Service Stream Limited (SSM) Earnings Call Transcript & Summary

Good day and thank you for standing by. Welcome to the FY '25 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 first speaker, 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, the Managing Director of Service Stream, and I'm joined today by our Chief Financial Officer, Linda Kow. In terms of the agenda today, I'll kick off by covering some of the group's highlights and providing an update on Service Stream's operational and financial performance over the year. I'll then pass to Linda, who will talk through some of the group financial performance in greater detail. We'll then provide an update with regards to outlook for FY '26 and finally we'll open up the call for questions. I firstly wish to begin by acknowledging the traditional custodians of the land in which we meet today, and we pay our respects to the elders past, present, and emerging. Okay. I'll direct you to Slide 3, where I first wanted to touch on some of the key messages in relation to the full year from the asset, we are really pleased to report that financial year '25 reflected another strong and successful year for Service Stream. The business worked diligently to execute against our strategy, came to deliver improved and sustainable value to our shareholders. The results are headlined by another period of strong financial performance, double-digit increases delivered across both earnings and profit. This combined another period of exceptional operating cash flows have assisted to further strengthen the group's net cash balance sheet, which provides increased optionality to support our strategic growth agenda. The business has had one of the most successful periods in the company's history with regards to winning work, substantially increasing the level of contracted work in hand. The business is able to successfully resecure almost all agreements which proceeded to market at the end of the natural term in addition to securing a number of new contract opportunities, which collectively will support growth into FY '26 and beyond. The success in these 2 areas over FY '25 has significantly strengthened the group's work in hand balance to a record level. Over what reflects a high-quality work order book of lower risk operations and maintenance revenues. The third [indiscernible] is simply with regards to our utility operations and performance is one of our major priorities, which was driving improvement across the division's quality of earnings. We're really pleased to have delivered a significant improvement in the utility division margins of FY '25 on the back of the division also exceeding the $1 billion mark in terms of revenue. Whilst the business still has further work to do to reach our FY '26 margin goal, the continued positive momentum against our plan provides increasing confidence that we will continue to deliver incremental improvements, creating a strong platform, which the business can grow and importantly, continue to provide improved results and returns has been a major strategic priority. In addition to a range of optimization programs and initiatives to support improved performance, we're really pleased to further strengthen the group's balance sheet during the year. And this allows seemto take advantage not only of a number of organic and adjacent growth opportunities ahead, building strategic M&A, which may present over the coming period. And finally, that this positive progress made throughout a strong year we have seen an increase in EPS, and the Board was pleased to also declare an increase in the group's full year dividend for our shareholders. Moving to the financial highlights and first sustainable group revenue, which over the year was $2.42 billion, was stable to the prior year by 1.2%. In revenue growth was lower than that previously achieved, and that's primarily as a result of the business successfully concluding a major telco upgrade project in advance of transitioning to the new programs, which we've recently secured. And successfully cycling off some of those lower-margin utility operations, whilst the division has also mobilized new contracts. We are however confident we'll see revenue growth reoccur in FY'26. More importantly, underlying EBITDA was $146.1 million, reflecting a significant increase of 13.1% on PCP. NPATA $68.5 million were significantly up on the prior period, with the group reporting a 36.7% increase. On a retail highlight of the group's half and full year has consistently been the generation of strong operating cash flows, and we're pleased to report that this year has been an exception. The group's cash flow is $148.9 million and achieved an EBITDA to OCF conversion rate of 104%. This is always again reflective of our blue chip in client base, positive terms, which span our commercial agreements and a strong focus placed on the works to cash cycle right across our business. The high cash flow supported a further strengthening of our balance sheet with Service Stream's net cash using closing at $73.6 million, reflecting an improvement of $65.7 million on PCP and $18.2 million on the first half position we closed at 31 December. We really foresee another strong result in this area ahead of consensus particularly as the business caters both increased dividend payments and supporting growth across the group. And finally, as I mentioned at the asset on the back of those strong results, the Board were pleased to increase the group's full year dividend to reflect the $0.03 per share for the franked that a dividend for the financial year '25 $5.5 per share. Moving on to Slide 5 now and some of the group's operations and strategic highlights. One of the key priorities over the last 2 years has been to optimize operations, creating a scale of platform from which Service Stream will continue to deliver improved returns. And a major feature of this even to drive those improvements across the utility division with respect to both its earnings and its EBITDA margins, supporting an improved and meaningful contribution to the group. We're really pleased to have delivered further increases across both of these areas during the EBITDA increased by 32.5% or $11.1 million on PCP to reflect $45.3 million for the year. And EBITDA margins moved up by 100 basis points on PCP from 3.5% to 4.5%. We've consistently delivered incremental improvement across these areas and are pleased to see the margin performance achieving the expectations we set for FY '25. Importantly, we're still offer the works to do and further improvement opportunities to execute. We have a clear plan and are confident that further progress and improvement will be made as we strive to meet targeted margin of a [ 500 ] over the course of FY '26. We think to be excited about the utilities division, given its ability to grow, noting FY '25, we broke for that $1 billion revenue mark. And this continues to reflect one of the major growth engines for Service Stream. In a similar manner, the group delivering improved EBITDA margin of 6%, reflecting another strong result and equated to a 60 basis point improvement on FY '24. Shifting gears from a looking at the other standout, which is the significant work that's been secured and the bolstering of our work in hand. We've also talked about the primary priority for all services businesses being the retention of existing contracts as a reach full term and proceed to market as well as securing profitable new growth. We're really proud of the business had a very successful period and secured a record $4.2 billion of contract works over the year. This reflected also a strong retention rate of 98% across those agreements, which reached a renewal milestone at the end of the term and preserved to market. The group's level of working gain increased to approximately $7.6 billion, reflecting 40% growth on PCP. And importantly, that number under reflects initial turnback greens with many of [indiscernible] year extensions, which I'll talk about later in the presentation. The business has worked over the last 2 or 3 years to improve the quality of our contracted operations and successfully pivoted away from major design and construction operations delivered on the lump sum fixed price arrangements. And instead, focused our energy on securing longer-term operations and maintenance agreements. And we're very pleased to see the O&M work now reflects circa 80% of the group's future work in hand, providing improved visibility and a lower risk profile. And finally, as I mentioned earlier, that improved balance sheet provides optionality to the business continue to look at a number of strategic growth opportunities throughout the year, which presents across our target markets. Importantly, though, we are very confident of organic growth across our existing operations, but we also acknowledge the opportunity which may present through further M&A. Turning now to safety performance on Slide 6. And as I've stated many times, the health and safety of our workforce, our clients and the communities in which we work with is our #1 priority. There is nothing more important than the safety of our people. It's our commitment, and it forms a major focus and shared vision for all and work across Service Stream. We're very conscious of the sale of our growing workforce extends across more than 5,200 employees and a full 17,000 lost skilled contractors. And of course, the year, we're incredibly pleased to deliver substantial improvements in our key lag indicators. Despite the business growing and our operations expanding, the period marked a significant improvement headlined by a 24% reduction in total recordable injury rates, a 28% reduction in lost time injuries and a 42% reduction in high potential incidents. As for business continues to focus on our high-risk work activities and ensure that our workforce adhered to our manager group critical controls. We also acknowledge the critical role of supervisors, lead hands and other managers play in supporting our field workforce. And we continue to add support and additional training. Moving on to Slide 7 now. We wanted to briefly reflect on the execution of the group's strategy as we sign another year with some of the results that have been achieved. If you look at the 3 graphs there and the first on the left talks to our total revenue growth over the period. And we see that the group has achieved a 15.7% CAGR organically growing from $1.5 billion in FY '22 to $2.4 billion where we are today. And importantly, as I mentioned earlier, that revenue is across lower-risk annuity style O&M works as opposed to what has historically been in a portion of large fixed-price D&C projects. We've improved diversification of group revenue, so the business is no longer dependent on any single market, customer and contract, a very different position than where we were several years prior. Looking at the middle graph there and talking to EBITDA from operations, which has grown from $91 million in FY '22 to $146 million in year just going on, and it reflects a 17% CAGR over that 4-year period. As I mentioned earlier, there's been strong focus on driving improved margins, particularly across our utility operations as well as a range of optimization initiatives across the broader business as we look to really improve Service Stream's overall quality of earnings. And finally, the [indiscernible] right talks to our EPS in creating enhanced and sustainable shareholder returns is ultimately core focus and intent of our group strategy. At this point, we'll really pleased that over the period, we've been able to deliver 28% compounded annual growth rate in earnings per share. Now I think we've seen improvement in the value and the rating about this during this time. The results drive consistent and incremental improvements in dividends aligned with its results. Moving through to Slide 8, we begin provide insights on the group's diversified revenue profile, representing another positive attribute for the business and the changes that have enacted over recent years. Over the course of FY '25, we've seen only a slight change in the mix of work across the group with operation and maintenance revenue reflecting 66%. Minor capital works reflecting a 31% is in line with our prior references and to be honest cares about the right balance. This provides service with positive exposure of our clients' capital expenditure programs with the work most commonly delivered through multiyear panel arrangements. And these offer the ability of our business to strategically review and selectively bid on specific opportunities that fit our criteria. If you look at the commercial models that govern the group's work, we continue to see that over the year, we've maintained 94% being delivered under either a low-risk schedule of rates or cost reimbursable a limestone marked a really positive transition from where the business was again on the few years prior. [indiscernible] to the contract terms and the expanded contract base, the business has an average contract of 5 years, improvement on what has started to been a 3-year duration on a few years ago. In [indiscernible] average contract tenure sits at 17 years, and we've got many partnerships that now assisted over 30 years journey. Meaning that if or since regularly test the market, we've got a strong reputation for partnering, delivering value, operational excellence and are, therefore, well positioned to resecure this greens. And finally, 67% of the work delivered was the government or government-related entities with the remaining 30% live through and on behalf of Tier 1 industrial client base of asset owners and in operators. As I've mentioned previously, it's a wonderful client base. They are well funded, typically contract under a reasonable set of commercial terms, pay the bills on time and represent a little to no risk. [indiscernible] shorter all to the financial performance of each of the reporting segments and the broader group, I'll provide some [indiscernible] commentary and insight into the major activities over our 3 reporting segments on the full year and refer you to Slide 9. Starting with telecommunications. The division commenced the second half with a strong win. We resecured one of our key material contracts reflected in the nbn field services agreement. This is in addition to several other major contract renewals and window in the period as per my price line, which has accounted for more than $3.3 billion of work secured. The key priorities and I discussed over the course of the year was securing additional programs at work to replace those existing upgrade project non-enterprise within the end. We're very pleased to confirm in accordance with the ASX announcements that we've released, the surgery successfully secured 2 major project allocations, one in June and another in July, which will support the continuation of those works over the next 3 to 5 years. [indiscernible] to our Utilities segment in line of earlier comments. It's been a big but productive year for utility division. Really pleased to see and report that the strategic repositioning continues to make further progress as evidenced by the increased contribution and improved margins. In terms of the improvement program, we outlined 3 for pillars, the first being a successful renegotiation or in some occasions, the exit of low-margin loss-making contracts, which we concluded very start of this year. The team continued to work diligent second pillar, which focuses on a broad range of optimization initiatives or improvements. They cover areas such as labor productivity, operational and contractual performance uplift, which can include the realization of incentives, result securing procurement savings, direct or indirect overheads and property consolidation. I'm pleasingly, the division has had continued success in securing new and incremental growth aligned to long-term maintenance agreements, which represents that third important pillar. The focus across these 3 collective areas supported a progressive uplift in the division's earnings and EBITDA margin, but has also improved the nature of their operations and we successfully pivoted away from [ Climisk ]/D&C works. As I mentioned at the [indiscernible] call, we've still got further work to do, but even continues to demonstrate incremental improvement over several half year period, and we are confident of delivering a 5 handle on the division's EBITDA margin over the course of FY '26. And final with regards to new growth. The business was proud to successfully mobilize the new urban utilities maintenance agreement in -- this is announced in early December and commenced operations in July. And in addition to that agreement, we've also successfully secured the second 5-year term with Sydney Water in support of our D2C joint venture operations, plus an additional new 8-year agreement to deliver sewer rehabilitation services for Sydney Water across the Sydney Metropolitan area. Transport, really pleased division successfully mobilized agent big roads for the delivery of road maintenance operations. It's been a successful first year and further supports what is an important capability in our business, being able to successful mobilize new agreements as they are secured. The Transport division completed the buyout of the remaining 50% of the South Australian Road Services joint venture. This is a JV between service and borrow. So moving forward, searching takes over and maintain full delivery of all services on the half of the South Australian government. And finally, it's really pleased to see the business has been able to secure an additional package of work for Transurban and Victoria associated with the upgrade was power supply, and this follows a successful pace lighting upgrade project we completed earlier in the year. Now moving on to secure contract awards on Slide 10. I spoke earlier about the imports of the business retaining contracts that they perceive to market at the end of their respective terms as well as securing profitable new growth. On Slide 10, we've outlined some insights into just a few of the major agreements that was cured across the group during FY '25. [indiscernible] exhaustive list, and I don't intend to go through the individual detail on each of these but there are a number of positive attributes I want to touch on. The $4.2 billion secured reflects a record for the group, taking working hand balance to $7.6 billion. Business maintained a strong renewal rate 98%. And I'm confident the business will continue to make positive progress in securing new incremental works over the course of FY '26, given the strong pipeline of opportunities that continues to present across current and adjacent markets. Probably an appropriate time for you to mention the defense opportunity, which I know many will want an update on. That opportunity is associated with the base service transformation program and reflects one of the major opportunities our business has been working on for several years as we look to expand across an adjacent client base and into new markets. We don't have an outcome that I can share today other than I can confirm the service room remaining assessment process, which has not yet reached for coding. We hope to have an outcome shortly, which we don't share, but as I'm sure you can appreciate, we can't go into specifics on the process extends that we're currently working through. And finally, before I hand across to Linda, I briefly want to touch on the business's success with regards to making a meaningful and positive contribution towards the sustainability. Our business has a very clearly defined sustainability strategy. It aligns to 5 power lines there being safety, people, community, environment and government. These areas represent those that we can not only make a meaningful contribution across but aligns to the feedback taken from our stakeholder engagement over several years. Highlights over FY '25 include, but not limited to, the significant improvements in active performance that I touched on earlier. I mean 5% reduction in combined Scope 1 and Scope 2 emissions against our FY '23 baseline. Stronger use of renewable energy across our operations now reflecting 75%, an increase in female workforce participation with several dedicated support programs across the business. And we're also seeing an increase in the number of First Nation supply, so we have supporting international operations. We're very proud of our chance across each of our 5 pathways, and we look forward to sharing more information in the group's sustainability report due to a release in mid-September. I hand across to Linda to walk through the group's financial performance in greater detail.

Thanks, Leigh, and good morning to everyone on this forward. As Leigh touched on this [indiscernible] comments, we've had another really strong year. The business has been able to build on the great start we had in the first half to finish the year positively across all financial metrics. Page 13 outlines our financial headlines. Total revenue for the group of $2.42 billion, a slight increase of 1.2% on last year. As we shared at the half, revenue this year was first half skew, just simply due to the timing of work and mix of contract cycles. Very pleasingly, utilities were just able to hit the $1 billion [indiscernible], something which I was not sure we would be able to chase this year. [indiscernible] operations was $146.1 million, an increase of 13.1% from last year, and lastly, as Leigh touched on margins continue to improve up 60 basis points to 6%. And this uplift was driven by improvement across all areas. The group adjusted NPAT for the year was $68.5 million, up 36.7% on last year and this equates to an adjusted earnings per share of $0.112 per share. This plot was aided by the 1 tax credit through our secure in relation to transactions in the first half. But even excluding the benefit, underlying NPATA has increased by over 30% this and at net profit after tax was $59.2 million after allowing for the amortization of customer intangibles, which is detailed in the appendix. Operating cash flow performance was again a strong highlight this year. we generated $149 million of operating cash flow, which was in excess of EBITDA was on a cash flow conversion rate of 104%. Consequently, we've been able to further strengthen our balance sheet with net cash increasing by $65.7 million this year to close at $73.6 million. And finally, tapping off the headlines, the directors have declared a final dividend of $0.03 per share fully franked which takes the total FY '25 dividend to $0.055 per share or [indiscernible], which is a 22% increase on last year. Now on segment performance at Telco on Page 14. The Telco segment had another solid year, maintaining the significant step-up in momentum from FY '24 across multiple clients and [indiscernible] program of works. Sales revenue for the year was $1.17 billion, down slightly on PCP by $34 million or 2.9%. This reduction was mainly due to lower interpret volumes in H2 with the progressive completion of the initial programs of work in advance of labor passes, which are recently secured and announced to the market. As expected, telco revenues for the first half group is due to the phasing of work programs and heightened backlog demand. Rounding off telco, wireless operations has continued to maintain its share of some revenues holding the study at 25%. Telco EBITDA for the year was $103.8 million, down slightly by $1.6 million, reflecting the dip in revenue. EBITDA margin decreased up 0.1% to 8.9%. Moving on to [indiscernible] on Slide 15. FY '25 has been another positive year for the Utility segment with further progress made on its strategic repositioning to securing new profitable growth and strong operational execution delivering to prove once and following. Revenue for the year was just $50 billion at $1.08 billion, which was up $36.1 million or 3.7% on [indiscernible]. This was net of reduced revenue in discontinued operations and completed D&C projects. Segment growth was driven by water O&M and the industrial sector through both new contract wins and increased demand across existing clients. As for shadow, revenue was also biased due to the scale and phasing of industrial shutdown works undertaken in the first half. [indiscernible] from operations was $45.3 million, up $11.1 million or 32.4% on FY '24. The closeout of legacy projects and contracts over the past 2 years has progressively cleared the path for improved financial performance, which is elected in the results. A highlight of this result is a continued improvement in EBITDA margin, which increased by 100 basis points a share to 4.5%. And looking to FY '26, we are expecting to see further progressive margin improvement. Slide 16, transport. The transport operations had a strong run home, which reflects the business of historical hedged buy due to client project funding cycles with additional project work associated infrastructure upgrades provide an additional revenue opportunity in the second half. Revenue for the year is $245.8 million, up 12% on PCP. This includes a full year benefit for a long-term Victorian road maintenance contract, which was mobilized at the start of the year and now performing really well. as well as the acquisition of the remaining 50% of the SAR JV in September. EBITDA was up $17.2 million, up 20% on the prior period. Our strong operational performance here has also enabled EBITDA margin to improve by 50 basis points to 7%. Now rolling that all up, we move to the group now on Slide 17, we present both the statutory and reported metrics. We've already touched on group revenue growth for [indiscernible] 1.2%, which was tested by contract cycles and exited or completed projects across the utility and telco segments. EBITDA growth this year has therefore been largely through margin expansion, while much of the [indiscernible] focus for investors has been on the utility margin improvement, all segments and areas in our business contributed to this uplift. The group continues to maintain a strong focus on quality of earnings from bidding for work and credit that appetite through the operational delivery and optimization, which has enabled progressive improvement in margin over recent reporting periods. We've also continued to carry costs this year to support the ongoing defense-based relative tender that we mentioned. We noted in the headline another step change upward in NPAT and EPSA of 36.7%, which is on top of the 36% we delivered last year, materially improving our income margin or conversion of EBITDA to a body line. This uplift includes the benefit from low financing costs due to our strong net cash position and the refinancing completed in December last year. I should note again kindest with related to the one-off tax credit, our corporate tax rate should revert to approximately 30% for future cycles. Now moving on to group cash flow on Slide 18. As noted in the headlines, we have again delivered an exceptional cash flow outcome the year, achieving an EBITDA OSB conversion rate of 104.4% which has enabled further expansion of our net tax position to $73.6 million. The working capital optimization program we embarked on post the acquisition of Leandlease Services has yielded significant benefit with FY '25 networking capital now running at 37% of LTM revenue. Below OP, a key callout is a lower cash tax number. which was significantly low tax expense due to the tax rate on received as well as a natural lag in tax installments paid when taxable income increases. This will require growth in tax paid for FY '25 -- for FY '25 is currently half as noted in [indiscernible]. Net CapEx and leasing cash flows for the year has again tracked well below expected 2% to 2.5% of revenue. This also included this year per some fleet base of $3 million. Our heavy [indiscernible] for a while, increased expenditure across IT systems as part of this have branch. This program works now been initiated and while still in the sale stage is ramping up with increased expenditure expected in FY '26. Now turning to the balance sheet and capital management on Slide 19. This slide outlines our approach to the balance sheet and capital management, which is focused on maintaining our strong balance sheet position, reinvesting in the business and supporting growth, balance will provide sustainable dividends to our shareholders. Maintaining a strong balance sheet is a key priority. It derisks our business and provides flexibility and optionality to growth. These are supported by our capital license model and available debt facilities, which provides ample liquidity. In FY '26, we are expecting investment cash flows to be at the upper end of our 2% to 2.5%. As noted on the previous slide, we have initiated an ERP modernization program, encompassing people refinance systems. This program is still in very early stages with final program budget and time face still may scope. I should note that these IT upgrades or like we occurred under access environment. with accounting guidance requiring such investments to be expensed. Is that fixed cost, we will exclude this cost of EBITDA from operations for reporting purposes for these major implementations. We are also continuing to invest in assets to support organic growth and mobilization of new contracts. With regards to acquisitions, we have will review M&A opportunities that could present our strategic acquisitions to further divest business and expand on our exposure, which is set and notes. And finally, delivery expanded dividends to our shareholders is important. This reflected an increase in our final dividend to $0.03 per share, with full year dividend $0.05 per share, up 22% on last year. And that's all for me. So I'll now hand you back to Leigh to take you through the refinement of the presentation pack.

Thank you, Linda. We're now at the end of today's presentation, will move to the group's outlook and outlook rather and direct everyone to Slide 21, work in hand. As for many of my comments, the group's had a very successful year, securing record levels of works on approximately $4.2 billion. That reflected a 40% increase on the prior year and took the contactor works to $7.6 billion. [indiscernible] reflects only the initial term of those contracts, we often have a multiyear extension options available. If we account for that, is that an additional $5 billion of work, taking our total working hand to $12.6 billion. This is a great bridge reflecting circa 5x revenue cover, as we sit here today. [indiscernible] work alongside and support an enviable client base, consisting of government entities in a Tier 1. As I said earlier, these clients are well capitalized. The work is generally contracted under a reasonable set of terms have had a build on time and the nature of their networks in port provides opportunities to support natural organic annual growth across many of our contracts. Moving on to the next slide here. And another positive attribute is the favorable market for our business operates across. These support the essential infrastructure at the millions of Australians depend on each and every day and continue to benefit from increased investment. There are several common drivers that support continued and profitable growth opportunities for Service Stream. The aging infrastructure requiring increased maintenance and continued capital investment, increased technology deployment and the digital transition. And our precedent level of population growth, particularly expansion into regional areas of Australia, where assets and infrastructure requires significant upgrade. The renewable energy transition and the impacts of natural disasters such as fire and floods, which require increased maintenance and improved resilience across network infrastructure. Then importantly, we possess strong service offerings and capabilities across these markets, which reflects $60 billion in annual maintenance related revenues, and that excludes capital investment. The market is growing year-on-year and Service Stream, given our relative revenue has a big opportunity to increase our market share, referred or one third of our business has been in a small amount in a very big pond. And finally, moving to the outlook slide. So in terms of group outlook for FY '26, we're in a fantastic position. We hold that large diversified work order book, strong momentum has been generated across FY '25, and that is carrying through to FY '26. We started this year with circa 85% of working hand under contract and 80% of that reflects lower risk O&M works. So the group expects earnings growth in FY '26. It's going to be supported by our strong order look and confidence in further improvements being delivered across those utility margins as we move to meet our target with 5 handle with respect to EBITDA. -- and that will be on the backdrop of strong and continued investment across each of our core markets. We have a clear strategy, which continues to deliver incremental improvement and are generally excited about the position of the business and the future opportunities that lay ahead. That concludes our presentation. On behalf of Service Stream Board, I'd like to express our personal thanks to our amazing staff working right across the country for their continued efforts and dedication. Now I'll now hand back to the moderator to open up the call from questions from anyone joining us today.

[Operator Instructions] Our first question is going to come from the line of William Park with Citi.

Firstly, with telco, can you just step through how we should be thinking about volumes in first half and second half of FY '26. Do you expect that lower volume that you called out in second half FY '25 to effectively rebound in first half of FY '26 and the momentum to continue? Or is there sort of a first half, second half skew that we should be thinking about?

Thanks for the call for the question, Will. Look, it's a good question. Look, we always know that the challenge of predicting half-on-half performance. We certainly expect to see Telco over the course of the year. I think we were probably largely flat to the revenue line and may be some bias for limited growth. So I think you'd expect to see some improvement on the second half of '25, but I don't think it's going to be significant. I think there will be incremental improvement, and that will continue through. We'd expect to see a much flatter half-on-half performance for telco and slightly elevated levels.

And then just in terms of utility margins, I appreciate that you guys are still sort of calling out in FY '26. But if I look at your second half margin of 4.8% or thereabouts. It seems to me that 5% does look fairly conservative here. Just wondering how you're sort of thinking about potential upside to that 5%? And then just related to, I guess, utilities as well I think a few months prior to you guys heading into sort of blackout, you guys have called out that utilities revenue could be below $1 billion, obviously, it exceeded that. So just wondering what's really changed there, please?

Yes. No, no it's a great question. Yes, you are correct. I mean we delivered 4.2% and then 4.8% in the second half. We knew we weren't going to get to 5% this year. So that gap is 4.5% over the year. I think we're sitting in a great position. We have absolute confidence to get to a 5% in front of that. We haven't previously quite some exit or an entry rate but we certainly won't be stopping at a 5% [indiscernible] break in. I mean it's a large range between 5% and 6%, and we expect to sort of land somewhere between that level over the course of the year. And importantly, we're not going to stop there. We're still going to continue to try and drive incremental improvement across those margins. We haven't yet discussed what that next medium-term target might look like once we get a 5% handle this year. But I certainly see that there is continued opportunity for us to drive some further improvement across the utilities margin. So hopefully that gives you some understanding there statin that 5% to 6% range.

And just $1 billion revenue. Obviously, you were kind of suggesting that you would track below the $1 billion revenue. Obviously, it's exceeded that. My apologies if I missed that on your earlier comments, but just wondering what's changed in the space last month or 2.

Yes, it's a great question, Will. So yes, we were cautious to it. I mean we delivered strong result, I think, $530 million and sort of $480 million across the course of the year in terms of first half, second half. And we just weren't sure that we'd see that continued performance in the second half running through. But we did see some positive works, particularly across our water operations. That continues to be a major area of growth. coupled with some industrial our industrial maintenance area. So both those areas have benefited -- continue to benefit -- we're confident that what we'll probably see this year is growth between 5% to 10% are the utilities whilst we continue to improve margins.

And then just thinking about transport margin, again, in the second half, I mean, it looks to be more calculations correctly in excess of 8%. Should we sort of be thinking about transport margin into FY '26 second half margin, a good proxy to kind of think about margin profile for transport going forward?

No, it's a really good question, Will. Look, we do and have previously commented on, in fact, there is a bit more variability in transport, the nature of those operations, often see government coming and looking to spend money rapidly on particularly row programs, and that can work the other way as well. So we're always a little cautious. Particularly, we find that we've had the sort of second half bias over the recent period. I would expect to see our margins hovering around that current level. So you are right. We delivered, I think, about 8.3% in the second half. It may not maintain that, but I think it will be in or around that level. and we should maintain that 7% margin throughout the course of the year, several weeks.

What the transport business really shows. And the same applies for all of our business is that while we don't have guaranteed volumes. When we work you said, I think the team are very good at making the most of it in converting that margin that's available and that scale that's available. But it's dependent on the volumes. And so that variability does present sulfates because it's a smaller business. But what the team demonstrated is that the opportunity to present itself, they actually make the most.

I think I'd expect to see maybe coming off a little bit in the first half, but I think we will certainly see continued improvement in the second. So I think we'll still hold a 70 front of that number over the course of the of the year and hopefully set upwards or closer to 8%, but we'll see how the year progresses.

And then just one last question for me. I mean looking at one of your peers' commentary, it looks like the industry is kind of expecting decisions on defense at the end of this quarter. Just wondering whether that is consistent with your expectations and sort of any progress or updates that you could share with us at this point?

No. I can't confirm that's the case. We do believe that by end of September, we should have an outcome reach that we communicate.

Our next question is going to come from the line of Megan Kirby-Lewis with Barrenjoey.

I've just got a question just on the telco margin. Just noting you were able to slightly increase it on the lower revenue. So how should we be thinking about that into FY '26?

Yes. Thanks for the question, Megan. I'll probably refer back to the comments that we made when we re-signed our agreement with when we re-signed that agreement, we called out the fact that we expected margins to come off slightly over the course of FY '26. It wasn't significant, but the nature of that agreement will be forward, we're probably going to have a little bit of softness in '26 before we can try and recovery and improve that. So I would expect we still very much have an aging front of it. There's probably a couple of basis points there in terms of movement from where we finished in FY '25, but not significant.

Our next question is going to come from the line of Nick Daish with RBC.