Lendlease : FY19 – Results Presentation Transcript

LENDLEASE

2019 FULL YEAR RESULTS TRANSCRIPT

19 August 2019

Presentation

Good morning and welcome to the Lendlease 2019 Full Year Results presentation. My name is Steve McCann, Group Chief Executive Officer and Managing Director of Lendlease.

Sitting here at Barangaroo in Sydney, I acknowledge we're on the land of the Gadigal people and extend my respects to their elders past, present and future.

Joining me in the room is Tarun Gupta, Group Chief Financial Officer.

Today I'll provide an overview of Lendlease's results for the period ended 30 June 2019. I'll then hand over to Tarun who will talk through the financial results before I provide an update on our operations and outlook. We will then be available to take questions.

Lendlease's long term value is driven by five focus areas that drive our approach to create economic, safe and sustainable outcomes for our customers, partners, securityholders and people. As today's briefing focuses primarily on the financial, I'll first touch on the non financial focus areas that drive our performance.

As always, our first and most important priority is Health and Safety. Our commitment to the health and safety of all who interact with a Lendlease place holds the highest priority in our organisation.

The frequency rate for Lost Time Injuries was 1.8 and the percentage of operations without critical incidents was 90 per cent. While our long term trends are positive, we need to continue our uncompromising focus on safety everywhere we operate.

An inclusive and diverse work environment inspires employees and drives both innovation and business growth. 26.1 per cent of leadership positions in our organisation are held by women and three of our nine Board Directors are female. For the second year running, we have been named a Platinum Employer by the Australian Workplace Equality Index, recognising the work we do to promote LGBTI inclusion.

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LENDLEASE

2019 FULL YEAR RESULTS TRANSCRIPT

19 August 2019

From a customer perspective, our global focus on customer feedback and measurement has informed numerous initiatives. New digital portals for our retail customers is one such initiative.

Our approach to Sustainability is focused on the two principal areas of Environment and Community. During the year our flagship office fund, APPF Commercial, was again ranked first globally in the 2018 GRESB survey - the fourth time in five years the Fund has achieved this ranking.

Turning to slide 5.

We announced at the HY19 result the decision that the Engineering and Services business is non-core and would be separated from the Group. A comprehensive strategic review concluded that this decision is in the best interests of our employees and securityholders and allows both Lendlease Group and the Engineering and Services business to focus on their core competitive advantages.

First to the impact of the non-core business which was disappointing and adversely impacted the Group.

The EBITDA loss of $461 million included a $500 million provision for underperforming projects that was brought to account in the first half of the financial year.

The provision related primarily to three Engineering projects with the estimated cost of completing these projects incorporated within that provision.

A brief update on the three projects.

Gateway Upgrade North has been operational since March 2019.

The other two projects, Kingsford Smith Drive and NorthConnex, are both more than 85 per cent complete and are due to finish in calendar year 2020.

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LENDLEASE

2019 FULL YEAR RESULTS TRANSCRIPT

19 August 2019

Works on Kingsford Smith Drive that were unaffected by the re-design are scheduled to complete by the end of this calendar year, while the works on the rock anchor solution to rectify the design defect are well underway.

The final major phase of work on NorthConnex, that is Mechanical and Electrical, commenced towards the end of the financial year. Phases that incorporated lining, waterproofing and paving are substantially complete.

This brings me to the remainder of the Engineering portfolio. New work secured was $2 billion, including the WestConnex 3A M4-M5 Link and additional works on the Southern Program Alliance.

The business closed the year with a backlog of $3.8 billion and remains active in bidding for work that is in line with the revised lower risk appetite parameters that came out of the strategic review. There is currently more than $1.6 billion of projects in bid stage, including several road and rail upgrades, and additional Western Sydney Airport works.

The two largest contracts, Melbourne Metro Tunnel Project and WestConnex 3A M4-M5 Link, account for the majority of current backlog. Both projects are less than 20 per cent complete.

We have reviewed the status of the entire Engineering portfolio as part of our full year reporting process. This review confirmed that the level of provisioning is appropriate.

The Services business remains a solid contributor to both revenue and profit with an EBITDA margin of approximately 5 per cent delivered in the year. New work secured of $1 billion was diversified by sector, with contract wins across telecommunications, utilities, solar and transport. The business closed the year with a backlog of $1.6 billion and an attractive pipeline of future opportunities.

Now to the separation process.

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LENDLEASE

2019 FULL YEAR RESULTS TRANSCRIPT

19 August 2019

As part of the separation, a sale process has been initiated for Engineering and Services, which has generated a good level of interest. Several parties are currently undertaking detailed due diligence.

We remain committed to delivering the best possible outcome from the sale process for our clients, employees and securityholders.

At the half year results we announced a preliminary estimate of future restructuring costs associated with the separation of $450 million - $550 million pre tax. It was anticipated that these costs may include implementation costs such as technology and systems, employee and advisory costs, and potential costs or indemnities to cover concluding existing customer contracts. The restructuring cost estimate excludes any revenue from ongoing operations or proceeds received from sale.

The restructuring cost estimate remains appropriate based on the current portfolio position and the progress made on the sale. To date, $15 million of restructuring costs have been expensed relating entirely to implementation costs.

Turning to slide 6

Lendlease's core strategy is focused on urbanisation in gateway cities and we aim to be the urbanisation partner of choice. Our ability to deliver across all aspects of major urbanisation projects, together with our financial strength and strong track record provide a point of difference we believe few can match.

Applying a disciplined commercial approach informed by the six key trends which drive our business model helps us create great places which make a positive contribution in meeting the world's significant urbanisation challenges.

Turning now to slide 7.

It was a difficult year for the Group with the provision taken in the first half for underperforming Engineering projects impacting the overall result. Profit after tax was $467 million with earnings per stapled security of 82.4 cents.

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LENDLEASE

2019 FULL YEAR RESULTS TRANSCRIPT

19 August 2019

Distributions of 42 cents per stapled security represent a payout ratio at the midpoint of the 40 - 60 per cent target range.

The Group's core business, excluding Engineering and Services, had a solid year with profit after tax of $804 million and a return on equity of 12.8 per cent, towards the upper end of our 10-14 per cent target range.

Origination was strong with the Group's development pipeline now approaching $100 billion after securing four major urbanisation projects, one of which was secured post balance date.

Development ROIC of 11.6 per cent was underpinned by strong apartment earnings across a range of urbanisation projects, the completion of the office precinct at Paya Lebar Quarter and the formation of the residential investment partnership in the US.

The core construction margin of 2.2 per cent was generated on $9.7 billion of revenue.

The Investments ROIC of 10.8 per cent reflected strong growth in funds under management and solid ownership income.

The Group remains in a strong financial position with gearing at the bottom of the target range and $3.9 billion of available liquidity.

Turning to slide 8.

During the year we cemented the Group's position as a global leader in urbanisation. Securing four projects takes our development pipeline to almost $100 billion, providing substantial visibility on expected future earnings.

We were delighted to be chosen by Google to partner with them to develop three mixed use communities in the San Francisco Bay Area. The predominantly residential led scheme has an end value of approximately $20 billion and will deliver more than 15,000 new homes over a 10 - 15 year timeframe.

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