38 for the year ended 30 June 2023 Directors' Report The Directors present their report on the company consisting of McConnell Dowell Corporation Limited (the Company) and its controlled entities for the year ended 30 June 2023. DIRECTORS AND COMPANY SECRETARY The following persons were Directors of McConnell Dowell Corporation Limited during the financial year and up to the date of this report: Directors S.J. Flanagan (Chair), S.V. Cummins, D.J. Morrison, I. Luck, A.H. Macartney, C.D. Lock Company Secretary D.J. Morrison PRINCIPAL ACTIVITIES The principal activity of the company is infrastructure construction. There were no significant changes in the principal activities of the company during the year. CONSOLIDATED RESULT The Company has recorded varied financial results for the year ended 30 June 2023. Our underlying Australian, New Zealand and Pacific Islands businesses reported increased operating earnings and cash generation however this was overshadowed by a significant $129 million loss recorded in the South East Asia Business Unit (SEA BU), pushing the group into a $66.5 million loss for FY23 year. The main cause of the SEA BU result was the $104 million loss reported on the BLNG LNG project in the Philippines. The Batangas LNG Terminal project was an EPC contract, which was significantly delayed by COVID-19 and supply chain issues that were further exacerbated by the war in Ukraine. The EPC project is now complete, and all commercial issues settled. We continue to assist the client with final commissioning works under a separate services agreement. The business has recorded revenue growth in FY23 to $2.16 billion, mainly driven by the Australian and Built Environs business units. Project execution across Australia & NZ/Pacific has been steady, with a balanced portfolio of over 80 projects predominately performing well, with 93% profitability. Project execution conditions remain challenging in the post COVID period with high cost escalation, however, we are starting to see some easing of the escalation risk for newer projects. The business secured 40% growth in Work in Hand to $3.5 billion, providing revenue certainty for the FY24 year. KEY FINANCIAL HIGHLIGHTS IN FY23 • Revenue grew by 25% to $2.2 billion (2022: $1.7 billion) • Loss after tax $66.5 million compared to a $31 million profit in the comparative period • Work in hand up 40% to $3.5 billion with $3.2 billion new work secured during the period • Stable liquidity position with $177 million in the bank. All the business units exceeded budget cashflow with the exception of South East Asia, impacted by the deterioration of the BLNG contract resulting in a net operating cash outflow during the period. • Bonding & bank facilities of $721 million available ($562 million utilised) with dedicated support from our financial partners • Preferred positions on prospects worth over $1.0 billion plus a further $1.7 billion live tenders outstanding • Strong position to capitalise on the revenue secured for FY24 and return to profitability and future growth. OPERATIONAL PERFORMANCE Strong ESG foundations were laid throughout the year in mental health, social procurement and sustainability arenas. The group reported an excellent safety performance with the lead indicator (PHAIR) exceeding target. There were zero major environmental incidents in the period. After a successful and profitable FY22, the Group was significantly impacted by the underperformance of the Batangas LNG Terminal project (“BLNG”) in the South East Asia business unit, resulting in the Group reporting an operating loss for the period. The impact of BLNG was offset by a strong operational performance from the Australia, New Zealand & Pacific Islands, and Built Environs business units, which delivered an operating profit of $77 million. The management team responded to the underperformance with a series of operational actions including: • Establishment of a Project Management Office (PMO), which will bring added rigour to delivery performance and a back to basics focus on time, cost and risk • Enhancement of risk management procedures including risk assessment, commercial limits, project review processes, and tender technical risk reviews The Australian business unit continued to execute works across all states and in a range of industry sectors. Operationally, 95% of the strong project portfolio are profitable. The business unit achieved similar profitable levels as in FY22, however there are some execution and cost challenges in the current environment. With a strong order book, the Australian business unit commences FY24 with 100% of its planned revenue for the new financial year already secured. The New Zealand business unit achieved a fifth straight year of improvement across all financial metrics. Over 90% of the project portfolio is at bid margin or better, with no loss-making projects. The business unit commences FY24 with a high backlog of 94% secured work, set to increase to over 100% when preferred contractor status contracts are secured. Revenue in South East Asia reduced to $120 million, and the region remains the most challenging for the Group. Profit margins were adversely impacted by difficult operating conditions and supply chain constraints, with limited new work secured in the reporting period. Changes have been made in the leadership team, and in FY24, the BU will focus on primarily marine opportunities in the key geographical markets of Singapore and Indonesia. The Built Environs business unit reported a 60% increase in its revenue to $229 million on the back of solid levels of work in hand at the beginning of the financial year. The business unit's operational earnings were, however, impacted by several projects priced prior to the significant price escalation, together with several subcontractor insolvencies and the subcontractor market generally being at full capacity in Victoria. Built Environs are well positioned for FY24. Work in hand grew by 40% from June 2022 to $3.5 billion, and the group is now positioned to achieve the budgeted revenue for FY24 with 100% of the revenue secured. The business has $1 billion of preferred tender positions under negotiation. While the Group’s secured revenue is strong, there are some complexities emerging, especially in its largest market, Australia. Recent government change at federal and state level has led to a review of priorities and major projects. Investment in social infrastructure (schools, hospitals, public housing) is set to increase in key states such as Victoria and NSW, with some of this investment likely to replace transport infrastructure funding. Similarly, all regions are planning for the inevitable energy transition and future climate and water resilience investment requirements. The Group’s Horizon 2030 Strategy is aligned with these trends, and the business is well placed to participate in these next waves of growth.
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