Service Stream Limited (SSM) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Service Stream Full Year Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speakers today, Leigh Mackender, Managing Director; and Linda Kow, Chief Financial Officer. Please go ahead.

Thank you, operator. Good morning, ladies and gentlemen, and welcome to Service Stream's FY '24 full year results presentation. As per the introduction, my name is Leigh Mackender, I am the Managing Director of Service Stream and I'm joined today by Chief Financial Officer, Linda Kow. As per usual, we're recording this session today via webcast. It's open to all registered Service Stream shareholders, and we have a number of institutional investors and analysts on the conference call, and welcome to participate in the Q&A session at the conclusion of the presentation. Turning to today's agenda, I'll start by covering the group highlights and providing an update on Service Stream's operations. I'll then pass to Linda, who will talk through the group's financial performance in greater detail. We'll then cover off on Service Stream's FY '25 outlook, and finally, about the call for questions. Okay. I firstly wish to begin by acknowledging the traditional custodians of the land in which we meet today and pay our respects to the elders past, present and emerging. I'll direct you to Slide 3, I'll touch some of the key messages. From the outset, we're really pleased with the group's progress and the results that we're presenting today, reflecting what has been a significant and positive year for Service Stream. FY '24 is defined by the delivery of strong and improved financial performance across all key metrics. We are pleased to report that the financial performance is headlined by significant double-digit increases in revenue, earnings and profit. The business has not only successfully navigated through the inflationary environment, but identified and realized a range of improvements which have contributed to these positive movements. And these financial results not only reflect a strong year, but provide positive momentum into FY '25. We're really pleased to present another period of exceptional operating cash flows and the group returning to a net cash position. Higher cash flow conversion rates, combined with improvements in working capital and our disciplined capital management strategy have each contributed to strengthening of the group's balance sheet, headlined by a net cash position being maintained at the end of the financial year. And this net cash position exceeds expectations we said at the half year, where we had expected the business to transition back to a small net debt position, given increased dividends being paid and support for new business growth. The strategic repositioning of our Utilities segment has been a major priority for the business, and we're pleased to report further positive progress made throughout FY '24. The repositioning is substantially complete with the division successfully exiting or renegotiating improvements across a small number of remaining loss-making agreements throughout the year. The utilities team also had great success in securing multiple new operations and maintenance agreements, and this has supported revenue growth across every market sector over the past 12 months. As a result of these actions, the businesses reported an improved margin. Whilst we still have work to do across the Utility division, the business is absolutely confident that we will see further improvements into the future, and I'll discuss those in greater detail through the presentation. Ultimately, our group strategy is focused on delivering sustainable value for our shareholders, our clients and our staff as Service Stream's serving primary stakeholders. We're very pleased to have delivered positive results for all 3 of these groups through the year. With regards to our shareholders, this includes a further increase in the group's full year fully franked dividend to AUD 0.025 per share. And finally, on the back of the positive progress and the significant momentum generated across FY '24, we are genuinely excited that Service Stream has a strong platform, which is well positioned to deliver further growth in FY '25 and beyond. Moving on to Slide 4, and I'll touch briefly on the group's financial highlights, which Linda will expand on further into our presentation. Group revenue for the full year was AUD 2.39 billion, reflecting another very strong period with double-digit growth of 11.2% on the prior corresponding period. More importantly, underlying EBITDA was AUD 129.2 million, reflecting an increase of 13.2% on PCP. And NPATA was up 36.4% on the prior period, with the group achieving AUD 50.1 million over the full year. As for my earlier comments, a standout achievement over the period, I believe, is the strong cash flows that have been generated across the business and the group's markedly improved balance sheet. The group generated OCFBIT of AUD 131 million and achieved an EBITDA to OCFBIT conversion rate of 101%, a major improvement on what was already a strong result of 81% delivered in the prior year. The exceptional result is a testament to the nature of our client base, positive terms negotiated under our contractual agreements and the strong emphasis placed on the importance across our work to cash cycle throughout the entire business. The impact on the group's balance sheet was significant with Service Stream achieving a net cash position and finishing the year with AUD 7.9 million balance, which is AUD 43.6 million up on the prior year. Linda will discuss this in greater detail, but for me, I was really pleased to see this strong result being generated. We called out in the half year that we'd expected the business to dip back into a small net debt position at June 30, given both increased dividends and support for new growth across the business. So whilst the business has not only achieved both of those, but we still managed to retain a net cash balance, which we now expect to be retained and increase further over FY '25, cements another strong result. And as for my comments on the back of this strong performance, the group's positive momentum, the Board were confident in announcing a step-up in dividend to AUD 0.025 for the full year, fully franked, and that takes total dividends for FY '24 to AUD 0.045 and reflects a 200% increase on PCP. Moving on to Slide 5, and I'll touch on some of the group's operational and strategic highlights throughout the last year. A primary focus for all service businesses is the retention of existing contracts as they reach full term as well as securing new growth opportunities. Service Stream had another really strong result in these areas, successfully re-securing AUD 2.2 billion of work over the full year, which reflects a retention rate of 97%. The strong level of work in hand, equating to approximately AUD 5.5 billion, provides improved visibility and importantly, reflects on the initial term of our agreements with many contracts having multiyear extension options, which I'll talk further to later in the presentation. As I mentioned during the answering of the call, we've been clear that a major priority for the business has been to drive improvements across the Utility division's margin and an increase into its level of earnings, which it provides across the group. We're very pleased with the increases in both these areas of margins and earnings over the full year. EBITDA margins moved up 30 basis points from 3.2% in FY '23 to 3.5%. And furthermore, we've demonstrated incremental improvement from half 1 FY '24 to half 2 with a 10 basis point improvement. Underlying EBITDA increased by 20% or AUD 5.8 million on PCP. And whilst we still have further work to do in this space, we have a clear plan, and we're confident that the heavy lifting has now largely been done. The business will deliver a margin, which commences for the fall in FY '24, transitioning to a fall in FY '25. And the Utility division operates across a number of key markets and reflects an exciting area of our business, exposed to significant growth opportunities, so these improved margins are going to make a substantial impact on the group in the future. And finally, from a workforce perspective, the business has continued to deliver industry-leading safety performance and that's headlined by a 23% reduction in high-potential incident rates over the full year. This is fantastic to see, particularly as our operations are expanding, and we remain steadfast in our commitment to providing a safe operating environment for our people working right across the country. Labor market continues to improve across each of our industry sectors. Compared to the comments at the half year, we've seen continued reductions in attrition rates over FY '24, and the business has not experienced any significant challenges in attracting or retaining resource to support our expanded operations. However it is reflective of our resourcing strategy, which aims to utilize the mix of both self-performed employee resource, balanced with specialist subcontractors to cater to work fluctuations. And the business continues to invest in expanding our gradual programs, apprenticeship programs and engage specialist resource through other means, such as [457 beta] programs as and when required. Okay. I'll move on to Slide 6 now. And given FY '24 reflects 3 full years since Service Stream announced the acquisition of Lendlease Services, we thought it would be appropriate to reflect briefly on the results which are being delivered and the value that's been created, particularly for our shareholders over this time, albeit with a few bumps along the way. Revenue growth. The first graph on the left-hand side we see the group's revenue was achieved at 44% CAGR, growing from AUD 800 million in FY '21 to the AUD 2.3 billion, almost AUD 2.4 billion we're reporting today. An important component of the acquisition was the diversification and the expansion of the group's service offerings and addressable markets, which has been a major success and continues to position the business well for future growth. EBITDA from operations or EBITDA has grown from AUD 80 million in FY '21 to AUD 129 million reported today, and this reflects a 17% CAGR over the 3-year period with the improved quality of earnings across a diversified client base of federal and state governments and large industrial asset owners. And importantly, the business has also worked hard to improve our quality of earnings, reducing our exposure to the risks associated with large-scale design and construction projects, while still maintaining positive exposure to our clients' capital investment cycles, which I'll talk further about in the presentation. And finally, EPS. Enhancing EPS is a critical first gate for any M&A transaction contemplated by our business. And we're very pleased to reflect that over the period that the Service Stream has delivered a 30% increase in EPS or 9% CAGR. Moving on to Slide 7. And we've provided a more granular insight into the group's revenue profile over the full year. First point I'd like to call out is there's been positive enhancements made over the course of the past year. Move the headline by the operations and maintenance work now reflecting 68% of the group's revenue, up on 63% during FY '23. Minor Capital Works now reflects 30% of our remaining revenue, and this latter aspect provides positive exposure to our clients' capital expenditure programs with the work commonly delivered under multiyear panel arrangements and delivered under short-term 3- to 6-month horizons. These works offer the ability the Service Stream to review and selectively bid on specific upgrade works as we see fit. And in terms of our commercial models, as indicated in the graph on the far right, we've seen an increase in work secured under lower risk schedule of rate arrangements and that reflects 74% of the revenue in FY '24 and 20% of the revenue is being delivered under Alliance or Cost Plus models, reflective of a positive increase from 17% in the prior year. These change is directly related back to our strategy to transition away from large-scale fixed-price D&C work given that risk profile and instead target operations and maintenance work delivered under multi-year agreements to support annuity-style revenue. Other changes reflect how some of our clients are approaching proposed commercial models over future agreements. Over the course of the last 12 to 18 months, we've seen an increase in the average contract duration and select clients looking to proactively transition to an alliance-style commercial model. Whilst each client has their own individual drivers, common aspects have included a shared need to attract, retain and grow skilled resources in challenging environments and an acknowledgment that a longer duration contract cycle often affords both parties a great opportunity to work together on driving operational improvements. And finally, if we look at Service Stream revenue today, the business has an average contract term of 5 years, however, the average contract tenure is 17, meaning even though our clients regularly test the market, we have a strong reputation for delivering value, meeting or exceeding expectations and are able to successfully retain the vast majority of our agreements and the business holds many agreements, which is celebrating 30-plus-year relationships. Changing gears now, whilst Linda will talk through the financial performance of our reporting segments in the broader group in a few moment, I'll provide some while commentaries on the insight across our 3 reporting segments and starting with Telco. Really pleased to report the division had another very strong year, benefiting from continued and significant investment across both fixed line and wires networks provide around the country. We called out in half 1, the benefit from bringing forward some project-based works and responding to some extreme weather events over the Christmas and New Year period. We therefore guided that we may have a slightly softer second half revenue profile. But pleasingly, this has not been the case, and the business has gone from strength to strength. We are seeing strong contribution from the program we're delivering with NBN to support their network upgrade program with demand for customer connections also steadily increasing after initial network build has been completed in a set region. And more broadly, the division now holds agreements with every major telco asset owner and operator at a time where demand for connectivity continues to grow. In fact, if we look at the last 3 years of performance, Service Stream's telco operations have tripled in size, and this has occurred off a more diversified client and contract base. So FY '24 reflected another very strong period, and we expect that positive momentum to continue and are pleased that the division entered FY '25 with a full order book. This means that there's no major new BD works that were required to secure to support growth. As of course, as the means that the business won't be targeting additional growth opportunities, but reaffirms the division is in a fantastic position for the year ahead. Moving to our Utilities segment. In line with my earlier comments, really pleased to see the strategic repositioning making further positive progress headlined by the successful renegotiation of existing contracts or in some cases, the business exiting select legacy making loss-making arrangements. This has been complemented by positive progress made in driving internal improvements across our operational areas with which our business has a spear of control. And as I mentioned earlier, we've delivered a 30 basis point improvement in our margins over the last year. We still have further work to do, the business continued to demonstrate incremental improvement over the half year period, and we are confident that we'll see further improvement aligned to our plan across our target margins, which will support improved earnings into FY '25. And finally, the legacy Queensland project reached a major milestone with construction complete and successful rectification of damage incurred over the Christmas and New Year period now finalized. The project is in its final stages of commissioning and handover to our clients. And finally, our Transport division. We called out a priority in FY '24 and that continue into the future has been on securing new growth for the division post rebasing of operations, which included the steam over lighting out of regional WA in FY '23. Really pleased to see in June 2024, the business is able to announce a new long-term asset maintenance agreement in Victoria with the Department of Transport and Planning. This agreement covers maintenance and servicing and road infrastructure across Melbourne Southeast Corridor through an initial 4-year term and offers 4 years of extension options. The division continues to focus on securing additional growth opportunities, and we've identified a number of similar maintenance agreements as well as upgrade works that are coming to the market over the course of FY '25. Moving on to major contracts and renewals as well as new business. I spoke earlier about the importance of the business retaining existing contracts, which received to the market at the end of their respective terms as well as securing profitable new growth. On Slide 9, we provide insights into a few of the major agreements that were secured across the group during the year. From the outset, FY '24 reflected another positive period with the business securing AUD 2.2 billion in multiyear agreements. This is not an exhaustive list. And while I won't go into the detail on each of these, as some have been covered in market announcements in our prior presentations, there's a couple of attributes I would like to know. Firstly, we've got a really strong renewal rate across the business, reflecting 97% for the last FY '24 period. Many of these agreements include expanded future operations, generally associated with our clients investing more into their essential asset base, driven by factors such as aging infrastructure, technological advancements and population growth. In addition to these retained agreements, there's a number of new works secured, which will support growth and ongoing diversification across each of our reporting segments into FY '25 and beyond. Slide 10 and turning now to our safety performance. As I stated many times, the health and safety of Service Stream's workforce and our clients and the communities in which we operate remains the #1 priority for our business. It's not a slogan. It is our commitment and it forms a major focus and shared vision for all the work across our organization. We're very conscious of the safety of our growing workforce, which extends to more than 5,200 employees in a pool of 17,000 skilled contractors. And over the course of the year, we're pleased to deliver a 23% reduction in high potential incidents across the corresponding period or compared to the corresponding periods of time. And these instance reflect those which have the potential to cause serious harm, and this follows the development and delivery of several issues, including leadership training for our supervisors, leading hands and people managers right across the business as well as our ongoing focus on adhering to critical controls across our higher work risk activities. This improvement reflects a marked movement of a relatively short period of time, but the business continues to maintain a steadfast focus on incremental improvement in this important area. And finally, before I hand it across to Linda, I'll briefly touch on the business' success in making a meaningful positive contribution to the sustainability of servicing operations and our broader business stakeholders. Service Stream has got a very defined strategy aligned to 5 sustainable pathways being safety, people, community, environment and governance. These areas represent those where we believe we can make a meaningful contribution, but also aligned with the feedback that we've taken from our stakeholder engagement. Highlights across the full year include, but not limited to AUD 19 million, reflecting circa 1.2% of group revenue being spent with First Nation businesses across the local communities in which Service Stream operates, a 7.8% in indigenous workforce participation, which both of these align into a major focus under the group's reconciliation action plan. Sustainability highlights also included an expected 10% reduction across our Scope 1 and Scope 2 emissions. The business is committing to undertake a detailed review of science-based target initiative framework, and that would guide our future reductions in these 2 areas of emissions over the short, medium and longer term. We expanded our commitment to deploy hybrid vehicles across our growing fleet, placing orders for 120 new vehicles, which will be delivered progressively over the next 18 months. And finally, we're really proud of our partnerships with many charities and community organizations, 1 of which is pioneering up the good where Service Stream provides the delivery of IT equipment or diverted the IT equipment from landfill, which in turn is sold and the funds supporting over 50,000 meals for those in need across our local communities. With the group's sustainability report due for release in October, I'm sure we'll have more to say in this area over the next 12 months. Okay. Now, I'll hand it across to Linda, who will walk through the group's financial performance in greater detail.

Thanks, Leigh, and good morning to everyone on this call. As Leigh touched on in his opening comments, we've had a really strong year with an integral set of financial results. Page 13 provides a bit more insight into our financial headlines. Total revenue for the group was AUD 2.4 billion, an increase of 11.2% on last year. This was driven by strong growth across all telco and utility market sectors and services. With this growth, telco operations have now surpassed AUD 1 billion of annual revenue for the first time this year with utilities actually not too far behind. Underlying EBITDA from operations was AUD 129.2 million, an increase of 13.2% from last year. Group EBITDA margin was 5.4%, which was slightly better than the 5.3% last year. Included in this result is the additional cost investment of approximately AUD 7 million incurred to bid for the defense based services transformation tender. The strength of the business this year has afforded us the ability to make this cost investment, deliver solid growth and still improve our margin on FY '23. The group's adjusted impact for the year was AUD 50.1 million, up 36.4% on last year. This significant uplift reflects not only the higher EBITDA, but also lower depreciation and interest charges. Stat net profit after tax was AUD 32.3 million, which allows for the additional Queensland project costs recognized in the first half and amortization of customer contracts. This compares to a statutory loss of AUD 4.5 million in the prior year. I should note that such provision has been recognized in respect of the Queensland provision over and above the AUD 9.8 million taken up in the first half. Cash flow and net debt were stand-out results for the year. Operating cash flow for the year was AUD 131.2 million, which was an OCFBIT conversion rate of 101.6%. You may recall that the business have managed to return to a net cash position at the half year, just 24 months after acquisition of Lendlease Services, but we had expected it would dip back into a net debt position for the full year with the unwind of some of the timing benefits from December and increased half year dividend. Pleasingly, the strong focus on cash flow and working capital management across the business has enabled us to retain and invested the net cash position at June to AUD 7.9 million. As a result, net leverage at June, including operating leases has reduced to 0.4 times underlying EBITDA. Finally, capping off the headlines. The directors have declared a final dividend of AUD 0.025 per share, fully franked, which takes the total FY '24 dividend of AUD 0.045 per share, also fully franked, which is a 200% increase on last year. This special increase in dues underpinned by the group's continuing strong financial performance, balance sheet and outlook. Now on to segment performance, telecommunications on Page 14. The telecommunications segment had an exceptional year and was able to maintain the strong revenue and earnings momentum generated over the first half throughout the full year. The segment had pulled forward some program of work into the first half and was expected to be first half earnings skewed. However, strong delivery and continuing demand has enabled H2 revenue and earnings to trade on par with H1. This included additional one-off revenue from rectification work over the summer period following the adverse weather events in New South Wales and Queensland. Healthcare revenue for the year was AUD 1.2 billion, which was AUD 230 million or 23.7% above last year. Revenue growth was delivered across both fixed line and wireless operations and through O&M and capital programs, including additional connection volumes flowing from the nbn fiber overbuild program. EBITDA for the year was AUD 105.4 million, which was AUD 19.9 million or 23.3% higher than the prior year, and EBITDA margin was 8.8%, which was in line with the prior year. Now Slide 15, Utilities. FY '24 has been a transformative year for the Utility segment with work required to strategically reposition the business now largely complete. Revenue for the year was AUD 972 million, which was up AUD 84 million or 9.4% on PCP. This strong revenue growth was achieved through multiple new O&M contract wins and organic growth opportunities within existing contracts despite cycling-off revenue from discontinued operations and a shift away from large-scale fixed-price lump-sum D&C opportunities. Revenue growth was also achieved across all of the market sectors that the utilities operations faces into, which includes water, gas, power, industrial and network services. Underlying EBITDA from operations was AUD 34.2 million, up AUD 5.8 million or 20.4% on FY '23. The closeout of legacy projects and contracts have progressively cleared the path for improved financial performance, which is reflected in these results. Additionally, exceptional performance from the core O&M contracts has enabled continued half-on-half margin improvement ahead of expectations, with H2 margin of 3.6%, which is a further 20 basis point improvement from the first half. Slide 16, Transport. As noted at the half of the year, Transport operations were rebased following the demobilization of WA regional road operations last financial year. The focus for this segment is and has been to now secure new growth opportunities across road networks, O&M and ITS markets to complement the existing high-quality operations. To this end, the business was reasonably successful in securing the new long-term contract with the Victorian Road Maintenance contract, which commenced on July 1 this new financial year. Revenue for the year was AUD 220 million and EBITDA was AUD 14.3 million. Whilst revenue reduced by AUD 73 million, the impact to EBITDA was nominal with a reduction of only AUD 0.5 million, enabling an improvement in EBITDA margin to 65%. This reflects the low margin contribution from the discontinued operations, work undertaken to rebase business and strong performance in the remaining transport contracts. This result also includes the final settlement arising from the Inland Rail PPP demobilization agreement, which was reported in the first half. Now, Slide 17 sets out our group profit and loss, both statutory and adjusted committed. We've already covered most of the headlines, so just a few more comments from me on the P&L. Firstly, with regards to revenue, most of you would know that all of our contracts now have some form of mechanism to adjust for inflation. Noting CPIs for the 12 months [indiscernible] was 3.8%, the 11.2% revenue growth we have achieved demonstrates real volume growth and is reflective of the strong market opportunities the business now faces into. Secondly, outside of ordinary operations, we've invested circa AUD 7 million this year in tendering for the defense BST contract. Due to the bid mission date being extended to August, the amount spent is lower than we expected for FY '24 with some additional costs now flowing into the new financial year. This result also includes some costs and benefits side from continuing optimization programs, which we flagged at the start of the year. This is really just a carryover of some of the acquisition synergy work with ongoing continuous improvement and productivity work now part of our BAU assets with particular focus on improvement in utilities margins. The group's NPATA has benefited from significantly lower D&A and interest charges, resulting in a AUD 0.365 EPS-A improvement in FY '23. D&A has reduced by AUD 9.9 million or about 19%. The prior year D&A did include a AUD 6.6 million acquisition-related software viral, which accounts for some of the movement, however, continued leasehold consolidation and tight CapEx discipline has provided additional benefit. Net financing costs have reduced by AUD 2.2 million, reflecting the shift to a net cash position over the course of the year. Now moving on to the group cash flow on Slide 18. As noted in the headlines, we delivered an exceptional cash flow outcome for the year, achieving an EBITDA to OCFBIT conversion rate of 101.6% despite the strong revenue growth and the working capital investment typically requires to support this growth. This has been achieved through an organizational-wide focus on working capital optimization, which includes the share of regular dividends and cash flow payments from our JV operations. Looking at OCFBIT, net cash outflow from the Queensland project was AUD 12.5 million for the year. There will be circa AUD 4 million net inflow over the coming months following last [indiscernible] average. CapEx and leasing cash flow for the year kept well below the collective range of 2% to 2.5% of revenue. This is partially due to the strong growth in revenue, but also reflects the continuing focus on property consolidation and fleet optimization programs. The fleet refresh program has also been enforced by availability, although we have seen an improvement in this over the past year. Likewise, heading into the FY '24 year, we had incurred IT CapEx expenditure for various consolidation of [indiscernible] being OpEx. Now turning to the balance sheet and capital management, which is on Slide 19. As mentioned earlier, we've been able to retain and improve the group's net cash position at June to AUD 7.9 million. Over the past 2.5 years, the group has effectively repaid around AUD 125 million of debt, taking our group leverage from 1.3 times pro forma leverage, including leases to 0.4 times today. Importantly, the balance sheet is now comfortably in the net cash of swim lane, which is something I expected would take another few reporting cycles to achieve. The strong cash position and outlook has enabled the Board to step up the final FY '24 dividend to AUD 0.025, taking a full year dividend of AUD 0.045, which is a substantial increase on the AUD 0.015 last year. The strong balance sheet also provides a solid platform to be able to invest in future growth, both organic and external and reinvesting the business through ongoing optimization and productivity initiatives. With this, we are expecting FY '25 CapEx to revert to our guidance range to 2%, 2.5% of revenue, although I think I have been saying this for a couple of years. Finally, we will look to extend the 10-year group syndicated facilities over the next few months ahead of the December half year results. And that's all from me. So I'll now hand you back to Leigh to take you through the remainder of the presentation pack.

Thank you, Linda. We're now towards the tail end of today's presentation, but I'll move to the group's outlook and direct you to Slide 21. So firstly, work in hand. As I mentioned the initial highlights of today's result, the group has successfully secured approximately AUD 2.2 billion of work throughout the year. That strong work in hand balance now exceeds AUD 5.5 billion in future work, and that reflects only initial contract term. If we are adding the multiyear extension options, that accounts for an additional AUD 3 billion of work in Hand. This work is spread across attractive industry sectors, an enviable blue chip client base consisting of government entities and major industrial clients. Clients are well capitalized, work is generally contracted under a reasonable set of commercial terms and they pay their bills on time. Over the past 12 months, we've seen elevated levels of new business opportunities coming through competitive markets, a few coming through competitive tenders, particularly their clients look to expand and upgrade their essential assets. And that demand is generally driven by aging assets, population growth, adverse weather events, technological advancements and the energy transition. So we feel really comfortable that there is strong organic growth opportunities that exist and the business will pursue over the next 12 months to complement the inherent growth that already exists under our existing contract base. And in terms of outlook for 25, as we've outlined today, the business is in a fantastic state, significant positive momentum being generated throughout FY '24, and that provides a strong foundation for FY '25 and beyond. We're confident that we're going to deliver further improvements in our Utility earnings as one of the major drivers of growth in FY '25, but also an area which has historically dragged on the group's performance in recent years. We've got a strong order book, 85% of work in hand already secured under contract or available by our agreements, which contain extension provisions, and these factors provide improved visibility and confidence for the year ahead. The group expects earnings growth, supported by that strong order book and favorable market conditions. We're really pleased with the results being delivered, but more importantly, we're genuinely excited about the position the business finds itself in and the future opportunities that are in front of us now. Our priorities for the year ahead include maintaining our industry-leading safety performance, realizing those improvements in the Utility division earnings, continuing to secure organic growth opportunities aligned to our strategy and risk appetite and the assessment of external growth and diversification opportunities as they may present. That concludes our presentation. On behalf of the Service Stream Board, I'd like to express our personal thanks to our amazing staff working right across the business for their efforts over the last year. I will now hand back to the moderator, who will open up the call, and we're happy to take questions from those joining us today.

Thank you. [Operator Instructions] Our first question comes from William Park of Citi.

Can I just touch on the utilities margin and the journey back up to 5%. Can you just step through how you're sort of internally thinking about that journey throughout the course of FY '25? Is there anything that could potentially expedite that journey or just wondering whether -- how you're seeing things in the utilities business.

As you know, this is one of our many priority areas. We feel really comfortable that plan is working well. We're going to see that improved margins delivered across the utility performance. So we are diving a margin before in front of it during FY '25, and that will transition to a 5 the year after because we always push hard, we always try and seek to drive that benefit as soon as we can. But at this stage, being only 1 month into the new year, I think that's probably the greater detail we can give or the insight we can give. The confidence we will certainly get there. And hopefully, like we've done over the last 1 to 2 halves, we exceed those expectations, but it's probably a bit early for us to call that just yet.

Well, just giving you a sense of the journey so far. We've spent the last, call it, 2 years reshaping the business. So strategically repositioning out of the businesses that we don't want to be in with big time [indiscernible] contracts, closing sort of noncore operations, but also lifting the bar and setting the risk appetite for new work and obviously, expectations on margins on new work plus ahead of us is to continue more of that but now really also more of the optimization work that we've been doing more from a synergy perspective as we put Lendlease together, but now there's still a range of opportunities ahead of us. So those things do take time, which is why we see the margin growing over the next, call it, 2 financial years as opposed to all happening over the next year.

And my apologies if I missed this, but are all those legacy arrangements within utilities, are there either -- have you or other exited those agreements will be negotiated better terms?

Yes, that's correct. That's largely all been completed now as of, I think, July the final arrangements there were largely completed. So as said, it's not now about renegotiating with clients or exiting those agreements, it's about driving or continuing to drive those internal optimization activities, which team have been executing well against all securing that new growth and delivering that in line with our expectations. So no more challenging commercial sort of discussions that need to be navigated.

Yes. And just moving on to the 2 other segments. Telco, clearly, instead of second half, first half skew we've seen slight growth in second half. Is that sort of the run rate that you'd expect heading into FY '25? And just on Transport side, how should we be sort of thinking about that contract win in terms of sort of a run rate in FY '25 and beyond?

In Telco, yes, it's been another really strong period. This is where our business all started. So it's really pleasing to see such a strong division. Really pleased to see that second half coming through as we thought it may be software, and we brought some project works forward. But I think that, that does, as you pointed out, provide really strong momentum into '25. So we're expecting to see another really solid year from Telco, potentially with the bias for further growth, I think we'll maintain the margins there. We might see some incremental growth in Telco because we are well positioned there, maintaining those EBITDA margins in its current sort of high single-digit range. And in terms of Transport, yes, that operation is actually mobilizing as we speak. So it will start to provide a contribution in the first half, and that should certainly support albeit only 1 agreement should support some growth across FY '25.

And just 1 last 1. I appreciate that you touched on how the attrition rate is improving and so forth. But given quite a bit of noise coming out of, I guess, the East Coast around Electrical Trade Union and some of the disruptions that's had in construction sector, just wondering really if you've seen any of that sort of impact your productivity at all?

No, we haven't seen any sort of impact in terms of productivity. Many businesses have agreements, which cover that area in the market, but that is one area that has not been negotiated up to this point. So we'll keep a steady eye on that as we go forward. The Power division represents a portion of our utilities revenue. As I said earlier, we've seen growth in each of our segments within utilities, but we haven't had to go through any protractive discussions or negotiations in that particular area.

[Operator Instructions] Thank you. I see no further questions at this time. I will now hand back to Leigh. I beg your pardon. Sorry, Leigh. We have people lined up for the questions. Next we have Warren Jefferies from Canaccord Genuity.

Just on the Telco, where you said you've got a pretty much full contracted 12-month outlook there. The 1 contract that's sort of been standing at is an nbn UniFi agreement, which was a 4-year contract, I think, ends early next year with a couple of 2-year options. Has that been extended yet or is there a sense that does get extended?

They're going through that process this financial year, Warren. So we've got that secured till 2025. It's being then going for a process for a longer-term agreement post 2025.

Right, so it's in play. I was just wondering, with the work in hand of AUD 5.5 billion, what's the profile of that? How much -- what percentage of that sort of represents AUD 25 million and then what sort of represents maybe some of the longer-term work in hand?

Yes. Look, I mean you've effectively got a couple of years of contract cover there. As I said before, I think work in hand across the entire group, we've got about 85% secured as we enter '25. We always have that sort of 80% mark historically. So we're actually in a better position than what we've been historically in terms of secured work in hand, but we always challenge our BAUs as we know to try and grow by sort of 5% to 10% each year. So there is a bit of bidding work, which is reflected in their targets, but are a strong position. So that will provide cover said if you look at our revenue here, Warren, with extension options is about AUD 8 billion. So there's a couple of years of contract cover there.

Yes. I was just trying to see if you sort of had like the 5.5%, maybe 50% of it or [2.5 or 2 bill] is going to be 25% delivered and then it tails off. But what you have got is 85% secured, I suppose, is what you're disclosing?

Yes, that's right. I should point out to secure '26 and beyond but 2025 look a really solid start.

And just on the investment in defense, how is that proceeding? And how do you see yourself set there to potentially pick up some of the defense work?

Yes. Look, I mean, as we know, there's one of the many opportunities that we've been targeting across the business. So we're pleased to confirm that we've submitted that bid in the early part of this financial year. And as we commented, we spent about AUD 7 million last year on defense bids. We're going to have a couple of million run over into this year to at least cover support and coverage up until probably Christmas, and we expect to know an outcome, hopefully, this calendar year on that is whether we are successful or not. If we are, fantastic, it represents an area that we are certainly excited to grow into. If we're not, we forward ourselves off and keep on focusing on other areas. But probably a couple of million to go there, and we shouldn't have an outcome by Christmas.

And I just want to allude to, is there any -- are we expecting at some stage a reversal of the cash conversion? I know we thought it might reverse a bit in the second half. But again, you've maintained that level of conversion around the 100%. Is that sustainable now or we still sort of seeing benefits coming your way…

Every year in our guide to 80% and we're trying to do better. And looking that regional revenues are growing, you do need some of that into your working capital. So I think every year I guide, but that view and we'll see how we go.

Thank you. I see no further questions at this time. I will now pass the conference back to Leigh.

Thank you. Operator, I really appreciate everyone joining today. As I said, we're generally excited about where the position is and the year ahead. We look forward to engaging with everyone over the next few days as we dissect and talk further through the group's results. Thank you very much.

This concludes today's conference call. Thank you all for participating. You may now disconnect.