Ventia Services Group Limited (VNT) Earnings Call Transcript

Thank you for standing by, and welcome to the Ventia Investor Call. I'll now hand the conference over to Mark Ralston, Ventia's Managing Director and Group CEO, for some opening remarks.

Thank you, Darcy, and good morning, everyone. I'm Mark Ralston, CEO of Ventia, and I'm joined today by our CFO, Mark Fleming. I would like to make a few opening comments on the announcement that we released this morning and then we'll open up the call to questions. Building on over a decade of Ventia over the past 10 weeks since commencing as CEO, I spent time assessing our market outlook, our strategy, our operating model and our trading performance. I've also engaged extensively with customers, employees, investors and other key stakeholders. From all of these activities and interactions, the conclusion is clear, and that is Ventia has built a strong platform, a reputation and track record of consistent performance and delivery for all of our stakeholders, and I intend to build on that track record. We have a workforce of approximately 35,000 people who are passionate and proud of the services that we provide to customers and communities across Australia and New Zealand every day. We're well positioned in the markets that we serve and they have strong tailwinds and remain highly attractive, particularly given the technology-driven disruption facing some sectors of the economy today. We have long-term contracts, deep customer relationships and for these reasons, I am confident sustaining our performance and growth long into the future. Our review has also reinforced the impact of some of our customers from the changing macro market environment that we're operating in, and therefore, the expectations and priorities of our customers. In response, there is a need and opportunity for Ventia to evolve. We need to be more creative with customer-led solutions, simplify our business, lower our overhead cost base and fully leverage our extensive capabilities and scale, so we can meet our customers as they evolve. In summary, our goal is to unlock the full potential of Ventia, creating long-term value for our customers, our people, our shareholders and our partners. Importantly, this is an evolution of our strategy, not a change in direction. Our existing markets and our 4 stated growth areas of defense, digital infrastructure, energy and renewables and water remain our focus. Governments and owners of critical infrastructure face increasing complexity, aging assets, greater security requirements, workforce challenges, and have rising expectations around reliability, service delivery and productivity. In some cases, they also have capital constraints that limit the speed of their investment cycles. Against this backdrop, infrastructure resilience is becoming an increasingly important driver of investment across our markets. Customers are looking for strategic partners that can solve their challenges, accelerate the speed of delivery, bring innovation and drive operating efficiencies. This plays directly to Ventia's strengths, our scale, breadth of capabilities, strong balance sheet and deep customer understanding. Our focus is on bringing these together more effectively and efficiently to deliver better outcomes for our customers. To support this, we will invest in the capabilities, technology and partnerships that differentiate Ventia, including in areas such as digital security, network resiliency, enhanced data capabilities and innovative solutions that respond to the evolving needs of our customers. To realize the full potential of our market opportunity, we will now align our business more closely to our growth markets and customers while simplifying our organization. The simplified structure will provide clear accountabilities, fast decision-making, lower costs and closer alignment between our capabilities and customer priorities. The simplification of our business includes reducing the number of operating sectors and simplifying our corporate functions and shared services to better leverage the scale of Ventia, reduce duplication and standardized processes across the group. We're doing this from a strong financial and technology foundation, following the successful delivery of our major SAP upgrade on time and on budget last month. In short, we're evolving now to position for a future we can see today. These actions are expected to generate at least $60 million of annualized cost savings with a full run rate expected from December 2027. We currently estimate one-off costs of approximately $30 million, which will be recognized through our statutory results. I also want to emphasize that this is not simply a cost-out exercise. This structural simplification is 1 part of the absolution of our strategy. We're making changes to support our customers and their long-term ambitions. We're simplifying Ventia, so we can move faster, make best use in digital capabilities and our scale and improve the delivery of services to the owners of critical infrastructure in Australia and New Zealand. Let me now turn to the trading conditions that we're currently seeing in telecommunications and energy. In telecommunications, our customers are focused on productivity and cost discipline. Capital allocation is selective and the timing and prioritization of discretionary programs is being closely managed. Market commentary also reports planning delays as a constraint on the pace of network investment in the industry. And as a result, we're not seeing the revenue growth that we have experienced in previous periods. At the same time though, the ongoing and underlying growth in data demand and adoption of AI continues to increase the need for reliable, resilient and new digital infrastructure. Based on the underlying market drivers, we are confident in the medium-term opportunity, though the timing of growth in this sector will be influenced by the pace of build programs and customer volumes. In energy, the growth opportunity is compelling. However, we are seeing market delays. The movement of projects from planning into execution has been slower than anticipated with transmission constraints, good collections delays, planning approvals and higher-than-expected capital costs being factors. As a result, Ventia's group revenue is expected to reduce in the second half compared to the prior corresponding period. Having said that, the impact of these delays on earnings is being mitigated through productivity improvement and cost efficiency initiatives already underway across the group. So for FY '26, we are keeping our underlying NPATA guidance of 7% to 10% growth, excluding the one-off costs associated with the changes announced today. In conclusion, I'm confident that the evolution of Ventia's strategy, our plan to simplify our business and the actions announced today will strengthen the speed of execution and cost competitiveness and also support sustainable earnings and EPS growth. These actions will better position us to unlock the full potential of Ventia, creating long-term value for our customers, our people, our shareholders and our partners. Mark Fleming and I will now happily take questions. Thank you.

[Operator Instructions] Your first question comes from Cameron Needham with Bank of America.

Mark and Mark, thanks for the presentation. Just a first question, could you just unpack in a little more detail what's actually deteriorated in telecommunications and energy? I think of the half year presentation, energy and digital infra were highlighted as growth areas, whereas today we're talking about work deferrals and lower second half group revenue. So what's sort of change in the customer environment and how much of that is sort of simply delayed mobilization versus customers actually reducing their spending intentions?

Yes. Thank you for the question, Cameron, and again, I'll start by saying the outlook for both the telecommunications and energy sector still remains buoyant, evidenced by the underlying market growth in sectors as well as the underlying market drivers. Look at the half year, we have seen some indications of lower volumes in telco in the reported half year results but remained positive on the fundamentals that we've seen in prior periods, those conditions have continued through the second half. And there's also been some new projects that we anticipated would be awarded in the second half that have not yet been awarded. But we do definitely see that as deferral of work as opposed to lost opportunities. And then energy is really the same as I said, driven by some delays and slower-than-expected contract awards for the reasons I outlined before, to certainly see those still looking to emerge in through 2027.

Okay. Sure. I appreciate the color. And then just a quick second one, if I may. I guess just with second half revenue now expected to decline, but your FY '26 NPATA guidance is unchanged. Can you just help us think about the bridge into FY '27? So how much of that $60 million savings program is already in the FY '26 earnings base? How much is incremental in FY '27? And then do we expect any as well to come through into FY '28 at all?

Yes, I'll take that, Cameron. Mark Fleming here. So the $60 million cost-out is going to happen progressively between now and December '27. So we'll see a portion of it come through in the FY '27 year, but the full run rate wouldn't be until FY '28. The other thing I'd say is that, that is a gross number. So we're not necessarily expecting that, that $60 million automatically goes to margin. There will be some investment associated with this and some sharing with customers as well. So the key focus for us going forward is that we drive strong revenue growth. But we do believe that what we're announcing today will support sustainable EBITDA margins. But the key focus is really on revenue growth going forward.

Your next question comes from Jakob Cakarnis with Jarden.

Mark, thanks for the presentation. Just wondering how long you guys can continue to generate the kind of operating leverage that the guide suggests against a weaker revenue environment? And I guess flipping that around, do you guys see '26 as a reset year for the revenue base? And are we looking at more contract wins to get back to revenue growth from here? Or is it simply that these deferrals roll over?

Look, thanks, Jakob. I might answer your second question first and then hand to Mark on the first part of your question. Look, I guess, ultimately, we think about the growth outlook in our markets is highly attractive and over the long term, remain a focus on the 5% to 10% growth over the medium term across our markets. The market opportunity is strong. We operate with total addressable market of around $100 million. And we've called out 4 key growth areas of defense, digital, energy and water where we see strong growth opportunities emerging. And again, the strategic changes we've made today is all about setting ourselves up for that, capturing those opportunities in the market and becoming much closer to our customers as well as the end markets that we're focused on. The changes that we're announcing today positions us for growth in 2027 and beyond. We're working through our FY '27 budget process right now, but we're certainly expecting that we're sort of returning back to a growth profile from '27 and beyond.

Yes. I might just expand on that as well. So look, I do see FY '26 as a bit of a reset year. In terms of revenue, as we've previously said, we've had the defense-based services contract, which was a significant reduction for us versus what we had in FY '25. We've called out the weakness in telco at the half year results, and that's obviously continued in energy as well. So -- but importantly, with telco and energy, we see those as timing not as permanent. And obviously, the defense-based services reset is a one-off. We've also won significant contracts this year, including, for example, the defense clothing stores that started during the year. So I do see FY '26 as a reset from a revenue perspective, and we do expect to see growth from here. And part of that growth, yes, will be new contract wins, but a lot of it is within contract where we should at least be seeing inflation growth, but obviously, inflation plus is what we're aiming for, which is why we talk about 5% to 10% being the market growth and also our expectation of growth over the medium term. So yes, from a revenue perspective, I see FY '26 as a base and a reset. And clearly, we're taking the opportunity now to reset our cost base this year as well, which will result in some one-off costs, which we'll take into this year's results. But FY '27 will be growing of a new base.

And then just a second one. I mean, there's a lot of commentary out there about some fiscal prudence, both at the federal and the state level, but the conversations today or I guess the segments that you guys are guiding to as being softer seem as though they're more private market considerations. So definitely on the telco side, but just interested in how you're seeing the state government versus federal government spending outlook and how we should be thinking about that moving forward, please?

Look, I mean, as I sort of mentioned, Jakob, certainly broader economic pressures across the market certainly from what we are seeing at the moment, the sectors we've called out, telco and energy is where really the impact has been. I think the nature of our business, again, is one of those that if there is not further investment into infrastructure stock, there is still a requirement of the maintenance of the critical infrastructure and the resilience point which I need to reinforce. We really believe that there is an absolute increasing theme across all critical infrastructure asset owners, defense, but other critical infrastructure asset owners around resilience. And that is the protection, the duplication, the replication and restoration of assets in times of disruption. So we're not seeing anything specifically that's impacting our results or performance at a state or federal level at this stage, really those areas that we called out on the deferral and then lower volumes on some of the telco and energy work is where we're saying it.

Your next question comes from Tony Mitchell with Shaw and Partners.

My question is, why didn't the former CEO make these cost reductions? Why was it left to a new CEO to do these things?

Thanks, Tony, for the question. Look, I can't really comment on the prior CEO. But equally, I think some of the elements that we've seen in the last number of months, obviously, have continued where we didn't anticipate earlier in the year. But equally, what I've talked about is this is an evolution of our strategy and the platform that we've built and have in place is tremendous. And I think the team and the CEO that's led that over the last number of 5 years has done a terrific job to build that platform. My role is now to build on that platform. And this is really a change of emphasis on what I believe are the right drivers to set the business up for the next 5 years and beyond, but also recognizing that the market has changed as well. The macroeconomic factors, geopolitics factors, the emergence of AI and other areas. And the reality is our customers are changing, and therefore, we need to evolve with that. So I would like to think that 10 weeks into the role, but no doubt with some preexisting knowledge of the business. This is seen as a fast, proactive step that I believe will set us up very well for the future. So I won't comment any more than that on the prior CEO, Tony, but building on a great platform has been established.

Okay. How many people are going to lose their jobs?

So we talked in the $60 million as a range of elements that make up that number. There are some people, there are contractors, there are consultants and there's also some discontinued projects that go into that. But the way we were sort of thinking and framing around that number we built through, it's circa 1% of our workforce.

Right. Now in terms of these deferred contracts you've mentioned, can you give us an idea of the size of those contracts? Because obviously, you normally deal in larger contracts over 4 or 5 years. Can you give us a taste of what sort of contracts have been deferred? How big they are and what their time period would be?

Yes. Look, we never tie in and get into specific contracts or specific customers, so we wanted to do that. But what I would say is that it's a combination of works under existing contracts that have been deferred that we fully expect to happen next year and some new works. But most of it is with existing customers under existing contracts. So it's just timing of works, and we don't expect, as we said, that those works will be completed in a future period.

Okay. You've probably seen no doubt that Service Stream have announced a $975 million acquisition, call it, $1 billion, which is pretty significant. And they operate in similar areas to you, particularly in telco. Do you think it makes sense for you to be looking at some larger -- a large acquisition like that to significantly enhanced earnings growth? Because their statement today said it's about 20% EPS accretive.

So look, at this stage, Tony, our capital allocation framework, which we have communicated remains in place. We've had success with some bolt-on acquisitions in recent years. We continue to look at that. But equally, as we've sort of evolving our strategy, these areas of defense, in particular, sovereign resiliency is really, really important. So if we build out -- capable to look to build out capabilities that continue to enhance our positions in those 4 target markets that we've identified, and we'll look at opportunities as they arise. So not to count anything out, but we continue to be focused on our capital allocation framework that we've outlined. I would say that where we will be looking for growth is absolutely in the 4 areas that we're particularly now built the business around being defense, energy and digital, water, as I said before as well, so we'll be focusing on those areas.

Okay. So you've seen the reaction of the market today, your stock has been built at the end of that 5% or 10%, would you consider accelerating your buyback, in other words buying a lot more stock back at these lower levels?

Yes. Look, I'll just say our buyback program is live and ongoing. So yes, I would expect that we will be buying back through the course of the rest of this year.