Service Stream Limited (SSM) Earnings Call Transcript

Good day. Thank you for standing by. Welcome to the Service Stream Full Year 2022 Results Conference Call. [Operator Instructions] Please advise today's conference is being recorded. I would now like to hand the conference over to your speaker today, Leigh MacKender. Managing Director. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to Service Stream's FY '22 results presentation. As per the introduction, my name is Leigh MacKender, Managing Director, and I'm joined today by our Chief Financial Officer, Linda Kow; and Head of Investor Relations, Chloe George. As per the introduction, we're recording the session today via webcast. It's open to all Service Stream shareholders, and we have a number of institutional investors and analysts on the conference bridge, and are welcome to ask questions at the conclusion of the presentation. Before moving into the presentation, you'll note that today, the business is releasing its preliminary final accounts. Unfortunately, due to some unforeseen disruptions associated with COVID, which has impacted a number of key personnel, the audit was not able to be finalized last week as originally scheduled. We thought we might get there. We're very close, and the audit is substantially completed. We're just waiting on some final processes to be reviewed, and we envisage uploading a full set of the audit accounts along with the directors' report in 3 days' time being Friday the 26th of August. Okay. Moving to the presentation, and I'll direct you to Slide 3, some of the key messages. I don't generally use the word transformational, but I do think it's appropriate when we consider the significant year the business has had, effectively doubling in size as a result of the successful acquisition and integration of Lendlease Services. The group delivered solid financial performance. It's headlined by EBITDA from operations of $91.1 million, impacted by a solitary issue within our utility division that I'll touch on further in the presentation. Had another year of strong cash flow generation and exceptional EBITDA to OCFBIT conversion rate of 108%, well ahead of the group's 80% target. We have a robust balance sheet, and we're very pleased to announce the resumption of dividends. The acquisition of Lendlease is understandably a major focus this year, and I'm very pleased that over the initial 8 months since reaching completion, the business has successfully exited all modules of the transitional services agreement by 30th of June, in line with our plan. That's both significantly exciting because we now have all the systems and processes managed in-house, and we're now working on making changes to drive further efficiencies and optimize our expanded operations. We've been able to continue supporting the fast tracking of synergies ahead of our original 18- to 24-month program and the profit contribution of Lendlease Services business was in line with diligent expectations. Very pleased that Service Stream has demonstrated its resilience in navigating the headwinds of COVID-19, particularly the impact this had on labor market, broader labor market availability challenges, cost pressures and adverse or extreme weather, particularly that during the second half of the year. However, our business is not totally immune, and the impacts were contained to delays and overruns with a major water project being undertaken in Queensland, which I will talk through in greater detail in the presentation. And we have confirmed a noncash goodwill impairment of our Energy & Water CGU of $38.2 million. This is noncash. It's associated with legacy operations, which incorporate meter reading, disconnection and reconnection of electricity and gas services and contact center operations as well as a revision in the group's WACC rate. Turning on to Slide 4. I'll briefly talk through some of the group's key financial headlines for the year and then Linda will further expand on these later in the presentation. Total group revenue for the year was $1.56 billion, reflecting an increase of $760 million or 95% on the prior period. That was made up of $727 million contribution from Lendlease Services over that initial 8-month period, coupled with better-than-expected work volumes across our Telecommunications division and some small growth across utility operations. Business reported EBITDA of $91.1 million, and that reflected a 13.7% increase on the prior year. The group's EBITDA margin for the year was 5.8%. That was impacted by the expected margin dilution from Lendlease Services integration as we previously outlined, with lower margin works and also some adverse weather impacts, most notably impacting utilities and transport operations. Adjusted NPAT was $31.4 million, down 19% on the prior year, and that includes a $2.1 million revaluation of Lendlease assets that were acquired through the transaction. As I stated earlier in the highlights, I think one of the strengths of our business over many years has been the strong cash flow from operations. They're reflective of our Tier 1 client base, the business's ability to ensure that we've got optimal processes to support the timely and accurate billing for works that have been complete. Our net debt finished at $81.3 million as of 30th of June, and again, Linda will provide an update on the group's balance sheet later in the presentation. And finally, with respect to dividends, after pausing the payment of dividends to assist with funding the acquisition, the Board are very pleased to resume dividend payments to our shareholders with a $0.01 dividend for the full year. And the Board reinforced their commitment to ongoing dividend payments, of course, subject to business performance. Moving on to Slide 5 and provide further insight into the group's revenue profile. The first point I'd like to note is Service Stream's improved revenue mix following the acquisition of Lendlease Services. Revenue diversification has been a major part of our group strategy over recent years as we look to expand the operations across new and growing industry sectors. About 80% of our work relates to favorable annuity style operations and maintenance or minor capital works. With minor capital works often associated with small individual projects where Service Stream holds a position on our clients' capital works panels. And these are often short-term projects generally completed over a few months in duration. So very pleased that we've got approximately 80% of work held with government or government-related entities, and the balance with major industrial Tier 1 asset owners and operators across the country. Moving to Slide 6. We wanted to provide an update in terms of the group's work in hand. I think another strength of the business and a highlight of FY '22 has been a strong work in hand held across the group. Not only has the group's work in hand forward order book grown, it's also increased the diversification and reduced our dependency on any single market or client program. In line with increasing investment spend and investments made by our clients, the gross order book has increased to more than $6 billion as of 30 June. This reflects on the initial term of what are multiyear agreements and equates to approximately 3.2x our FY '22 pro forma revenue. Again, each of those agreements generally include multiyear extension options, which we don't include when we reference current work in hand. I'm very pleased that over the year, the group's performance in retaining our existing agreements, but also securing new works has resulted in approximately $1.5 billion of revenue being secured. The graphs on the bottom of the page provides a further breakdown of the group's work in hand, and we've incorporated that both in terms of segment and work type. Draw your attention to the breakdown of construction-centric work, and I'd just like to make the following points. Positively, the business has less than 1%, which relates to fixed-price lump-sum or major construction programs. Just over 16% is aligned to either alliance agreements or those which are formulated on a lower-risk targeted cost model. And that's where costs can be recovered, and it's only overhead or margin that may be at risk. And it's a very small portion of construction work to utilize a schedule of rates. I think it's particularly important given the focus on inflationary pressures to understand the positive position that Service finds itself in regards to the nature of our agreements and that strong forward-looking order book. As it is mentioned in light of the current economic climate, we've provided additional detail on Slide 7 to assist and understand the nature of our contractual agreements and the business' ability to manage those inflationary pressures. First point I'd make is that over 87% of the group's revenue is subject to either an annual price review mechanism or in the case of shorter-dated minor capital works, these are priced by the business on an ongoing basis, and therefore, we take into account rising labor and operating cost changes when putting forward our pricing submissions. We have limited exposure to fixed-price lump sum D&C works over 12 months in duration as per my prior slide. The majority of our revenue is, in fact, derived from lower risk schedule of rate arrangements. And the group has progressively sought, as we've discussed previously, to move the majority of our materials to be supplied by our clients. If we look at each of our reporting segments at the bottom of the page here, we've provided some detail as to how they do differ slightly. Telecommunications, we have more than 85% of future work in hand subject to an annual review. Annual Review typically involves a constructive review with our clients across all rates and overheads. Reviews don't understand they occur at a single point in the year but are progressively occurring at set contract milestones. And the work in Telecommunications, as many of you know, is generally undertaken on a schedule of rates basis where we look to fix rates downstream for the works to be complete. Utilities, a slightly different model there. 95% of our work in hand is subject to automatic annual adjustments or they're priced on application, as I stated, for the small minor capital works. The adjustment mechanisms include CPI and/or WPI, and that just depends on the nature of each agreement and how labor-intensive they are. Importantly, the group has, as I said earlier, 2 to 3 larger D&C projects equating to less than 1% of work in hand, which currently extended over a 12-month period. And the third and final revision with respect to transport. 70% of the work in hand has either quarterly or annual adjustment mechanisms in our agreements. Those agreements, which are associated with longer-term maintenance activities as cost escalation pricing will initially submit our pricing. And again, any minor capital works, which were undertaken generally completed over a 3- to 6-month duration, and our commercial teams based that pricing on current or expected market conditions. Turning now to Slide 8, and we'll just touch on group safety. As many of you would have heard before, the health and safety of our workforce, our clients and the communities in which we operate genuinely remains our highest priority. With more than 9,500 resources, which may be taking -- undertaking field works at any point in time, we look at driving continual improvement across our operations and particularly focus on those high-risk tasks. During the last year, the inclusion of Lendlease Services was a factor in the decline of some group performance metrics. We expected this, we identified it during due diligence, so it didn't come as a surprise. I think it's important to note, though, that the business takes -- the Lendlease business takes safety very seriously. And the difference in performance is more associated with the nature of the field operations and the expanded markets that the business operates across. I've been really pleased with the positive aspects that the acquisition has brought to the wider group in terms of health and safety. That's included specialist industry experience, strong and proactive culture and leading HSE management systems, one of which is now being expanded across the broader Service Stream group and will go live in the coming months. Business continues to deliver strong safety performance. Very pleased to see industry-leading lost time injury frequency rate of 0.77, and our focus for the year ahead is to continue to work on those high-risk work activities, as I stated, and looking to implement improved critical controls, which will drive continued improvement across our safety culture. Turning to Slide 9 entitled Sustainability initiatives. We continue to take a measured focus in driving improved ESG outcomes. We provided some highlights here in terms of our sustainability pathways, covering the 5 major areas of focus: incorporate health and safety, environment, people, governance and community. I think it's really important to note that those 5 pathways reflect alignment with the sustainability materiality assessment that we conducted last year, and that was a broad engagement across all of Service Stream stakeholders, which really guided our priorities and areas of focus. The group's sustainability report is due to release on 1 September, but some of the highlights have been included here. They include that this year, we've aligned the group's sustainability strategy and reporting to the UN Sustainable Development Goals framework. We've adopted a science-based targets framework across our Scope 1 and Scope 2 emissions and targeting a 50% to 60% reduction by 2025. Community is a major focus for us, and we continue to support Aboriginal and Torres Strait Islanders with a group only a few months away from releasing our inaugural innovative reconciliation action plan. And of course, given the important role that our people play in the business's success is a significant body of work being undertaken in terms of enhancing our employee value proposition. That's included a review and changes to nonfinancial and financial benefits, and I would fully expect that to continue to be an area of focus into the future. Moving into the second section of the presentation, and we'll provide a couple of slides here, which update on the integration program. So I'd direct you to Slide 11. As outlined in my instructed comments, a lot has been achieved by the group over this year and I'm really pleased and genuinely excited with the progress that's been made against our original time line of 18 to 24 months. Some of the highlights and milestones that we've achieved through the year include successfully exiting from the TSA by 30th of June. That reflected a significant amount of work but has enabled all of the systems and processes to move in-house, and the business is now working to optimize and drive further efficiencies over the next 12 months as we conclude the integration program. We successfully completed the restructure of our telecommunications and corporate support functions. Those corporate support functions incorporate HR, finance, payroll, safety, IT, et cetera. The utility division restructure is very well progressed. Several key appointments have been made, and we expect that to be finalized over the coming months. In relation to the synergy program, this continues to pleasingly track ahead of schedule. We've worked to fast track the delivery against our targeted $17 million of synergies and so far delivered approximately $10 million on a run rate basis as of June 30. It's both ahead of our initial estimates in terms of timing and quantum. The group's has achieved an enormous amount of our work in this area over the last year, whilst importantly, maintaining our focus on businesses [ use ] operations around the country. And I thank all of our people working right across the business for their efforts involved in the program. We have noted the integration program costs that we initially estimated back in July last year at approximately $15 million will come in a little higher. That just really reflects the scale of the program and some of the challenges with constrained labor in the market during the year. Slide 12 talks to the timeline and updated synergy realization. In relation to those areas, I think the business, as I said, is running ahead of schedule and in a very positive position. The focus for '22 is really on delving further into the business engaging with and supporting key people as we brought the 2 organizations together. I really wanted to ensure that we gained a deeper understanding of the operations across the business. And then we're then able to implement the majority of the organizational changes but ensuring we retain our key people. A major focus is also the exit of the TSA, as I just discussed, and that we successfully concluded. We really wanted to work to align the entire business under a consolidated brand, and they were just a few of the priorities we discussed throughout the year. The next phase of the program focused on securing growth opportunities across the expanded market segments and client base. We'll continue to refine the organizational structure and align many of the group's systems, and those alignments will support optimizing processes and simplifying the group's support operations. Slide 13 talks to the group transformation and how the acquisition has really supported the growth and diversification of revenue and operations. The graph at the bottom of the page talk to this progression over what is a relatively short period of time. We can see in FY '21 on the bottom left-hand side there that revenue was $800 million, focused across 2 divisions and a small number of utility and telecommunication clients. That significantly changed over FY '22. Pro forma revenue, $1.9 billion, spread across 3 market segments. And importantly, those market segments are all exposed to major infrastructure investment. And then if we look further and we consider the group's strong pipeline of work in hand, again, approximately $6 billion in value, we see how well we're positioned for the future. Importantly, this growth is weighted towards annuity style of O&M works or minor capital works as that was the majority of the works that we acquired through the Lendlease transaction and aligns with our focus on growing the annuity-style revenues for the business. It's reduced the group's dependency on any single client or market segment, as I stated earlier, and we continue to hold, I think, an individual client base. 80% of our work is held either directly with government or government-related entities across the country, and the remaining 20% is with major industrial asset owners and operators. And finally, before I hand it across to Linda, who will provide further context and insight into the group financials, I'll provide an update on our segment performance, and we'll refer you to Slide 15, which updates on our utility division. Utility division generated revenue of $697 million. That represented an increase of $284 million or approximately 68% on the prior corresponding year. Utilities EBITDA from operations was $19.5 million, reflected a decrease of $9.5 million against the prior year. Unfortunately, as I stated earlier, the division did experience some challenges which reduced EBITDA over the year. Those challenges were associated with 2 aspects across our legacy utility operations, not associated with the acquired Lendlease Services business. The first of those related to a large water project that I referenced earlier, and that's where we're constructing a major pipeline water transfer or pumping station. The delays were initially due to resourcing constraints both across our field operations and some of the specialist partners and contractors we have to rely on. That was then further exacerbated by multiple and prolonged delays associated with extreme wet weather across Queensland, particularly during the second half of the year. As a result of these challenges, the group recognized a $5 million onerous contract provision for the project. We wrote back small profit that had been recognized, and we've had to make an update in terms of our expected forecast cost to complete. We're approximately 50% complete through the project and expect the entire program to conclude in this current financial year. It was a disappointing result. And as our businesses have not historically incurred these types of challenges outcomes, the vast majority of our revenue is based on operations and maintenance of minor capital works and those small projects being completed over a short period of time. On the positive side, the group has less than 1% of future revenue associated with those larger major design and construction works under a fixed price or lump-sum contract framework. And as I said before, that's where we're going to continue to focus particularly given the expanded service offerings as a result of the acquisition. The second impact this year was in the utility division, and that was associated with some of our legacy operations. traditionally associated with the Energy & Water division of Utilities. That included work such as reconnection, disconnection of utility services and [ integrating ] and some minor meter replacement works. Linda and I have previously discussed the impacts to these areas throughout the COVID pandemic. Volumes have been improving, but they're not returned to those pre-COVID levels. Those continual impacts across the Energy & Water operations and a revision of the group's weighted average cost of capital resulted in at $38.2 million noncash impairment of goodwill. We said that impairments are largely associated with historical goodwill across those legacy utility operations. But important to note, it also includes some noncore contact center operations, which haven't been a focus for many years. Post-acquisition, the Utilities division has expanded its capabilities, got broad utility services market as we denote by the revenue breakdown; electricity, gas, industrial and water, and we'll leverage those expanded capabilities across those markets to support continued growth. I think fortunately, the group's diversified portfolio has assisted us in offsetting or reducing the impact of these challenges and the Telecommunications division is one, which has had a very positive year, and I'll move on to next -- direct you to Slide 16. So the Telecommunications division generated $640 million in revenue, representing an increase of $247 million or approximately 63% from the prior year. That increase in revenue reflected the addition of Lendlease Services Telecommunications operations. They included revenue from nbn network construction upgrade program references N2P and Optus, where we provide a range of O&M field services as well as an expanded portfolio of wireless operations now servicing all major telecommunication network owners and operators. EBITDA over the period was $61.5 million. That was up 6.5% on the prior year. Telecommunications EBITDA margin of 9.6% reflected the reduction in scale across the legacy Service Stream operations, as we previously flagged and advised was going to be expected. Margin remains robust, though includes some dilution impacts associated with the Lendlease Services acquisition, again, as we called out but offset that is some benefit of cost synergies post acquisition. I think the Telecommunications division has made really solid progress this year to integrate the operations, and I'm very pleased that we've got that expanded depth and breadth of services. And I think we're really uniquely positioned to further capitalize on further investment in telecommunications space. A major focus this year was on mobilizing and supporting the nbn network upgrade program that's associated with deploying fiber across legacy networks. This program is approaching expected peak run rate in production in line with our targets. And pleasingly, we note that there's an opportunity for that program to now be expanded with additional 1 million homes to be upgraded with fiber over the coming years. And finally, directly to Slide 17, which provides an update on the group's new Transport division. Transport [ incurred ] a revenue of $220 million with an EBITDA of $9.9 million during FY '22. EBITDA margin finished the year at 4.5%, reflective of the 8 months of ownership. I [indiscernible] call out during the first half that we expected the margin to come down after some of those one-off program benefits that were delayed pre-completion, were successfully completed over November and December. Operations during the second half were impacted, unfortunately, by some wet weather events. They cause a delay to road maintenance and some of the improvement activities both across Western Australia and New South Wales, but they are delayed. Over the year, the business has made solid progress on improving or exiting those lower-margin works that we called out. We note the decision recently by Main Roads WA to in-source some aspects of their maintenance programs. That will reduce FY '23 revenue but will actually support improved margin across this area. As we announced in March, the businesses regenerate rail consortium that incorporates, obviously, ourselves, Plenary Group, GS Engineering, Clough and Webuild. We're appointed as a preferred supplier for the Gowrie to Kagaru section of Inland Rail. Our role in that project is to provide specialist operations and maintenance services as part of a 25-year maintenance period post construction, and I expect to be able to provide a further update on the status of that over the coming months. Outside of Inland Rail, there's a number of other road infrastructure programs, which serve, I think, as exciting opportunities for the group. They're generally associated with providing maintenance and operations across both existing and new road infrastructure projects as well as the deployment of smart technology or ITS, Integrated Technology Solutions, which are aimed at improving traffic flow. I'll now hand across to Linda, who will run through some of the group's financial performance in greater detail.

Thanks, Leigh, and good morning to everyone on this call. On Slide 19, we have the profit and loss. Total revenue for the year was $1,563.8 million, which is $760 million or 94.5% higher than last year. I would like to remind everyone on this call that we have moved to a total revenue metric as opposed to such [ period ] this year to recognize the group's share of revenue generated in our incorporated transport joint ventures of $47 million during the year. Lendlease Services added $727 million of total revenue to the group from the date of acquisition and revenue from the legacy Service Stream operations was $827 million, which was 2.8% higher than the prior year. EBITDA from operations was $91.1 million, which is an increase of 13.7% from last year. This result includes a better-than-expected performance from the rebased legacy telecommunications operations. On the downside, the utility and transport segments were impacted by the numerous and prolonged wet weather events, which Leigh has outlined, including significant impact to a major Queensland utility project. And the full year result also includes the benefit of synergy delivery, which is tracked ahead of plan. Group EBITDA from operations margin reduced from 10% last year to 5.8%, largely reflective of the rebased group operations, dilution from lower-margin LLS operations, which we flagged and weather-related impacts to utility and transport businesses. It should be noted that the EBITDA from operations excludes $25.5 million of transaction acquisition and integration costs, including TSA expenses. The appendix includes a summary of these nonoperational costs. Dropping down to NPAT, the group's adjusted NPAT or NPAT-A for the year was $31.4 million. Depreciation expense for the year was $39.3 million, an increase of $18.9 million largely relating to the addition of Lendlease Services, which also includes additional depreciation from an upward revaluation of acquired plant and equipment of $2.1 million or $3.2 million on an annualized basis. The increase in net financing cost is obviously due to the acquisition, amplified by the recent interest rate increases. Statutory net profit after tax was a loss of $36.3 million. This reflects the noncash goodwill impairment of $38.2 million against Energy & Water operations. It also includes an additional $5.4 million for the amortization of customer intangibles acquired through the transaction, taking full year amortization expense to $14 million. We have also provided an updated customer contract amortization schedule, which you can reference in the appendix. Moving on to Slide 20, which is the cash flow. The key highlights here include a strong operating cash flow inflow of $98.7 million, which equates to an OCFBIT conversion rate of 108%, which is well ahead of expectations. This reflects continuing focus on the release of working capital balances acquired through Lendlease Services and from recent contract mobilization. The net acquisition payment made for Lendlease Services was $313.5 million, noting that the final completion adjustment payment remains pending and is expected to be finalized this half ahead of December reporting. You will note that CapEx for FY '22 was well below expectations. This is largely due to our focus this year being on TSA exit, which was conducted on a lift and shift basis, which did not require a significant capital investment. And the majority of new fleet requirements, including those Lendlease Services being undertaken via leasing model. We would expect to see an uplift in CapEx, particularly IT spend by '23 as we transition to systems integration and improvement initiative. Total net debt for the year was $81.3 million. This equates to a 1.5x EBITDA leverage inclusive of lease liabilities, slightly ahead of where we expected to be post acquisition due to the strong cash flow and lower net debt position for the year. Our debt facilities at June remain unchanged at $395 million, and allowance of bank guarantee is drawn of $113 million, the group has access to ample liquidity of approximately $200 million to support operations and future growth. All of the group's banking covenants were also comfortably met at June. Now moving on to Slide 21, which touches on the group balance sheet. You will see here that we have continued to provision the account for the Lendlease Services acquisition at 30th of June. This is largely due to the final completion adjustments still outstanding and expected to be finalized this half. We have, however, updated provisional accounting in December with the updated value presented on this slide. Firstly, of the $202 million of acquisition intangibles, we have allocated $103 million to the value of customer contracts and relationships. This will be amortized over a period of 15 years. And as mentioned previously, an updated amortization schedule is provided in the appendix. We have recognized property, plant and equipment of just under $60 million. This includes an uplift in book valuation of $15.4 million, with commensurate increase to depreciation expense of $3.2 million on an annualized basis. The including of Lendlease Services has certainly changed the composition of the group's balance sheet with an uplift in working capital requirements reflective of the increase of working capital requirements of their contracts. The group net working capital was $66 million has increased to just under 4% of LTM sales but still remains well below our 5% targeted range. The other major movement to this year's group balance sheet is a $38.2 million impairment that we've made against the current value of Energy & Water goodwill that Leigh's touched on. This is again reflective of the continuing earnings impact to the business since the onset of COVID and has led to a reassessment of the future cash flows of the business. These impacts include a reduction in higher-margin discretionary works, program disruptions and higher turnover of the itinerant field workforce leading to higher cost and operating inefficiencies. We've also revised the group's RAP this year, which has also contributed to the impairment. All of Energy & Water goodwill dates back to acquisitions undertaken over 15 years ago, and some even relate to legacy operations such as the call center operations, which are no longer being operated. Given Energy & Water has been our smallest operating units historically, the reassessment the CGU earnings is immaterial to the overall group outlook going forward. And that's all for me. So I'll now hand you back to Leigh to take you through the remainder of this presentation pack.

Thanks, Linda. Before moving to Q&A, we'll conclude with the group's key messages and outlook for '23. So I direct you to Slide 23, total key messages. I think -- as from my introductory comments, I think FY '22, the group's delivered a solid financial result, demonstrated resilience through some challenging times, although had some one-off issues that we've had to attempt to mitigate, particularly in the utilities area. We had another exceptional cash flow result. The company's balance sheet remains in a strong position as Linda has just given an update on, and we have significant headroom to support future growth. We've outlined a strong pipeline of work in hand, approximately $6 billion, which has increased during the year. And we start the year with 85% of our forecast revenue secured. Of course, knowing we don't have guaranteed volume comments in all agreements, but we do work proactively with our clients to update forecast across each program throughout the year. The input challenges that have thus far been proactively and effectively managed across the group's broad contract base. I think, is the benefit of those stable commercial structures and adjustment mechanisms. And they've supported that cost containment thus far. As I discussed in the utility segment, with the expanded maintenance capabilities acquired through Lendlease, we'll focus on securing more of our annuity style work and wind back what was our initial focus on some large-scale D&C projects unless they operate under that balance risk-sharing models. Priority, of course, remains on finalizing integration and delivering further shareholder value this year. And finally, on the outlook slide on Page 24. We look to the future. I think Service Stream has got a strong and exciting pipeline of growth opportunities ahead across each of our sectors. Significant opportunities across each market and will benefit from continued investment by our clients, and the business has strengthened with those additional capabilities and that diversified portfolio. That will include the continued deployment of renewal upgrade of utility infrastructure, gas, water, electricity and industrial client base, continued investment in the upgrade and further deployment of wireless and fixed-line technology networks and increasing investment in public and private road infrastructure networks. Group expects continued revenue and profit growth during FY '23 on the back of the full year's contribution from Lendlease Services. That's subject to successfully navigating any extreme adverse weather events and effectively managing those continued labor resource challenges, supply chain impacts or any other market disruptions that may present ahead. We do expect continued inflationary pressure despite favorable contract structures and that cost containment thus far, but we will provide a further update on the business' performance at the company's AGM in October after we've got our first quarter under our belt. In closing, I'd like to take the opportunity on behalf of our Board of Directors to thank our staff working right across the country, their support of the business through a significant year of change and positioning the business well for the future. Concludes the presentation, and I'll now hand back to the moderator to ask any questions from those joining us on the bridge.

[Operator Instructions] Our first question comes from the line of Marni Lysaght with Macquarie.

Leigh, Linda, you can hear me?

We can. Thank you, Marni.

Just a few quick ones from me. I'm just looking at the balance sheet. I revert back at the time of the acquisition being announced in July 2022, you targeted, I think, leverage of less than 1x at 24 months post settlement. So is that still -- you still retaining that? And just remind me, is that a pre- or post-AASB target?

That was a post-AASB target, Marni. I think it could stay this year, I think we're still on track for that.

Okay. Okay. Another one for me is just around the operating cash flow -- just the cash flow conversion. Obviously, I remember back at the first half, we had some timing benefit there, which really boosted it, but kind of how do we think about this moving forward, given that we know that Lendlease wasn't as focused as the existing Service Stream business on the monetization of cash?

There's a couple of things going there. I mean we've always maintained that we target an 80%-plus each and every year, and that doesn't change. I think there's definitely opportunities you see, they carry a heavier working capital load than we had. And part of the benefit we had this year was the monetizing of what we got. We'll continue to do that. But as I said before, some of that will be dependent on contract cycles and ability to reposition ourselves each and every time these things come up. But yes, it's certainly an opportunity for us.

Okay. Okay. And another question I have is just around kind of where you're at with the integration. Are you able to quantify that? Because I think back at the interim result, you said about 60% would have been done by the second half '22.

Yes. I think that we're really well progressed. I think Leigh has given a pretty good outline. I know it's kind of hard and saying we live and breathe it every day. We did the Telecommunication business unit incorporate pretty early on in second half. We've started the Utilities part now. That's in progress. As Leigh mentioned, we've got the key roles appointed, and we're going down to the next level. What's really ahead of us is trying to consolidate some of the systems. It's quite [indiscernible] at the moment. Obviously working across multiple systems. That's going to be continuing for quite a period, but we want to get at least the material items done over the next year. And then we're also starting to look at things like property rationalization. So between the businesses, we've got quite a lot of sites. And some of them we can send those of each other. Obviously, that's dependent on when these leases come up for renewal. And what we're trying to do there is consolidate 5 sites into 2 [indiscernible]. But then that's part of our synergy plan. That is a little bit more dated, and we will probably get that towards the back end of this new year, but I mean it's just one of the elements. But we remain confident that we'll deliver the synergies that we've stated within the time frame, if not, will sooner.

Just to follow on from that, and then I'll jump back in the queue. Just with, I guess, the utilities being impacted by weather, would you say the fact that Telco had received the integration and utilities is yet to be addressed? Would that have also contributed to, I guess, the different results of those respective divisions generated?

It's a good question, Marni. I think certainly, Telecommunications going first was the right thing. We certainly identified the -- given our pedigree there, we were confident in making those changes. Utility is a much broader division, and it was more complex, hence, why we sought to see Telecommunications incorporate first. I don't think the lack of integrating was a result of that -- or contributed to the challenges associated with that one Queensland project. I think that was something completely separate.

Yes. But I think I would say that the integration synergies was largely Telco, [indiscernible] cost corporate, there's not much in the kitty at all at June for Utilities up ahead of us. And so yes, you could say there's some of it but not in the operational sense.

And our next question comes from the line of Piers Flanagan with Barrenjoey.

Just a couple maybe if I could. Maybe just firstly on the utilities project. So thanks for the additional comments. Have you seen any improvement sort of more recently within that project? And I guess how should we think about sort of the Utilities segment margin sort of into '23? Will that be sort of along a similar sort of EBIT or EBITDA margin run rate heading into '23 as what it was doing, sorry, over the sort of 2 half?

Yes. So just -- sorry, just to go up here. What we've effectively done by taking the onerous lease is we basically dealt with the cost to complete this project at no profit. So we've dealt with that in the June accounts and hence, it's a bit of a double whammy. We are only about 50% through the project. So there will be a dilutive effect in terms of just seeing it out because we'll have some revenue but for 0 profit although we've quarantine that. Look, we would expect to see that what we have this year is a floor, but there is just a timing difference that we have to navigate through.

I'd expect to say, I think it's right, Piers. I'd expect to see obviously margin come back in the division to improve this year because of that one issue being somewhat isolated. The rest of the utility operations have performed well. So I would expect that to go back up. It's more of a one-off hit, given that significant project.

Sure. And then just on the $91 million, You have to give us a bit of, I guess, color on how that compares with the underlying EBITDA, how that compares to sort of the pro forma guidance of the $120 million to $125 million, just for a bit of context?

Yes. I mean the elements for the $120 million to $125 million was going back to...

Has this the underlying EBITDA, how that compares to sort of the pro forma guidance of that $120 million to $125 million, just a little bit of context?

Yes. I mean the elements for the $120 million to $125 million was going back to a year ago now was, call it, base business, 50-ish, Lendlease services 45-ish and synergies of 17-ish but that would be delivered over a 24-period time frame. I think the elements are intact. However, it's a bit challenging to pick that just looking at the accounts. And the reason for it, you'll see disclosures in the accounts that Lendlease Services contributed $46.4 million, which doesn't take into account things like the synergy delivery that's embedded predominantly within Lendlease Services. But also as we have stood up for the TSA replacement costs within the business, that's been borne under effectively the legacy SSM side. So you can't just take the disclosure at face value. But if you put aside the impact from the Utilities business, I would say that all elements are running pretty much in line with that at the moment, but this issue we had to deal with.

Sure. And sorry, just on those Lendlease Services comments to $46.5 million in sort of $6.2 million sort of implied monthly run rate. Does that not include synergies? Is that a pretty strong, I guess, monthly run rate versus...

That includes synergies so if you go back to obviously -- that, if you divide that by [ n ] times, it's probably going to give you a much bigger number than $45 million clearly. So that does include synergies, and it does include the bidders one side or the call it, head office site cost that we've had to restand out. That -- it's not sitting in that Lendlease number. It's just the way that -- that's the legal entity, and that's what we had to call out and record.

Sure. And then maybe just on the outlook, I guess, how you're seeing sort of the tender environment at the moment in sort of the competitive backdrop?

Yes. No, thanks, Piers. Tendering environment has been really strong. It's been strong throughout the year as we've previously talked about. Just about all of our sectors are seeing strong opportunities, particularly Utilities. We're seeing a lot of opportunities there continuing around the sort of upgrade of infrastructure. A lot in the maintenance or industrial area as well, which is part of the Lendlease acquisition. So certainly seeing the highest level of activity that we've seen to date. Have no concern about the strength of our pipeline. I think the challenge is to make sure that we're selective as to which opportunities we focus on, just given those broader resourcing constraints in the market and just making sure as we always do that if we go in to commit the client -- to a client that we can deliver the project that we're comfortable that we'll be able to do so successfully, but no, really strong.

Great. And maybe just one final one, just on the Lendlease Services provisional balance sheet and the balance sheet. Do you have any expectations that you can provide just on what that potential completion payment is likely to be? Or should we wait to the December update?

Yes. Look, I mean it will be anywhere between a high single digit to maybe low double, but there's so many factors at play at the moment. It's that range.

We're probably a couple of weeks away from understanding that final outcome, Piers, but yes, we'll certainly provide updates at the first half.

And our next question comes from the line of Ian Munro with Ord.

Can I just start on the onerous contract, please, just with respect to the provision of $5 million? What exactly you've provisioned against there? And just conscious that there's sort of 50% of the contract is still to go in FY '23. Can you give us a sense of how...