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

Ladies and gentlemen, thank you for standing by, and welcome to the Wood Trading Update. [Operator Instructions] For your information, this conference is being recorded. Now I would like to hand the conference over to your speaker today, Mr. 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 hopefully provide a bit more color around our financial performance in 2020. As you know, the global engineering and consultancy market has faced unique and unparalleled challenges from COVID-19 and volatility in oil prices. In 2020, our resilient financial performance against this challenging backdrop was underpinned by the breadth of our end market exposure and the flexibility of our business model. Our strategy to broaden our consulting projects and operations business across diverse energy and built environment markets has been the right one. To remind you, the shape of our business is roughly 25% chemicals and downstream, 25% renewables and other energy and 15% built environment with only 35% now from upstream and midstream oil and gas. With this breadth of exposure, we've continued to win and execute work and have seen relative resilience in around 65% from end markets, including strength in the built environment and growth in renewables and relatively robust revenue in chemicals and downstream. Our success in diversifying our end market exposure is reflected in the new work secured in 2020. And that includes EPC work for Glaxo, onshore wind and solar awards in the U.S., an LNG renewal in Asia Pacific and 3 new oil and gas scopes with Equinor. We have also very recently announced an EPC scope for an ethylene expansion project in China and have been awarded a fee detail design engineering and EPCM scope on an oil and gas project in Iraq and the scope to deliver late-life solutions for North Sea assets. We continue to benefit from opportunities in energy transition and sustainable infrastructure as demonstrated by work throughout the year. Our recent awards include a scope to evaluate the decarbonization of industrial clusters in the Northeast of Scotland, and that's utilizing carbon capture and hydrogen technologies; a study for the supply of domestic hydrogen in Australia; and our framework agreement with transport for London for strategic transport planning. The flexibility of our operating model has always underpinned our investment case. And we have a proven track record of leveraging our asset-light model to get ahead of changing market conditions. We took early action, and at the start of April, announced measures to keep delivering safely for clients, reduce cost and maintain margins, protect the balance sheet and generate strong cash flow. This has remained our focus throughout the year, with the safety of our people working remotely and at client sites being a key priority. We achieved high levels of utilization and delivered overhead reductions at pace, resulted in savings of around $230 million. Our flexibility was also evident in steps taken to protect the balance sheet, and that included voluntary salary reductions, the withdrawal of dividend payments, CapEx reductions and improved working capital performance. Our breadth and flexibility translated into a resilient trading performance in 2020. On a like-for-like basis, adjusting for disposals of businesses in 2020, revenue will be down around 20% on 2019. As I noted previously, we saw a real benefit from the breadth of our end market exposure, with full year revenue reflecting the relative resilience in around 65% of our portfolio. Adjusted EBITDA on a like-for-like basis will be down around 22% with margins down only 20 to 40 basis points on 2019. Against the backdrop of lower-than-anticipated activity due to the uncertainty around COVID, we were able to protect margins through maintaining utilization at high levels and overhead reductions of around $230 million. This is partly offset by cost overruns and delays on a small portfolio of EPC projects in our Process and Energy business in the Americas. Compared to expectations in August, margins are stronger in EAAA but weaker in Americas. On a reported basis, revenue will be around $7.6 billion, adjusted EBITDA will be $620 million to $640 million, and adjusted EBITDA margin will be 8.2% to 8.4%. Operating profit before exceptionals will be around $215 million to $235 million. At the business unit level, in EAAA, like-for-like revenue will be down around 20%, and that reflects lower activity in upstream and chemical and downstream projects. Excellent execution, high utilization and overhead cost reduction resulted in very strong margin performance, and that's going to be significantly up in 2019. In TCS, like-for-like revenues are about 20% lower than 2019, and that reflects the decision not to pursue higher risk, lower-margin construction work, the expected roll-off of automation work on TCO and some project delays due to COVID-19. This is offset in part by strength in the built environment market, which represented about 50% of activity. Margin performance improved strongly compared to 2019, benefiting from synergy delivery initiatives and high utilization. In the Americas, revenues will be down just over 20%, reflecting relative strength in chemicals and downstream and higher renewables activity in both solar and wind work, offsetting -- offset by challenging market conditions in upstream and midstream. While adjusted EBITDA margins benefit from improved utilization and cost reduction initiatives, that will be significantly down on 2019. This is due to further operational challenges and delayed delivery on a small portfolio of energy projects within the Process and Energy business. And this is due in part to COVID-19 as well as adverse weather conditions. Profitability in the business will be around $50 million lower compared to 2019. We continued focus on how we can improve delivery performance in the Americas, in line with the excellent performance we've seen in EAAA and TCS. A number of actions continue, and these include dedicated execution excellence improvement programs, organizational change, enhanced functional oversight and reducing risk exposure through discerning contract tendering. Turning now to the balance sheet. We delivered a further reduction in net debt in the second half as we expected. Net debt of 31 December is anticipated to be around $1.03 billion, and that's a reduction of around $400 million since December 2019. The reduction includes the benefit of the actions we took to protect cash flows and ensure balance strength -- balance sheet strength. These included voluntary salary reductions of the Board, executive directors and senior leaders, and withdrawal of dividend payments, CapEx reduction and working capital performance improvement. Cash generation in the year includes the impact of their wind of advanced payments as well as the benefit of lower cash outflows on provisions and proceeds of around $460 million from the disposal of our nuclear, industrial services and our interest in TransCanada Turbines. We retained considerable financial headroom, undrawn facilities of around $1.75 billion, and in October, we extended our RCF of $1.51 billion to May 2023. Looking ahead, order book at the end of November was $6.2 billion with over 60% due to be delivered in 2021. The progression of our order book down 22% from December 2019 reflects the effects of the macro conditions in our diverse end markets, with delays to larger upstream awards and deferral of investment decisions in chemicals and downstream being offset in part by continuing strength in the built environment and resilience in renewables and other energy. It also reflects our discerning bidder approach to contract tendering, ensuring we attain the appropriate level of risk and reward, in line with our measured risk appetite. Whilst we see some short-term headwinds in our markets, including uncertainty around the ongoing impact of COVID, we believe we continue to offer significant opportunities for the medium term. The strategic steps we've taken to build breadth in our business and diversify our end marketing exposure, our differentiation and our strong customer relationships position us well to take advantage of these opportunities. In 2021, we'll continue to focus on what we can control. Our financial focus will continue to be on EBITDA margin through high utilization, further operational and efficiency improvements and a focus on growth markets. Our operational focus is on ensuring our business is fit for the accelerating pace of energy transition and the drive towards more sustainable infrastructure. We are actively engaged in optimizing our operating model and further digitalizing the way we work to unlock stronger medium-term growth. We also ensure that we continue to maintain our leadership position in ESG and sustainability as recognized by the leading rating agencies. So just to summarize before we go to Q&A. The global engineering and consultancy market has faced unique and unparalleled challenges from COVID and the volatility in oil prices. Our financial performance in a very challenging market in 2020 was underpinned by the breadth of our end market exposure and the flexibility of our business model. On a reported basis, revenue will be around $7.6 billion, adjusted EBITDA will be $620 million to $640 million and EBITDA margin will be 8.2% to 8.4%. Our actions to maintain utilization at high levels and deliver overhead reductions of around $230 million are reflected in the strength and protection of our margins, which are down only 20 to 40 basis points in 2019. We delivered a significant reduction in net debt of around $400 million to around $1.03 billion and has considerable financial headroom. While order book progression reflects some near-term headwinds, we continue to win new work, demonstrating our differentiation, strong customer relationships and the benefit of our strategic position across diverse markets. And these position us well for the significant medium-term growth opportunities in our diverse end markets. And with that, I'll now open it up to questions.

[Operator Instructions] We are now taking our first question from the line of Victoria McCulloch from RBC.

I was wondering if you could go into a bit more detail on the deliverability issue in the AS Americas business. I know you mentioned it's not just COVID-19 issues in terms of those weather. Is this a recent contract? I know we talked about contracts in the past where you've tried to have greater discipline and take more control over the process to avoid these issues. But as does this happen again, you -- has it been currently been resolved? Where are we at this contract? And what should we read more into this?

Yes, sure. Let me try to take you through that, Victoria. It's probably worthwhile just starting with the perspective. It goes without saying, 2020 has been a challenging year, and it's had a fairly severe impact on activity levels and our revenues down 20%. As you know, we set out a strategy to protect margins as much as possible through focusing on high utilization and reducing overheads. And the actions we've taken have been largely really successful in protecting margins. And we've seen very strong margin growth in EAAA and TCS. In ASA, we do expect to see significantly lower margins, and that's driven by the operational performance in a small portfolio of EPC contracts in our Process and Energy business. And there, we've experienced some cost overruns and delays. And in part, that's due to COVID, and in part, it's due to adverse weather that we've seen in Q4. And as I said in the narrative, we expect the overall impact in our Process and Energy business to be about $50 million lower compared to where it was last year. In terms of what we're doing about it, we are very focused on trying to get the same margin performance, great margin performance we have at EAAA and TCS. And so we have a number of initiatives that are ongoing. I talked about, we've got a dedicated execution excellence team working in that business just now. We've greatly increased the functional oversight we have through commercial, financial, people, supply chain. And also, we're reducing the risk exposure, so actually, the number of contracts we take into that business just now. And that's by upping effectively the bar in terms of the contracts and the type of contracts we take into that business. In terms of -- maybe a bit more color in terms of some of the delays. COVID has undoubtedly given the projects some challenges. And generally, we're protected from a time perspective in terms of COVID. Clearly, there's always a discussion with the client around the quantum of that. But we're not generally protected for cost in EPC contracts for COVID. On adverse weather, again, we're generally protected for named storms in those business. But we can face some exposure in terms of cost. And so that's been part of the challenge around Q4 for us in terms of these contracts. In terms of the types of contracts, in August, we talked about 2 contracts where we had difficulty, and we expected those to complete. They did complete. They're operationally complete. We're still in the commercial stages of those contracts. So this is some challenges we've had on a couple of other contracts within the same division of Process and Energy, which is where we've probably got the most of our EPC activity across the group. Hopefully, that gives you a bit more color on that, Victoria.

Super. That was really helpful. And now maybe something slightly different. Could you just give us a bit of an outlook on terms of renewables pipeline, how this has changed over, certainly, the last 6 to 12 months? And maybe how does that sort of compare to the headwinds you're seeing in itself?

Yes. Maybe -- because I know it will probably be a bit of keen interest, so maybe just talk about our backlog generally and pick up renewables in there as well because I imagine there'll be a few similar type questions. When we -- the starting point, again, it sounds like a bit like a broken record, but the ongoing impact of COVID is making the general environment uncertain. When we look at our pipeline of opportunities, it's actually recovered to pre-COVID levels, but there's uncertainty around timing. When we look at what's in the pipeline of opportunities, the actual shape of it has changed. So there's much more opportunities around renewables, for example, and around the built environment compared to some of our more traditional markets. We -- when we look at our backlog, you can see that our backlog has shrunk 20-odd percent from 2019, and it shrunk from the half year. And it's maybe worthwhile going through the individual business units because that will pull out some of the themes. If I maybe start with TCS, we've actually seen a very small, a really modest decrease from December 2019, and it's been slightly up compared to June. That's largely driven by our built environment market. And again, it's worthwhile remembering this is the higher-margin consultancy part of our business. When we look forward, as we said, about 50% of that business is in the built environment. A big part of it is in the U.S. We expect to benefit from stimulus packages. Again, the uncertainty is around timing of how that stimulus will flow through, whether it's either through green initiatives or infrastructure initiatives. I think the other thing we've seen that's really encouraging in TCS, although it's not material in the short term, it's actually the number of smaller-scale projects and studies we've won in hydrogen and carbon capture. I talked about some of those in the script. There's many more. They're not material in terms of revenue in the short term. But what they do is they really position us well for when bigger projects start coming in. And that's definitely a medium-term story. But for us, it's really good proof-of-concept around our differentiated capability, our technology and the experience we have. And so we believe when these start coming up to bigger projects, we'll also be able to bring effectively our project experience and our ability to be a system integrator in brownfield projects, for example, as well. So again, we've been really encouraged by that but not material for 2021. In the Americas, we've seen a significant drop-off in backlog. And so what's driving that? One, U.S. shale. Our U.S. shale business was down about 50% compared to 2019. Again, I don't imagine that will be a surprise to anyone. But the other factor that we've seen much more pronounced in the second half is actually the impact in the downstream of chemicals business where there has just been a deferral and a postponement of investment decisions and bigger projects. So our bigger projects are starting to roll off. We achieved mechanical completion on YCI in the fourth quarter. There's a little bit more work in the first quarter, but that's starting to roll off. And so the replacements for that are generally smaller scopes and FEED scopes. And so we've seen a reduction in backlog in ASA. In EAAA, we've seen the similar theme around downstream and chemicals and upstream projects, but we've had more protection there from some of our operation-type activities. So as you know, we do a lot of operation activities in Europe, Asia and the Middle East and so that's given us more protection in that business unit. So where does that bring it? As we said in the statement, we do still see the general uncertainty associated with COVID, and that's obviously affecting our order book build in the short term. But we do feel we're very well positioned for the medium term. And encouragingly, that's in higher-margin activities as well. A very long answer, Victoria, but hopefully, covers a number of points that other people have as well.

We're now taking our next question from the line of Vlad Sergievskii from Bank of America.

David, if I can very quickly follow up on the backlog. What sort of most recent trends you have seen on book-to-bill, perhaps during Q4? Have you seen book-to-bill moving in the direction of 1? And should we export -- what should we expect to happen to the backlog in the 12 months of 2021? Is it fair to assume that the backlog is around the bottom right now? So that's the first one, David. And then, David, if you can help us just directionally frame headwinds and tailwinds to profitability in 2021 versus '20? What is helping the margin? What is perhaps creating some headwinds? That would be super helpful.

Okay. So maybe starting with that book-to-bill, it's probably an extension of what we -- what I've said around the backlog, I'll try and flesh out a little bit more. If we looked in probably the summer months, June, July, August, our book-to-bill was probably hovering around the 1. In the fourth quarter, we did see a postponement of some investment decisions. And as we continue to roll off work, that had an impact in terms of our backlog. Again, it's just worthwhile reemphasizing, the exception to that was TCS where actually, effectively, the book-to-bill has been above 1. So in EAAA and ASA, our book-to-bill was below 1. I think as we come out of this, it's part of the uncertainty. How is the order book going to build through 2021? We've got about 60% of our order book relates to 2021. Usually, that's about 50% of our revenue in a normal year. It's probably not a normal year. When do we start to see people getting confidence around investment decisions as we come out of COVID is the remaining question for us. And that will dictate how our order book builds and then also how our revenue for 2021 looks. In term of headwinds and tailwinds, I think the headwind is just the obvious one. It's the impact of COVID in terms of the general market uncertainty. There's -- I've seen some recent oil and gas expenditure surveys that suggests it's slightly up, so flat to slightly up. That's clearly a bit -- it's flattish, so it's not going to provide a tailwind in terms of that. If I look at what do we -- so generally, the environment is the headwind. In terms of the tailwinds to our margin, one is the changing shape of our business. We've talked about either the TCS and the build of backlog there and probably a more positive short-term outlook around activities there, particularly around the built environment. I think equally, it's just our focus. We done a -- we did a tremendous amount of work to protect margins. And it's -- our margins are down slightly, 20 to 40 basis points. We think that will compare really well to any of our peers. The work we've done in margins to protect it to that level, we're really proud of. And in 2 of our business units, we've had margins increase, which, again, we think is a tremendous performance by them. I think in terms of -- when we look forward to 2021, we don't look at efficiency and improvements on a static basis. We're constantly looking at how we can make ourselves more efficient, how we can drive improvement in our margin, and it is our big focus. And so we've got a number of initiatives that are ongoing just now. We'll maybe talk about a bit more about them in March. But again, we'd see those as being helpful to our overall margin story as well.

That's great, Dave. And if I can, very quickly, follow up on your outlook for cash conversion in the near term. Probably the tailwind, obviously, would be lower cash exceptionals, as you highlighted earlier. Any particular material changes to working capital you are expecting?

Yes. We went through it in detail in our half year results and we'll go through it in detail in our full year results. Maybe it's just worthwhile going through some of the bits that affect cash conversion. In 2020, we gave guidance around provisions. We expect that to be slightly better for 2020. And again, we flagged that we see a significant reduction of that in 2021, which is still the case. When we look at exceptionals, our exceptionals will be slightly higher because we've done more work in terms of our cost base. Again, we wouldn't expect to be doing the same level of cost work in 2021, and we do expect that exceptional to reduce. The -- in terms of the working capital itself, probably the bigger impact has been advances in the roll-off advances. We expect that to be around $300 million in 2020. We don't expect that in 2021 -- our advance is balanced. I think at the start of the year, it was over $400 million. So it's a relatively small balance now. And so if anything, we probably expect that to build as order book builds as we go through 2021. So it might give us a bit of benefit in terms of working capital. In terms of the other working capital, we would expect that just to move in line with activity. We've -- at the half year, we saw a significant reduction in our DSO, which was great. It's difficult to keep getting that reduction in DSO going forward. So we'd expect it to move more normally with activity.

Our -- we're taking our next question from the line of Mark Wilson from Jefferies.

I think you've actually answered my question. I was going to ask on the coverage point, you said 60% of your current backlog is for 2021. Now looking back, I see 60% of being the typical coverage that you talk about. You just mentioned about 50% in a normal year and it not being a normal year. If you could maybe just cover those again? And then just break down, 25% of the business you spoke about as being renewables in the past. Would that be the -- how we should look at the current order backlog? And do you think that proportion grows through the year as you win more work to meet the revenue?

I think the -- I guess there's a number of different things there, Mark. I think you've probably picked up the backlog maybe slightly wrong. At the end of November, we have typically about 50% revenue coverage for the next year. The 60% refers to the proportion of our backlog that relates to 2021 as opposed to outer years. And so another way of saying that is $3.7 billion of our $6.2 billion relates to 2021. And that gives us in a normal year, and I do stress this in a normal year, and I think none of us would feel that last year has been normal, and it still doesn't feel particularly normal, that would typically be 50% revenue coverage. I guess in terms of the second question, could you just remind me of what your second question was, Mark?

Yes. Just what is the proportion of renewable within that backlog? I think you spoke to 25% of the business being renewables.

Yes. 25% of our business is renewables and other energy. If you looked at 29 versus -- 2019 versus 2020, our renewables activity had doubled during that period. And as I said, in terms of our pipeline of opportunities, we continue to see really good opportunities in renewables. We have to win those, but there's no lack of opportunities just now. In terms of the shape of our portfolio going forward, maybe just covering that more broadly, probably some of the more significant move has been really in that built environment space. So the built environment continues to form a bigger part of our business. If I looked at revenue, the exact revenue proportions, it's increased in '19 to '20. And when we look to 2021, we expect it to increase further. So we would expect renewables and the built environment to be an increasing part of our business going forward. I think on the flip side of that, when we look to 2021, in downstream and chemicals, we expect that to reduce. And that's related to the lack of bigger awards in the back half of 2020 and to date in 2021.

Okay. All right. And then maybe just quickly, you've deleveraged $400 million in the year, excellent achievement but the disposals of $460 million. Looking at where the business stands now lower cost base, but yes, tough market, do you expect organic free cash flow generation in 2021?

Yes. It's probably just the answer I gave earlier. We do see our free cash flow opening up. What's the bigger element? The bigger element is the advances, Mark. We effectively had an unwind of over $300 million of advances in 2020. We don't expect that in 2021. And with a reasonable order intake, we should see some build in that number. Equally, we see the impact of provisions reducing and the impact of exceptionals reducing in 2021. All of these help us open up a bigger free cash flow as we move forward. Again, if I just take a step back in terms of 2020, 2020 has been a really challenging year. We've managed to reduce our net debt by $400 million in this really difficult circumstances. Again, we're really pleased where we've got to in terms of our net debt. We're now down to about just over $1 billion. We're at $1.4 billion, obviously, the end of last year. As the business grows out of COVID, we obviously then see our net debt-to-EBITDA reduce going forward as well.

We're now taking our next question from the line of Michael Alsford from Citigroup.

David, a couple of things, just to elaborate maybe a little bit on what you said earlier. I'm just wondering sort of short term, you've obviously seen the rally in crude prices. And I know you're obviously diversing off in your business into other areas. But I'm just wondering whether you're seeing any noticeable sort of change in customer behavior to move forward with some of the sort of short-cycle work, maybe in U.S. shale or internationally within oil and gas. That was my first question. And then just to follow up a little bit more on -- you've obviously done, as I say, a great job on disposals in 2020. I'm just wondering whether you think that portfolio reshaping is now largely done? Or there are other things that you have to think about disposing, which could, again, provide some deleveraging in 2021 as well?

Okay. Probably too early to say in terms of the price impact. We continue to see a strengthening in our stability in oil prices. We really expect that to have an impact. And as you correctly identified, usually, U.S. shale has been the first to react in that. So I've seen some pronouncements from some of the players in there that would suggest that, that's not the case. That's not been the history of it. Typically, it reacts quite quickly to oil prices. To date, we're not seeing anything significant. It's probably too early for that given we've just gone over the Christmas period. But we would expect it to have an impact. In terms of disposals, we've not got any material active processes just now. There's a few smaller tidy-up of portfolio-type activities that are ongoing that we'll talk about in due course, not particularly material. However, we were clear at our Capital Markets Day, we still -- we do see ourselves reshaping our portfolio around those trends of energy transition and built environments. One thing we won't do through is fire sale assets or try and sell things into difficult markets. And we'd like to also get back to doing the other side when we feel our balance sheet is strong enough, which is using proceeds to invest in areas we see greater growth.

We're now taking our next question from the line of Amy Wong from UBS.

Just a couple of questions here. On the cost savings, $230 million for 2020, could you talk about what proportion of it is structural? And what of -- how much of that is more variable and that will likely go back up when activity picks up, please?

Yes, sure. We reckon about 1/3 of it is temporary in nature, and that's typically things such as salary and bonus. And so the salary reductions that we made in 2020, we did them for a longer period. We -- the salary reductions were from the start of April to the end of December, but then they revert back from the 1st of January. So roughly 1/3 of our cost savings we see as being temporary in nature. I think in terms of thinking of how you model it going forward as well, a lot of our cost savings were done effectively in that second quarter. So we'll get some uplift for the full year benefit of those cost savings as well in 2021.

All right. You read my mind. That was going to be my follow-up, you see. Can you quantify roughly how much that could be in 2021, incremental cost savings and -- yes.

There's a bit of a balance between the 2 trends that you mentioned there, one, the temporary versus getting the full year benefit. If you work through the rest of it, by and large, we did most of our cost savings in the second quarter.

Right. Okay. And then my next question is, I know we've kind of danced around the subject of kind of profitability in 2021. But just to maybe get a bit more color on that, in terms of thinking about the moving parts of 2020 versus 2021 margins, like there's a mix, there's cost savings. Can you talk a bit more about how you expect, say, maybe the margin mix to evolve into 2021? And how cost could weigh that down? And maybe are there additional things you could do on utilization to maintain that margin? Or just talk about some of those moving parts.

Yes. There's probably not much more I can say than I've already said, Amy. We're not giving out detailed guidance at this point. I'm sure, you probably wouldn't expect it. Some of the trends are the trends we're seeing in the backlog. TCS is a higher-margin part of our business. It's becoming a greater proportion of our business. So that will have a positive impact for us. If I look at in terms of margin protection and cost saving, one of the things I think we've always been able to demonstrate is we're able to play the hand we're dealt. And so we will respond to activity levels. And so if we need to do more work in terms of our cost base to protect margins, we'll do that. As I said, we've got a number of active programs that are underway just now that will deliver further efficiency improvements for us and also will help us position in growth markets as well. So really just the points that I've made previously, Amy.

Okay. And then just one last question for me on your TCS margin. About 1.5 years ago, you guys talked a bit about restructuring and there were some cost savings in there. And now you're also seeing an expanding pipeline for TCS projects as well from what I gather from your comments earlier. So as the opportunities are increasing, the pool of work is increasing. Are you still able to see that kind of -- TCS to be able to maintain that better margin profile?

Yes is the short answer. So when we announced TCS, and we brought together Specialist Technical Solutions and our environment and infrastructure business to create this big consulting business, we identified synergies at that point. TCS has delivered those synergies way more than that over the last year. And that has largely been structural changes in terms of driving higher utilization, taking overhead costs out. We're doing things, much more things around shared services. There's quite a number of initiatives around property, around how do we run our hub-and-spoke model. We've got lots of offices all around the U.S., which you need that local presence and where we work. But is there more efficient ways to do it? So we've done a lot of structural things around our cost base that we don't see coming back as markets start to recover.

We're now taking our next question from the line of Mick Pickup from Barclays.

Just one quick question. You mentioned a couple of times in your commentary about risk aversion and being more discerning. Is that just a continuation of your policies you have in place? Have you've seen the market your clients asking for more risk on contracts as part of the downturn?

It's less about our clients and more around our risk appetite, Mick. So you always need to be thoughtful around EPC activities. We've deliberately derisked the business over the last 3 years in terms of, one, the proportion of lump-sum work that we take into the business and also the type of lump-sum work that we take in the business. So the proportion of lump-sum work has come down significantly, I think from 35% to 25%, the last time we published numbers. And we would expect that trend to maybe reduce a little bit further still. But also effectively, the risk profile of that lump-sum work has been derisked as well. And so when we look at some of the challenges we have in our Process and Energy business, we've probably upped the bar there in terms -- or lowered the bar in terms of risk appetite in that business unit just now to make sure that we're actually delivering some of the improvements I talked about earlier. So in the short were -- it's more an evolution of our risk appetite than being driven by our clients, would be the short answer, Mick.

Okay. And can I just come back on the cost savings. As far as I can interpret, you think there's more to go for in next year. Now you're also talking about what looks like the revenue pressure into next year, which has a margin impact, and you've been saving costs for the last 3 years. Do you not get concerned that you're getting very close to the bone on these cost savings at this point in time?

Yes. I remember us having this conversation back in 2015 as well coming out of it. I think one of the things we've proven -- if you look at our cost base, there's an operational piece and there's an overhead piece. The operational piece is managing our utilization in line with activity while protecting our capability. And we're always conscious of protecting our capability. But we need to have people buying our services fundamentally to justify keeping people. In terms of our overhead base, we're quite a big and diverse company. There still is lots of things for us to do. If I look at one of the things we're doing for our E&I business, it's moving our finance services into our daily shared service center. The impact of that is -- the cost benefit is roughly 1/3. And so we do feel there's still stuff that we need to do. We've done a lot, but there's still stuff that we can do to make ourselves more efficient, and we're getting on with that just now as well. For the avoidance of doubt, we'd much rather be in that strong market space. But COVID has been a bit of a headwind this year.

We're now taking our next question from the line of Kevin Roger from Kepler Cheuvreux.

Most of the question have been answered, but I have just one follow-up, focusing on the renewable markets, which is basically growing fast for you. I was just wondering if you can talk about the pricing environment just in the renewable because we have seen over the past months a number of players trying to enter the markets, either in the hydrogen, the solar or the wind, et cetera. So I was wondering if you can mention the pricing and so the margin evolution for just the renewable, please?

Yes. I think I read a piece. I'm trying to remember what analyst, I think it was Amy actually. She probably captured it well in terms of how we look at it. The margin probably moves more with the type of services we do rather than the sector, whether it's renewables. So if I look at our EPC activities, typically, they're fairly competitive. But our EPC activities, whether it's industrial, oil and gas, are pretty competitive as well compared to renewables. In terms of things such as hydrogen, again, we see -- typically, that's more consulting-type scopes for us just now. And there's a lot of people who would like to do it. But there's not a lot of people with our capability and differentiation and experience in hydrogen. So that's typically -- just now it's relative little revenues. But actually, we get very good margins on those type of activities. And we do think that's reflective of our differentiation in the EPC activities. Within onshore, solar and wind, there's less differentiation. There's quite a number of players in the market. We try to work with customers with longer relationships with. So we've got some sort of edge there rather than it just being almost a super type -- supermarket-type space. But in things like hydrogen, carbon capture, consultancy and renewables, these are typically good margins in line with the margins we have in other consultancy-type activities. So more in line -- margins move more in line than the type of services, rather than the sector.

We're now taking our next question from the line of David Farrell from Crédit Suisse.

Two questions for me. Firstly, I just wanted to talk about the kind of growing gap between the margins in ASA and AS EAAA. Obviously, we discussed a lot what's holding back ASA. But is AS EAAA outperforming? Is there anything particular in the revenue mix there which could reverse? And then my second question. I just wanted to get an update with regards to the ongoing discussions with Brazil, U.S., et cetera, and the provision that was taken in this -- in December 2019. I think it was $46 million relating to the kind of settlement with those authority. Where do you stand on those negotiations?

Yes. I'll maybe take that one first and then come back to your margin story. There's no -- there's nothing really to add to the disclosures we've got in 2019. David, I don't know if you're typing it just now, if you could go mute. There's nothing further to add to our disclosure from the 2019 financial statements. You picked up some of it in your commentary. We continue to assist the relevant authorities in connection with their investigations. We did book a provision for the U.S., Brazil and Scotland. And we're currently going through the discussions with these authorities. The timing is still uncertain. So not much to add to our disclosure we've made previously. In terms of the margins, in EAAA, we have seen some really good margins. It will be up significantly on 2019, and that's on the back of really good execution across the portfolio and a lot of good work in terms of the cost base and further improvements in terms of their utilization. So really pleased with the performance in EAAA. As ever, we always expect that excellence to continue. Sometimes, we can have issues on projects, but we've not seen that in EAAA. Structurally, when you look at our reported margins in EAAA, they do benefit from the rollout of the turbine joint ventures, and so you should remember that. So because it's equity-accounted, the benefit from that in terms of their margin. If you look at ASA, it's been more of a challenging space in terms of margins. We've had issues in the Process and Energy division. Equally, in our oil, gas and chemicals business, we've delivered some pretty decent projects at reasonably good margins, including things like YCI. In the U.S., we also have been exposed to U.S. shale where we've seen very dramatic changes in activity and very quick changes in activity. And we've talked about pricing before. Generally, this has been in our oil and gas markets. So it's been more of a volume issue than a pricing issue, but we've had considerable pricing pressure in U.S. shale. So we've got a lot of focus around the Americas, around -- well, how do we get that consistent delivery of projects in the Americas, and that will have an impact in terms of our margin. And we rightsize our business for where U.S. shale is just now.

We're now taking our next question from the line of Amy Sergeant.

I'll keep it brief given we've had a lot of questions by now. But I mean you talked about the composition of the backlog. But maybe if we could just have a bit of detail on the composition of the order book and sort of how you would like that to evolve in the coming years, that would be very helpful, in terms of sort of renewables versus petrochemical, downstream and then the upstream side.

Yes. I think I'll probably start, Amy, by -- we would like the order book to get much bigger. I think in terms of the trends within it, I've talked a bit about it. In the short term, we're more encouraged with markets such as the built environment market and our renewables and other energy market in terms of the short-term pipeline. As we look to the medium term, we've talked about -- our business has changed significantly. I know we've said this a number of times. Back in 2014, '15, we were 90%, 95% upstream oil and gas. Today, we're 35% upstream oil and gas. So we've already seen a very significant change in our business, and we would expect that change to continue to evolve over time. We -- that's not saying that upstream oil and gas is not a really important part of our business. It is. We've got some excellent capability. We deliver excellent projects for a number of our key clients. And those key clients are broadening their portfolio and we'll deliver great work for them in other sectors as well. We're probably -- over that medium term, we've been clear, we expect those trends to continue. The only other one that I mentioned in the short term, we do -- we have seen our backlog in downstream and chemicals reduce as we burnt off bigger projects. And those replacement projects have been deferred or postponed. We would expect petrochemicals to rebound and again, that to be an important part of our portfolio. But in the short term, we'll see that dipping in terms of proportion of our work.

Our next question comes from the line of James Thompson from JPMorgan.

Obviously, a lot of questions so far, but I just want to ask one question, really. You talk about free cash flow opening up in 2021. You've got some tailwinds on working capital provisions, exceptionals. As we go into the year, I know activity is down and the backlog is not necessarily where you want it to be. But obviously, margins were resilient. Your update in terms of near-term activity is, I suppose, relatively cautious. But the way I look at it, you've got a bunch of tailwinds in terms of -- obviously, oil prices are much stronger. U.S. stimulus is probably on the way. Your pipeline, as you said, is back to pre-COVID level even if your order book isn't. I just wondered, putting all that together, if there was any kind of real impediment to returning the dividend during 2021. And maybe you could update us on when the Board will be having that conversation. Is it into full year 2020 numbers? Or do you think it will be later in the year?

No. In terms of the dividend, it's really the same story. We'll resume dividends when we feel, one, the general environment supports that, and it's less uncertain and we've got the comfort levels around our balance sheet and our future cash flow. The next time we will review the dividend will be in March, and so we would speak about our March results, so we would review it again at our March board. And ultimately, as you know, that's a board decision around when we renew dividends. But it is related to our comfort level of our balance sheet and our future cash flows, and that's clearly a function of the environment we're in.

Sure. Sure. Okay. Not to put words in your mouth, but clearly something you'd like the real estate to see sooner rather than later?

Yes. We do understand that many of our shareholders, not all of our shareholders, value a dividend. And we would like to get to a position where we've restated paying a dividend, but it needs to be in the right circumstances.

There are no other questions from the line. Please continue.

Okay. If there are no more questions, we'll leave it there. Thank you for attending the call, and I wish you all a great year. Thanks. Bye.