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

Good day, and thank you for standing by. Welcome to the Wood Third Quarter Trading Update Conference Call. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Ken Gilmartin. Please go ahead.

Yes. Thank you very much, and welcome, everybody, to our Q3 trading update call. So I'm here with Arvind Balan, our CFO, to talk with you about today's trading statement ahead of taking your questions. So let me start with group performance. So we continue to make progress on our turnaround, building a simpler, higher-quality wood, and we have confirmed our full year guidance. So looking a little closer to group performance. So our group Q3 revenue was up 1% compared to last year, strong growth in Operations, offsetting lower revenue in Consulting and Projects. Our adjusted EBITDA for the first 9 months of the year is up 4%, and that's driven by very strong growth in Operations, modest growth in Consulting with expanded margins in both businesses. However, the group EBITDA was down in the third quarter, and that's following a disappointment performance in Projects. Our Simplification programme continues to be on track to deliver significant cost savings, and we agree 2 disposals in the period. So in terms of the higher quality wood we're building, I'm pleased that we continue to expand our margins. We continue to see improved pricing across our business, and we continue to grow our sustainable solutions, which now account for nearly half of our pipeline. All this progress supports our confirmed full year outlook of high single-digit growth in EBITDA and net debt to be broadly flat compared to last year, assuming that the sale of EthosEnergy completes by year-end. So as you will have seen in the statement, we announced an independent review, so let me talk to that. So following the exceptional contract write-offs relating to the exit from lump sum turnkey and large-scale EPC reported at the half year 2024 results, and in conjunction with our auditors ongoing work, the Board, in response to dialogue with our auditor, has agreed to commission an independent review to be performed by Deloitte. This review will focus on reported positions on contracts in Projects, accounting, governance and controls, including whether any prior year restatement may be required. We will provide an update as appropriate following its conclusion. Noting the results presented in this trading update and our full year outlook are before any potential impact from the independent review. So turning now to the financial performance in our business units. So Consulting continues to expand its margins. So Consulting managed to grow its EBITDA despite the weaker top line and showing the benefits of the higher pricing as well as the work they have done to shift their business mix to higher-margin work. The top line in Consulting partly reflects the hesitancy many of our clients have around how the regulatory landscape will evolve over the coming months. In Projects, the performance was impacted by weaknesses in minerals and life sciences, plus a softening in our chemicals business in the period. The Projects EBITDA was disappointing. The top line weakness was matched with overheads that have remained too high, and thus the, drop in the EBITDA. So as a result, we're taking actions now to readdress this. We have plenty of opportunities to convert in Q4 with a stronger order book, but we are also laser-focused on billability. Operations continued to see strong growth with higher activity levels across Europe and the Middle East. Operations growth came from both revenue and margin expansion helped by continued strong performances across our contract portfolio. And moving to our order book. So our group order book was $5.4 billion at September 2024, 8% lower than a year ago. Now while this partly reflects the weaker end markets in Projects, it does also reflect timing impact of large awards in Operations. We continue to win fantastic, highly complex engineering and delivery work across our businesses. So we've included some examples of the work won recently in the statement this morning. But what I want to call out here is the significant engineering contracts secured with Aramco just last month. Wood will provide a range of engineering services, including pre-FEED, FEED and EPC contracting support for critical gas facilities in Saudi Arabia. So it's a major win with one of our key clients in a strategic growth region. So when we do look at our full pipeline, we continue to see a growing number of sustainable solutions opportunities, which now represent 46% of our pipeline, up from 39% at the half year. So in line with our strategic focus and prioritization, we agreed 2 disposals of noncore businesses in the period. So together, these are expected to generate net cash proceeds of around $125 million in 2024, plus loan notes due to Wood of around $40 million. So the sale of CEC Controls, which is an industrial and process control systems business, completed in the quarter for net cash proceeds of $30 million. The sale of EthosEnergy was agreed in August and regulatory approvals are ongoing. And while we aim to complete by the end of this calendar year, there is a potential for regulatory delay and for the sale not to complete this financial year. So moving on to our outlook. The full year outlook remains unchanged. We expect high single-digit growth in adjusted EBITDA before the impact of disposals, helped by an expected strong performance in the fourth quarter. Net debt, excluding leases, at December 2024, is expected to be at a similar level to December 2023 after disposal proceeds. This is, of course, dependent on the sale of Ethos completing. So to conclude, we continue to make progress in building a higher-quality, simpler business. I'm pleased with the performance in our Consulting and Operations business, and we're resolute in taking actions to improve the performance in Projects. We expect a strong fourth quarter, leading to confirmed full year guidance. So with that, Arvind and I will now take your questions.

[Operator Instructions] And now we're going to take our first question, and it comes from the line of Guilherme Levy from Morgan Stanley.

I have 2, please. The first one, just following up on the independent review commission by the Board. Just wondering if you can expand a little bit on that. How long is that expected to take? Why has that been decided at this point? And perhaps just on the focus of the investigation, I know that's related to Projects, but if you can expand a little bit further. And then on guidance for next year, in the press release, you didn't explicitly say that you expect free cash flow to be significant for next year. So I was wondering if that was on purpose or if something changed in terms of your expectations for 2025?

All right. Guilherme, thanks for the questions. So first of all, on the appended review. So I'll go back to kind of the statement. So it follows the exceptional contract write-offs from our exit -- to the exit from the lump sum turnkey and the large-scale EPC reported at the half year 2024 results. So in conjunction with our auditor's ongoing work and in response to the dialogue with the auditor, we have agreed to commission that independent review to be performed by Deloitte. We will provide an update as appropriate following its conclusion date. I think back on the cash flow, look, Projects is weaker, but we continue to see strength in Operations and Consulting, and it's both grown its EBITDA despite that top line weakness. So we are and we remain confident in the continued improvement in the cash trajectory of the group, with improving operating cash flow and reducing exceptional drags. So with various work streams in place to improve that cash generation of the group, and we need to assess these alongside our budgets as they are finalized, we will be giving guidance at the full year results.

Now we're going to the next question, and it comes from the line of Kate O’Sullivan from Citi.

We're now halfway through 4Q, what are you seeing that's giving you confidence that we'll see a step-up in Projects business to support the full year EBITDA guidance range?

Yes. Thanks, Kate. A few things from a Projects standpoint. I think we saw -- and we are seeing some increased momentum from a sales standpoint. I mean we talked a little bit about the Aramco piece. We are also expecting to finalize kind of a significant petrochem contract in Europe shortly, too. We've also seen some of the actions that we've taken, really that laser focus on billability starting to -- and we're continuing to press on that. So there's a high degree of confidence as we're moving into Q4 that we're going to be able to get there.

And now we're going to take our next question, and the question comes from the line of Richard Dawson from Berenberg.

I just wanted to pick back up on the Projects business, and you mentioned there are some specific actions which you're taking within that segment. Could you maybe just provide a bit more color on what those actually are? And then secondly, on cash. Is there any change to the cash exceptionals expected for 2024 or 2025? And I suppose some of that change in free cash flow guidance for next year, is that maybe working capital maybe not unwinding as quickly as expected?

Yes. All right. Thanks for that, Richard. So maybe I'll start on the Projects front. So we really go back to -- first thing that we're actually have been laser focused on was the sales pipeline and making sure that a lot of the opportunities that we have in Projects, that we convert them into awards. And I think as I answered earlier, starting to see some good momentum coming there. Irrespective -- and taking away some weakness from some of our major clients from a CapEx spend, there's still plenty of work out there. There's lots of work for us to win. We're going to continue to go after that with that laser focus. I think the other thing we're looking at again is that billability, right, making sure that sales, pipeline, revenue, backlog, as that pertains to the kind of billability of our people, continued laser focus on that and making sure that we do have the organization and a right size to where we are today, and we're going to continue to do that. They are the 2 big levers we have right now, Richard. I think on the second part, maybe, sorry, could you repeat the second question again?

Yes, sure. It was on cash. Just on cash exceptions for this year and next year, is there any change in guidance to that? And then maybe just on working capital, is that maybe unwinding a bit slower than expected?

Yes. Let me take that. Thanks, Richard. So as far as exceptionals are concerned, we've always expected that exceptionals will reduce as we go forward. And as we said, as Ken said before, we are confident about that continued improvement in the cash trajectory of the group and largely that includes operating cash flow and reducing the exceptional drags. Now I've spoken earlier about our whole working capital program, 8 points, 10 points, whatever the number of points might be, that's very much in progress as we speak. That's not only to change the cash outlook of the company, but to change the culture of cash. It's early days, but we're very confident on that journey as we speak.

And the next question comes from the line of Alex Paterson from Peel Hunt.

So can I just clarify that the independent review which is going on has no cash implications? So this is purely about historic accounting restatements, it wouldn't make any difference to your cash? And secondly, within that, I imagine this is going to be quite an extensive review. And so how would the cost of that review be treated, please.

Yes. Thanks for that, Alex. So back to kind of on the question. Look, as you said, the review will very much be focused on those reported positions on contracts in Projects as well as that accounting and governance and controls. Look, we will give an update as appropriate following the conclusion of the review, Alex. I think that's why we said that. I think the second part of that was then the cost associated with that review?

We don't even know what it is.

Yes, that's right.

Yes, we're continuing to evaluate that as we're going to go through this, right?

Excuse me, Alex, any further questions?

No, that's it. Thank you.

Dear speakers, there are no further questions. I would now like to hand the conference over to your speaker, Ken Gilmartin, for any closing remarks.

Yes. Listen, thanks, everybody, for the questions. Thanks for listening today. And we look forward to talking again soon to you all, right? Have a good day. Thanks very much.

This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.