Downer EDI 1H25 Earnings Call Highlights

Downer EDI (ASX: DOW) shares fell 3.6% on Thursday as the company continues its turnaround efforts, aiming for further improvements under the transformation program launched two years ago.

Earnings Summary

• Underlying revenue down 8.6% to $5.5 billion

• Underlying NPATA up 67.1% to $127.2 million

• Normalised cash conversion up 6.5 percentage points to 94.2%

• Interim dividend up 80% to 10.8 cents per share

• FY25 underlying NPATA guidance of $265-280 million

Earnings Call Highlights

The below topics have been answered by CEO Peter Tompkins and CFO Mal Ashcroft.

2H25 NPATA Guidance: "We expect the level of Victorian transport agency spend to remain soft for the rest of the financial year compared to historical levels, albeit an increase on what we delivered in the first half to reflect the second half seasonal SKU."

Seasonality Impact: "Transport revenue decreased by 7.1%, largely impacted by previously identified areas of market softness in Victoria and lower revenue in our Auckland building business that reflects the application of our tighter risk guardrails."

Disruptions and Lower Transport Spend Comments:

• "These improvements have offset the lower contribution from our Australian Roads business, which continues to be affected by declines in transport agency spend most noticeably in Victoria."

• "We expect to return to a historical average spend level over time, which will align to network maintenance requirements and road user expectations and the need to address what is the building backlog of maintenance to address network degradation."

Soft Markets – Victoria and New Zealand:

• "We expect the level of Victorian transport agency spend to remain soft for the rest of the financial year compared to historical levels."

• "Utilities revenue fell 5.9% to $1.6 billion, again largely due to the application of our enhanced risk guardrails and selective tendering, as well as some softer conditions in the New Zealand infrastructure market and the deferral of maintenance shutdown work in industrial and energy."

Bidding Opportunities in Utilities and Energy:

• "In this area, we have a number of significant tenders currently underway that should replenish work in hand in the second half."

• "The outlook for the energy and utilities business is very positive and is a key growth vector for the group, especially in power and water construction and maintenance."

Cost Reduction Initiatives: "The transformation program has now delivered AUD 180 million in cumulative gross annualised cost out, with AUD 50 million achieved in the first half. This exceeds the revised AUD 175 million target, and we're on track to achieve AUD 200 million by the end of FY 2025."

Defence Funding:

• "Defense funding is forecasted to grow to more than 2.3% of GDP by 2032 and 2034. And Downer has proven capabilities in advisory, construction, maintenance and front-line services where spending is forecast to steadily increase above historical averages."

• "Pleasingly in December of last year, our 50/50 joint venture was awarded the Riverina Defence Redevelopment Contract, which is the Department of Defence's largest current managing contractor agreement."

Addressable Market for High-Voltage Projects: "The size of our addressable market for high-voltage projects is estimated to be greater than $5 billion annually for the next five years, which is more than double the level of spend in the preceding five years and there's more than 10,000 kilometers of transmission lines that we estimate that needs to be built by 2050 just in relation to committed projects."

Inflation and Labour Shortage: "In terms of the broader economic settings affecting Downer over the past three or so years, higher inflation and labor shortages have been challenging. However, the level of disruption continues to reduce and we are navigating the remaining areas of price escalation, which continue to remain sticky through our commercial arrangements."

Energy Transition Demands: "Transitional energy and the need for new power infrastructure to support a lower-carbon economy. Our electrical and engineered – energy capabilities have always been a strength. And over the past 10 years, Downer has constructed more than 2,750 kilometers of transmission lines and more than 70 substations."

Analyst Q&A Highlights

Can you provide more details on the composition of Road Services and transport systems, specifically the contributions from New Zealand, Victoria, and Queensland?

• "Transport is 51% of the group, and we have significant scale in roads and transport infrastructure in Australia and New Zealand."

• "The improved performance and uplift in earnings and revenue is being driven by the ramp-up of QTMP for the rail business."

• "We won’t disclose individual sub-businesses or state splits for commercial reasons."

Of the $37.4 billion work in hand, how much are you willing to let go due to low margins before rebidding higher-margin contracts?

• "A big chunk of the low-margin work has already been burned off."

• "There’s more than enough in the 'good box' to offset the loss-making work we've run off over the past 12 months."

• "We’re not concerned about the lack of opportunity—our focus is on maintaining discipline and onboarding profitable work."

The revenue outlook is down 5%—originally, you targeted flat growth. What has changed?

• "There’s no change to the outlook—the areas of softness were previously flagged."

• "Declines were driven by reduced transport agency spending, softness in New Zealand utilities, and a strategic repositioning of Hawkins."

• "We’ve been deliberate in managing risk appetite, and the revenue burn-off aligns with our retendering strategy."

How are you seeing end-market dynamics, particularly in Victoria and New Zealand, where economic conditions have been weaker? What offsets are in place?

"Offsetting what we've spoken about in Vic, if you look through that, there is improvement in other parts of the business like power and rail. While we've got some softness in New Zealand, utilities infrastructure for our transport business is going really well. We're also offsetting some of that softness with cost, and we've got the outperformance in power, ramp-up of QTMP, and improvement in New Zealand."

Are you still seeing strong bidding opportunities in renewables? Any update on the timing of defense contract outcomes?

"We expect an outcome on defense contracts in the next few months." "The standout for us is in the utilities and energy space, where our bidding teams are the most active. The drop in work in hand is a timing issue, with opportunities in power and water, both in construction and maintenance. New Zealand is also shifting gears in terms of transport agency priorities, and we’re well-positioned with some major bids coming up."

This article was generated with the support of AI and reviewed by an editor.