WG.L (WG.L) 2019-08-21 Earnings Call Transcript

Good morning and welcome to Wood's Half Year Trading Update Call. Before we go to the usual Q&A, I'll take you through some of the key highlights of this morning's statement and hopefully provide a bit more color around the performance in the first half of 2019. There are three main themes to highlight in today's statement. Firstly, our first half earnings performance is ahead of the prior year and we delivered a significant earnings growth. We expect our operating profits to be up around 25% and EBITDA up around 7%. And that will be driven by performance in assets solution in the East and the environment and infrastructure business in North America. To be absolutely clear, this is before the impact of IFRS 16 and is after the impact of disposals that we made in the back end of 18 and then in the first half of 19. Secondly, we have delivered improved margin performance in the first half of 2019. Our first half margins are up and we're benefiting from delivery of cost synergies as anticipated. Thirdly, our strong performance in the first half gives us confidence in our full year outlook. Revenue growth in the region of 5% with the second half of expected together with the benefit of cost synergies of around $60 million is expected to lead to growth and adjusted EBITDA in line with market expectations. We remain confident of achieving strong cash generation in 2019 and this in line with our previous guidance. Looking at the first half in more detail, performance has been led by our activities in the energy market in East and the environmental and infrastructure operations in North America together with the delivery of further cost synergies. Growth in EBITDA and margin has been achieved despite the impact of disposals completed and the net increase in the element of save from cost, which has been driven by fluctuations in the discount rate applicable to asbestos liabilities. In asset solutions EAAA, we benefit from good executions and cost synergies driving significantly improved margins. We saw relative strength from operations solutions work in the Middle East, the Caspian and Asia Pacific. We also delivered stronger performance in our turbine joint ventures, including EthosEnergy. Capital projects saw lower procurement revenue in mix and benefit from FEED and project management consultancy work in Saudi Arabia. In environment and infrastructure, government and industrial spending increases in the U.S and Canada supported good revenue, earnings and margin growth. Elsewhere, activity in asset solution America is up and earnings are slightly down due to cost overruns in heavy civils and pipeline work. And this is related to weather delays and execution issues in the first quarter. We’ve seen increased activity in chemicals and downstream and in onshore upstream principally in pipeline projects; and improved visibility on early stage project in offshore upstream. Solar and wind contracts won in the first half were contributing increased activity in the second half. Performance in STS was in line in the first half of 2018 with revenue increasing in our subsea and technology consulting activities. Productivities on STS led scoop of the TCO automation project reduced as expected. Overall excluded impact of IFRS 16, adjusted EBITDA in the first half was up around 7%, and operating profit will be up around 25% from the first half of 2018. The slow growth in operating profit is driven by strong growth in EBITDA together with the reduction in depreciation and amortization. Our first half performance demonstrates a continued focus on delivering reductions in a flexible cost base and the opportunities from our alignments of broader group markets such as the built environment. It's worth remembering that we broadly addressed forward mean markets across the energy and built environment. Around 40% of our activity is in upstream and midstream, around 20% in chemicals and downstream and around 25% is in renewable and other energy. The built environment markets accounted for the remaining 15%. Generally, we see a positive lead in term eclipse in each of these markets. Looking to the remainder of 2019 and into 2020 from a markets perspective, we see relative strength in the chemical and downstream and markets for capital projects in the Middle and Far East and in the Americas particularly in the Gulf Coast. We continue to see big opportunities in midstream and pipeline work with U.S. general shale work looking steady in the near future. In upstream cash flow disciplines remain the overarching feeling. Early stage work is pointing towards increased offshore capital activity in 2020 and beyond. Activity is presenting opportunities for operations solutions work especially in Middle East and Australia, Asia Pacific. In renewables, we are confident of a good pipeline opportunities in the U.S. in winds and particularly in solar. In built environment, government spending and regulatory driven environmental considerations are providing good opportunities in North America. In terms of full year trading, our outlook is unchanged. We are confident of a strongest second half due to a usual weighting of earnings with around 55% to 60% of EBITDA expected in the second half and also due to the contribution of solar and wind contracts secured in the first half in the AS Americas. We continue to anticipate that the earnings impact of revenue growth in the region of 5% weighted to the second half together with cost synergies of around $60 million and further margin improvement will more than offset the impact of disposals with other EBITDA in line with market expectations of $927 million. Consensus numbers are based on published estimates which include the impact of IFRS 16. Turning to the capital structure and financing. In line with our expectations, we anticipate that the net debt of end of June will be around $1.6 billion, excluding the impact of IFRS 16. That is broadly in line with the 2018 year end net debt of $1.55 billion. And net debt-to-EBITDA at 2.2 times. The position at the end of June reflects first half earnings grew combined with the continued focus on the active management of working capital. This is offset by the final dividend payments of $159 million in May, of which two-third is paid in the first half, and also the payment of known exceptionals, cash inflows and contract provisions including Aegis as expected, and the weakening of our earnings in the second half. We've made good progress on disposals and received proceeds of $38 million for Terra Nova Technologies in May. We're active on a number of sales processes and are confident of generating proceeds an aggregate of $200 million to $300 million. There is no change to our expectations on cash conversion and net debt guidance for the full year. We expect a modest reduction in absolute net debt excluding the impact of disposals, with operational cash generation weighted to the second half in line with our earnings, and known exceptionals and provisions continuing to accrue on a straight line basis. We've demonstrated the strong operational cash-generation capability of our business model. And looking further ahead, we expect debt reduction will accelerate in 2020, as the $180 million of cash outflows relating to the known exceptionals and Aegis in 2019 reduces by around two-thirds year-over-year. So to summarize before we go to Q&A. Our first half earnings performance is ahead of the prior year and we're delivering significant earnings growth and margin improvements. We anticipate net debt at the end of June will be broadly in line with the 2018 year-end position at around $1.6 billion. There's no change to our full year guidance for earnings and cash, so we're on track as we close out the first half. And I'll hand back to the operator for Q&A.

I think probably the answer to your question is the same for both questions, to tell you the truth. So in AS Americas the lower margin was driven by the issues we had in civils and pipelines in the first quarter. These are largely related to weather and execution issues. So we've not seen the same issues in the second quarter and the projects that they related to are largely complete and so we don't expect to be a continuing theme across the year. Across the whole group it's obviously less than zero within Americas and it does impact with margin.

Yes. So, we are very comfortable with the synergies for the full year. Our synergies will deliver about $60 million. That is largely across the asset solutions businesses.

Hi, Henry. Are you there Henry?

In terms of the first part of your question, in terms of the step up in activity, we expect to be weighted to the second half between 55% to 60% that's pretty much in line with where we were last year at this point. And In terms of the underlying reasons for that step up in activity, some of them are just the shape of our business. So, we have a seasonal pick up activity, especially in the Americas under the E&IS business and to a lesser extent, experiencing the turbines as well. And that's largely driven by construction activities, whether we're performing the construction or the project, construction activities. The other aspects are obviously the synergies. Our weighting of synergies is broadly the same between the first half and the second half. And clearly, we don't expect the execution issues we have in Americas to continue into the second half. And so you see an impact in their margin in the second half versus the first half as well. And we're also continuing to focus on actually how do we make our business more efficient and how do we increase the margins. So that's the broader reasons for the set up in H2. In terms of being selective on projects, we are very selective on projects. And we feel we're starting to see that coming through in some of our margins, particularly in our E&IS business. If you remember we take the decision to not do certain capital projects. And so we reach out to the business too much more focus on the consultancy work that they're very good at. And as a result, we're starting to see an improvement in the underlying margin of that business, which is really encouraging. By the same time we've actually seen really good growth in revenue as well in the first half.

Yes, let me just be clear. So in 2019, we signaled we will have roughly about 100 million of known cash exceptional. And so this is cash related to exceptional that have gone through the P&L in prior years and we just have a working capital outflow of approximately 80 million on the Aegis project and only Aegis we expect that the large that we recovered but not until 2021. As we look forward to 2020 and beyond, here we see our cash exceptionals and Aegis dropping off significantly. And so by 2020, we would expect that number for exceptional that we know today at Aegis to be roughly about two third, so roughly about $60 million as compared to the $180 million that we have in 2019. And so that additional cash will receive to support in terms of debt reduction and investment in the business.

Our cash flow is second half weighted. It's on track with where we expect to be. And think of moving parts there, we paid two thirds of our dividends in the first half and our trading shape is either I'd say 55% to 60% in the second half. So, you have a miss match of a large outflow and our principal inflows. And so, that’s the broader reasons why we've seen -- we expect a slight increase in our net debt at the first half, but we expect a modest debt reduction excluding disposals for the full year. And so, our guidance around cash is unchanged from previous. In terms of DD&A, we do expect our DD&A to be falling slightly, compared to 2018 over the full year, and that’s where you get the impact obviously an operating profit where we're showing excellent growth of we expect over 25%.

A couple of questions from me please. The first one is. I just want to pick the point on the cost overruns in your ASA division. Can you help us notice that, you called out some cost overruns in the full year was all well even the fourth quarter. And I appreciate the time you’re saying that there are some weather delay that you couldn’t have expected at time, but just wondering if there were additional kind of significant cost overruns on the project that you had not provisioned for at the end of ’18 that could have been -- or just to get a sense of what kind of cost overruns are those, the nature of the cost overruns? So that would be my first question please.

Yes, so one, they weren't provisioned at the end of the year and sort of because they were overrun that we experienced in the first half of 2019. And I’d say, these related largely to weather and some execution issues on civils and pipeline projects. As we move through the year, we've seen significant improvement. So, we don’t expect that to be a continuing feature in our results and we feel we move beyond this.

It is trading of the, I mean of our half year trading, but clearly if there any other big material provisions maybe flowing through our results, and so clearly, we don’t expect any or you would see them actually flowing through in terms of our trading. In terms of contingent liabilities, we’ll update our usual contingent liabilities notes and for half year results. And again, there was nothing exceptional or else may be tough to be and making you aware of it.

Yes, maybe start with I think 40% of our business is in upstream and midstream. And as we flagged offshore of the U.S., we've probably got safe that we’re building momentum and we’re picking up a number of early stage scoops and we expect this to lead to more activity just north in 2019. In terms of U.S. shale side, we have picked up a number of significant scoops mainly in EPCM type activity or pipelines in the U.S. related to U.S. shale. We still see a good number of opportunities in that space. Equally, we expect, when some of the capacity constraints in the Permian is alleviated. We’ll see the pickup in the facilities type work. So our facilities work has been okay in the first half, but we expect that to pick up as some of the capacity constraint is alleviated.

In terms of the TCO contract, it's rolling off and is rolling off from an STS perspective. We've actually picked up or we have significant activity actually within our assets solutions, EAAA business related to TCO as well, more on the more on the commissioning side. In terms of foreign backfills filter, it's a number of smaller projects. And TCO was the big elephant automation project, so when we look at our automation business, we see good opportunities, particularly in downstream, refining, but they know of the same size as TCO. So it's mainly prospects we see off of TCO.

We feel pretty good about revenue coverage, and that's relative to where we've been, in the past, we've seen at the backlog additions during the first half will give you an update clearly we are on the backlog, obviously, with our half year results. But our actual revenue coverage is one of the things that gives us confidence about the guidance we've given us of 5% revenue.

Okay. In terms of the asbestos, the delta is roughly about $20 million in the first half. And just to give you the clarity. It's really dictated by the movement and long-term U.S. bond rates. And so we had a benefit in 2018 in the first half. And we actually, that benefited, benefit was reduced in the second half. And we'll see a cost coming through in the first half of the first half of 2019. In terms of solar and wind, if you look to the business for us in the first half, I think as we flagged, we had lower activity, but actually we were pretty successful in winning opportunities. And so that set ourselves up for a good second half. In terms of working capital, we try to keep these projects in a cash positive space throughout their life and that realizing this obviously executing a cash advance to start these projects. So we don't budget for them being a drain on our operating capital.

Okay. I mean, separately, could I just ask how the YCI methanol project is going and the stage of ramp up, you are on there I know that's increasing significantly through this year?

Yes, the project is doing really well and we're obviously at a relatively early stage of the project, but it's progressing very well.

Hi, thanks. Two questions for me, please. Firstly, could you let me know or let us know to what extent the working capital facility has been used in the first half? I think it ended FY '18 at $140 million? And then my second question is whether or not there's any major re-tenders coming up in the North Sea O&M marketplace? Thanks.

In terms of the working capital facility, we're obviously not at the end of the month here so we'll give you the full details. And as part of our August results perhaps, at the end of 2018, I think we were about $150 million and not $140 million. Our facility size is $200 million as we fly, with no intention of increasing this. It's a useful facility in the context, but only about 5% of our financing. In terms of the major re-tenders in the North Sea, none of them will significantly impact our results.

I guess I'm not thinking in terms of results. I'm thinking in terms of kind of potential news flow, large contract additions to the back of the mind comes through in the second half.

And none, that's coming to mind to tell you the truth, David.

Hello, sorry, that's me. I think everything has been asked out. Just one quick one. Can you just tell me the impact of disposes in the first half? I now you've mentioned that there isn't many more in the first half?

And then just secondly, just on EAAA, you're seeing flat revenues on 1H last year. That's down about 10% sequentially. Is that the normal seasonal trend we should be looking at for that business?

I wouldn't characterize all of it was a seasonal trends. Actually in the first half, we have the lower procurement activity than we have in the first half of '18. Some of that is just timing related and we'll see that in the second half of '19.

Hi, good morning, David. The first question and I know its stronger performance in EthosEnergy. Is that still part of your $200 million, $300 million disposal trend?

It's not part of our disposals, but certainly our initial wave of disposals. Again, just to take you back to where we are, we've flagged -- we saw $200 million to 300 million of disposals that we sold the TNT business in May for just under $40 million. We have three active processes just now, none of them are EthosEnergy. And one of them is more matured than the other two and by more matured and it's beyond their live stage that's going through diligence. Obviously, deals are not done still there, done, but that gives us confidence in making it to 200 to 300 million at target, but that doesn't include EthosEnergy.

I think it will depend on when you actually do the financing. So, we had a successful year USPP placement in the first half. That is based on gap at the end of 2018 in that based as it relying on the results at the end of 2018. To the extent these rely on results through the end of 2019. I imagine that will change. So to be clear, all of our covenants are based on frozen GAAP just now at the end of 2018.

Only for new financing.

[Operator instructions] There are no further questions at this time, please continue.

Okay, we'll maybe wrap it up there. So, we will just reiterate our closing messages here around. We have seen good earnings performance in the first half of 19 and the growth relative to this the prior year. We think the margin improvement is pleasing and we expect the net debt to be around $1.6 billion at the end of June. And finally, there is no change to overall guidance for the full year both in terms of earnings and in terms of cash. So wish you all a good rest of the day.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Victoria McCulloch from RBC. Please go ahead.

And just if we, I can have a couple questions on the AS Americas business. On the cost overruns and the -- both associated with weather and the projects delivery, are you happy that these have all been resolved and you've identified the issues with -- for how these happened and to avoid going forward? And then looking at the cost synergies, you talked about in the EAAA business how this has been successful and helping improve the margins. Is it competitive pricing that's causing you not to be able to realize and the cost saving margin improvement in the U.S.? Thanks very much.

And maybe then if I can just have, basically have a follow-up. So you are realizing the same cost savings ex these issues in the AS Americans since that is [indiscernible] delivered the cost savings you'd anticipated through the, sort of from the deal?

Thanks very much.

Thank you. The next question is coming from the line of Henry Tarr from Berenberg. Please go ahead.

His line -- he's not there anymore, sorry. The next question is coming from the line of Lillian Starke for Morgan Stanley. Please go ahead.

Hi, good morning, David. I do want to see, if you could share a bit more color on sort of a progression into the second half, in terms of margin. If you can provide a bit of detail of how much can we expect, because it's quite an improvement from what we've seen in the first half. So in terms of if you can, I mean quantify or provide a bit of color of how much is synergies and also how much is on the overall improvement on the mix, and you being more selective on projects, and as well as event selection of project is something that you expect to see supporting margin going forward?

Thank you. The next question is coming from the line of Henry Tarr from Berenberg. Please go ahead.

So can I just confirm, you said looking up to 2020, you think cash exceptional and Aegis will roll off to what extend did you say, sorry?

Okay thank you, and then just two other quick ones. Could you give an update on the DD&A outlook for this year? And then is the -- your sort of -- I guess you're on track for the full year. Is the first half sort of cash flow and cash conversion showing that same trajectory, or is it kind of second half weighted a little bit with the cash flow? Thanks.

Thank you. The next question is coming from the line of Amy Wong from UBS. Please go ahead.

Got it, okay. And my second question is more related to a broader question, I mean, appreciate that this is only the trading update for the first half, but could you give us a sense of some of your provisions and contingent liabilities, if there is anything that we've gone through your portfolio to see if there is any other big cost overruns and any other projects that are on your radar that we should be aware of as well?

Got it. All right, that’s clear. I’ll turn it over. Thank you.

Thank you. The next question is coming from the line of James Thompson from JP Morgan. Please go ahead.

A couple of questions, if I may. Firstly, just in terms of U.S. shale. It seems like the activity outlook for the upstream is a little bit more challenged, I suppose, in the second half of 2019. And midstream has been and pipeline has been pretty good for you. I just wondered whether that was going to continue, whether you saw the sort of pipelines piece remaining pretty strong through the second half of '19 into 2020 and potentially offsetting some of the delays perhaps to upstream activity there.

And in sort of the same vein, just in STS. Obviously, a part of that TCO contract is rolling off this year. What is sort of coming through to offset that in that division?

Okay. And let me just one final for me. Obviously reiterated comfort with consensus and I think pretty good print in the first half. Could you just give an indication of where you are in terms of revenue coverage for 2019 at this point?

The next question is coming from the line of James Evans from Exane BNP Paribas. Please go ahead.

A couple of questions from me please. You've mentioned [indiscernible] and the asbestos and discount rate change being a bit of a headwind. I just wondered if you could kind of help quantify that rates being where they are. I imagine that's been relatively material, but I just wondered as well. Could you give any separately a little bit more details of the solar and the wind and the ramp up, you're seeing there? And does this have in fact any impact on your working capital this year, like those EPC projects with advances or the more sort of the typical working capital consumption projects. So now they can be quite muted from when Amec was doing a lot of solar work? So this is my first couple of questions, please.

Thank you. The next question is coming from the line of David Farrell from Credit Suisse. Please go ahead.

Okay, thank you.

Thank you. The next question is coming from the line of Mick Pickup from Barclays. Please go ahead.

And it is priced about 10 million.

Thank you. The last question is coming from the line of Mark Wilson from Jefferies. Please go ahead.

Okay and second question, David, as we look forward, you've mentioned refinancing in October 2020. Should we consider that IFRS adjustment on the balance sheet and EBITDA are part of future refinancing? So let me speak the frozen covenants now, in the future, they will include the IFRS 16 changes.

But that probably changes in the future is, what you've said would be the answer.

Would that includes refinancing?

I think we're getting into a level of detail, Mark. But it's difficult to ask [indiscernible] in any situation. I think, to the extent that new financing I think it will be based on new GAAP.