Well, good morning, everyone. My name's Grant Fenn, Chief Executive Officer of Downer, and with me is Michael Ferguson, the Chief Financial Officer, and our incoming CEO, Peter Tompkins, who will take over as CEO following this call. We've got a lot to discuss this morning. I'll begin with an update on the utilities contract issue, then a summary of the past six months, including a look at some of the challenges in our operating environment. Michael will then go through the financials in more detail. I'll cover the outlook, and then we'll finish with Peter talking through Downer's strategies to realize value for shareholders, which we raised at our AGM last November, and we'll then open up for questions. I'll start with an update on the utilities contract issue.
On 8th of December, Downer reported that we'd identified historical misreporting of revenue and work in progress in one of our maintenance contracts. This morning, we've issued an update to the ASX that I would encourage you to read if you haven't already. The root cause and contributing factors have been established. We've reviewed our broader workbook across the group, and I can confirm that we believe the issue to be isolated to the one contract. I can also confirm that post-tax earnings were overstated by approximately AUD 1.7 million in 2020, AUD 8.8 million in 2021, and AUD 11.7 million in FY 2022. Comparative financial information have been restated to incorporate the correction in underlying results. There are contributing factors which contextualize but don't excuse what happened here, and we've moved quickly to ensure that it won't be repeated.
We're heavily focused on the remediation of the contract. A detailed recovery plan is being actioned. The new contract management team, along with external business improvement specialists, are working closely with our operations teams and our customer to address the contract performance. We have agreed and documented a commercial reset of the contract with the customer, and this, coupled with planned operational improvements, indicates that the contract is not onerous. We'll now move to slide five here on the first half financial results. As we've discussed a few times over the course of the last six months, the first half of 2023 has been very challenging, with significant parts of our business impacted by rain, storms, and flooding, and the labor productivity hangover from COVID.
Our cash conversion at 8.5% is way off our normal half end position, but very clearly, due to a meaty subcontractor payments on completion of our Sydney Growth Trains project and a couple of large customer receipts expected in late first half being received in January. Michael will provide more detail on both business unit financials and group operating cash flow later in the presentation. That brings us to the next slide, which takes you through in some detail what the business has been dealing with. Wet weather resulted in a 40% increase in lost shifts, as well as reduced product volumes in our road services business. I'll talk a little more about that on the next slide.
In utilities, extensive flooding and rainfall has caused these site closures and project delays in the water business, while the wet conditions have also led to lower worker utilization across our outdoor activities, such as meter reading services. Of course, we try to mitigate these impacts by utilizing annual leave and scheduling training during periods of forecast rain. You know, this doesn't reduce the material impact on the business. The labor market remains challenging, and this is not just an issue impacting Downer. We're still seeing higher than normal job vacancies, particularly in casual roles and in certain geographies. We've had to rely on increased use of outsourced labor, as well as increased overtime during the half. On the positive, our enterprise bargaining agreement renewals have all settled within our expected range and well within our CPI price escalators.
We are ranked among the top 10 employers by Randstad Employer Brand Research, and we were also recognized as an employer of choice at The Australian Business Awards. If I just move on to the next slide. These two graphs show the increase in lost shifts and the increase in outsourced labor over the prior periods. Now there is a clear focus across the business to address this. Now on to transport. This business unit continues to be the powerhouse of the group, contributing 44% of revenue and has a very strong outlook. As we've already reflected, continued severe wet weather materially impacted the performance of the roads business in this half.
As the wet weather eases, extensive road rehabilitation opportunities are starting to present in Australia, and there'll be a significant effort that will be required in New Zealand to recover from recent floods and storms. On 6th of February, the Rail & Transit Systems business was named preferred applicant for the multibillion-dollar Queensland Train Manufacturing Program. This is a very significant win, which will cement our position as the largest passenger rollingstock maintainer in Australia for the next 30 years. Peter will cover that in more detail later. On the 22nd of February, we announced that we had entered into an agreement to sell the Australian Transport Projects business to a wholly owned Australian subsidiary of Gamuda. The sale price represents an enterprise value of AUD 212 million to Downer. On to utilities.
A number of factors contributed to a disappointing result, including a loss in the power maintenance contract that I discussed at the start of the presentation, as well as provisions taken on weather-impacted water infrastructure projects and projected losses on a New Zealand wind farm. I expect utilities to grow substantially over the coming years with many opportunities from the energy transition. Downer is the market leader in power transmission services, and we've recently entered the New Zealand transmission market with a contract to deliver transmission services to Transpower. Our telco business performed well with revenue growth led by NBN and Telstra contracts. Our facilities business now contributes 38% of revenue and pleasingly performed above expectations for the half.
In September, we were awarded a 7.5 year contract to deliver maintenance services to the South Australian Housing Authority, consisting of approximately 27,000 social and public housing dwellings and valued at over AUD 630 million. We'll just move on now to our work in hand slide. Our work in hand is a substantial AUD 39 billion, which also includes our estimate for the recent announcement on the Queensland Train Manufacturing Program. It's long dated, it's more than 90% government or government related, it's diversified by industry. I'll just now hand over to Michael, who will cover the financials, then I'll come back on for outlook.
Thanks, Grant. Good morning, everyone. I'll start on slide 13 with a summary of our half year FY 2023 group underlying performance. As Grant said, this has been a challenging period for Downer. The group reported total revenue of AUD 6.1 billion for the six months to 31 December 2022. This was 2.9% higher than the prior corresponding period. Underlying EBITA declined 24.5% to AUD 133.6 million with an EBITA margin of 2.2%. Margin was impacted by several factors across the group, including labor availability, elevated cost to serve, continued wet weather, and project losses in utilities. I'll go into more detail on some of these in the following slide.
Net interest expense of AUD 40.3 million is represented by approximately AUD 30 million of bank and DCM net interest and AUD 10 million of lease interest. This is reduced by 12% due to an improved average cost of funds. The effective tax rate of 26.7% remains below the Australian statutory rate of 30% due to non-taxable distributions from joint ventures at a lower corporate tax rate in New Zealand. Downer delivered an underlying NPDA of AUD 68 million, which is 28% lower than the prior corresponding period. The Downer board has declared an unfranked interim dividend of AUD 0.05 per share, representing a payout ratio of 54%. Moving now to slide 14, outlining the performance of our business segments.
Downer's urban service businesses delivered EBITA of AUD 182.5 million, a decrease of AUD 21.8 million on the prior corresponding period. Transport delivered EBITA of AUD 88.7 million, a decrease of 14.5%. Wet weather labor market challenges and increased transport and logistic costs were a key driver behind the margin deterioration. This was particularly evident in our roads business. Long-term rail maintenance contracts delivered solid revenue and margin performance, this was not enough to offset challenges in other areas of the segment. Utilities delivered an EBITA loss of AUD 5.2 million. There are a number of factors behind this disappointing result. Utilities recognized losses on three projects in the half. The power maintenance contract associated with the revenue recognition issue, a water construction project, and a wind farm project in New Zealand.
With the quantum of these losses set out in the slide. Further, there were losses in the meter reading business associated with labor availability and productivity. Utilities revenue growth of 12% was driven by NBN and Telstra work within the utilities tech and comms business, which continues to perform strongly. Facilities performed well during the period. EBITA increased by 11% to AUD 99 million through strong performance in the government and health and education businesses. In addition, the power and energy business is seeing growth in new contracts following a period of subdued activity. We've provided more information on each of the divisional performances as part of the appendices to this presentation. Slide 15 reconciles Downer's statutory result with the underlying result.
The difference between the statutory and underlying result relates to the non-cash fair value movement on the Downer contingent share obligation liability arising from options issued as part of the Spotless minority acquisition. This is consistent with prior periods, and there are no other individually significant items. Moving to slide 16, operating cash flow. Downer reported operating cash flow conversion of just 8.5% for the half, which was well below our target and historical actual cash conversion levels. As Grant pointed out, there have been a number of significant factors on the first half operating cash flow. First item relates to the timing, relates to timing of payments to our subcontracting partner on completion of the Sydney Growth Trains project.
During the half, we made payments of $78 million with the associated cash inflows having been received over the last three to four years. The second item relates to $22 million of settlements for two liquidated damages claims provided for in prior periods relating to renewables projects. The third item relates to $40 million impact from the change in timing of collection from two key customers where we ordinarily would have received the cash in December. The fourth item we have called out is the slippage of $40 million in claim positions. This slippage relates to two specific contracts into transmission and transport projects, in which the timing of receipt was initially agreed with the customer to fall within the period that have actually been collected early in the second half. There was also an increase in working capital in the period, particularly in inventory.
The breadth of Downer's business generally means the portfolio effect will balance our cash flow timing factors in any given period. The culmination of these individually material factors all falling in the same period has led to a disappointing cash performance. Of the low earning space in the half, each of these items has had a material impact on conversion. We'll continue our strong focus on cash collection and conversion in the second half to return it to traditional levels. Turning to the broader cash flow on slide 17. Net core CapEx, lease payments, and IT investment of $166.4 million is in line with prior periods. Cash held at the end of the period was $450.4 million, which when combined with undrawn facilities of $1.2 billion, provides Downer with significant liquidity of $1.6 billion.
Slide 18 gives an overview of Downer's debt profile. The group's weighted average debt duration is 3.4 years, with the maturity profile shown in the graph to the right of the slide. Following Downer's refinancing activity in the first half of FY 2022, we have no maturities due in FY 2023 and very little in FY 2024. Net debt to EBITDA of 2.3x has risen sharply in the half due to both increased debt and reduced earnings, particularly from the utilities losses. While it remains within Downer's capital allocation framework target range of 2x-2.5x, it is above what we deem the current optimal level. We will continue to focus on improving profit performance and operating cash flow performance in the second half to reduce net debt.
Downer remains in compliance with all debt covenants. The expected proceeds from the sale of Australian Transport Projects will improve key financial metrics. Thanks very much. I'll now hand back to Grant.
Thanks, Michael. Now on to the outlook. It's pretty obvious that FY 2023 has proven difficult for us to provide accurate guidance given weather and changing conditions. You know, in summary, in August 2022, our guidance for FY 2023, 10%-20% underlying NPATA growth, subject to, you know, a number of things. In the AGM, 8th of November , at that point, our forecasts from the business and our view had continued to support guidance. On December 8, we announced, as part of the release relating to the utilities issue, that trading for October and November had indicated that guidance was unlikely to be met, and that we reset guidance to AUD 230 million NPATA, excluding the impact of utilities contract issue.
Since the 8th of December, as part of our half year reporting process, which was finalized over the weekend, Downer has conducted a detailed reforecast review and considers it appropriate to further adjust the guidance for the following items, a number of which we have already spoken about in the discussion today. Losses associated with the utilities power maintenance contract. Whilst the contract is not considered onerous, further losses have been put into the forecast, and will impact H2 in that forecast until the contract reset and recovery plan takes effect. We believe there's a heightened risk of water project losses due to prolongation costs, which may not be recoverable.
A slowdown in government minor capital works, based on very recent customer feedback, and the impact of recent storms and flooding in New Zealand, which we think ultimately will be very positive for the business in terms of rework, but not the case really for the remainder of the four months in the six months, I should say, in FY 2023. Downer now expects underlying full year 2023 NPATA to be between AUD 170 million and AUD 190 million, assuming no further material COVID-19, weather, labor, et cetera, disruptions and excluding any restructuring costs which might come about from what Peter's gonna talk to you about now. I'll now hand over to Peter to take us through the forward view of Downer.
Thank you, Grant, and good morning. I want to say first up that I have enormous conviction in Downer and our people. This is a truly great company with tremendous capability and opportunities. We won't shy away from the fact that this is a disappointing set of results today. Last week, I announced a major restructure of the business to our staff, which I will cover in more detail shortly. The changes are significant, and I'm confident that we have the plan to make our business more efficient and profitable. I assure you that we are responding to the current challenges with energy and an intense focus. I'm absolutely committed to taking decisive action to make our business more resilient to the factors that are impacting Downer. I have been at Downer for 14 years and have held risk management, commercial and senior operational roles.
I feel confident and clear in my thinking on the drivers of performance that we need to concentrate on. I will now give you an update on where I am at with my plan to improve business performance and realize value for shareholders. At our AGM last November, Downer committed to exploring strategies to realize better value for shareholders that properly reflects the exceptional businesses and capability at Downer. As the new CEO, I am committed to this course of action, and these are the three areas of focus coming out of my review of the business that I believe are critical to the future success of Downer. The first is to reset our operating model by merging our Australian and New Zealand operations to be sector-led, to enable better customer solutions, resetting our cost base and creating a one-d owner.
The second element is to continue our focus on simplifying our portfolio, and we have already made good headway on this, which I will cover shortly. The third, and probably most critical, will be an unrelenting focus on improving margins and ensuring we have a disciplined approach to risk management. To be clear, we have a very good risk management framework, but I believe that the way in which we manage the risk through higher levels of accountability for operational excellence can be improved. To the transformation program that I announced last week. We have committed to a program of work that is targeting to deliver benefits of at least AUD 100 million in FY 2025. These benefits are set around several initiatives, one being the merger of our Australian and New Zealand operations that is now underway.
Currently, we have two transport businesses, two utilities businesses, two facilities businesses, and two corporate head offices, and all of these with their own leadership teams. The new Trans-Tasman sector-led business units will create standalone transport facilities and utility businesses of significant scale to accelerate efficiencies and consolidate our technical and management capability into their specialist areas. This will simplify our operations, support sector-led growth, and enable a standardized approach to how we manage our portfolio. Combining our corporate functions in both regions will also eliminate a significant amount of duplicated work and again, simplify how we support our operational teams. The other key areas covered as part of our target are fleet, property footprint, and procurement.
A project team has been established to support the business with this transformation program, and we have engaged external support to help us accelerate the achievement of the benefits and provide the framework and measurement of progress. Now to portfolio simplification. As mentioned, we are making very good progress in this area, and this aligns with my view of how best to create a business with a narrower focus on core markets. As Grant discussed, last week, we announced the sale of our Australian Transport Projects business to the Australian subsidiary of constructor, Gamuda. Not only does this demonstrate the inherent value in Downer's portfolio, it is an enabler for further structural simplification and cost out. The potential sale of Repurpose It, of which Downer owns 45%, is also underway. This is a leading waste-to-resource business, and it has already received a lot of interest in the market.
Now on to operational excellence and risk management. Downer has exceptional businesses with market-leading positions. Whilst we are well-positioned strategically with our exposure to energy transition, defense spending, and government outsourcing that each offer high growth potential, our performance has not been up to scratch and we must find ways to be more profitable. This is regardless of the significant pressures being experienced as a result of weather, labor shortages, and supply chain issues. We have set a target to improve our average EBITA margin to be at least 4.5% across the business in FY 2025 to tie back to our planning, budgeting, and accountability frameworks. There are several initiatives that are key to this. The AUD 100 million benefit delivered through operating efficiencies and synergies is one.
The continued simplification of our portfolio with a focus on exiting lower margin operations is another. Importantly, compliance with our integrated management system, The Downer Standard, will also ensure consistency in process around our project execution, risk management, and system efficiency. Part of what we're doing here with the transformation program is to make sure that our teams go back to the basics and focus on the activities that deliver higher performance and ensuring the new management team is accountable for this. In the current climate, we have been lowering our risk appetite and increasing pricing to reflect uncertainty. While there are significant opportunities in areas such as energy transition, we are not rushing into them.
For example, the construction of high voltage transmission lines to the renewable energy zones, an area where we have significant expertise, but at the moment, the risk allocation in these very large projects does not fit our risk appetite, and we are waiting for this to improve. As I said earlier, risk management is one of my key priorities. Our new sector-led business units will have the scale, specialization, and accountability for performance, operational assurance, and frontline risk management to support this. There's a higher level of accountability on senior management, especially around job selection and tendering and delivering the tendered margins. I've put up here a timeline that summarizes what I've just outlined, particularly in relation to our transformation targets and the improvement in margins that we have applied to an FY 2023, 2024, and into 2025 timeline.
We'll be using this timeline here to keep shareholders updated on progress with our Investor Day in April being the next key forum. In some very good news, one of the significant recent announcements was Downer being named preferred applicant for the Queensland Train Manufacturing Program. Excuse me. With the award of the Queensland project, Downer will manage the largest fleets of passenger trains across Australia's eastern seaboard, having now delivered a total of 119 Waratah trains in New South Wales, and now more than halfway through completion of 70 High Capacity Metro Trains in Melbourne. Under the new Queensland contract, Downer will be designing, manufacturing, and commissioning 65 passenger trains and simulators with our key subcontractor, Hyundai Rotem.
We will design, construct, and commission the train manufacturing facility on the Fraser Coast and a maintenance facility on the Gold Coast, and we will deliver through-life support and maintenance of the new fleet for an initial term of 15 years, up to a potential term of 35 years. Our proven experience in working with international rolling stock suppliers and our industry-leading engineering and maintenance practices will be applied to delivering this new contract and importantly, supporting local manufacturing capability in Queensland. At the bottom of this slide, we've included a graph showing the indicative revenue and delivery profiles for the project scopes. As you can see, over the next few years, we will be mobilizing the delivery. Excuse me. We will be mobilizing the delivery of the manufacturing and maintenance facilities, which will be completing at the same time as we ramp up to full production of the fleet.
Manufacturing of the new fleet will be completed ahead of the 2032 Olympic and Paralympic Games. With my new leadership team, we are clear on our immediate priorities and demonstrating progress against the key focused areas just outlined. The next 12 months for Downer will be defining, and I am confident that it will be a period of positive change. As mentioned in the outlook statement, we expect to incur a material level of restructuring costs in the second half, which we will update the market on at Investor Day. The three points I want to leave you with here today are that the board and the management team are aligned on the need for change, and I have a strong mandate. The restructure announced last week is a critical part of how we will simplify our business and create value.
Finally, we are responding to the current challenges outlined with energy and an intense focus. Finally, as today is Grant's last day, I would like to thank him for his 12 years leading Downer. You've steered the business through some challenging periods, and you've been instrumental in building the enviable portfolio of businesses that we have today. Grant, we are all grateful for your steady leadership and vision that you've provided for Downer. I now open the call up to questions that you might have for either Grant, Michael, or myself.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Andrew Scott from Credit Suisse. Please go ahead.
Morning, gents. Thanks for taking my questions. First question just relates to the resolution around the accounting irregularities. Just want to understand a little better when it was described to us on the 8th of December, effectively, it was described as revenue recognition ahead of completion of the work and not matching the costs. It doesn't make sense to me if that contract's relatively steady state, that there's so much of the profit overstated in latter years. Can you just help me understand how exactly the mismatch has happened and it's continued to grow in latter years if the contract's a steady state contract?
Yeah. Thanks, Andrew. I should just say that, there's limited amounts of detail that we can provide here. On the point that you raise, I think the premise that the contract has been steady state, I don't think that, in fact, is the case. Volumes, across different aspects and mix, has been quite volatile, and in particular in relation to the amount of storm work, et cetera, that we've been undertaking. The contract really hasn't been in steady state.
Thank you. Just to follow up on that, the reference to the contract management team having been replaced, I assume that means they've also left the business. Am I assuming correctly that you just said you can't discuss certain things about this suggests that there's further action to be taken?
No, no. No. This. No. Yes, the management team are no longer with us and there's a new management team in place. As we've said in the release, there's an action plan that is well progressed now. We've recut the contract with our customer, and we're right into the middle now of improving the Downer side of that productivity. That's all on board at the moment. All happening at the moment, Andrew.
Thank you. Just one more question, if I could, around the reference to the sustaining, or the minor capital works for government customers. Is it one particular region? I guess one of the things about the business that you talk about is this government dependability for revenue. The fact that there's some slowdown with regard to some of that capital works is a little concerning. Is it one particular geography, one particular government, or is it spread broadly across the business?
No, it's in one, and it's in relation to budget spend.
Okay. Thank you.
Thank you. The next question comes from Scott Ryall from Rimor Equity Research. Please go ahead.
Oh, hi. Thanks very much. I guess my first question is to Michael. I'm wondering if you could just talk us through, and I've asked this question previously, but the changes in guidance since the 8th of December just make me think that, and the contractual issues that we've had in the first half make me think that... Well, it just make me question how often and what the quality of financial data that you're getting from the individual business units is, please. I guess, you know, question to yourself and Peter. Is there any spending required to improve the quality of financial data that you get on a monthly basis, please?
I don't think the issue is not the quality of the financial data. The issue has been the change in circumstances between the dates that's given rise to the forecast change. If you look at the changes from the 8th of December to now, the impact of the second half OM&A contract, I think we called it out at the point we gave the guidance in December that it wasn't included in that and we needed to work through our planning on that. The issues that we've recognized around the water projects are issues that have presented very recently, as has the issue with the government spend. The issue is not-
Okay.
With the quality of the data.
Can you just remind me-
The issue's just with the changing in the environment that we're operating in.
Okay. Can you just remind me, how long does it take you to get monthly information and what's the nature of the information you get each month, please?
Sure. We get detailed information across the business. Yeah, we get flash reporting on working day four, and then we work through the broader reporting, and then we generally have a reforecast about three or four weeks after the month end.
Right. and what's the information that comes up, please?
Just financial forecast information and profit and information on projects, and it's very detailed.
Okay.
The issue is not the forecasting accuracy of the business. The issue has been new issues that have arisen in regards to the utilities contract and then issues in the environment that we have identified and quantified.
Yep. Okay. It's been no shortage of those, I guess. Peter, just one last question, top-down. The restructure to, I guess, collapse the Australian and New Zealand structures, which you've outlined seems pretty sensible to me. Can you just comment on why that hasn't been done historically in your view?
Look, it's Grant here. I might just cover that. I think, and then Pete can finish that off. Look, it's always been something that's been sitting in the background as something that has always been there as a potential cost reduction position. We have not done it, as we've been building our business there, and we've not done it because we've historically had, you know, some concern as to how we would make sure that the New Zealandness of the business is maintained. Now, our New Zealand business has, you know, grown and done very, very well over the recent times, to the point where in almost everything that we do there, we are market leaders. We think, now is the time that we can make this change without having the risk that we...
Certainly the size of the risk that we have previously viewed. It's not that we won't be concerned about making sure that the New Zealandness, you know, the feeling of the New Zealandness of our business by government in New Zealand is not something that we won't be thinking about. We of course will be, and we'll be making sure as we make this change, that aspect of our revenue generation is maintained. We'll be doing a lot of work making sure that those relationships, et cetera, and the view of decision-making from our New Zealand customers are maintained. Peter, you might wanna just follow on from that.
Yes, Scott, I agree with you. It is logical, and I agree with Grant's sentiment about making sure that you do this in a way that ensures that we get, you know, a single focus to the business, but ensure that we have the scale and representation in all geographies. You know, now is a time where I feel confident that we have the team and the ability to do that.
Okay. All right. Thank you. That's all I have at the moment.
Thank you. The next question is from Rohan Sundram from MST Financial. Please go ahead.
Thanks. Morning, team. A couple from me. I might just start with the guidance. Implied impact a second half AUD 100 million-AUD 120 million. How much of that reflects seasonality versus actual improvement in the outlook? Is that in any way representative as a base for growth in your view? Just trying to understand the level of normalization we could see here.
Yeah. Look, you've got sort of aspects of both in there. You know, to be, to be frank, I'm not sure that we can sit down and exactly go through, you know, line by line, how much there is in each. All right? These are detailed forecasts that have come up from the business unit, and you'll have both of those aspects in there.
Okay. On the asset sales, appreciate the commentary, Peter. The decision to divest, Repurpose It, what's the rationale there?
Look, it's a very.
There's other owners.
...valuable business. We're one of the shareholders there and, you know, we're, you know. Think it's a very good opportunity and time to do it.
Yeah. We're not the only owner there, right? There's some individuals who are in there as well. You know, we've also got those matters to deal with here. It is a very good asset that you know, we think we'll be pretty highly contested in the market.
Okay, thanks guys.
Thank you. The next question is from Anthony Longo from JP Morgan. Please go ahead.
Well, good morning, everyone. Just following on from Scott's question earlier with respect to restructuring and then why it wasn't done earlier. Perhaps I just wanted to understand what's gonna make it different this time. I mean, this business seems like it's been in perennial restructuring. I guess, Peter, in the role historically, you mentioned you have had an experience in risk management. You know, what confidence can you give investors that we can actually see some execution this time around?
Look, I think you're making the point around the evolution of the way that the business has been organized in the past. You know, that's been for very good reason. What we're talking about now is a, you know, a transformation program that's very much focused on creating highly scalable sector-led businesses that's coupled to, you know, a transformation program. I mentioned earlier, you know, the target around the 4.5 EBITA margin. What you're seeing here is a mobilization of a very, very clear and well-defined project that the leadership team is backing and that we've, you know, kicked off also with the support of some external help.
Okay, great. No, I appreciate that. Secondly, with respect to the sale of the transport business, I mean, that was announced, I think, what, 8:00 after market earlier this week. On the early read, it looks like that multiple was pretty light on relative to what we thought could be achievable. Can you perhaps give a bit more context around, you know, the proceeds around that, and then ultimately, you know, what those proceeds are gonna be used for?
Yes, Michael here. I mean, I think a couple of comments on the multiple. We were quite pleased with the multiple. You know, that business for Downer does, you know, about AUD 1 billion, AUD 1 billion a bit revenue at 2%-3% margin. Relative to comps, we thought, the... it was in fact a very good price, so.
Yeah. Fair enough. Finally, I mean, in terms of guidance, I mean, again, similar to Scott's question, I mean, what confidence do you now have in giving visibility around guidance range, just given, you know, you've issued that from December and appreciate, you know, circumstances change, but, I mean, it's a bit of a worry that, you know, a month out, you're seeing an 18% downgrade at the midpoint, in a month?
The specifics have been highlighted, you know, so that's our view of where this is at. We've given the reconciliation there, so you can understand what's occurred.
Yeah. Okay. I guess we'll back to Operator. Thanks very much.
Thank you. The next question is from John Purtell from Macquarie. Please go ahead.
Good morning, Grant, Peter, and Michael. Just had a few questions, please. Michael, maybe just to start on the gearing side, obviously, it's moved up to 2.3x . How do you see that profiling through the second half? Obviously, you've got the transport project sale there, but you've also got the material restructuring costs. Is there more a cash effect from those coming in 2024, or will that be also in 2023?
Yeah, John, We're still working through the finality of how much the cash impact of the restructuring costs will be in 2023. I don't think it will be, you know, material to the gearing. When you look at the spike, you know, there was obviously the increase in the net debt due to the cash performance, but there's sort of been an equal contribution almost from the LTM EBITDA decline. I guess through, you know, return to normal cash conversion and sort of improvement in earnings performance, we expect that to come down. Then obviously to the extent we close transport projects, this side of 30 June, that'll have a pretty good impact on it as well.
Thank you. The second one, you flagged some further issues in terms of a water project there, I think in New South Wales and also New Zealand wind farm. If you could just sort of color in what the issues are there and appreciate they're probably partly weather related, but, you know, is there ability to better contractually protect yourself for that type of thing going forward?
Look, I'll just touch on the water job. You know, that started, you know, some time ago and has been consistently impacted by flooding on a number of sites. Right up until very recently, obviously, we've had a view that the revenue there ultimately would cover the costs. The latest forecast cost of completion, including our view of, you know, a detailed view of prolongation costs, and, you know, a view of, we'd say a conservative view of recoverability from the customer on claims, that's the position that we've taken. I think if we had been looking at a dry period, then we wouldn't be looking at this loss, John. It's as simple as that. It's been absolutely smashed.
Whilst we thought that we could get our way through it, you know, as we've done this final forecast cost to complete, that's been the answer that's come out. That's where we are.
Okay. The final question I've got just in terms of, the, obviously the review that's been undertaken both internally and externally, just trying to get a sense of how extensive that's been. You've obviously reviewed, you know, revenue recognition around particularly where there's been a material weak balance there. But has there been a broader review, I guess, outside of that in terms of, you know, revenue recognition, more generally? So yeah, that's a, that's the final question there. Grant, I'd like to echo the early comments and wish you all the best going forward.
Thank you, thank you, John, on that latter point. Just on the earlier, rest assured, first of all, I point you to the ASX release, and I really have to stick pretty largely to what's in there and not go too far beyond that. You could imagine, we do talk about some conclusions that we've made in that ASX release, John, which deals specifically to your issues that you raised. You could well understand that our view is that those have been adequately dealt with.
Thank you.
Thank you. Your next question comes from Reinhardt van der Walt from Bank of America. Please go ahead.
Hey, good morning, folks. Thanks for taking the questions. Just wanted to check on the fixed price lump sum exposure across the work in hand at the moment. I noticed that we haven't received that disclosure in this presentation. Could you just maybe give us a bit of comment around where the recovery risk is at the moment?
Yeah, look, I'm not sure I've not really highlighted to me that we'd taken it out. Perhaps we can come back with you. This is not a business that is a hard dollar constructor in the normal course. Even in the utilities contract that we have talked about here, there is sharing of risk.
Okay.
That's good.
Thanks. Just on the 4.5% medium term margin targets, it looks like the AUD 100 million cost out from corporate consolidation should get you about 70-80 bits of improvement. Of that remaining 40-50 odd basis points, how much of that improvement is expected to be just weather normalization and how much was actually sort of genuine performance improvement in the business?
Yeah, well, we have been dealing with a fair bit of stuff here, but Sorry, El, well, I'll hand over to you, but you've got to deal to it.
Look, I think if you just take where we are at the moment, you know, there are, they are historically abnormal, you know, EBITDA margins. The point we're making here is based off everything we know, we're creating buffers and resilience in the organization, and that partly comes from the AUD 100 million of benefits, but also through optimization and just making sure that we're focusing on the things that drive performance. That's a really important factor. I think the other point I'd leave you with is that, you know, as conditions improve, we've been very intentional here to say that 4.5% is not the ceiling. That's where we wanna be sometime in FY 2025.
Okay. Thank you.
Thank you. The next question is from Scott Ryall from Rimor Equity Research. Please go ahead.
Hi, Peter. I'm following up on one of the questions that you answered before where you said you've got some external help on your restructure. I was wondering, I assume that's a management consultant. Could you tell us who it is and what you'll be doing to structure the relationship so that they are, you know, success is not defined as just executing the project and then walking away with their pretty large fee, which is typically the case? Actually it's structured so that you have sustainable benefits for the business going forward in terms of the profit, profitability targets and things like that that you've set, please.
Yeah. Scott, you must have been sitting around our boardroom table because they're the points that we were discussing amongst ourselves. The first point is, yes, we are using one of the very top-tier external consultants. The key point I mentioned in my presentation was that we've also mobilized our own project team. I have also appointed a chief transformation officer that will be responsible for ensuring that, you know, whilst our externals are providing us with that sophisticated view of how to set these programs up, it won't be too long before we take the running of that program and, you know, we're responsible for the achievement of the targets, you know, well into 2024 and 2025.
Okay. Sorry, who's the transformation head internally?
Yeah, we're really pleased to, excuse me, have been able to appoint, Chris Pemberton to that role. He joins my new leadership team, and, he started a couple of weeks ago.
Okay. All right. Thank you. That's all I had.
Thank you. Your next question comes from Nathan Reilly from UBS. Please go ahead.
Hey, Peter. Just a question for me around the Queensland Rail contract. I presume this is a fixed price contract with Downer operating as the head contractor. Can you just give us an update, please, on how you're approaching the management of risk on that particular contract, particularly given, you know, you're partnering with the new rolling stock manufacturer there? Thanks.
Yeah. Thanks, Nathan. Look, it's a good question. We are the head proponent in that deal, we are applying a very similar commercial model to the one for our HCMT and our Sydney project, where we subordinate the delivery responsibility to our key delivery partners. Yeah, that's been a very significant focus in how we do that.
That's both on the train manufacturing and also on the facilities.
Okay. Any risk around delays around the supply of those sets…
Yeah.
You're saying is pushed back to the manufacturer.
That's right. I think the phrase that you'd be looking for here is that back to back, you know, approach to, you know, ensuring that we've got the very, most, the most robust commercial structures in place with our delivery partners downstream.
Yeah. Nathan, this isn't, you know, obviously you and the people on the call here know that this isn't the first one of these. We've done a number of these now since Waratah. We think we sort of understand, you know, very closely what needs to be done, particularly with our customer, to make sure that this is successful.
Okay. Thanks for taking my question.
Thank you. There are no further questions at this time. I'll now hand back to Peter Tompkins for closing remarks.
Yeah. Look, I'd like to thank everybody for joining the call today, and I look forward to keeping everybody up to date as we go through the balance of the financial year. Thanks very much, everybody.