Release Date: August 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Downer EDI Ltd (DNERY, Financial) achieved a pro forma EBITDA margin of 3.3% for the full year, up from 2.6% in FY23.
- The company reported a 34% increase in pro forma EBITA to $384.1 million.
- Normalized cash conversion improved to 104%, up from 63% in FY23.
- Net debt to EBITDA ratio decreased to 1.4 times, down from 2 times at June 30, 2023.
- The FY24 total dividend increased by 30.8% to $0.17 per share.
Negative Points
- Downer EDI Ltd (DNERY) experienced three workplace fatalities during the year.
- The transport segment faced reduced spending from transport agencies, particularly in Victoria.
- The company incurred $177.2 million in individually significant items, including regulatory reviews and legal matters.
- Cash flow phasing on a major project will unwind in the first half of FY25, impacting cash conversion by approximately 10 percentage points.
- The company expects continued subdued levels of government spending on roads in Victoria in the first half of FY25.
Q & A Highlights
Q: How would you describe the environment for transport agency spend at the moment?
A: We've called out Victoria in particular. We saw very subdued levels in the first half of FY24, with a bit of a pickup in the fourth quarter due to budget cycles and flood recovery spending. We expect a similar pattern in Victoria for FY25, with an improved second half. South Australia is steady, Queensland looks optimistic, and New South Wales is somewhere in between. In New Zealand, there's a reasonable amount of spending on roads and maintenance, shifting from larger projects to local road networks.
Q: Can you clarify the comment around the $10 million claim settlement benefit?
A: Last year's results included an aged legal matter settlement related to a project claim. This elevated the comparative cost in the corporate segment. The 13% headline reduction in corporate costs year-on-year adjusts for this unusual item, showing a more accurate 4% reduction. The second half of FY24 also saw a 13% reduction compared to the first half, unaffected by the settlement.
Q: Can you help bridge out the EBITA growth in FY24 by discussing the benefit from the cost-out program?
A: The improved performance is roughly 50-50 between cost-out and improved project performance. The majority of project performance improvement comes from concluding lower-margin and loss-making work, with new higher-quality, higher-margin revenue starting to come online.
Q: Can you talk about transport maintenance volumes in the second half of FY24?
A: Volumes were much improved in the second half, particularly in Q4. This is somewhat normal due to seasonality and transport agencies' budget cycles, but the improvement was more pronounced this year.
Q: Does the cash flow conversion target for FY25 include the cost impact of cost initiatives taken in FY24 and expected in FY25?
A: Yes, the cash flow conversion target adjusts for the cash impact of individually significant items (ISIs) from both FY23 and FY24. The cash impact of ISIs taken in FY24 is expected to be around $40 million in FY25.
Q: How much of the $130 million cost-out achieved in FY24 was realized in the period, and what is expected for FY25?
A: Of the $130 million, about $80 million was realized in the first quarter of FY24. The remaining $50 million was achieved late in Q4, so it will have a run-rate impact in FY25. These are gross annualized cost-outs, with some offset by cost escalation across the business.
Q: Do you expect revenue growth in FY25, given market factors and divestments?
A: Revenue is expected to be relatively flat in FY25, focusing on quality of earnings and margin enhancement. We see a healthy pipeline of opportunities, with modest to flat growth in FY25 and better prospects for revenue and earnings growth in FY26.
Q: Do you expect transport margins to improve in FY25?
A: Yes, the transport businesses achieved good cost-out levels and commercial resets in FY24, with positive impacts expected in FY25. The New Zealand projects business and the ramp-up of QTMP in rail will contribute positively, offsetting the subdued roads spending in Australia.
Q: What are the expected transformation costs in FY25, and what will be the P&L charge?
A: We won't provide specific guidance on ISIs and transformation costs. However, achieving the remaining $45 million cost-out target in FY25 will incur some costs, but they won't be substantial relative to FY24. To date, achieving $130 million in cost-outs required about $36 million in investment.
Q: What is the expected cost inflation on the non-billable cost base over the next 12 months?
A: Our commercial models generally handle cost escalation well, but overhead structures are exposed to inflationary pressures, particularly wage pressure. We are reducing overhead personnel and reviewing IT procurement arrangements to manage these costs.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
