Minnett. Just a question on the Telco segment, so looking at the second half margins and how that might translate into next year, is there any kind of I guess cost escalations or mix shift to think about, looks like there was quite a decent chunk of rev inflated sort of half on half or albeit a slightly lower incremental margin, so just interested in whether there's any mixed impact there? And then the second question is around the utility segment and the problem project in South East Queensland. Good to see obviously no more onerous provisions coming into the mix, but also just conscious of the timing on the project and whether you have been any updated completion targets?

Thanks, Ian. Really appreciate the question. So firstly in terms of Telco margins, like I said, I'm conscious here that we're reporting against FY '22, 9.6%. We outlined with the Lendlease transaction that we would see some possible sort of dilution impacts. I think a lot of those were largely offset. So in FY '23 first half we did the 9%, it's a minor movement here in terms of 8.8 across the full year. We're not concerned about it. I think Telco will always continue to have strong single-digit margins. We have seen a bit of minor movement that we've outlined on the slide pack there. Certainly competition for resources, we've had to see increased demand and we're mobilizing for some of these projects that we've recently announced and secured. And of course program bonding is a mix of works that always plays a role but a 0.2% swing is not concerning for us at all. We still expect Telco to derive strong single-digit margins into the future. In terms of the utility project in Queensland, so as you said really please see that the owner's contract provision we've taken is absolutely sufficient to see these works through. In terms of construction performance, that continues to remain on schedule. We outlined that we would see the bulk construction works completed by the end of calendar year, that's still absolutely the case. And we'll always have some sort of commissioning, some minor works and handover to complete past that point. But, I mean, despite a challenging project, we're really pleased to see that we don't need to change that contract provision and works are continuing in line with our schedule. So certainly making good progress over the last 6 months to 12 months in getting that project complete.

[Operator Instructions] Our next question is from William Park of Citi.

Just while we're on the theme of margin, can we sort of touch on transport margin in the second half and I can see that it's slipped down versus first half. And just wondering how we should be thinking about margin heading into FY '24, please.

Yes, absolutely. I really appreciate the question. So yes, margins for transport, we always called out, this is our newest division, we expected to see some fluctuation in margins here and our comments always sort of been around that sort of mid single-digits for the transport margin. We were pleased to see 5.1% for the full year. It did come down from first half of 6%. There's always some one-off benefits and work volumes that fluctuate, but we're conscious and pretty confident they'll continue to be around those mid single-digits across the transport section into the future.

And just the other one around work in hand, just looking at your interim results presentation, You're talking about $6 billion of working out. Does that include extensions or does it exclude extensions?

At the interim, the $6 billion didn't include extensions, but it did have in there the value of the inland rail which was now taken out and that was quite substantial. That's the key drive for the difference.

Yes. We don't include those extension options, but we do reference that additional $3 billion there and like I said the inland rail project was sort of 6 years to 7 years away before we potentially see any revenue there, so we've got plenty of time to replace that should that project be cancelled.

Yes. And Just one last one for me. I know you haven't really alluded to this in this slide or the previous interim results slide, but in terms of how we should be sort of thinking about EBITDA now that you fully integrated Lendlease business, is EBITDA level that you pointed out at the time you acquired that business, is that still a target that's achievable in the next 1 year or 2 year or could you see perhaps some upside to that?

Are you referencing the guidance? William, are you referencing the guidance we gave of 120 to 125? Yeah, look, I mean, we clearly haven't provided a quantitative guidance, but you have heard us say before that effectively the events of, particularly around the utilities performance have set us a year back. So I think we leave you with that to form your own views.

I would like now to hand the conference back to Mr. Leigh MacKender.

Thank you very much for that. Look, I really appreciate everyone joining us today. I know it's a busy day in terms of releases. We look forward to engaging with some one-on-one meetings following this and providing further update in what I'm sure will be a very positive year for the business for FY '24. Thank you very much.

Thank you. This concludes today's conference. You may now disconnect. Thank you very much.