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

Thank you for standing by, and welcome to the and welcome to the Wood Trading Update Conference Call. [Operator Instructions] I must advise you that your conference is being recorded today, Thursday, the 13th of January, 2022. I would now like to hand over the conference to your speaker for today, Mr. David Kemp, CFO. 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 our financial performance in 2021. The key areas that I want to highlight are, firstly, continued momentum in our markets, driving a stronger second half performance with growth in consulting and operations, and stabilization in projects compared to the first half of the year. Our full year margin improvement of around 0.5 percentage point with cost efficiencies and revenue mix more than offsetting lower activity. We've strengthened our order book, laying foundations for improving activity levels in 2022. Our net debt came in at $1.4 billion higher than expected due to a larger working capital outflow. And finally, an important update on our strategic review of the built environment business. The Board has now approved a full sales process to best deliver value for our shareholders, and that process is underway and a sales agreement is expected to be announced in Q2. So moving to some detail on activity in the year, improving momentum and activity levels from Q2 has continued during the year, with growth in consulting and operations compared to both the first half of '21 and the second half of 2020. In our Projects business, we have seen a stabilization in market conditions, with activity in H2 flat with H1. However, the rate of recovery in projects has been slower than anticipated as the ongoing impacts of COVID-19 continue to affect the timing of some activity and investment decisions. Overall, revenue of around $6.4 billion is down around 14%. Looking at our markets, we've seen growth in the built environment, which accounts for around 20% of our revenue. Market conditions have continued to improve in conventional energy, particularly in operations, where we're seeing an increase in scope with a decarbonization focus. Activity in Process and Chemicals will be down in 2020 due to our focus on ensuring the appropriate risk profile in our portfolio, with less focus on larger lump sum EPC. Large EPC contracts completed in the year and new awards during the year were limited to smaller earlier-stage scopes. Following significant renewables growth in 2020 when revenues doubled, activity in renewables and other energy will be down in 2021. Looking at profitability, adjusted EBITDA is around $550 million to $560 million, down around 9% on 2020, but with an improved EBITDA margin. EBITDA margin improved by circa 0.5% compared to 2020 driven by our focus on maintaining high utilization, the delivery of efficiencies under our Future Fit program and improving project execution, which more than offset the impact of lower activity and the impact of disposals. Looking at our BUs on a like-for-like basis, although activity significantly declined in projects, margins improved driven by cost efficiencies and overall improvement in project execution, albeit with a greater range of outcomes than we would have liked. In consulting, we saw both growth in activity and margin expansion whilst operations activity increased and margins, although remaining strong, reduced. Then on debt, we expect our net debt of 31 December to land around $1.4 billion, up from $1.3 billion at the half year. Net debt was higher than guided as a result of increased working capital outflows, principally due to lower collections in our projects business. Net debt is around $400 million higher than a year ago and reflects a large working capital outflow and expected exceptional cash costs. The unwind in working capital was driven by the reduction in lump sum EPC activity in our projects business as the portfolio was both reduced and derisked by moving away from larger lump sum EPC contracts. Exceptional costs, including expected regulatory payments of around $70 million. Our leverage ratio on a covenant basis was around 3.2x. While lower covenant levels, this level is significantly higher than our target leverage. We expect that both higher activity levels in 2022, plus proceeds from the proposed sale of our built environment business, will significantly strengthen the group's balance sheet. We also retained considerable financial headroom with undrawn facilities of around $1.3 billion and no material maturity dates before 2026. Now to provide a few updates on our strategic progress, we have made good progress during the year to deliver our strategy, building on our leading positions for the delivery of solutions for energy transition and decarbonization. We secured a number of strategically important awards related to the decarbonization of industrial sectors, including an integration project, management scope on one of the U.K.'s leading industrial decarbonization projects, Humber Zero, and a contract with Nevada Gold for the EPC of a large solar plant to deliver a zero emissions mine. We continue to win renewables projects, including an EPC contract for a package of 4 solar projects to provide renewable power for a customers' onshore oil and gas operations in the U.S.A. We are accelerating the development of low carbon fuels through our role as a steering member of the Hydrogen Council and our partnership with Honeywell for the development of sustainable aviation fuel. We're also winning new work in the space, including an EPC contract with Renewables Energy Group for the expansion of their diesel biorefinery, and an MOU with HYGEN Energy to accelerate the production of green hydrogen for use in transportation in the U.K. We see conventional energy as remaining a material part of the energy mix for some time, and are pleased to have secured a significant contract for engineering and project management services for Aramco's Safaniyah and Manifa oil fields. And importantly, an update on our built environment strategic review. In November, we announced the initiation of a strategic review of our built environment business, with a focus on unlocking value, unlocking the value of that business, and assessing how best to allocate capital and resources to deliver growth across our business. The Board has now approved the proposal for a full sale of the built environment business. This is a business that we've generated around $150 million of EBITDA on a post-IFRS 16 basis in 2021. The sales process is underway with strong interest in the market, and we expect the sales agreement to be announced in the second quarter of 2022. We expect the sales proceeds to significantly strengthen our balance sheet and provide opportunities to enhance investment. Finally, on outlook, we expect activity levels to improve in 2022 across our business. Our order book at December 2021 is significantly higher than December 2020, with growth in all business units. Growth is most notable across conventional energy and built environment activity. With that, I will move to take your questions.

[Operator Instructions] We have our first question coming from the line of Amy Sergeant from Morgan Stanley.

Yes, a couple of questions from me, if I may. Thanks for the update there. So I guess post any potential sale, could you give us an indication of how you're thinking about what the right sort of target leverage could be for Wood Group on a go-forward basis? And then separately on the sort of energy transition side of the business, could you give us a bit more indication on what's the size of that sort of transition work that you have within your current backlog and then sort of how you would hope that would progress in the coming years?

Thanks, Amy. In terms of target leverage, our target leverage just now is 0.5x to 1.5x net debt to EBITDA. Obviously, we've announced the 100% sale of our built environment business, and that was following a strong gauge of interest in the market. With those proceeds, in terms of what we're looking to do with that, we look at it with 3 parts. Obviously, addressing our leverage is a significant objective as is looking at how we enhance investment around things like energy transition and decarbonization. And clearly, looking at the shareholder distribution angle to that as well. And so those are all things that the Board will consider as part of the sale process as well. And we'll update you as we progress that. In terms of energy transition and the work we do, we're seeing a significant step-up in terms of the activity we do really across the portfolio. And that theme of decarbonization of industrial activity is one that's becoming ever more prominent. We've recently won significant projects that really illustrate the sort of crossover between our clients. So one of the projects we've just recently won is providing effectively solar power to onshore oil and gas. And so with one of our traditional oil and gas companies, providing solar power. Equally, we're doing something similar for a mining client. We're also providing consultancy advice around providing hydrogen to mining clients. So we're really seeing that theme of industrial decarbonization significantly picking up. And we see that as being a continuing trend in our order book. In terms of where our order book landed, just to cover that off speaking, we expect our order book to be broadly similar with where we were at the end of September, and that was up 18% year-on-year. And so we've seen a significant growth in our order book. Industrial decarbonization has been a significant feature of that as well.

We have the next question coming from the line of Mick Pickup from Barclays.

A couple of questions. Can you just talk about built environment and the separation? Obviously, I think large part has been integrating this into the wider business and trying to get synergies, and now you separate it out. So how easy is the process as a starting point?

Yes, one of the things that we looked at as part of our review of the built environment business, and this is going back many months, is the synergies across the business. As you know, we faced broadly 2 big markets, energy and the built environment. And actually, the synergies between the built environment and our energy business are relatively small. They're relatively immaterial. And part of that is because we've never had that ambition to do bigger projects in the built environment space, bigger infrastructure projects. And so the activity has largely been restricted to consultancy, and is largely separate from the rest of our business. There's the usual things around disentangling, IT, but none of these we feel are more material than they would be in any other sale, for example. So the business has been relatively self-contained.

Okay. And then the other one is, you mentioned, I think, $150 million of EBITDA of $1.3 billion, that must include an IFRS 16 impact. So what is the number pre-IFRS 16? I seem to remember that presentation a few years ago was running at like 7% EBITDA margin in this business.

Yes. Firstly, we've done quite a good job of driving the margin in that business over the last few years. So the margin has significantly picked up across our whole consultancy business, as you can probably see from past disclosures. In terms of pre-IFRS 16, it's about $125 million on a pre-IFRS 16 for 2021.

The next questions come from the line of James Thompson from JPMorgan.

A couple of questions, if I may. First of all, the process seems to be happening a reasonable amount quicker than I expected. And obviously, you've settled on a straight sale which certainly from all the conversations I've had since you announced it in November, it seems like the preferred route. So I think the market should be quite pleased with that. But maybe could you just give a bit more color about the process so far, the kind of level of interest with sort of confidence in executing in 2Q? I mean the statement itself reads like you are very much on top of -- confident on top of this, but just a bit more color on the process to get to this point so quickly would be really quite helpful.

Yes, thanks, James. I guess part of the answer is we've done a lot of work before the announcement of the strategic review in November. So this has been something we've been looking at for probably 12, 18 months because clearly, we could see that there is a big value gap between where the market was valuing similar companies and the implied evaluation in our share price. And some of our efforts, initially, we are around trying to provide more disclosure on that business around -- particularly within our consultancy around margins, revenues to see if we could close that gap through disclosure. So we've actually been looking at this quite a long time. As we came to the second half of 2021, we obviously started to focus more around the strategic review and looking at the options around what could we -- what would we do with that business. And so when we announced the strategic review in November, we've done a lot of work around that strategic options. From November to December, we spent a lot of time gauging the interest in the market. And the view that came back is there's a strong interest for the business. It's a very high-quality business with top quartile margins, I think great macro outlook, very exposed to U.S. stimulus. And so we did expect a strong interest in the market, and that was confirmed by our advisers in the run-up to Christmas. And so I guess a lot of the work have been done already in advance. And so we're now proceeding with the sales process, and we expect to sign a sales agreement in the second quarter of 2022.

Second question really is on kind of potential use of proceeds. I think an investment case has been hampered, obviously, in recent years by some of those other liabilities, whether it's the receivables facility, the obviously, the ongoing asbestos, things like that. Maybe you could give us a bit more color about the sort of priorities. I mean you talked about leverage and investing in new energy and things like that. But maybe some more color about thoughts around the use of potential proceeds, obviously, before we understand what sort of level they might be at.

Yes, there's obviously a timing aspect to that question. So I can speak generally about the ports. The allocation of that proceeds is obviously something we'll be working on and the Board will decide on in due course, having taken on board some of the views of our shareholders. So when we -- when we look to the built environment, the primary aim has been to unlock a shareholder value. And so that's been the primary lens. The secondary lens has been around a financial reset. So our leverage is higher than we would like it to be. And so one aspect of that financial reset is bringing our leverage down to within our range. The second aspect is cleaning up our free cash flow. We have a number of drains in our free cash flow. If I look forward to 2022, with asbestos, which will be $35 million, $40 million. And we obviously have payments to the SFO of $40 million. So one of the things we'll look at is there something we should do there that will give us a cleaner free cash flow going forward. So that will be one of the things we look at as well. And then the last part is obviously around dividends. We paused our dividend as COVID-19 hit as a prudent measure. We haven't restarted that dividend given where our leverage is and given some of the ongoing challenges of COVID-19. And so we do value dividend and we'll look at how we restart that dividend as well going forward. So those are the broad ports in terms of capital allocation in addition to enhanced investment around energy transition and decarbonization.

Final one for me. I mean, obviously, the working capital has been pretty poor in the second half of the year, unfortunately, and seasonally unusual to see that in terms of the way the business has worked. Historically, I appreciate that sort of project revenues are down pretty significantly relative to the rest of the business. Kind of what gives you the confidence that you can, if you like, start the road on that organically and actually start to see an improving picture in working capital as we head into this year and into next?

Yes. We've had a very significant outflow in working capital, principally driven by our projects business in 2021. Again, to set the context, our revenue in our projects business is going to be down 35% year-on-year. And so we've got the impact of that revenue. And for us, we've -- what's driving that. Part of it is undoubtedly the market, but part of it is our decision to derisk our project portfolio, particularly around lumps sum EPC activity. And so we came into the year working on projects such as YCI. So these projects have closed out in the first half, and we're not replacing these activities with further large lump sum EPC. And that's a choice we've made around derisking. Part of the consequence of that is we've seen an unwinding of that effective EPC working capital largely in the first half, but trailing into the second half a little bit. So in the second half, overall, the company's working capital will be a small negative as opposed to a positive. As we go through into 2022, what gives us the confidence that that's largely behind us. Firstly, if I look at our projects revenue, it's down significantly year-on-year. But across the H1 versus H2, it's broadly flat. So we've seen a bottoming out of that revenue. Equally, when we look at our order book, our book-to-bill has increased significantly from the start of the year. And so we expect to be marginally positive when we announce our December numbers. And so we've seen an improving picture in our project business in terms of order intake as well. And so that's been slower than we had originally anticipated, but nevertheless, it's an improving picture. And so that gives us some confidence around that working capital outflow is behind us, and we'll move to a more normal working capital profile.

We have the next questions coming from the line of Mark Wilson from Jefferies.

You talked in the press release to a good momentum in order intake in 4Q specifically, and also spoken to how the order book is up significantly on the start of the year. But given commentary in one of the answers before, it seems like it's been flat in the second half of the year at $7.7 billion. So could you talk to the difference between the 2 halves in terms of overall order intake? And as I say against that you mentioned good momentum in order intake in 4Q.

Yes. I think we've seen good momentum across the business, Mark. In terms of our order book, our order book was $7.7 billion at the end of September. We expect it to be broadly in a similar place at the end of December. But that will be up about 18% on the year before. And if you look across our business, there's difference of the cost to be used. But in our consulting operations are up very significantly higher than that average. And projects, as I said, is going to be a very slight increase on the prior year. So undoubtedly, we've seen an uptick in our order book that positions us well for 2022. We're also seeing that momentum in our business. If I look down through our BUs in our consulting business versus the second half versus the first -- the second half of last year is up about 8%. Our operations business is up about 16% in H2. So we are seeing that momentum in our business. And as I said, we start to see the stabilization of our projects business. And so the revenue in our projects business has been significantly down compared to last year but it's flat with the first half. So we've seen that stabilization, we're seeing a slight uptick in our order intake, which gives us confidence going into 2022. But we're really pleased with where our backlog is. Growing it by 18% year-on-year, it would be a significant achievement.

And can we ask how much of that $7.7 billion backlog is contained within the built environment part of the consulting business? And secondly, in previous years, you've spoken to the percentage of that backlog you would expect to be executed in the coming year. Could you answer those 2 points, please?

Yes. If you look at our consulting backlog rather than just in terms of the built environment, first of all. In our consulting backlog, it's roughly about $2.1 billion of that overall. And roughly about 2/3 of that is the built environment to give you an indication of that. And so we've seen good growth in that consulting backlog across the built environment, but also in terms of our energy consultancy as well. And so the growth rates of that have been excellent, and that includes our work in hydrogen and carbon capture as well. What was the second part of your question again, Mark?

Was -- in previous years, you've spoken to the percentage of backlog you'd expect to execute as revenue in the coming year. I'm wondering if you could talk to that.

Yes. Obviously, we haven't closed out our backlog for December yet. So it's provisional numbers just now. But we expect our revenue coverage based on that backlog for the first year to be about a 60%, 65% range.

Okay, got it. And then if I may ask 1 more broader point. On the -- to put the strategic review into some kind of context, clearly, it would appear there's an attractive valuation that can be obtained for the consulting business. It's the highest margin part of your business. It seems a lot of focus in recent years. But therefore, going forward, we saw the balance sheet problem, but we're also looking at a lower margin business overall, it would appear. Can you just speak to the context of that and how the business will look post this sale? And also, how would that fit in with the medium-term target, which I think is still 100 basis points increase in EBITDA margin out to 2023?

Yes. Let me speak to the margin and some of your comments there. The built environment business, as I think someone else picked up, is about 11.5% margin in our consultancy business. A very good margin compares very well to peers. It's not the highest margin part of our business. Our consultancy margin as a whole is going to be touching 13% as a whole. So we do have a very significant -- we'll still have a very significant consultancy business and a very high-quality consultancy business going forward, doing all the things in energy around hydrogen, carbon capture and storage that we think there's going to be great prospects. And equally, these are areas we'd like to invest in further as we go forward. But undoubtedly, if I look on day 1 where will our margin be, our blended margin be, if we take out built environment, that will be in a different place than where the group is just now because clearly, it's dilutive. That's just arithmetic. I guess as we look forward, we'll look at -- we're going to look at our margin target in the context of the sale of the built environment and we'll advise the market of that in due course. In terms of where we are in terms of margins just now, we have made very good progress towards that target. Despite the drop-off in activity, we see our margin going up by 0.5% to 8.7% in 2021. And so we've made very good progress towards that margin target of 9.6%. But with the sale of the built environment business, we'll revisit that margin target.

[Operator Instructions] We have the next question coming from the line of Nick Konstantakis from BNP Paribas.

I am starting on a different place than I was intending to and it refers to your comments as to how you could use the proceeds. You mentioned dividend and buyback. Just help us understand, I mean, it's kind of a one-off nature proceeds, it helps with the balance sheet, which puts you in a position to restart the regular dividend. Can you just tell us whether a special dividend or a buyback is also within the mix of the things that you're thinking about to return value to shareholders? And then if I could, please, just touch back a little bit on what you just discussing, obviously, the end market exposure is changing quite a lot. Yes, you have a big energy transitional business. But then you're also increasing simply arithmetics back the gearing towards oil and gas quite a lot. How are you feeling about the end market exposure, I guess, on day 1? And outside of energy transition, is there anything else that we could think that you would like to target? And lastly, apologies for having 3 questions. within the energy transition bucket, you're obviously clearly a leader. As you mentioned, you have previously talked about potentially EPC solar in Europe or that kind of activities. Can you just give us an idea of potentially are you're seeing gaps? Or are you thinking about bolt-ons, technology or maybe something more chunky? And any color you have and appreciate really early days, of course.

Yes, thanks for that, Nick. I'll try to go through those. In terms of just starting with the potential proceeds from the sale of the built environment, firstly, we've not made any decisions around those proceeds as you would expect at this stage. We do have, clearly, buckets. Clearly, deleveraging is a bucket that we want to address. And when we talk about a financial reset, we see that financial reset as being deleveraging and also around getting a cleaner free cash flow going forward. The second aspect is clearly around enhancing investment around energy transition and decarbonization we feel we've been very well positioned to 2 very good macro themes, energy transition and sustainable infrastructure. This will allow us to really accelerate investment behind energy transition. And the third aspect is obviously around shareholder distributions. I've not talked about buybacks per se. In a way, I've talked about we did pause a dividend, and one of the objectives would be resuming that dividend. But clearly, that's a decision for the Board. So these are the ports as such. But at this stage, we've not made any decision around the allocation of that. And of course, we would want to get the views of our shareholders as well before we decided that. In terms of the end market exposure, you're right on. If we take out the built environment business, which is roughly about 20%, on day 1, we will have more oil and gas activity in our business. I think what we've seen, we've talked about before, is the nature of that oil and gas business is very different to what it's been in the past. Almost all of these contracts that we're winning in the operation space now have a decarbonization element to it. And so lots of our conventional energy business is now around decarbonization. And so it's not that traditional oil and gas focus. And so one of the things we'll be looking at as part of the sale of the built environment, how we set out our new strategy, is around how we characterize all of that activity around decarbonization. I talked about some of the industrial decarbonization work that we're doing, which is for oil and gas clients but actually providing solar farms for onshore. And so there has been -- although lots of our clients are exactly the same, the change is in what we do for these clients, with lots of it being around industrial decarbonization. In terms of the last thing, I probably don't want to say too much around energy transition targets. But we want to enhance investment and looking at inorganic and organic investment around energy transition and decarbonization. And we have a range of areas where we think we would want to invest further in. And how we look at it is around, inorganically, would be around those bolt-on acquisitions.

And I apologize for the follow-up and being a daft here, but how -- when are you thinking about cleaning up your cash flow, you mentioned asbestos [and SFO], what are the possibilities there? Sorry, it's not very clear to me.

Yes. For example, just now we -- if I take the SFO as an example, we are scheduled to make 3 payments of $40 million over the next 3 years. And so that is a nontrading cash outflow, and it creates a disconnect between our EBITDA and our free cash flow. As part of this exercise, we will have a choice to pay that. And that's one of the things we would consider. And that would give us a cleaner free cash flow going forward. And I use that as an example.

We have the next question coming from the line of Henry Tarr from Berenberg.

I guess most of my questions have been asked and answered. One I would come back to is for 2022, I think you've talked about the SFO payments and asbestos. Are there any other cash exceptionals at this point that we should be aware of in terms of project provisions or anything else dropping through?

In terms of cash exceptionals for 2022, you've picked up the bigger elements in terms of the SFO payment is $40 million. The asbestos is not so much an exceptional. It's obviously a provision outflow that we would anticipate. The other elements are smaller we have an ongoing runoff of onerous leases, and that's about $20 million.

And then as you look at the -- so I think you've talked about the projects going into next year is sort of stabilizing with backlog there sort of slightly up year-on-year, could you talk about the types of projects that you're taking on now and whether they're different to the projects that you've taken on historically, either in terms of risk profile or average size, et cetera?

Yes. So you're right in terms of the characterization of projects, what I flagged is we feel we're in that stabilization space. Our revenue was flat H1, H2. We expect our backlog at the end of December to be slightly up. But that has been an improving picture through the year. we'd like to have been better, but it has been an improving picture. And so that positions us as we go through into 2022. In terms of the projects we're winning, we have changed the risk profile of the work that we're taking on. And so as we came in 2020, we had some very significant lump sum EPC projects greater than $500 million revenue. And so we've dialed down our risk appetite around EPC lump sum projects. And so typically, our EPC lump sum projects are more in that $100 million space rather than being $500 million plus. So that has significantly changed the risk profile of our projects. As we talked about, the types of projects we're winning are varied. In conventional energy, we've had some very good wins with Saudi Aramco that I talked to. We've picked up some very good mining work generally around EPCM rather than EPC. Again, that's largely been driven by energy transition. And we're picking up lots of these sort of crossover around decarbonization of industrial activity. We've picked up a scope around a biorefinery. And so there's lots of opportunities around that decarbonization of industrial activity, whether it's oil and gas or other industrial complex. And even if I broaden it to operations. Again, as I mentioned earlier, in the U.K., where we've been very successful in winning work, our multiyear term contracts in the U.K. with a number of clients, TAQA, Spirit, Shell. Almost all of these have a decarbonization element to them now. And so that is a shift of where we were last year and certainly where we were the year before.

And then just quickly and lastly, on the sales process for the built environment business, I realize there's probably a limited amount you can say. But would it be fair to say at this point that there are multiple interested parties and the time lines are relatively set at this point?

Yes. You're probably right. First, Henry, there's a limit to what we can say beyond what I've said already, there's a strong level of interest in the market for this business because it's a very high-quality business, and we're proceeding through the sales process.

We have the next question coming from the line of Mark Wilson from Jefferies.

Yes. So I just wanted to follow up. A thought occurred to me, David, if there's any of the current debt you have or indeed liabilities that go alongside the built environment consultancy that you're able to speak to.

No, none of the liabilities are particularly attached to the built environment business. Our debt is corporate facilities.

The next questions come from the line of Mick Pickup from Barclays.

Just a quick follow-up. Just big picture, you talked about a recovery in conventional work. Can you just talk about the type of clients who are turning up? I'm speaking to a lot of companies we see in independents, NOCs moving and majors not yet getting going. I'm just wondering what you were seeing in the client base.

I think we've seen elements of that. But we've also seen probably in conventional energy, the pickup has been in operations first, Nick. And so I think I mentioned, if I look at H2 '21 to H2 '20 in our operations business, which is very heavily weighted to conventional energy, that was up 16% between the 2 halves. And so we've seen that pick up in activity. Across the clients, it's really a mixture from everyone such as Equinor to newer companies such as Spirit Energy and some of the new entrants into the U.K. I think in terms of kicking off investment around projects, what would I say, I think we've seen the Middle East react quicker than IOCs today. It's probably the only theme I would really highlight at this stage. And so we've picked up really good pieces of work with Saudi Aramco with ADNOC in the Middle East.

There are no further questions at this time. Mr. Kemp, please continue.

Okay, if there's no further questions, then we'll leave it there, and I wish you all a good day. Thanks. Bye.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect your lines. Speakers, please stand by. Thank you.