Ventia Services Group Limited (VNT) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Ventia Full Year Results Briefing 2022. [Operator Instructions] I would now like to hand the conference over to Mr. Dean Banks, CEO. Please go ahead.

Thank you. Good morning, and thank you to everybody joining Ventia's full year results for the year ended December 2022. A warm welcome to everyone on the call. I am Dean Banks, proud and privileged to be the group CEO at Ventia. I'm joined today by Stuart Hooper, Ventia's CFO. Following the presentation, Stuart and I will be happy to take questions. I'd like to start by acknowledging the traditional custodians of the land on which we meet, the Cammeraygal people of the Eora Nation. We acknowledge their ancient and ongoing connection to the lands, waters and communities. On all the lands in which Ventia operates across Australia and New Zealand, I want to pay my respects to the traditional custodians and their elders past, present and emerging. We also recognize and celebrate the heritage and culture of New Zealand, where our teams engage local Iwi and communities across the country. Given what is currently happening in New Zealand, my sincere thoughts go out to our people, clients and communities who are impacted. Please stay safe and look out for each other. Now I'll start by taking you through our high-level performance. At our Investor Day, I said we were on track to hit our full year '22 prospectus forecast, and I'm pleased to announce today that we have delivered on what we said we would do. These full year results are not only consistent with but in many instances, exceed our forecast. Of course, health and safety is and always will be our number one priority, so that's where I'd like to start. Safety is our license to operate and our continued diligent and disciplined safety focus has resulted in a 14% improvement in TRIFR. Moving on to our financial performance. We achieved full year revenue of $5.2 billion. This number exceeds prospectus forecast by 4.6% or $240 million. It's the same for the bottom line, NPATA, which was 4.5% up on prospectus. This continued growth delivered a final dividend of $0.0828 per share, which makes a healthy total dividend of $0.1575 per share return for our investors. Our work in hand reached $18 billion, growing 7.1% compared to this time last year. This was underpinned by our strong client renewal rate of 85% alongside $2.1 billion of work secured with new clients. When it comes to innovation, the key milestone this year was a successful completion of our Core Systems Transition in April. This has structurally reduced our cost base and simplified our business, delivering an enterprise-wide technology platform. Sustainability remains a critical and growing focus for the business. I'm pleased to report our emission reduction for the year was 10.6% across Scope 1 and 2. We look forward to sharing many more of our initiatives in our sustainability report, which will be released in March. To summarize, we've been able to strategically navigate challenging macro conditions with minimal business impact due to the nature of our work as an essential services provider, combined with our large, resilient and diversified portfolio. All results highlighted in this pack are on a pro forma basis. I've already discussed revenue growth, so I'll start with EBITDA, which was $420 million, an increase of 10.5% on the prior year with a margin of 8.1%. NPATA was particularly pleasing, up 22% on full year '21, outperforming our prospectus forecast by 4.5%. Operating cash flow conversion remains high at 88.9%, up 4 percentage points on the prior year. We know that a growing and stable dividend is important to our investors. Cash back profits are a key focus area. It is in the lifeblood of our business. Moving now on to our sector performance. Starting with our defense and social infrastructure business, we have seen exceptional growth. Revenue grew 22.8% on the prior year, and EBITDA was 19% up. The outperformance was driven largely by increased volumes on new contracts, such as AGFMA and Austin Health and additional minor capital works primarily from the defense-based services and New South Wales schools contracts. The D&SI work in hand is solid at $6.1 billion, illustrating strength and long-term nature of our strategic partnerships. We expect continued growth in this sector as government spending on both social infrastructure and defense continues to increase, underpinned by the current geopolitical climate. Infrastructure Services revenue remained flat versus full year '21 with pro forma revenues of $1.2 billion. EBITDA was $112.6 million, down 5% on full year '21. In 2022, we saw lower volumes of shutdown and transition work alongside an increased number of rig relocations. We've also taken a considered approach to new market opportunities. The telecommunications sector has had a strong year with growth in revenue and EBITDA of 14.6% and 9%, respectively. This growth is attributed to increased volumes in existing contracts, primarily N2P with NBN in the fixed wireless services business. As I've discussed over the last 18 months, the sector has rebounded, and we have leveraged our expert capability to unlock potential in adjacent markets. Finally, transport. Revenue has reached $518 million, up 8.1% on last year. EBITDA has grown significantly, up 19.5%. Our Transport sector had an excellent year of work winning, securing 2 large long-term contracts, namely the Sydney and Western Harbour Tunnel and the Western Corridor for Auckland Transport. Winning new clients evidences the success of our strategy. Our ability to bring the whole of Ventia to key opportunities is a differentiator and a key component of our value proposition. We secured contracts totaling $6.4 billion with $2.4 billion of contract renewals, $2.1 billion from new clients and $1.9 billion of contract growth. Work in hand increased from $16.8 billion to $18 billion. The 8 contracts illustrated on this slide are just some of the significant contracts awarded to Ventia this year. First, the InterCity fiber project with Telstra InfraCo, part of the broader Telstra relationship. The Stage 1 contract value is $125 million over 3 years, and the project will eventually deliver up to 20,000 kilometers of new ultra-high-capacity fiber. The win demonstrates our compelling value proposition and number one position in the telecommunications sector across Australia and New Zealand. The Transpower New Zealand grid maintenance contract supports 2 regions of New Zealand; one in the north and one in the south, delivering electrical and telecommunication services to the grid. This is a truly collaborative relationship built through decades of partnership. The base contract is valued at $300 million over 5 years with the additional opportunity to participate in capital projects across all regions. Repeat clients are the ultimate key performance indicator and fundamental to the success of our business. These successes for me, are an illustration that our strategy to redefine service excellence is valued by our clients. Our client focus has seen us win in new and emerging sectors. The square kilometer array observatory contract in Western Australia is evidence of that. By spending time, listening to the voice of the customer, we are able to submit an innovative proposal to a complex and technical project for the design and construction of what will eventually be one of the world's largest array of next-generation radio telescopes. In the innovation pillar, the business has been busy. One of the biggest step change in transparency, reporting and client outcomes has been our project on a page within Power BI. This provides enhanced governance and control while delivering strong insights and analytics, allowing us to make better informed decisions. In sustainability, we have taken a prudent approach to our entry into the energy transition market, limiting our exposure to construction risk, focusing our attention on transition services to support our clients. For example, within our defense-based services contract, we have currently installed 87,000 LEDs. These are expected to reduce carbon emission by 24,000 tons in the first phase. It is these types of services and capabilities that are well-positioned to cross-sell into each of our sectors and clients. Key safety risk for our business is working at height. And in conjunction with the Federal Safety Commissioner, Ventia has developed and promoted the What's Up campaign. Since launching this program in December that has been embraced by the industry and more than 30 external businesses have participated in our training with positive feedback. This is a great example of our people shaping the industry, making it safer and exemplifying our strategy to redefine service excellence. Now let's take a deeper dive into our financial results. For this section, I will hand over to Ventia's CFO, Stuart Hooper.

Thanks, Dean, and welcome, everyone. In short, it's been a stellar year for Ventia. We've outperformed the prospectus forecast, demonstrated the resilience of the business and set ourselves for growth into 2023 and beyond. It is worth highlighting that we prepared the forecast for the 2022 year as part of the IPO process some 18 months ago. Not many companies have had guidance in the market from mid-2021 until now. This again underlines the resilience and predictability of the business. There were no pro forma adjustments in the second half. These are clean results that investors can take confidence in. Moving to the slides. On page 9, the graph shows solid and consistent growth in performance across 2020, 2021 and 2022. This page demonstrates a clear and compelling investor proposition, with revenue growing 13.4% in the year, delivering NPATA dollars, expanding margins, and this is then converted to cash in the bank, an increasing and higher cash conversion. Focusing on the top line, revenue outperformed the prospectus forecast by 4.6%, supported by strong growth in defense and social infrastructure and as predicted, a strong rebound in the telecommunications sector. EBITDA margins have remained consistent, easing by 0.2 percentage points to 8.1% overall. The change is a result of the mix shift between the sectors. Given the higher revenue in D&SI, which has slightly lower margins, but a great profile of long-term low-risk contracts, this was offset by lower revenue from Infrastructure Services that performed specialized services at a higher margin. Importantly, the strength of the portfolio across the diversified markets we service delivers predictable and consistent performance, such that EBITDA is up 10.5% from the prior year and outperformed the prospectus forecast by 2.7%, a fantastic result. As we look forward, we expect overall margins to remain in a relatively tight band influenced by mix with EBITDA and NPAT dollars growing with the growth in the business. Moving to NPATA. This is an all-important metric for investors as it drives dividends. This year, we delivered an impressive 22.4% NPATA growth, which has been reflected in the dividend declared by the Board today. We continue to deliver against the manager of cash back profits. We focus all contracts on being cash positive from day one and then the steady delivery of cash back profit across the contract life. 2022 delivered $373 million of operating cash flows, pretty close to bang on the prospectus forecast. This represents a 3-year CAGR growth of 8.8%. Importantly, we are starting 2023 with a high level of secured revenue, which gives us good confidence as we look forward. Moving on to slide 10. We've talked about our business being resilient and diversified. Let's look at some of the business fundamentals that underpin those statements. Firstly, we have a workforce of over 35,000 employees and subcontractors. We provide essential services across over 400 sites, and 40% of our work is based in rural or remote areas across the whole of Australia and New Zealand. We have over 100 major contracts. So as you can see, it's a very large and well distributed organization. We have built long-term strategic partnerships with key government clients and some of the best private organizations. The average contract length has increased to 5.4 years. And if you include extensions, it grows to 7.1 years. This longevity provides a long runway of secured annuity style revenue into the future. We have a low-risk contracting profile, with the vast majority, some 75% of our revenue coming from a schedule of rates. One interesting shift we saw in 2022 was an increase in cost reimbursable work from 10% to 16%, and this was primarily driven by the defense and social infrastructure sector. In the current market, we recognize that inflation is a major consideration. By design and over multiple cycles, 95% of our FY '22 revenue has inflationary or price escalation mechanisms built-in. In the pie chart on the right of the page, you can see the proportion of contracts tied to the various escalation measures. On slide 11, we lay out the elements that sit behind the financial results. Let's move to the cost base. Given Ventia is a people business with a large workforce, the cost of labor is something we manage strategically and monitor closely. Labor across our own employees and our subcontractor networks continues to make up around 90% of our expense base. Turning to labor cost escalation. More than 65% of our wages employees are covered by an EBA or collective agreement. In 2022, we successfully renegotiated 27 EBAs, covering approximately 30% of our wages employees at an average increase of 3.5% per expectation. This provides good visibility of future wage costs, the increases of which are recovered through our contracted price escalations. Quickly to working capital, which has increased by $54 million. This is primarily due to the unwind of the PPA provisions. This roll-off continues per our original expectation. And going into next year, it will decline into a longer tail. Operating cash flow remains high. As I said earlier, the absolute cash flow number is $373 million and conversion is 88.9%. Pleasingly, conversion in H2 was above 90%. We expect conversion to remain around this rate for the medium to long term. Lastly, finance costs, like the rest of the market, our finance costs have increased in line with base rates. As of December 2022, we've hedged 50% of the cash rate exposure on our term loans for the next 2 years. However, we do expect a further increase in interest costs next year on the unhedged component. Moving to capital management on slide 12. Our conservative capital structure we put in place at the time of the IPO continues to serve the business well. We have an investment-grade balance sheet. Our $400 million revolver remains undrawn. We have a healthy cash balance at 31 December of $280 million, resulting in total liquidity of some $680 million. Headroom on our covenants is material and expected to be maintained. To the dividend on slide 13. Today, we are announcing a final dividend of $0.0828 per share, which will be paid on April 6, bringing the total dividend for the year to $0.1575 per share. This dividend represents a 75% payout ratio of NPATA, which is at our target level. Consistent with the interim dividend, it will be 80% franked. We anticipate to maintain a franking rate of around 80% over the medium-term before moving to a fully franked dividend after the benefit from our tax losses has been exhausted. We understand that dividends are important to our investors, and we are committed to providing sustainable and growing dividend profile. Finally, to capital allocation on slide 14. I discussed this framework at our Investor Day. So I won't go through all the detail, but instead focused on what we have delivered in these categories during the year. We've invested $34 million on capital items this year or approximately 0.7% of revenue. This reinforces the capital-light nature of our business, and we have demonstrated that we do not always need to grow CapEx to drive revenue. One key area of capital investment is technology, which underpins our strategy to redefine service excellence and deliver the best possible client experience. This investment is then returned to the business through our high contract renewal rate. I've already talked about dividends, but this is another big tick on delivering on our prospectus commitments. On acquisitions, here, we're looking for capability that we can leverage across the enterprise or filling out gaps in geography or an opportunity to establish a long-term relationship with a key target client. We've recently closed 2 transactions; the first was Kordia Australia, a telco services business. This business has specialized services, including delivering in-building communications capability that is complementary to our existing offer. In addition, we leveraged the Kordia capability to secure the Babcock contract, a $64 million contract to deliver high-frequency communication services to defense, and this was signed at the back of December 2022. The second acquisition was the assets of a small electricity distribution and transmission business in Victoria, ATC Energy. This business has given us access to clients that are facing into the challenges of the energy transition, something that Ventia is keen to play a significant role in. Both of these bolt-ons fuel further organic expansion as we leverage the capability across the Ventia platform. Lastly, management of excess cash. This year, we had a small amount of excess cash, which we are retaining for flexibility. The Board and management will continue to assess on a periodic basis the highest and best use of this cash and where the various capital management initiatives are appropriate. And with that, now back to Dean.

Thank you, Stuart. And now I'd like to move on to talking about the outlook. BIS Oxford has updated our total addressable market. The chart on the left represents forecast market growth for the industry segments in which Ventia operates over the next 5 years. Our markets are forecast to grow, on average, at a CAGR of 6.6% across Australia and New Zealand to $88 billion by 2026, driven by the factors illustrated on the right-hand side of this slide. Our share of this market is currently $5.2 billion or 7.6% of a $68 billion addressable market; in my view, offering a significant headroom for future growth. Contracts like Sydney and Western Harbour Tunnels demonstrate the increasing requirement for aging and new infrastructure to be serviced, operated and maintained. The growing and aging population drives demand for additional hospital capacity, an industry where we serve in multiple regions. Our proven track-record, long-term strategic relationships and compelling value proposition provides confidence in our ability to grow market share. Unlocking the diversity of Ventia's business is key to our future ambition. Today, we offer a wide range of services across different markets. And moving forward, we seek to provide more holistic solutions for our clients. Defense and social infrastructure is well positioned to leverage our existing client base, taking advantage of the increase in government spending. We have positioned ourselves for success by expanding the scope of capability available to defense. In Infrastructure Services, we have identified opportunities to provide remediation services for traditional utility and resources facilities as they are decommissioned. We have tentatively entered the decarbonization and energy transition services market with small projects that support the needs of our clients and will continue to explore opportunities in this place. The demand on telecommunications networks and infrastructure continues to expand, with new technology, data availability and connectivity anywhere at speed becoming a standard expectation. 3G is being decommissioned and 5G rapidly deployed, providing opportunities for our telecommunications business across a range of infrastructure and network types. The key opportunity for Transport is identifying and pursuing local government and council contracts by taking advantage of our current footprint. These organizations are increasingly looking to outsource services to achieve value for money from expert providers. Each of our sectors have significant growth opportunities, but our differentiator is how we leverage the benefits of our overall enterprise. The opportunity I see is taking a more prominent role, leveraging our track record and cross-sector expertise. Moving on to slide 18. Our revenue is targeted to grow at 7% to 10%, thus gaining market share. We'll continue to drive a diligent focus on cash-backed profits, aiming for 80% to 95% cash flow conversion on a consistent basis. Our target NPATA payout ratio of 75% reflects a high conversion of profits into dividends. Annual distribution will be aligned with earnings growth. To wrap-up, I believe we have the foundations and platform in place for continued success. We've outperformed revenue, EBITDA and NPATA. I've previously articulated, we are building positive momentum and continually upgrading and expanding our capability. Importantly, our strategy to redefine service excellence is driving superior results. That said, we must continue to raise the bar to exceed customer expectations in a safe and sustainable way. Future demand drivers are favorable, which, alongside the robust platform we have in place should allow us to realize our growth ambitions. Our strong business fundamentals and clear strategy offers a high degree of confidence in the business outlook and our ability to deliver long-term value to shareholders. This gives us confidence today to announce our 2023 guidance range for NPATA growth of 7% to 10%. Our results, both for 2022 and those that we are forecasting for next year are reflective of the strength and resilience of the Ventia portfolio and the passion for excellence of our people. I'd like to close by thanking all our stakeholders, our Board, employees, sub-contractors, suppliers, clients and shareholders for your continued support. Thank you for your attention. And now I'd like to hand back to the operator and open up for questions, please.

[Operator Instructions] Your first question comes from Ross Chapman with JPMorgan.

The first one is just in regards to margins. Aside from transport margins were down across the board on FY '21. So are you able to talk to your contract structures in terms of whether this is mostly being caused by contract pricing lags? Are there sort of other underlying pressures on your margins you can talk to that you expect to be more secular?

I think the first thing for us to say is, clearly, our mix and our contract tenure is 2 key components to our margin. We've talked before about in this particular period, D&SI had high revenue and the margin associated with that activity is largely a lot of lower-skilled activity, cleaning and catering services at a fixed location, whereas in our transport and our telecommunications business, you see expert capability delivering work at different locations, which drives a different margin profile. Equally, we need to make sure the maturity of our contracts are at different stages. But I think the key thing for us as a business is we've always said we're going to maintain the appropriate risk profile. And I think from our perspective, we see relative consistency around that 8% to 8.5% margin and that's balanced against the risk profile that we have within the portfolio.

I suppose, expanding on that. When you look at your exposure to fixed fees or fixed rate contract terms, can you talk to whether there's a consistent theme in these contracts in terms of your duration. So are you more likely to see these roll-off quickly over the next 2 or 3 years and use the pressure on margins.

I think there's a couple of things that I'd probably ask Stuart to add a bit of color. So 2 things key, I think, happened in the year. First of all, we moved a split of public and private work more towards government. So we moved from 70% government work to 77%. I think this is a much safer client base. They deliver the work that they say they're going to do, and they pay you on time. So I think that's important. Secondly, you'll probably notice that we've seen an increase in cost reimbursable work within our portfolio as well. And obviously, that gives more security. In terms of the fixed work we do, largely for us because we don't do large construction projects, it's very short-term. So the work is often won and delivered in year. Very little of our fixed term work is over multiple years. Now obviously, where you've got a panel contract, that may be multiple items of work, but each one is contracted on an individual basis and normally of a short duration.

I'll just add that, look, on the fixed fee work, it's been a pretty consistent level over a number of years, and we'd probably expect it to remain around that 10%. But to Dean's point, it's less sort of construction style projects. It's more add-on projects to maintenance contracts. And so where we've got long-term maintenance contracts with particularly government clients, we're always looking for small capital minor works projects to build on both our relationship, the commercial framework that's in place and expand our revenue base. But really looking forward, I'd expect some consistency.

Just one last one, if I could, quickly. You called out at the first half result, lower infrastructure services earnings on lower volumes in Water and Environmental Services. Have you started to see those volumes recover through the second half? And do you see any sort of growth or recovery profile in margins for the division over the next few years?

Yes. I think the first thing to say is you can see revenue growth from H1 to H2 in 2022 within Infrastructure Services. And we sort of alluded to that at the half year, although we didn't expect to see a significant increase in volumes. A couple of reasons for that, which we called out in the presentation. The first one is we didn't have any shutdown works at the same level as we had in prior years. In our rigs business, which is seeing the rigs very well utilized this year had a number of movements of rigs to new locations to start new contracts. Our anticipation is that we will see continued steady growth within IS in 2023. But I think we're also -- and I'll use the word cautious to a degree around the sort of energy transition work because a lot of it is around construction activity, which for us brings potentially a higher risk, and we really want to focus on operations, maintenance and service. That's not to say we won't do construction work because we will, but we need to get the balance of risk profile right. And I've talked many times about it's great to see our work in hand numbers, but our work in hand numbers to me, it's important that their quality rather than just quantity. And the positive for IS for me, as you can see, they've got $5.4 billion of work in hand, so clear trajectory of opportunities in front of them.

Your next question comes from Piers Flanagan with Barrenjoey.

Just a couple from me, if I can. Maybe just firstly on the guidance into '23. Can you provide a bit more color on sort of the growth outlook from a segment perspective and also the forward visibility that you have within those segments?

Yes. Look, I think from our perspective, we see growth opportunities across the board. They're all different in terms of their makeup. So defense and social infrastructure, clearly, we're seeing continued high expenditure in both social infrastructure and defense. Clearly, as well, I will say within defense, we have a number of contracts coming up for renewal over the next 18 months, and that's a key requirement for us. And it's great to see in 2022, our renewal rate was at 85%, and we've talked about before trying to drive that up to circa 90%. But not only do we want to renew the contracts, we want to continue to offer additional services and drive contract growth in both social infrastructure and defense. I think there are a number of opportunities in that sector, which build on the back of continued growth by the team. Infrastructure Services, we've talked about before, is probably more of a fragmented business. And therefore, business units all see different perspectives. But clearly, within, if you like, utilities, there are opportunities, be that power, be that electricity. And if I said we did less shutdowns last year, clearly, we anticipate there will be more shutdowns this year in our resources business. So I think we can see opportunities there, but they're probably more individual across that portfolio. Telecommunications, I'm really encouraged by the fact that we've seen a rebound as we start to see both fiber rolled out across Australia and New Zealand and the wireless growth as we move towards 5G. But the other big thing in telecommunications is we've taken the expert capability and started to show clients how we can assist them in adjacent markets. So the wins for scale as we call it, for the array of telecommunications activity within Western Australia is a great success for us. It moves us into the space sector, and the Babcock award moves into the defense sector. So we hope to continue to see some growth, not just in telecommunications, but in adjacent markets. Transport, as you said, has seen good growth already. The other good thing for transport is that $4.9 billion working out, that is a much longer tenure. So a lot of the contracts they want go over a longer time. For instance, the contract for Northeast Link that we've discussed previously, one in 2021, but doesn't actually commence driving any revenue to the business until 2024. So you get some longer-term perspectives there. And I think, again, in the transport sector, we certainly see more work around that sort of local council and regional opportunities. And there are some big opportunities still to come to market and we get a good lead-in without because often for new infrastructure is clearly going to be built first before we can service operate and maintain. Across the board, I think there are opportunities. We have a healthy pipeline sitting behind this. We didn't last year see any of the large bonanza contracts, $1 billion plus. But I think this year, we'll probably see a better mix of smaller contracts, the medium contracts $200 million to $500 million and potentially a couple of billion dollar contracts as well. So I think there's -- depending on timing, opportunities this year to see continued growth in our work in hand and therefore, confidence in the outlook.

And Piers, just the only thing I'd add is as we look at secured revenue we hold across each of the sectors, each of them start this year in a really good position. So we've got a good view over revenue for the next 12 months. Back at the time of the IPO, we talked about a range of sort of 70% to 85% secured looking out for the next 12 months, and we'll be towards the higher end of that range.

And then just a final one, just on the labor front. So you're winning new work and understand that can often come with installed workforce. But just on the higher volumes that you're seeing, just interested in how you're seeing labor availability and sort of how that compares at the moment to what you're seeing last year?

Look, I think it's quite similar to what we saw last year. We did see attrition build in 2022. It sort of plateaued in quarter 4 of last year, and we hope to see attrition move in the right direction this year. Equally, from our business, we want to attract the best and the brightest, and we've talked about that before and we also want to start fishing in some pools that probably we've not considered in the past. Last year, we had 5,396 new starters. Encouragingly, 32.3% of those were females, which I think starts to drive our gender diversity agenda. And actually, in a year, our gender diversity went down, but I think we'll see this year that we'll start to reverse that trend during the period of time. It's definitely a challenge still in the marketplace. It was good that last year, we saw net migration being positive. And I think we can start to see additional opportunities for overseas staff. Probably our biggest challenge is in the lower skilled area. Cleaning and catering staff is still in the market, a rare resource in terms of availability. The way we recruit and we've got internal recruitment capability, we also look at critical hires, and I'm really pleased to say that our critical hires in the business have reduced substantially during 2022. And therefore, we're never going away through it. The one other thing to say Piers is if you look at the makeup of our portfolio in 2022, we did see a slight increase in work being delivered by subcontractors versus direct workforce. So I think it's now 53% subcontractor delivery to 47% direct, where I think it was 51%, 49% last year. So as I said, we're agnostic in how we deliver the work. And clearly, we need to leverage the long-term relationships of our subcontractors who hopefully value as we do them being part of the Ventia family.

Your next question comes from Liam Schofield with Morgan.

Just 2 quick questions. Just on that fixed price contract complaint. Can you just perhaps talk to like the level of concentration like party concentration or like the number of contracts you have there, firstly? And then secondly, just on the provision release on the PPA. It was up $40 million this year, declining to $20 million next year. As you sort of comp into '23, you have to sort of pick-up that 5% and then grow a further 7% to 10% to make guidance.

Thanks, Liam. So I'll start with the PPA provisions actually. So the roll-off of the PPA provisions definitely was per expectation. So as we look into 2023 and factor that into our guidance, we've obviously built that into all of the underlying budgets and the buildup within those. So from that perspective, it's factored in. But the reality is we've also been dealing with that really over the last couple of years. So consistently year-in, year-out, building that in and then delivering on our overall forecast.

I just going to add one thing, Liam. The other thing that for me is really important is in 2022, we didn't introduce any new contracts to the unfavorable or onerous category. So I think that's really important as well to say that we've integrated a number of contracts. We've looked at them and the contracts we've got in the business are all performing on an individual basis.

And back to your question on the fixed price type of work. So as I was describing, it tends to be a significant number of smaller projects. So anything from sort of $50,000 to $100,000 to do a small upgrade on some assets, an example could be new carpets and whatever else within a mess hall at a defense base could be an example where we'll have a fixed price, the work will be delivered within a relatively short time period. So we have good visibility over the costs. To Dean's earlier points around subcontracts, it tends to be more subcontracted out. So we have a good commercial relationship with the taxes and then it's delivered in a relatively short period of time. So we love this kind of work. It's churn, style work, and it is complementary to our existing maintenance contracts.

Liam, if I just may add, the other thing I think that's really important here is the governance control that we have in the business around contracts, so every single project runs through the project on a page that we've identified, and we're consistently looking for any disconnects. So if you looked at time, value, cost, if we see a disconnect, first of all, hopefully, our team of highly qualified leaders will pick-up the disconnect, but we're also building an algorithm in the background that sends us a risk score to identify, there may be a challenge on the project. And of course, if you are focused as we are on cash back profits, if we're not seeing the cash coming through on any project from day one through to its conclusion, that's a great flagger as well around governance control. So from our perspective, single transparent way of measuring every single project means that if we move people from one project to the next, they know exactly how it's going to be measured and they understand what's expected in terms of delivery.

So cash conversion is monitored all the way up to the executive at a monthly level.

Yes, more often than a monthly level. Stuart and I see it every day, Liam.

Every project.

Your next question comes from John Purtell with Macquarie.

Just I've got a few questions, if I can. So just maybe to start with a couple of questions, financial questions there. Obviously, you delivered the pro forma cash flow there of $373 million and your EBITDA was 2% ahead of prospectus. The cash conversion was correspondingly about 2% below prospectus there on that higher EBITDA. So firstly, so if anything just to call out there?

I suppose not much to call out. I mean we are happy with the result. We've seen strengthening cash conversion over the last couple of years, really through the year as well, I think for the first half, second half, second half finishing above 90% was pleasing. I think as we look forward from here and I suppose the impact of the PPA provisions becomes less next year, we'd expect to see, again, confidence around those high 80%s, low 90%s cash conversion, which is a good place for the business to be and is very much sustainable as a business.

And just second question. Just looking at your receivables and payables. Obviously, your revenues were up 13%, which drives those 2 items higher. But within receivables, you had quite a pickup in contract assets there. So what was driving that?

So if you go through the detail behind when you sort of get down to almost project every level by BU, by sector, et cetera, it is just a mix of those contracts and the difference between, I suppose, work in progress or contract assets and then how that's converting through receivables. So nothing to call out specifically, John, on that mix. Look, I think overall, net exposure has remained pretty tight and pretty consistent with the prior year. In working capital, we've seen a small increase in inventory, about $10 million year-over-year. That relates really on the most part to the telecommunications business. In fact, some of the work that we're doing in that in-building space off the back of the Kordia acquisition, where we bought some items in for future projects. So I don't see that as structural in inventory. I see that coming back a little bit, but working capital across the board has been pretty consistent, both year-over-year and with expectation.

And just, sorry, and add on to that, we also saw contract liabilities go up. So is that sort of connected to the increase in contract assets?

Yes, it is. And it also probably flexes depending on some of the cycles that we go through. So where we have at the start of larger programs, and we're receiving those upfront milestone payments that can have some impact across time, but we'd like to see everything moving together. So when you add together all your elements of working capital, probably put inventory to one side, that net exposure, we like to see that consistent as much as we can across time.

And just the last one. Dean, you mentioned some of the contracts are up for renewal sort of over the next 18 months and most particularly in defense. Can you give us any further color just in terms of the phasing of some of those renewals within that 18 -months period? Are there some that are up sort of near term or more sort of 12 to 18 months and just your overall level of confidence regarding those renewals?

Yes. I think the first thing to say is I talk all the time about the importance of repeat customers. And we have incumbency on a number of these contracts, but we also have opportunity within the contracts that are coming to the market. So from our perspective, I believe that the client sees us is performing a good job already. I think for defense, it's advantageous that we're now a listed business on the Australian Stock Exchange because that makes us a domestic supplier, and we have good financial balance sheet, which helps in their considerations. Clearly, we've got to put a compelling value proposition together. But what I will also say in defense is there are a number of contracts. So it's not like you're sitting here and it's like win one or lose one. We're probably talking 7 to 10 contracts coming to the market over the next 18 months. In terms of timing, defense, obviously, take a long cycle in procurement, so they can consider the proposals from various parties and therefore, get the right decision. So I think the timing could move around a little bit, but I think they're probably more back-end of '23 earliest, moving into '24 than they are in the near term.

Your next question comes from Richard Amland with CLSA.

Just a quick question. The reconciliation of group EBITDA to the segment EBITDA. It looks like corporate overheads dropped by about $3 million and that's representative of about 79 bps against the group EBITDA for the period, which ordinarily would be pretty minor. But in the context of us talking about 10 bps to 20 bps movements across the EBITDA margin collectively is reasonably material. What can you sort of talk about in terms of that corporate overhead number and what to expect going forward?

So I think the first thing to say is that successfully completing the integration of all the systems in April this year, I think, was a big step for the business. We're now in that sort of single enterprise suite of systems, common processes and really having the whole business being able to operate as a single enterprise. What that does open-up then is the ability to really leverage that platform, but also leverage the fixed cost or the overhead in the business. So the $3 million decrease is described, I think is important in the context of a growing business, as you say. But what we'll be looking to do is to continue to build out that operating leverage as we go forward from here. That just provides us additional capacity in the business to either reinvest in top line growth or continue to deliver that through the bottom line.

And Richard, I think it's important to say as well that we saw a significant reduction in the overhead in 2021. One of the things that was a concern was would you be able to maintain that as the business grows. And I think a $3 million increase in a high inflationary year, I think, illustrates that we've managed to get the growth in the business without increasing the overhead, which is back down to the systems we have in place. And as Stuart said, we've got a great platform now. And hopefully, we can continue to enhance that moving forward and simplify even further. But our aim is not to see growth of overhead in line with revenue. And I think that will give us further opportunity as we move forward.

There are no further questions at this time. I'll now hand back to Mr. Banks for closing remarks.

Thank you very much, everybody, for your time today. Thank you for your interest in Ventia. Stuart and I have the privilege of presenting the results of the thousands of people that support Ventia. We'd like to once again say a massive thank you for their contribution. We look forward to continued dialogue with all our current investors and prospective investors moving forward. And otherwise, I wish you a very good weekend, and look forward to talking soon. Thank you very much for your time.