SOUTHERN CROSS ELECTRICAL ENGINEERING LTD — Investor Presentation 2017

Aug 29, 2017

Full Year Results Presentation Year Ended 30 June 2017

30 August 2017

About SCEE

Southern Cross Electrical Engineering (SCEE) is an ASX listed electrical, instrumentation, communication and maintenance services company recognised for our industry leading capabilities

Established in 1978 in Western Australia, the combination in 2016 with Datatel Communications Pty Limited (established 1998) and in 2017 with East Coast-based Heyday5 Pty Limited (business established 1978) has created a diversified national electrical contractor

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Highlights

Statutory revenue $199.9m, EBITDA $6.3m and NPAT loss of $0.4m

Activity in H1 negatively impacted by slower award of work in several sectors

Strong H2 turnaround with Underlying H2 EBITDA of $8.2m and Underlying H2 NPAT Financial profit of $4.1m in line with guidance

Significant restructuring, M&A and investment costs to drive savings and growth Strong balance sheet with net cash of $40.3m at 30 June 2017 Achieved transformational milestones in SCEE’s strategy to diversify and grow into adjacent and complementary sectors and geographies:

• Acquired leading east coast electrical contractor Heyday with strong presence in commercial and infrastructure markets for an enterprise value of up to $54.1m

• Strategic • Expanded telecommunications-focussed subsidiary Datatel into QLD, NSW, VIC and TAS and into wireless sector

• Organically diversified original SCEE business into defence, transport, renewables and utilities sectors

Record order book of over $480m at 30 June 2017

Outlook Greater longevity in order book with over $190m orders for FY19 already secured Anticipate revenue over $350m in FY18 with over 80% of orders already secured

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• SCEE H2 FY17 Statutory and Underlying results reconciliation contained in Appendix 2

Underlying full year financial performance

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Activity in first half slow due to delayed mobilisation to projects, lower than anticipated release of work in iron ore sector and NBN delays

In second half strong turnaround with impact of acquisition of Heyday, expansion of Datatel into East Coast and contribution from organic diversification into projects in transport, defence and renewables

Underlying overheads as percentage of revenue fell from 14.9% in H1 FY17 to 6.2% in H2 FY17 as consequence of management action to ensure an efficient operating structure and higher volumes of activity

FY16 comparative result included significant contributions from large-scale iron ore construction projects which successfully closed out with strong gross margins

• Results presented on an underlying trading basis. An FY17 reconciliation to statutory results can be found on slide 4 and

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• • results presented on an underlying trading basis. A reconciliation to statutory results can be found on slide 23an FY16 reconciliation to statutory results can be found in Appendix 1

**Reconciliation of underlying to statutory FY17 results ***

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1. Organisation restructuring represents the costs incurred, primarily redundancies, as management took actions to ensure an efficient operating structure in a strongly cost focused market

2. M&A costs represents external costs of M&A activity, primarily the acquisition of Heyday in March 2017

3. Expansion and diversification investments represents investments in progressing expansion and diversification initiatives, primarily the integration of Datatel and its expansion onto the East Coast

4. Deferred consideration adjustments and amortisation charges represents reassessment of Datatel deferred consideration expectations as FY17 earn-out not achieved and reductions in stretch earn-out assumptions in FY18 and FY19. Amortisation charge relates to the amortisation of intangible items arising on the acquisition of Heyday and is a non-cash item

• An explanation of underlying trading can be found in Appendix 1

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Balance sheet

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Strong balance sheet throughout the period

Cash of $40.6m and negligible debt at 30 June

Further $9.25m of cash due to Heyday vendors in September 2017

Available bank guarantee and surety bond facilities of $75.5m of which $42.9m used.

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Cashflow

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$5.9m cash expended on restructuring the business to drive future savings, investing in growth and expansion initiatives and on M&A activity

Capex remained low at $2.0m and forecast to remain at these levels for time being Payment of final FY16 dividend made in H1 FY17

No dividend declared for FY17 in order to fund working capital requirements servicing increased order book

• • results presented on an underlying basis. A reconciliation to statutory results can be found on slide 4

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Health, safety and people

Workforce increased from 600 employees in June 2016 to currently over 1400 and recruitment is continuing

Thirteen years LTI free in Australia

Ongoing commitment to indigenous participation

Restructuring of the organisation during the year to ensure efficient operating structure with continued transition of tasks to our offshore support centres

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Order book by sector

Transformational growth in order book from $55m at end FY16 to over $480m end FY17. Grown in all sectors including resources. Organic diversification into infrastructure, defence, renewables and utilities. Acquisitive entry into commercial, telecommunications & data centres, and infrastructure.

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Order book: $55m Order book: $480m
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Order book by geography

Order book grown from $55m at end FY16 to over $480m end FY17. Held steady in WA and grown in Queensland. Organic entry into NT and acquisitive entry into NSW and ACT.

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Order book: $55m
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Order book: $480m

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Leading national diversified electrical contractor

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Strategy

Recognising the cyclical nature of the resources construction market, from early 2016 we implemented a strategy to:

• transition to a sustainable resources business through exposure to sustaining capital and maintenance markets; and

• grow through expansion into adjacent and complementary sectors and new geographies

The acquisition of Datatel provided a direct and scalable entry into the telecommunications sector

The Heyday acquisition was a transformational milestone combining two well-established, culturally aligned electrical contracting businesses operating in complementary sectors and geographies

SCEE continues to build on these initiatives to create depth and capability for the next growth period:

• the enhanced scale of the group unlocks the opportunity to pursue upcoming large scale infrastructure projects

• leverage the combined Group’s customer relationships and skills into new states

• opportunities arising in telecommunications driven by continual technological innovation

• being positioned for the next turn of the resources cycle

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Diversification by sector

Sector diversification has begun in FY17 as resources-derived revenues in WA and Queensland declined from FY16 to be replaced with commercial, telco and infrastructure work. Order book indicates those declining sectors will turn around in FY18 combined with strong growth elsewhere.

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Revenue: $207.6m

Revenue: $199.9m

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Diversification by geography

Geographic diversification also has begun in FY17 as revenues in WA and Queensland declined from FY16 to be replaced mainly with work in NSW and ACT. Order book indicates WA decline will halt in FY18 with strong growth elsewhere.

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Revenue: $207.6m

Revenue: $199.9m

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Heyday acquisition–March 2017

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Business established in 1978 as a specialist electrical contractor

Heyday is a leading provider of electrical services to the building industry and major private clients

Established client relationships with some of the most prominent participants in the Australian construction industry including Multiplex, Lendlease, Grocon and Laing O’Rourke

Acquisition completed in March 2017 – summary of main terms in Appendix 3

David Hammond, Executive Director of Heyday, joined SCEE Board on acquisition

Heyday has continued to win projects since date of acquisition with $140m of new awards announced or in advanced stages of negotiations since March

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Sector outlooks

Whilst SCEE remains a major supplier, flow of work from iron ore clients to be subdued in the short term but there is now visibility of upcoming replacement tonnage projects

LNG activity expected to continue through FY18 Resources Commenced over $25m of work at Rio Tinto’s Amrun bauxite project in Queensland Actively pursuing FY18 opportunities in bauxite, gold and lithium sectors and other metals

Commenced over $30m of work at RAAF Tindal base in Northern Territory Positioning for significant defence opportunities in WA, NT and VIC Public Infrastructure seeing strengthening growth driven by public and private sector infrastructure investment in major road and rail infrastructure which the enhanced scale of & defence the Group enables us to pursue in WA and NSW Circa $80m of healthcare work in order book and other East Coast opportunities being pursued

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Sector outlooks (continued)

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Strong commercial sector growth forecast over the next five years particularly in
NSW and ACT
Office developments and fit-outs and shopping centre refurbishments driven by
Commercial
population growth
Potential to leverage combined Group’s customer relationships and skills into
new geographies
Datatel has twelve framework agreements with Telcos and Tier 1 contractors
across five states in the NBN, wireless and telco infrastructure segments
Telecoms &
data centres Expecting to further expand and grow offerings and capability
Data storage services industry in growth stage and further data centre work in
prospect
Entered utilities market with first award from Western Power in WA and now
Industrial, Ergon Energy in Queensland
energy,
Commenced our first renewable energy project (130MW solar) in NSW and
renewables &
further solar and wind farms in pipeline
utilities
Current energy sector critical issues expected to present further opportunities
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Business Development pipeline

Tendering at high level with over $400m of submitted tenders with clients pending decision

Business development pipeline strong with immediate prospects of further $900m currently being estimated in tendering departments

Order book and pipeline indicates those sectors and geographies that declined in FY17 will begin to turn around in FY18 and beyond

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Conclusion and outlook

• Transformational year for SCEE

• Activity in H1 impacted by slow award of work but strong H2 turnaround with result of Underlying H2 EBITDA of $8.2m and Underlying NPAT profit of $4.1m* in line with guidance

• Incurred significant restructuring, M&A and investment costs in period to drive future savings and growth

• Achieved key milestones in diversification and growth strategy including acquisition of Heyday with a strong presence in the East Coast commercial and infrastructure markets, geographic and sector expansion in telecommunications through Datatel and organic entry into the defence, transport, renewables and utilities sectors

• Order book grown significantly to a record $480m at 30 June 2017 ($55m at 30 June 2016)

• Anticipate revenue over $350m in FY18 with over 80% of orders already secured

• SCEE H2 FY17 Statutory and Underlying results reconciliation contained in Appendix 2

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Appendix 1-Underlyingto statutoryresults FY16 reconciliation Appendix 2-Underlying to statutory resultsH2 FY17reconciliation Appendix3-Heyday transactionterms

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Appendix 1–FY16 Underlyingto statutory results reconciliation

SCEE’s results are reported under International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. The Company discloses certain non-IFRS measures that are not prepared in accordance with IFRS and therefore considered non-IFRS financial measures. The non-IFRS measure should only be considered in addition to, and not as a substitute for, other measures of financial performance prepared in accordance with IFRS.

EBIT and EBITDA are a non-IFRS earnings measure which do not have any standard meaning prescribed by IFRS and therefore may not be comparable to EBIT and EBITDA presented by other companies. EBIT represents earnings before interest and income tax. EBITDA represents earnings before interest, income tax, depreciation and amortisation. A reconciliation of profit before tax to EBIT and EBITDA is presented in the table on the left below.

The term “underlying trading” used in this document is a non-IFRS measure which refers to the statutory results excluding one-off items disclosed in the reconciliation presented on below and on slide 4 and in Appendix 2. This measure was used by management to assess the Company’s performance. The underlying trading results are unaudited.

FY16 underlying profit reconciliation:

Contract revenue Contract expenses Gross profit Other income Overheads EBITDA Depreciation expense EBIT Net finance expense Profit before tax Income tax expense Profit from continuing operations	Statutory Acquisition costs Underlying trading (unaudited) $m $m $m 70.5 70.5 (55.0) (55.0)
	15.4 15.4 0.1 0.1 (11.0) 0.4 (10.6)
	4.5 0.4 4.9 (2.5) (2.5)
	2.0 0.4 2.4 0.2 0.2
	2.2 2.2 (0.9) (0.1) (1.0)
	1.3 0.3 1.6

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**Appendix2–H2 FY17Underlying to statutory resultsreconciliation ***

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1. Organisation restructuring represents the costs incurred, primarily redundancies, as management took actions to ensure an efficient operating structure in a strongly cost focused market

2. M&A costs represents external costs of M&A activity, primarily the acquisition of Heyday in March 2017

3. Expansion and diversification investments represents investments in progressing expansion and diversification initiatives, primarily the integration of Datatel and its expansion onto the East Coast

4. Deferred consideration adjustments and amortisation charge represents reassessment of Datatel deferred consideration expectations as FY17 earn-out not achieved and reductions in stretch earn-out assumptions in FY18 and FY19. Amortisation charge relates to the amortisation of intangible items arising on the acquisition of Heyday and is a non-cash item

• An explanation of underlying trading can be found in Appendix 1

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Appendix3– Heydaytransaction terms

Acquisition

Acquisition of 100% of Heyday5 Pty Ltd Completed on 9 March 2017

Up to a total of $54.1m payable as follows:

1. Initial Cash Consideration : $18m in cash paid at completion on 9 March 2017

2. Further Consideration : $2.25m in cash to be paid in September 2017

3. 2017 Results Consideration : Heyday having achieved FY17 EBIT greater than $9.8m:

• a) $7m in cash to be paid in September; and

• b) $13.85m in ordinary fully paid SCEE shares representing 27.5m shares (refer to details below)

4. Earn-out: Deferred Consideration

Consideration

• $4m in cash if Heyday’s EBIT result for FY18 is equal to or greater than $9.8m

• $4m in cash if Heyday’s EBIT result for FY19 is equal to or greater than $9.8m

5. Earn-out: Outperformance Consideration

• 50% of EBIT in excess of $9.8m for the FY18 period, payable in cash and capped at $2.5m

• 50% of EBIT in excess of $9.8m for the FY19 period, payable in cash and capped at $2.5m

Terms of SCEE Share Issue

Issued at VWAP of 10 day period commencing 5 trading days pre-transaction announcement which was 50.4 cents 50% of shares will be escrowed for 12 months and 50% of shares will be escrowed for 24 months from issue date Shares will be issued to four vendors in September 2017 and to David Hammond, as Executive Director of SCEE, following shareholder approval at the AGM

Vendor Involvement

The four of the five vendors that are currently executives of Heyday continuing in executive roles post-completion David Hammond appointed to the SCEE Board as an Executive Director on completion

Funding

Cash payments to be funded from existing cash reserves and earnings of combined Group Access to additional liquidity to support ongoing growth via a $10m facility with CBA if required

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Disclaimer

Some of the information contained in this presentation contains “forward-looking statements” which may not directly or exclusively relate to historical facts. These forward-looking statements reflect the current intentions, plans, expectations, assumptions and beliefs of Southern Cross Electrical Engineering Limited (“SCEE”) about future events and are subject to risks, uncertainties and other factors, many of which are outside the control of SCEE.

Important factors that could cause actual results to differ materially from the expectations expressed or implied in the forwardlooking statements include known and unknown risks. Because actual results could differ materially from SCEE's current intentions, plans, expectations, assumptions and beliefs about the future, you are urged to view all forward-looking statements contained in this presentation with caution and not to place undue reliance on them. No representation is made or will be made that any forward looking statements will be achieved or will prove to be correct. SCEE does not undertake to update or revise any forward looking statement, whether as a result of new information, future events or otherwise.

This presentation is for information purposes only and is not financial product or investment advice or a recommendation to acquire SCEE shares and has been prepared without taking into account the objectives, financial situation or needs of the reader. Before making an investment decision prospective investors should consider the appropriateness of the information having regard to their own objectives, financial situation and needs and seek the appropriate professional advice.

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