Welcome to the Service Stream Market Update. All participants are in a listen-only mode. There'll be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the one on your telephone keypad. I would now like to hand the conference over to Mr. Leigh Mackender, Managing Director. Please go ahead. Thank you. Good morning, ladies and gentlemen, and thank you for joining us for today's briefing, following the company's market update, which we released yesterday afternoon. As per the introduction, my name is Leigh Mackender, Managing Director of Service Stream, and I'm joined today by our Chief Financial Officer, Linda Kow, and have our Head of Investor Relations, Chloe George, with me also. As per the introduction, we're recording this session today via webcast. It's open to all Service Stream shareholders. We have a number of institutional investors and analysts on the bridge, whom will welcome to ask questions at the conclusion of the presentation. I'll walk through yesterday's announcement, and at the conclusion of the call, I'll hand back to the moderator to open up the briefing for questions. Okay. Yesterday afternoon, the business released a market update with regards to the owner of Queensland Water project and an update with regards to the final cost to complete. The second aspect of the market update was a trading update, an insight into the group's unaudited financial results for the half year, ending 31 December, to provide context to the broader group's performance. I start first with the Queensland Water project. Service Stream was contracted to design and construct a 27-km pipeline and a water transfer or pumping station in Southern Queensland. It was a fixed price contract and was entered into by the legacy Service Stream business, combined infrastructure division over two years ago. As a reporter of the group's FY 2022 full year results, the project unfortunately suffered delays due to resourcing constraints, both across our in-source field operations and those of our specialist third-party partners and contractors that the business was relying on for services such as detailed design. The impacts were further exacerbated by multiple and prolonged wet weather delays across Queensland during the second half of last year and by latent conditions. As a result, the group wrote back a small profit, which had been recognized at that point. The project moved to a loss position, and we recognized a AUD 5 million onerous contract provision as of 30th of June in terms of what, at that point, we had the expected costs to complete the project. Where we find ourselves today, with the business having recently completed the major design activities across all work packages and in the process of working through the remaining construction works, the business completed simultaneously internal and external reviews of the cost to finalize the project. It's very unfortunate that during those reviews, the business determined the project will require an additional $20 million, which does include prudent contingency to cover final construction costs and support the project's completion by the end of calendar year 2023. Magnitude of that increase is certainly not lost on me or the management team. To break that down a little further, a few million dollars in additional costs, which forms part of the $20 million, did become evident towards the end of the last half and was largely due to the delayed design process and the extension of program duration. This, however, wasn't significant in the context of the group, given the performance of our broader business and specifically our telecommunication operations were performing ahead of expectations. Given the progression of the project's remaining elements that had reached design milestones and the scope was therefore locked down, the business saw prudent to undertake that simultaneous internal and external reviews of the cost to complete the project line by line across each aspect of the scope to be delivered. The additional costs that were discovered are associated with those design delays, some scope development throughout the design process, increased labor and material costs aligned to current market forces, and overheads to cover the project's completion given the slippage in schedule. This revision, again, does include a prudent project contingency. I'm obviously very disappointed that we've had to increase the provision for this single project, and the increase of this magnitude. Certainly committed to quarterizing what is a single project, ensuring that the work is completed in calendar year 2023 so the business can move ahead and leave this troubled project behind. These additional costs will be recognized as part of the group's half one FY 2023 results, which will be released shortly. Importantly, we've not increased the contract provisions taken at June 30 with regards to claims, disputes, variations, and works to resolve those is continuing and will be escalated over the coming months. I understand engaging for our shareholders in the broader market over the last half that this single project has understandably been an area of focus and a lot of questions. The revisions that we've outlined today will allow the project to be successfully completed, and I hope that it provides shareholders with confidence that the broader performance across the business can shine through, including that of our utility division's other operations, and that that performance will not be further eroded into the future. Service Stream across the group has in excess of 170 contracts and a strong pipeline of growth opportunities associated with the operations and maintenance of critical infrastructure. As many know, our business has not historically undertaken these types of large-scale fixed price design and construction agreements. Over the last half, we have pivoted the utility division to focus on opportunities aligned to operations and maintenance works, particularly given the expanded capabilities that we gained through the Lendlease Services acquisition, and that is now fully integrated across the Service Stream business. Moving to the trading update with respect to the group's half-year results, which are subject to our half-year audit that is currently underway and the results are due to be released on February 22nd. The board of businesses generally performed well outside of our utility operations, and that diversified portfolio that we now have is providing benefit. Telecommunications division has been a particular standout. It's benefited from strong work volumes across both wireless and fixed line operations. The division has been able to successfully accelerate some of the works that were expected to be completed in early half two into the latter stages of half one. Our transport operations is performing in line with expectations. The group's first half EBITDA from operations will be around AUD 54 million. That excludes an AUD 20 million provision that we've taken for this project. With regards to full year, the group has not released guidance. We are, however, conscious that market consensus for the business, which is AUD 114 million in EBITDA from operations. The project impact of AUD 20 million we've just outlined would not have been envisaged in these numbers, and as I said, will be incurred in half one. If we look into half two, the group still expects a slight increase or bias, again, aligned to our historical business performance. Hopefully, these numbers allow our shareholders to triangulate where we believe the group will finish for the full year. The group's balance sheet remains in a strong position, closing net debt of AUD 91.2 million. This compares to a June position of AUD 81.3 million, which did reflect some working capital timing benefits to deliver an OCF bit of 108%, which management discussed throughout last year's results, with some of that expected to reverse in this half, as we outlined. The increased provision also reflects strong telco volumes, particularly over Q2, in our wireless operations ramping up, and that results in a buildup of working capital for these contracts. Half on cash flow includes the absorption of costs associated with the pipeline, circa AUD 16 million, but note the project was only approximately 50% complete at June. Finally, the board is expected to declare an interim dividend of AUD 0.005 per share for the half year, and that's obviously subject to completion of the half year audit, which, as I said, is underway. Again, the impact of the utility revision is certainly not lost on the board, myself, and Service Stream management. The business is committed to seeing this project through to completion and allowing our business to focus on more broader business operations. I'll now hand back to the moderators. I'm conscious we may have a number of questions from those joining us and happy to take those. Thank you. If you wish to ask a question, please press Star One on your telephone and wait for your name to be announced. Your first question comes from Piers Flanagan. Please from Barrenjoey. Please go ahead. Hi. Morning, Leigh and Linda. Just a couple from me, if I can. Maybe just firstly on the provision and the AUD 20 million increase. Can you just give us a bit more color on the overruns, I guess, sort of what sits within design and then expectations for construction? Just trying to get a sense of if we look forward, I mean, do you have the labor that you need now and sort of the materials on hand to complete this project? Appreciate the question, yes. The additional costs, as I said, a portion of that was associated with design delays. The expansion of the project or the extension of the project in terms of time duration. Those design delays cost us to go through that process, but also then push the schedule out. The other aspects are around that scope development through the design process and refining what needs to be delivered, and then increases in labor and material costs, as in, given those sort of market forces, ensuring we've got the right overheads and cost structure, support structure to deliver the project. Very conscious. Second part of your question, which is around resourcing. The team have gone through detailed line-by-line reviews of every aspect of the project that needs to be delivered to see it through to completion. Are confident that they have subcontractors and resources on board, and the updates will require them to finish the project within the confines of this AUD 20 million. It's right to think about it, yeah, these design costs are now completed, though, that's already. Design milestones. Yeah, design milestones have been achieved. It allows us now to move forward to the construction of the final phase, which is the water transfer station. That is the remaining elements that need to be completed. Sure. Just on the rest of the contracts that you have within the business, and I know you touched on it briefly, but any other fixed price contracts and are you able to provide any commentary on just the size of them? As we discussed at the half year, we had obviously this was part of a trial and looking at expanding capabilities to do large scale design and construction. We've since, importantly, pivoted away from these sorts of works that are circa AUD 30 million-AUD 40 million and over a long duration of time at a fixed price. We had discussed at the June that we had 2 other projects. We had one which is in the final stages of completion in Queensland, which is associated with a SCADA upgrade. That will be finished in February. We have brought forward the completion of those works. We have looked to get that completed as soon as possible and bringing that forward in February has been a priority. The other project that we have is a treatment facility in Gisborne. Very different scope of works, and that is at 5% complete. Again, very, very different to the size and scale of this project. That project is about AUD 30 million, and is more aligned to what the business had historically taken. No doubt, the learnings from this understandably have filtered through to a utility team that are overseeing that project, and we're ensuring, and have ensured over the last few months, that we're really getting to a granular level of detail on that other water project at its very start, to make sure that that doesn't follow through the same path. Thanks. Just a final one just on the balance of the business and the strong telco performance over the first half. Can you just talk about some of the drivers behind those volumes? Are you still seeing that, I guess, you know, over the second half of the six weeks that we've had? Yeah, that's a great question. We certainly have seen strong performance across telecommunications. As I said, it's been both in our wireless operations and fixed line. Wireless, we're seeing an increase in wireless as a portion of our revenue. We're seeing more spend increasing from all our wireless providers. As we reported as part of the acquisition, we're now providing services for all wireless telecommunication providers across the country. That's positive. It does build up some working capital, as I outlined, but certainly there is a strong run rate ahead of us there. Fixed line operations, faults, maintenance, and network upgrades, that's continuing to also perform well. We did bring forward and we're able to accelerate a small portion of those programs into the end of the last half, but we still have a lot of work ahead of us, significant opportunities for telco, and I think that'll have another really positive performance with regards to the full year. Thank you. That's all for me. Thanks, Piers. Your next question comes from Marni Lysaght from Macquarie. Please go ahead. Good morning, Leigh, Linda, and Chloe. Thanks for taking my question. First one is just about, I guess the rebasing of the business. You did flag to us over last calendar year that you're pivoting away from this project and going into more O&M in utilities. The extent of, I guess, of the impact on that of your kind of, I guess, level of operating performance moving forward, has that changed now following these, this review? No. Thanks, Marni. No, absolutely not. We started that pivoting process when we first became aware of this project running out, as I said, and we talked about the last half. Those expanded capabilities we acquired through the Lendlease acquisition are more associated with operations and maintenance, which is akin to our core competencies. Lendlease also brings in capabilities associated with, power, so operations, maintenance, and minor capital works of power and electricity networks, which is a growing area of focus and will be for us, and I think provides a lot of opportunities. Gas and industrial services maintenance and shutdown is another area that we are seeing strong volumes and again, have those capabilities from Lendlease that have really allowed us to pivot away from what was that trial in the traditional business of looking to expand and grow our water capabilities. We'll certainly be focusing on those latter aspects, which are complemented through Lendlease's acquisition. Sure. Another one for me, just remind us of, like, the margin profile of D&C with the utilities versus the operation and maintenance? Yeah. Look, we don't generally split that out. I mean, utilities is generally sort of a 5%- 7% business. I think D&C, we've talked about previously, has traditionally been lower than that. The difference being, obviously you've got higher risk there, you've got design and construction elements that is somewhat fixed price, generally. O&M, over a journey, often you have a relationship or a contracting cycle that spans many years, and you're therefore able to drive initiatives and improvements to improve your margin over time. Traditionally, we do see an improved margin from our O&M operations as opposed to design and construction, generally speaking. Excellent. Just a final one from me. Is this around net debt as of the balance date of that, you know, circa AUD 90 million? Just to clarify, I know you did make some comments around cash flows on the call, and I understand, obviously, you can't repeat what the strong cash flow conversion you had in the first half of FY22. Does that include- Yeah. Does this, that AUD 90 million, you know, capture the, you know, all the kind of the unwind of that? Look, I understand the question. Yeah ... it does. We'll certainly have, obviously this AUD 20 million, of outflow. Yeah ... the next calendar year. That will flow into- Yeah ... this year and part of next. Yeah ... outside of that, the business continues to perform well in terms of cash flow generation. Linda and I did call out, again per my earlier comments, at the full year that we did expect to see a lower conversion rate this half anyway. We had stated- Yeah ... that we always sort of strive to get an 80% conversion rate, but did expect in this first half it would be lower. We called that out. Very good visibility in terms of cash flow performance across the business. We could see that that was gonna be an unwind, plus the buildup of working capital in our wireless telecommunication operations, and broader business. We could see that those aspects were going to take effect. You're still comfortable to get the gearing down, you know, in due course down to that, you know, 1x EBITDA number? Absolutely ... despite these developments? Yeah. That certainly when we made the acquisition, we stated, obviously, we were coming out of the blocks at a higher leverage ratio. We did state then that we thought, given sort of two years' time from completion, we would aim to try and get around that sort of 1x. Yeah ...that was what we did announce. That's will need to be reviewed here in context of this. We're gonna have the AUD 20 million, I think we're still looking to absolutely get to around that sort of 1x number. Excellent. Thank you. I'll jump back in the queue. Thank you, Marni. Your next question comes from Ian Munro from Ord Minnett. Please go ahead. Good morning, Leigh. Just a couple of questions from me, please. Just firstly, can you give us a sense of the% project completion and perhaps the complexity of the remaining elements of the project relative to what you've already completed? It's a great question, Ian. I appreciate it. We've, we're probably now, about, I'd say, circa 60%-70% through the project. I can get an absolute number and confirm that, and we will provide an update at the half year. In terms of the complexity, we've really finished the most complex aspects, from my perspective, being the design process. Design is not one design, it's multiple designs across every aspect, and we rely on third parties to help us finalize that design. We incur their costs, and we have to manage them around the scope. What we have now reached is a period where it's effectively a construction-only project. Design's been finished, we now need to go forward and construct that. That's the way in which we're sort of viewing this now, is it's a construction project. The team has rebased the price, looked at line by line each aspect of the remaining works, which is largely around the transfer station, and some minor pipe work. As I said, we're very, very conscious of the need to ensure that we've got prudent contingency. It is one thing to have a revision that we do during, it's a second thing to have a second time like we have to date. We wanted to ensure that we had that contingency to cover that aspect of work for the remaining months that will see us through to late calendar year 2023. How do we know that AUD 20 million is enough? Yep, no, look, certainly good question. We've gone through, I think one aspect is the design being finalized, so you then know exactly what needs to be constructed and there is no ambiguity there. I think the second aspect is that we've gone through or the team have gone through a detailed line-by-line analysis of all the aspects of scope, work, and cost to deliver it. That review has been done by 2 internal teams, two separate internals, and an external to review that. We certainly have tried to do the very best we can in analyzing and scrutinizing all those costs to make sure that we've got an understanding of what that cost will be given market conditions, et cetera, to finish the project. Just finally, the release makes reference to focusing on resolving commercial matters. Perhaps can you give us a sense of, has Service Stream ever sort of gotten into a commercial dispute with a key customer like this before? How should we be thinking about liquidated damages in either direction and perhaps your strategy? Good, good question. in that segment? Thank you. The reference there certainly is to variations, disputes, claims. We have some variations with the client that we talked through at the half year that we need to have, or the full year, sorry, that we need to have reconciled. We've taken a position on those cents in the dollar that we believe is absolutely appropriate, and we have independent experts to support our position. We've not at this stage looked to progress any matters downstream to parties that may have had a hand in or impacted our performance negatively. We have had disputes with clients over the journey. This is part of a contracting business. You do have them from time to time, and our business always tries to work proactively with clients to try and deal to the matters. We certainly hope that in this instance, our client will assist us in finalizing any of those outstanding commercial matters. Liquidated damages is a risk for us. There is LDs, it is capped at a percentage of the contract, which is 10%, so it's about AUD 5 million of the original sum, and they've not been levied on us. It's, again, part of what we're negotiating with our variations at the moment. Incorporated into this number, though, Ian, is the view of total magnitude to finish the project based on what we have today. Just one final, I know I've asked a few. Can you give us a sense of the cash flow profile on the AUD 20 million from here? Is there any lumpy components to between now and completion? Thank you. Ian Munro, I might jump in there. The residual cash is actually closer to AUD 30. Sorry, Leigh Mackender, for correcting that. Look, the vast majority of that will be spent between now and through to, say, August. You'll see the bulk of that in the June numbers. Really beyond that, it's really your commissioning and, you know, it's really your overhead profile. By and large, I think the vast majority of it will be done by June. Thank you. Welcome. Your next question comes from William Pang from Citi. Please go ahead. Hi, guys. Thanks for taking my question. Just quickly, in terms of these reviews, how often does Service Stream undertake these reviews? That's a great question, William. Linda and myself have weekly reviews with our divisional heads of each of our business units. Every week, we sit down and review the performance, financial performance, operational performance of our operating divisions. That's been part of what we've undertaken for many, many years. The specific review here in terms of a project, the division continues to manage that project. They undertake periodic reviews. They're continually, obviously, managing that. The internal and external review that we've undertaken at this point is far more significant than what we would normally do in a BAU environment. That is not common to go through and use an external plus two internal teams to challenge. We needed to do that in this instance, given the revision that we had seen, in terms of time, and we saw those a few million AUD coming through at the end of last year. We thought it's important now we've reached that design milestone to actually ensure that we've got both internal and an external view on the cost to complete this project. Yeah, understood. Just on this project, obviously, you, like you said, you've conducted internal and external reviews. Was there a, quite a, I guess, a deviation from, you know, the quantum of, I guess, additional cost assessed by internal staff members versus, you know, what's been sort of concluded for the external review? No, it was immaterial. No, immaterial. Our teams made a view as to what they believe was the most appropriate estimate to take forward. I believe the magnitude of difference was something in the order of AUD 1 million. Both internal and external reviews came up with a very similar position in terms of the cost to complete, which is positive. No, that's great. In the release yesterday, you made some comments around strengthening leadership and senior management team within the utilities business. Could you provide some color around that? Absolutely, I can. Part of the acquisition of Lendlease, we used this as an opportunity to look at our utility division, which had substantially grown, and we're bringing in new capabilities and new people. We appointed at that time, a new head of the utility division, which we have had in the business over the last six months. David has also strengthened his leadership and senior management team, finance, commercial and many other roles across the business. We've also looked to strengthen those around our business development areas that I talked about earlier. Power, industrial maintenance, shutdown, those areas we'll be growing into. We've certainly looked broadly over the last six months at what do we need to do to support the business pivoting away from these works and to grow into the future. Okay. Just the last one from me. I mean, you've provided some color around telco in the first 6 weeks of into the second half. Could you also provide some color around transport and utility segments? At this stage, we've really focused on the group. We will obviously release some detail there. I think Transport said for last half, performing in line with expectations. I think we expect the Utilities business will bounce back after this provision, and we'll go back to sort of a normal operating rhythm. At this stage, I haven't provided any details around the expectation in terms of a dollar value. I do expect that we'll continue to see operations in line with our expectations. Yeah, that's probably as detailed as we can go at this stage. We're a week and a half out from our results, and we'll obviously provide some details then of the actual performance for each of the divisions. Yes, understood. Thanks for your time. Thank you. Welcome. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Warren Jeffries from Canaccord Genuity. Please go ahead. G'day, Leigh and Linda. look, you might have touched on this, but just, I think you mentioned, Leigh, in the short to medium term, you're looking to get a leverage ratio around 1x EBITDA. sort of between now and then, what sort of peak debt number do you think the business will have to carry? what sort of magnitude would that be? Good question. Obviously, as you know, Warren, what we report at each balance date is a reflection of some of the things that occur on either side of balance date in regards to timing. I would say that where we sit right now, we might be a tad higher by June, again, subject to timing as we flush through this project and the spending for this project. We can certainly provide a more granular sort of feedback on that as obviously this is quite fresh for us and we've been feeding it through. That'd be my gut feel. In regards to that target, absolutely agree with Leigh Mackender's comment that, you know, we're still aiming to get below that 1x. It may take a tad longer. I don't suspect it'll take much longer, perhaps another, you know, half a reporting period to get to that goal, but that still remains the objective. All right. Just to reconfirm that the cash flow impact, first half result will have a AUD 16 million impact in relation to this onerous contract? Yes. Yep. Then there's AUD 20 million to flush through, over the course... There's AUD 30. There's AUD 30 to flush through. If you look at where we were at June, we were about halfway through, so still a fair amount to spend. Obviously the taking of an IFRS provision just simply means we've got P&L coverage, but the cash still had to be spent. There's AUD 30 to go, but the vast majority of that I expect will be spent by June. Right. 30 to go, is it? Sorry, we're just breaking up there. Yes. Yes. Right. Ta. All right. Thanks, guys. Thank you, Warren. Your next question comes from Simon Conn from IML. Please go ahead. Yeah, Leigh. Hi. Just a quick thematic question. Just obviously we hear a lot about the tight labor markets. You've got interest rates going up. You've got two of your competitors or two of your main competitors, well, four are listed and one's going through quite a big transition in terms of their management team and approach to the market. Can you just talk about the competitive intensity when you're coming into the non-traditional area? Obviously, telco you know well, but you've introduced a new skill set and a new area of expertise for the business. Can you talk about the competitive intensity in the area, and, you know, the margin profile going forward in that area? I, you know, obviously I would've thought that there's a scarce skill set and you should be generating reasonable returns in those divisions going forward, unless there's new competition or we're missing something. Absolutely. The acquisition of Lendlease really bolstered our utility capabilities in the area of power, industrial maintenance and shutdown. Whilst it's new to Service Stream as a business, Lendlease had obviously operated in those markets for many, many years. They've got a really good understanding of those markets. We've got a very strong internal workforce and significant portfolio of sort of skilled contractors that have assisted us there. There's no doubt constraints across labor, across the market at the moment. Power is a particular area where we're seeing increased spend. There is certainly going to be that spend continuing for a period of time. Those certain pockets will have constrained resource. We have to look at how we address that, and we are looking at how we address that and bring resource in to assist. In terms of transport, that is again, something that Lendlease Services have provided for many, many years as part of their business. New to us, we're not seeing significant challenges around the resource to support transport operations. What we're doing there is really three aspects: control room operations and operations and maintenance of roadways, tollways, et cetera, and emergency response and minor repairs. We haven't seen significant impacts in terms of resources across those areas. It has been pockets aligned to particular industries or particular skill sets where we've seen some challenges over the period. Thank you. There are no further questions at this time. I'll now hand back to Mr. Mackender for closing remarks. I thank you everyone for joining us today. Just to confirm that our full year results will be released on 22nd of February. We'll certainly be happy to engage and take further questions either at the full year results or in the meetings following. Really appreciate everyone's time. Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.