Release Date: February 21, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Service Stream Ltd (ASX:SSM, Financial) reported strong financial performance with double-digit growth in both earnings and profits.
- The company achieved significant improvements in cash flow, with operating cash flows of $70.1 million and an EBITDA to OCFBIT conversion rate of 111%.
- The utility division showed margin improvements, with EBITDA margins increasing from 3% to 3.4%.
- Service Stream Ltd (ASX:SSM) secured $1.2 billion of works over the first half, contributing to a strong work-in-hand balance of approximately $5.1 billion.
- The company announced a step-up in dividends to $0.02 per share, reflecting confidence in future performance and solid financial results.
Negative Points
- The Beaudesert project faced setbacks due to extreme weather, resulting in an additional provision of $9.8 million for repairs and extended project timelines.
- Despite improvements, the utility division still has legacy agreements that are not providing adequate returns, requiring further renegotiation.
- The transport division experienced a decline in revenue and EBITDA due to the demobilization of WA regional road operations.
- The company faces ongoing challenges in managing inflationary pressures and cost management.
- There is no formal dividend policy in place, which may create uncertainty for investors regarding future dividend payouts.
Q & A Highlights
Q: Firstly, just on the Beaudesert project, and the additional provision that you've taken, are there any tail end of work that's left to go, or is that done and dusted?
A: Yes, good morning, Will. Thank you very much. We've got, as I said before, bitterly disappointing that we've had to increase provisions at Beaudesert. The fact that our teams got to a point where the infrastructure is in the ground, and we're actually currently supplying potable water to the nearby communities, it is just disappointing that we've never got to go back and repair that. So that $9.8 million provision covers a couple of things. It certainly covers the repairs to some of those aboveground assets -- some of the buildings and other infrastructure that was damaged in those winds and heavy rain -- but also covers the cost associated with our team, just extending out to towards the end of this half year, so that they can stay through that final completion.
Q: And in your commentary, you've talked about how you're looking at a number of legacy agreements, and trying to negotiate better terms and so forth with respect to utilities. Can you just give us a sense around how much of that legacy agreements relates to utilities work-in-hand, I believe it's around $2.7 billion? Thank you.
A: Thanks, Will. I don't have a number off my head as to what portion of that revenue those agreements would reflect. But we can follow that up and get back to you. But look, we do have probably about half a dozen, I'd say, legacy-related projects. And legacy that existed in our business for a period of time. But ultimately over the last couple of years, these have transitioned to a period where they're not providing an adequate return to the business. Some of that is due to issues that we've had to address, and we have, and now, but some of them are also related to just changes in the market or change in the client business. We have some instances where clients have decided to take a portion of those work in-house. So we are looking to renegotiate those. We are very confident we'll see further improvement in those margins as we work through that tail end of half a dozen contracts. To give you some insight, our utility business probably has about 70 contracts across the company. So to have five or so, it's not a significant number. But as Linda stated, I think we'll certainly see some improvements from -- and it actually [knows] all those further improvements that we're in the process of making and taking benefit as well as that new growth. And that's a really important aspect, we are seeing the division successfully secure growth at a higher margin and deliver at or above those expectations. So those things combined will certainly improve the margin performance across utilities into the future.
Q: Just moving on to, I guess, the entry into adjacent markets you've talked to, any meaningful progress and update with respect to social infrastructure and defense?
A: So a couple of metrics there. Certainly we are I think, as I said before, in a favorable position where our business given the turnaround, given the performance we're delivering, and the strength of our balance sheet are able to really now look at how we might fund further growth, both organically and looking at external. That external growth will cover, I think a range of sectors and issues that we find attractive. Some of those are expansions of our existing sectors such as power or industrial, new energy, et cetera. Defense is another one that certainly we are looking at some opportunities in that space. In terms of our work around social infrastructure, you would have seen over the last 12 months, the major defense contracts that we are sort of bidding on as one of the major opportunities in that space has been extended for a 12-month period to allow that tender to take place. We are and have been ramping up our team, and that will start. So the next phase of that response starts later in this half year. So I think we probably have a couple of months of service work to provide a response and then hopefully some positive engagement with defense thereafter. But that represents one of those opportunities. As we've talked about before, there's a lot of other opportunities in that sort of social housing, education, health sectors, et cetera, where we are also able to leverage some of our services and skills. But at the moment, the primary focus has been on this defense tender. Given the significance at play, it's only once every 10 to 15 years that this comes out to the market. So that's certainly been a major focus over the next couple of months for the team.
Q: Dividend payout ratio going forward, how are you sort of thinking about that given that your cash position has improved quite materially half on half? Thank you.
A: Yes. So we've said this before, we don't have a set payout ratio. I think what we're trying to provide is the indication that we see improvements now in our earnings and the strength of our balance sheet. You know, the $0.02 we struck is an indicative quantum, but we don't have a set ratio.
Q: The $9 million investment into further optimization and looking at the facilities management, defense and infrastructure, how much of that has been invested in this result?
A: Yes, as I noted in my section, we've spent a little bit, not a lot, but the second half will be heavily weighted as we ramp up, particularly around the defense tender. But again, we listed that wasn't indicative of what we may look to spend, and the mix will really depend on the opportunity. But yes, we haven't spent too much, but it is kind of in the first half results.
Q: Did you quantify how much you've spent?
A: Couple mil. Not much.
Q: Just with the [onerous] contract being impacted by weather and now there's a repair process, there, and additional cost to that, countering that, was there a bump, or a level of -- not one-offs, that's not the right term -- but gain or uplift laid in the period on the weather events that may have helped the telco business or other parts of the business?
A: Yes, you're absolutely right, Warren. That was something I covered with the insights. You may have missed it, but absolutely, as you know, weather can be a positive aspect and generally is a positive aspect -- adverse weather for our business. It's not a project-based works, we've got a set budget and a set time. But as we said, we're running that legacy project down and we'll finish shortly. So yes, we actually called out, but that does that same adverse weather, in Southern Queensland, actually provided substantial increase in work volumes across our telecommunications, and some broader aspects of our operations, which is great. We know that that's part of what's the situation and circumstances of these events
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
