John Wood Group PLC (WG.L) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Wood Full Year Trading Update for the year ended on the 31st of December 2019. [Operator Instructions] I must advise you that this conference is being recorded today on Thursday, the 16th of January 2020. I would now like to turn the conference over to your speaker today, David Kemp. Please go ahead, sir.

Good morning, and welcome to our full year trading update call. Before we go to Q&A, I'll take you through some of the key highlights of this morning's statement and provide a bit more color around performance in 2019. So starting with the 2019 earnings. We delivered a strong -- stronger second half, and our full year 2019 results will demonstrate earnings growth, margin improvement and strong operational cash generation, resulting in a reduction in net debt. Revenue will be in line with 2018 at around $10 billion. Adjusted EBITDA, including the impact of IFRS 16, will be around $850 million to $860 million. And operating profit before exceptionals will be around $410 million to $420 million. Both of these are in line with market expectations. Earnings growth and margin improvement has been underpinned by generally robust activity and the delivery of cost synergies relating to the acquisition of AFW of around $60 million. We saw growth in operations work in the Middle East, Caspian and Asia Pacific and excellent execution in Asset Solutions EAAA as well as solid activity and better execution in built environment markets. In the second half of the year, we took additional cost-reduction measures and accelerated synergies from the formation of TCS, our consulting business. This was in response to a slowing macro environment from Q3, which impacted our previously anticipated revenue growth, cost overruns on certain projects in Asset Solutions Americas and weaker automation performance in Specialist Technical Solutions. It is worth noting that cost overruns in the Americas did not relate to the YCI project, which is progressing well, but to a small number of other energy projects in the U.S. It's important to note the strength of our earnings growth on a like-for-like basis. Adjusting for disposals executed in 2019, TNT, the legacy AFW power machinery business, and our interest and infrastructure assets, we expect to deliver adjusted EBITDA growth of around 6% on a pre-IFRS 16 basis. We also expect to deliver strong like-for-like growth in pre-IFRS 16 operating profit before exceptionals of around 20%, driven by EBITDA growth and a circa $10 million reduction in depreciation and amortization. Our strong focus on operating cash flow has delivered better-than-anticipated cash generation in the second half, reducing net debt to below $1.5 billion, and that equates to around 2x EBITDA. Being a large group, there are some smaller subsidiary balances to confirm before we can finalize net debt, but we're confident in our current assessment, which represents a reduction of around $300 million from the half year. Operational cash generation was weighted to the second half, in line with our earnings, and we delivered a strong working capital inflow. Exceptional costs and settlement of provisions also continued to roll off in the second half. There is no change to our expectation that cash outflows and exceptionals and legacy contracts will reduce further in 2020. There was no material change in the use of our receivables facility since June with it being drawn down by a further $6 million in the second half to $198 million at the end of December. We have made some good progress with our portfolio rationalization strategy as we focus on premium, differentiated, high-margin activities, and we're active on sales processes. The agreed sale of our nuclear business for around $325 million remains on track. The CMA started its standard Phase 1 process on the 10th of January. This process covers CMA's market-testing work with input from ourself and Jacobs and will complete on or before the 4th of March. This step in the process is as anticipated, and our expectations of completion by the end of Q1 2020 are unchanged. We remain committed to a strong balance sheet. Net proceeds from disposals will be used to repay amounts due under our revolving credit facility and will accelerate progress towards a target leverage of 1.5x net debt to adjusted EBITDA on a pre-IFRS 16 basis. Moving on to 2020. Looking at the macro backdrop as we enter 2020, we're well positioned for growth opportunities presented by the trends of energy security and transition and sustainable infrastructure development across energy and built environment markets. In the Eastern Hemisphere, we expect growth in upstream oil and gas activity in Asia Pacific and the Middle East although there's some risks from geopolitical developments in the region. Capital discipline remains prominent in our customers' development decisions, and this is evident in the Americas, both in U.S. onshore and offshore. The outlook for renewables is positive, and we have a robust opportunity pipeline in U.S. solar. We're also seeing encouraging opportunity pipeline for downstream and chemicals work, particularly in the Middle East and Far East. Our built environment markets are expected to show further growth in 2020 as demand for Environment & Infrastructure Solutions in the U.S. remains robust. In terms of what this means for Wood in 2020, overall, we expect revenue to grow modestly and our focus on margin improvement to deliver growth in adjusted EBITDA. So to summarize before we go to Q&A. Our full year 2019 results will demonstrate earnings growth, margin improvement and strong operational cash generation. Better-than-anticipated cash generation in the second half will deliver a reduction in year-end net debt to below $1.5 billion, and that creates about 2x net debt to EBITDA. Revenue will be in line with 2018 at around $10 billion. Including the impact of IFRS 16, adjusted EBITDA will be around $850 million to $860 million, and operating profit before exceptionals will be around $410 million to $420 million, in line with market expectations. On a like-for-like basis, we expect to deliver adjusted EBITDA growth of circa 6% on a pre-IFRS 16 basis and growth in operating profit before exceptionals of around 20%. We remain committed to a strong balance sheet and continue to make good progress with our portfolio of rationalization strategy. In Q4, we outlined our clear strategy to focus on higher-margin project management, operations and consulting activities, supported by the formation of TCS. Looking ahead, our business is well positioned across its energy and built environment markets. And with a strong focus on margin improvement, we expect to deliver earnings growth in 2020. And with that, I'll now take questions.

[Operator Instructions] Your first question comes from the line of Michael Alsford from Citi.

I've got a couple of questions, if I could, please. So just firstly, just speaking around the sort of cash exceptionals as we head into sort of through 2020, could you maybe just comment a little bit on the quantum of a reduction in cash exceptionals year-on-year and where you see those reductions coming from, please? I think the second one would be just touching on your comment on looking at other noncore disposals. I don't know if you could try and quantify sort of the amount of what you're targeting in terms of noncore disposal proceeds. And then just finally, if you could just touch on what were the issues in the sort of cost overruns that you saw in the energy projects in the U.S. and whether they'd be repeatable or not or they now come to a close.

Okay. In terms of the cash exceptionals and generally around cash guidance, we've not changed our view from our Capital Markets Day in November. So we set out some fairly detailed guidance around all aspects of our cash in the medium term. Specifically on the cash exceptionals, in terms of the AFW energy costs, we see these rolling off in 2020. In terms of investigation costs, more difficult to quantify where we'll be there. And in terms of onerous leases, we see these going down from $30 million to about $25 million in terms of 2020. We also see a significant fall-off in terms of expenditure on legacy contracts that we've previously provided for, so these are not exceptional by their nature. Again, that's pretty much in line with where we set out in terms of our Capital Markets Day in November. In terms of the noncore disposals, we are very active on a couple of processes just now, one of which is very mature. And we would expect to announce in due course if it gets over the line, and that's likely to be in Q1. We'll give you the details around the quantification of that as and when we sign a deal. In terms of the cost overruns in ASA, these were the issues we previously flagged related to the execution. So at the start of the year, we had some issues in our pipelines in civil division, and in November, we flagged some issues with our process and energy division. And there's a variety of different reasons. They're all construction related. It's a mixture of generally weather and productivity. If we look across our portfolio, we've had some really good execution in Asset Solutions EAAA and in E&IS, and that's really driven excellent margins for both of these business units. So the challenge for us looking forward is how do we get that consistency of outcome across all of our business. So when we talk about margin improvement plan we flagged, we're looking at the efficiency of our operations, but we're also looking at how we can improve in execution, and the Americas is a major focus of that.

Your next question comes from the line of Lillian Starke from Morgan Stanley.

David, I just wanted to clarify on the commentary regarding modest growth in 2020 in terms of top line. Is that on a like-for-like basis, I mean, adjusting for the disposals in '19 and '20? Or you're comparing the $10 billion expected for '19 and on top of that, expect modest growth despite the disposals?

It would be on a like-for-like basis.

Okay. And would you say then, let's say, adjusting for the disposals, could we expect a reduction on top line? Or still maybe flat...

No, that's not what we're expecting. We still expect that absolute growth.

Your next question comes from the line of David Farrell from Crédit Suisse.

Two questions for me. Firstly, just to touch on the nuclear business disposal, could you go into a little bit more detail as to where the 2 businesses are likely to overlap in their end markets? And then the second question I've got is around the working capital, obviously, stronger than anticipated in the second half of the year. Is there a risk that this kind of unwind fairly quickly in the first half of 2020? Yes, those are my 2 questions.

I think in terms of the overlap, maybe I should take a step back, firstly, the sale is progressing just exactly as we anticipated. So we've flagged in all of our announcements around nuclear that we expected a CMA review. So the starting of the clock for us is entirely positive. Equally, we remain very confident of its completion, and we'll hear back from the CMA on or before the 4th of March. And that is the major contingency around the deal. So we would expect to complete shortly thereafter, assuming everything goes well. In terms of the overlap, nuclear -- Jacobs have a nuclear business in the U.K. So there is an overlap around the number of activities, including things like decommissioning. Again, we remain as confident as we did when we signed the deal as do Jacobs that there is no significant issue from a CMA perspective. In terms of the second question around the second half working capital and unwind, we don't look at it so much as an unwind. But our cash flow is driven in the second half where our profit is weighted to the second half, but we've also had better working capital performance in the second half. We're still closing our books. So we don't have the detailed analysis of that just yet. But it appears we've had much better collections than we'd anticipated. So we would expect that to unwind as such. I think as we look forward, we clearly had a very good working capital performance in 2019, which has generated significant inflows. Will -- that would have driven our DSO down significantly. So there is a law of diminishing returns in terms of continuing to drive working capital improvements. But that's not an unwind as such. I think in terms of the broader around the cash flow, we'd obviously targeted 80% to 85% cash conversion at the start of the year, and we reiterated that at the half year despite poorer performance in the first half. It looks as though our cash conversion is going to be over 90%, and that's after exceptionals. So we've had a significantly better performance in the second half.

And your next question comes from the line of James Evans from Exane BNP Paribas.

David, I've just got one question. I kind of want to dig back into the heavy civils. I guess first half, but it's disappointing. I just wondered if you could put some idea of a quantum of overrun or disappointment that you think you've seen in 2019 into perspective. And when do these small number of contracts start to wind down? And when did you process really change in terms of how you're bidding these contracts to sort of make sure that anything that's coming in is going to be on sort of better terms, be it risk or base margin?

In terms of the civils contracts, that was really an issue at the start of the year, James. I think we said that at that point, I think, in our March results, the impact was about $20 million across pipelines and civils. So that was really the issue at the start of the year. It's not been one that has perpetuated through the year at any material extent. We did have some different project issues in the Americas that we flagged in November, and these have been related more to process and energy business in terms of construction activities. And as I said, there is a mixture of reasons for that in terms of the cost overruns. In terms of the bidding process, it's worthwhile saying that the civils business is heritage Wood Group business, and so the bidding of those was done using our existing risk processes at that time. So there wasn't anything to change in that sense, and really, the driver was execution rather than per contract as such.

Okay. And on the process and energy impact, is that a similar quantum to what you saw in pipelines in civils at the beginning of the year? Or is it more so?

Yes, it's not dissimilar. So the net impact is below $50 million. So it's not dissimilar when you look at the net impact between '19 and '18. In terms of the mix of that, I think I know where your question is coming from, the majority of that was legacy contracts or contracts signed before, but not all of it. And it's been more an issue around execution than around the actual contract signature -- or the contract terms, rather.

Your next question comes from the line of Amy Wong from UBS.

David, 2 questions, please. The first one is about net debt, clearly, a very good performance here. What was your average net debt over the second half? If you can give some color on that. And my second question is a bit more macro. Just your comments, I mean, we saw you say here that renewables activity was lower in the second half in ASA second half '19, but in your outlook, you point out that there's robust opportunities in the pipeline for U.S. solar. So my question is really just to get an understanding of when we expect to see some more announcements about contract awards, a timing of when those are going to start showing up in your results. And also, whether it's going to be much more kind of project kind of related type ups and downs, or do you expect to be able to kind of really benefit more longer term kind of more robust growth, a structural growth type kind of business for you? Those are my questions.

Okay. There's quite a few questions in there. In terms of the net debt, we don't give out the average net debt. But let me take you through, really, the cycle of our cash flow. I think as we flagged at the start of the year, half year, we typically are second half-weighted in terms of activity, and we do have a wind down of activity out, particularly as we get to the back end of November, December. So we have less construction activity in November, December and certainly, in January and February. So we typically see an unwind of working capital, particularly in those last 2 months. I think for a number of years and across a number of businesses, we also seem to -- we also have an impact in December of almost settling of receivables. So our collections in December are always much higher than June, for example, and November and October. So our net debt comes down as we go through the half. So we were at 1.77 at the end of June, and it's come down with a -- a significant come down in the -- in November, December period. In terms of solar and renewables, generally, we are seeing a good pipeline of opportunities for renewables, mostly solar but not explicitly solar. We're seeing good wind opportunities as well in the Americas as well. Generally, these are EPC-type projects, and so generally, a significant construction scopes to those. In terms of the pipeline, a number of these should come to fruition in the first half, so they've been in the pipeline. We talked about them in November. They've been in the pipeline. We've been bidding off them. We'd expect them to be awarded in the first half of the year. As to how that continues to play out, we're obviously going through another cycle of expenditure on solar projects. I think you get into that broader space of energy transition, and we would expect all of the staff show there is going to be significant investment in renewables, generally, not just in the Americas, so, I mean, we see that as a trend that continues.

And your next question comes from the line Erwan Kerouredan from RBC.

Most of my questions have been answered. I might have 1 on renewables, though. You mentioned -- you just mentioned potential in wind and EPC. Can you just clarify the opportunities you're looking at outside of U.S. solar?

I'll not mention the specific opportunities. But generally, they're onshore wind farms, I would categorize them, and some significant opportunities with clients we've worked with before. Generally, again, it's generally mostly construction-type activities.

Your next question comes from the line of Grace Osborne from Barclays.

It's not Grace. It's Mick here. A couple of questions, if I may. Firstly, you mentioned problems in the U.S. is not YCI. What's the percentage of completion on YCI at the moment? What stage are you at?

We're over 65% complete, and so we expect the project to complete in the second half of 2020.

Perfect. And then U.S. share obviously slowed down back end of the year. What are your expectations on speed of recovery, if any?

As I take you through '18, '19, '20 in terms of shale and what we've seen, so we actually saw some good growth that we look '19 to '18 around U.S. shale, and that was mainly driven by midstream work for us. And so there was a significant procurement scope in that, so midstream work in terms of bigger pipelines for us. As we look to 2020, with less of that activity, there still is some opportunities but much less -- doing a lot less procurement activities. So we expect our revenue to reduce at some part in 2020. More generally, in terms of U.S. shale, it feels pretty muted just now in terms of U.S. shale.

Okay. And just a final one, just admin. Obviously, you report EBITDA including IFRS 16, and you exclude it from net debt. Now we're a year late. Are you going to start including IFRS '16 when you report it in net debt going forward?

We haven't made any decisions on that yet. I think in terms of reporting the net debt, because there's been such a focus on our net debt and the net debt-to-EBITDA ratio, we didn't really want to change anything until we move beyond that sort of focus. So what we can say is around the [ quoted ] guidance around net debt will be in the future.

[Operator Instructions] Your next question comes from the line of Mark Wilson from Jefferies.

David, first, a question I'd like to ask on the dividend. I imagine progressive dividend strategy remains, and interim is up 1%. So are we looking for the same for the final dividend?

We've not made any decision on dividends. That's really one for the Board. And we picked that off in our March results. There's no change to our dividend policy.

Okay. I think in your comment regarding the disposals and other ones being in process, you mentioned debt maturities or disposals helping with debt maturities. Could you just take us through what they are this year?

In terms of -- we have a term loan that we now have $390 million left that matures in October 2020. We've actually extended $100 million of that in December, and we're likely to extend a further $200 million of that in January. So the maturity of that will then be May '22, which is the same maturity as our RCF.

Okay. Okay. And if I -- one last question. I think you're very clear on the revenue guidance, the modest growth being on a like-for-like basis. And would you be able to tell us what the nuclear business is in 2019 revenue?

In terms of 2019 revenue, bear with me, nuclear is around $300 million, just under $300 million in terms of revenue and is around $30 million in terms of EBITDA. And obviously, we expect to complete that in around Q1, so we will have a certain amount of revenue and profitability in our 2020 numbers.

Got it. And just to be clear, you answered clearly, even if we take that out for completion, you'd still expect revenues to grow more than what you just guided for 2019?

Yes.

And your next question comes from the line of James Thompson from JPMorgan.

David, just a couple for me, really. Just in terms of revenue coverage, really, obviously, you don't give backlog here. But can you just kind of give us any color in terms of where you are revenue coverage for 2020, kind of how that looks on a like-for-like basis, that kind of gives you confidence underpinning that guidance? And then secondly, obviously, a few questions on execution in the Americas business. And clearly, that's implied as an improvement in underlying margins 2020 over 2019. But is there anything in EAAA or TCS that might offset that kind of implied margin expansion that we need to be aware of? Or is it those going to be sort of relatively flat and then just get that benefit through from the Americas?

In terms of revenue coverage, first of all, we're almost at exactly the same level as we were at the same point last year. So as at the end of November, we're just over 50% of our revenue covered. As I said, we've not closed our books for December. And so that gives us a reasonable degree of confidence around the delivery of revenue, albeit there's still work to do in terms of winning orders, booking them and executing them. In terms of the margin story and how that should play out in 2020, the first thing I'll start with, we've had some excellent execution in EAAA and an improving execution, good execution in our built environment markets and TCS as well. And so the problems we've had in ASA need to be set against that context. As I said, we are very focused on getting good execution across our whole portfolio. We do have a fairly extensive portfolio. So it probably is unreasonable to expect everything to go excellent. But that's clearly the ultimate goal.

We have no further questions at this time. Please continue.

Okay. If there's no further questions, I'll just thank you for your participation, and I look forward to speaking to you on our March half year results -- yes, our March full year results, rather.

That does conclude our conference for today. Thank you for participating. You may all disconnect.