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

Good morning, everyone, and thank you for joining our half year results presentation. I'm optimistic by the time it comes to deliver on our full year results, we'll be able to meet again in person. But until then, I hope everyone remains safe and well. As always, I'll take you through some opening remarks before passing it over to David, who will take you through the financial performance for the first half of the year. I'll then close the presentation with a focus on 2 areas: the steps we've taken to ensure that we're fit and fat for the future, and the impact this has already had an unlocking growth opportunities this year. So by the end of today, I hope you'll be encouraged by our margin delivery and the demonstrable growth momentum underpinning a healthy medium and long-term outlook for the business. Firstly, some brief reflections on the first half performance. Whilst the pandemic did continue to cast a shadow in the early months of the year, actions we took to ensure our business was as efficient and effective as possible have been successful in offsetting the impact of lower activity on our margins. The resilience of people have shown throughout this period has also been absolutely outstanding. Although revenue of $3.2 billion was down around 23% in the first half of 2020, we've actually delivered margin improvements across all our business units. Overall, our EBITDA margin of 8.3% is 80 basis points up compared to the first half last year, equating to earnings of $262 million. Looking ahead, we see an improving picture in the second half and beyond. A large part of our optimism stems from the strong growth in our order book, which is up 18% compared to the end of last year with around $3 billion worth of work due for delivery in the second half and recent multiyear awards and operations given visibility of revenue in 2022 and beyond. Growth in our order book has been led by Consulting and Operations, and we're seeing encouraging signs that we're also now passing the inflection point for our Projects business. Finally, we've made significant early progress on our Future Fit program. We're seeing the benefits of an optimized organizational design, improvements in our operating model and have already achieved $20 million worth of efficiency savings year-to-date, with a further $20 million anticipated in the second half. Before passing to David to go through our financial performance in detail, I'll take a quick look back at the journey we've been on and how this has shaped some of our current focus areas. This time last year, we were approaching the end of a 3-year integration program following the Amec Foster Wheeler transaction. We took stock of where we were as a business and drew several conclusions. Firstly, our strategy to broaden the business across different end markets has proven to be the correct one, derisking the business overreliance in the upstream market and framing us for future growth and value delivery built upon a highly skilled employee base across the globe. Secondly, we recognized latent opportunity to further unlock the power of the platform we've built and to build upon our green-to-green capabilities that enable us to partner with clients across the entire asset life cycle. Thirdly, we recognize the need to invest again in specific areas to accelerate growth. And lastly, we acknowledge the need to be even more disciplined around operational excellence and narrow the range of delivery outcomes as we completed the legacy projects portfolio. This prompted us to take 2 important steps to help accelerate delivery of our strategy and to unlock sustainable growth in the future. We reinforced our focus on energy transition and sustainable infrastructure as primary growth areas and, in doing so, placed ESG at the very heart of our business strategy by committing to a stronger set of sustainability goals. We also launched Future Fit, our 18-month program to transform our operating model, deliver near-term efficiencies, accelerate future skills development and secure medium- and long-term growth in the markets where we see the greatest opportunities for Wood. My focus in the second half of today's presentation will be to show you how these steps have enabled us to enhance efficiency and performance today and put us on the path to sustainable growth. Firstly, however, I'll pass over to David to take you through our financial results in some more detail.

Thank you, Robin, and good morning, everyone. Our H1 results reflect improving momentum and activity and good margin performance across the business. Revenue of $3.2 billion was down around 23%, as the ongoing impacts of COVID-19 continued to create challenging market conditions. Around half of the reduction was in Process and Chemicals as major projects completed. We saw strength in the built environment, relatively robust activity in renewables. And although conventional energy activity was down, revenue reflects improving market conditions. In Q2, we saw improving momentum in activity with a return to growth in both consultancy and operations, and we expect that momentum to continue in the second half as the group as a whole returns to growth. We delivered EBITDA of $262 million and strong margin improvement, with EBITDA margin up 80 basis points to 8.3% with a significant improvement in our Projects business. Our focus on high utilization, delivering efficiencies, including those from our Future Fit program and improved project execution have been key to delivering stronger margins in all 3 business units. Group margins are also benefiting from improving business mix, with a greater proportion of revenue from higher-margin consulting activities. Overall, against the backdrop of challenging activity levels, we are pleased with the improving momentum in the business and delivery of increased margins. Revenue has reduced by 23% compared to the prior period with COVID-19 impacting activity. Obviously, the first quarter of 2020 was largely unaffected by the pandemic. The main driver of lower volumes in the first half was our Projects business. We completed a number of large projects in the first half. The impact of the pandemic on new awards during 2020 and 2021 has resulted in being replaced with smaller earlier-phase scopes. Additionally, our lower risk appetite and being selective over the EPC scopes that we bid has contributed. After accounting for the $61 million revenue impact of the disposal of our nuclear business in Q1 2020, Consulting activity was robust. We saw growth in built environment activity, which accounts for over 65% of Consulting revenue. Activity was robust in renewables and other energy, including assessments and studies in renewables and decarbonization, which positions us well as these projects advance. Consulting activity grew in the second quarter compared to 2020, reflecting improving momentum. Revenue in our Operations business was relatively resilient after adjusting for a reduction of $12 million related to the disposal of our industrial service business. In Operations, we have seen reduced activity in Q1 2021, but growth in Q2 as market conditions in conventional energy improve. Against the backdrop of challenging market conditions, we've made strong progress towards our medium-term strategic margin target of 9.6%. Group margins increased by 80 basis points with improved margins in all of our 3 BUs. The EBITDA impact of businesses disposed during 2020, principally nuclear and industrial services, was $9 million. In addition, EBITDA in Investment Services reflects benefits from closing out legacy issues in 2020 and additional costs in 2021 towards the completion of the Aegis project. The earnings impact of lower volumes was largely offset by improved margin performance in all 3 business units. This was driven by cost efficiencies, including $20 million from our Future Fit program and improved project performance. Group margins have improved 80 basis points despite challenging activity levels. Projects margins have improved significantly, up 220 basis points, benefiting from efficiencies as well as improved execution and a lower risk portfolio. We've been very focused on replicating the exceptional execution we have in large parts of our business across everything we do. Our recently established operating committee is embedding standardized project delivery frameworks and enhanced project governance throughout our organization. We're already seeing the benefits of this in terms of improved execution. In addition to this, we have continued to focus on ensuring the appropriate level of risk and reward in our portfolio. As we've worked off a number of fixed-price projects, we're focused on securing new work that is in line with our measured risk appetite, which will also be beneficial in delivering more consistent outcomes. Although the most significant margin improvement was in Projects, we have delivered improvements in all 3 business units in the first half. In Consulting, we have built on an already strong margin, delivering a substantial increase of around 100 basis points through our focus on maintaining high utilization and efficiency improvements. Operations margin also improved, reflecting continued good execution and efficiencies. The impact of higher margins at business unit levels is amplifying the impact of our improving business mix, as we deliver against our strategy. Our actions to better position our high-value consulting capabilities into a more efficient global and industry-leading offering are reflected in our revenue portfolio. In the first half of 2021, 28% of our revenue was from highest-margin activities in Consulting compared to 24% in the prior period. Our flexible asset-light commercial model is fundamental to our investment case. Our track record of leveraging our cost base was crucial to our ability to respond quickly and decisively to the unique market conditions in 2020 as a result of the impacts of COVID and oil price volatility. In April 2020, we initiated a number of actions which reduced our overhead costs by $230 million in 2020. In 2021, the additional full year benefits of actions taken in 2020 is offset by the unwind of some temporary measures. However, the $230 million will be supplemented by efficiencies we anticipate from our Future Fit program of $40 million. Although we see market conditions improving, our ability to drive efficiency through our cost base and maintain utilization at the high levels is one of the key drivers of margin improvement in H1 and creates a platform for further margin expansion in line with our medium-term margin target of 9.6%. Turning to the cash flow. Net debt has increased by $261 million, largely driven by a working capital outflow of $237 million, which I will cover in detail in the next slide. Cash from operations is an outflow of $107 million and is stated after provisions of $59 million. The impact of provisions is lower than in H1 2020 due to the closeout of legacy issues. Cash exceptionals of $46 million include payments in respect of the settlement of legacy investigations and costs related to the delivery of our Future Fit program and costs related to prior period onerous leases. Payments for CapEx and intangibles includes investment in our digital capability and the resumption of our ERP program. Overall, expenditure was lower than H1 last year as our disciplined approach to discretionary spend continues. Overall, our net debt was around $100 million higher than expected with working capital outflows higher than anticipated. This was principally due to receipts due in June being received in July. Overall, we had a working capital outflow of $237 million in the first half. Receipts were lower than anticipated, with an outflow of payables in line with reduced project activity. Working capital was also impacted by the expected unwind of advanced payments of $61 million as large EPC projects completed. Looking at the full year expectations for net debt, we are confident of delivering a reduction in H2, with a significantly improved working capital performance and improved profitability, offsetting the impact of exceptional items in the second half. Exceptional items in the second half will include $60 million of further investigation settlements and Future Fit costs of $15 million. Working capital will benefit from our typical H2 inflow, the impact of timing of receipts reversing in H2 and in advances build in line with project awards. Improving activity levels and momentum in our order book gives us confidence of delivering stronger profitability in the second half. The effect of this and lower net debt is anticipated to deliver a reduction in net debt to EBITDA from the current level of 2.9x. As we look forward beyond 2021, leverage will continue to benefit from the growth in profitability, lower exceptional costs and the resolution of legacy issues improving cash generation. Our confidence in delivering a stronger H2 and returning to growth is underpinned by positive momentum in our order book. We have seen good growth in order book, which is up around 18% on December 2020. New contract awards and positive scope variations have more than replaced order book delivered as revenue in the first half, giving a book-to-bill ratio of around 1.4x. Momentum in order book reflects improving conditions in our core markets. Good growth in Consulting, up around 15%, has been driven by strength in the built environment and momentum in energy. Projects order book is down around 3% compared to December '20, but we are encouraged by both recent awards across all our markets and projected second half awards. Operations order book reflects improving demand in conventional energy, with recent growth in order book reflecting the renewal of a number of multiyear contracts and new wins. And these include significant contract awards, such as our 5-year specialist engineering contract for a major oilfield in Iraq and a late-life asset solutions contract at a U.K. gas field. Our current order book reflects a lower risk profile in our portfolio. As we have completed larger EPC contracts, particularly in process and chemicals, we have continued to be selective in our bidding for new work. We are focused on ensuring new work is in line with our measured risk appetite and, combined with our focus on execution excellence, will deliver predictable margin outcomes. Around 78% of our order book is now reimbursable, with only 3% from fixed-price work over $100 million. Order book of $7.7 billion at 30th of June is up 18% since December '20. Around $3 billion of the order book is due for delivery in the second half, giving us good visibility over 2021 full year revenues. Around $4.7 billion relates to activity beyond '21, laying strong foundations for 2022 and beyond. The building work secured for delivery in 2022 and onwards includes a number of EPC awards and projects secured during June. Early-phase activity on these will commence in H2, with the majority of the work to be delivered in 2022. It also includes renewals of multiyear contracts and operations across the Americas, Europe and Asia Pacific. Looking at more detail at projects. We believe we have seen the inflection point in order book. In our Projects business, H1 order book reflects the impact of large fixed-price contracts in our portfolio completing. However, this has been offset by improving momentum in awards throughout the first half, such that order book is now broadly in line with December 2020. We are encouraged by the mix in our order intake. These include early-stage concept and feasibility scopes, which position us well for follow-on work as the projects advance and EPC scopes align to our measured risk appetite. New awards in the first half have been spread relatively evenly across our core energy markets. We are seeing awards from growing investment in both hydrogen and decarbonization of assets. In addition, early-stage feed scopes in conventional energy are an indicator of activity increasing in anticipation of growing global demand. Looking ahead, we are seeing encouraging trends in bidding and opportunities and expect momentum and awards to continue into the third quarter. In summary, we have a high quality and improving projects order book that reflects a lower risk profile. Looking to the full year. Improving activity levels in Q2 and growth in our order book is giving us confidence in delivering a stronger second half, which will represent growth compared to the second half of 2020 and to the first half of this year. Overall, our outlook is unchanged. Activity in Projects will be lower due to the completion of large process and chemicals projects. This will be offset by growth in Consulting as built environment activity continues to be strong. In addition, we expect growth in Operations as activity levels in conventional energy improve. EBITDA margin in the second half is expected to be up on the first half, reflecting increased utilization in some parts of Consulting due to seasonal business, as is typical, and a further $20 million of Future Fit efficiencies. We expect to make further progress towards our medium-term target of 9.6% and anticipate full year EBITDA margin to be strong, up around 50 basis points in 2020, reflecting high levels of utilization, improved project execution, efficiency improvements, including $40 million of savings from Future Fit and our business mix weighted towards higher-margin consulting. Looking further ahead, improving momentum in our activity levels and strong growth in order book are laying strong foundations for activity levels and operational cash generation into 2022. In summary, although the ongoing impacts of COVID-19 have continued to create challenging market conditions, an impact on our revenue in H1, we're encouraged by improving momentum and activity in Q2 and good growth in order book. We're really pleased with our improved margin performance. Our strong focus on delivering efficiencies, improved project execution and maintaining high utilization, together with improving business mix, has more than offset the impact of lower activity. Strong growth in order book reflects good momentum in awards, which is delivering a lower risk profile as new awards in line with our risk appetite replace large fixed-price contracts completing in H1. Positive momentum in Q2 activity and order book underpins our confidence in returning to growth in the second half, relative to both the first half of '21 and the second half of 2020. The order book momentum also laid strong foundations for 2022. Full year EBITDA margin will reflect further progress towards our medium-term target of 9.6%, and we're confident of delivering a net debt reduction in the second half. I will now hand over to Robin.

Thank you, David. I'll start with a brief recap of our Future Fit program. At its core, it has got 3 primary components. Firstly, unlocking stronger medium-term growth through a simpler organizational design and a concentrated focus on select markets where we believe Wood has a differentiated offer. Secondly, driving efficiency savings through operational excellence. And thirdly, value creation through investment in digital solutions and future skills. I'm very pleased with the progress we've made so far. The program is already delivering benefits with $20 million worth of EBITDA efficiencies in the first half of 2021 and more to come in the second half, and it will deliver value across a range of areas in the medium term. Over the next few slides, I'll touch on some of the outcomes Future Fit has helped to deliver and how they relate to our growth agenda. We prioritized a select number of markets to pursue accelerated growth and have seen excellent progress in each area, and I'd like to call out a few examples. In the first half, we secured over 30, 30 distinct hydrogen contracts. For me, the 2 exciting elements here are the breadth of the different scopes that we've delivered and the future opportunity we can see building. We're actively tracking over $600 million worth of hydrogen-related opportunities in our unfactored pipeline and recently signed as a steering member of the Hydrogen Council, which puts us at the heart of industry-led debate and thinking in the role of hydrogen and its -- how it will play in the net zero future. We've also signed an extremely exciting teaming agreement with Honeywell UOP to combine our respective technologies to deliver carbon-neutral aviation fuel. That will allow the aviation industry to decarbonize. We are hugely excited about this. Just think about it, Jet 1-spec fuel with zero carbon footprint. Similarly, on carbon capture and storage, we secured over 20 distinct awards in the first half of the year. We've got over 80 opportunities at unfettered pipeline, and that's valued at $500 million. The projects we're working on are industry-leading, including the world's largest carbon capture storage project covering multiple studies in the U.S. This has potentially captures store up to 10 million tonnes of carbon annually. In Renewables, we doubled the size of our business in 2020 and see good opportunities in our order book. In our solar and wind business in the U.S., we've developed a new proposition based on standard block design and lean execution methods, which is already differentiating us and opening up new markets and wins like the Nevada Gold contract that I'll touch on later. The integration of renewable energy and industrial projects is also emerging as a strong growth theme within our future pipeline. We have a strong track record in this space as evidenced by our work in Oman with Shell, where we delivered the first utility-scale PV solar project in the Middle East to cut emissions from an industrial facility. Based on what we continue to observe in the market, we're confident that this carbon reduction trend is a generational shift and a multi-decade growth opportunity. The exciting bit is we're already right at the heart of it, providing the solutions that will deliver this low-carbon future. We're also building some valuable partnerships in the digital and technology space. I'd like to share a couple of great examples that showcase how our investment in digital solutions is driving added value for Wood and for our clients. Earlier this year, we formed a new alliance with AVEVA, a global leader in industrial software, to develop a connected build solution that uses digital twin technology to drive improvement in design work in industrial sectors. We're applying this in projects today, including EPC work in a chemical project in Texas, where it's helping to reduce operational costs, energy consumption levels and wastewater volumes. The other example I'll reference is a collaborative agreement we signed with Microsoft to give 7,000 of our field workers access to their suite of connected worker apps. These are delivering a range of benefits. For example, the technology allows field technicians to connect to the right experts across our global business so they can discuss live challenges and projects and real-life decisions. This saves both time and money and crucially allows us to bring our very best insights to our clients where it's needed most. Another factor that will be fundamental to our future growth is the breadth of our capabilities. Our ability to provide solutions that span decarbonization, energy transition and sustainable infrastructure is an offering that few other companies can match. Many of our projects represent the world's first or largest or cutting-edge solutions. Tell you straight my point, here's a quick snapshot of just some of our contract wins in the first half of this year: Owners engineer in Europe's largest single-site onshore wind farm; reducing the carbon footprint of offshore activities for clients like Equinor and Spirit Energy; shaping decommissioning strategies in Australia; cutting-edge blue hydrogen production in the Middle East; delivering the U.K.'s largest waste-to-energy project in London; and finally, building resilient and future-proof infrastructure across the U.S. I could go on, but suffice to say, I'm very proud of the diversity of work we're delivering across the globe, and it really differentiates the Wood proposition. As I highlighted earlier, ESG is at the very heart of our business. Earlier this year, we committed to a stronger set of targets to measure our performance against our sustainability strategy, and we're making good early progress. In 2020, we delivered an 8% reduction in our Scope 1 and 2 carbon emissions, a strong start towards our goal of a 40% reduction by 2030. We currently have over 30% of female representation in senior leadership roles compared to our target of 40% in the same time frame. More recently, we've also taken strategic steps aligned to the delivery of our purpose. A good example is the work we are doing with global goals to engage with stakeholders to promote the importance of achieving UN Sustainable Development Goal #7 around clean and affordable energy, and that's as part of the wider commitment to accelerate the energy transition. I'll now step through each BU in a bit more detail and provide some color to the near- and medium-term growth prospects we're seeing. Before doing that, this slide provides a helpful reminder of the shape of our business today. In very simple terms, it's a balanced and well-diversified portfolio. We've got 4 end markets across energy and built environment. We've got 3 complementary business lines that offer green-to-green solutions across the life cycle of a project. Starting with Consulting. In the first half, this business delivered nearly $1 billion worth of revenue and a very strong EBITDA margin of 12.1%. In many aspects, it already reflects the strategic direction of Wood, premium reputation, differentiated capabilities, high-margin returns and solutions for clients across all of energy and the built environment markets. Our order book is strong, up 15% compared to December 2020, with about $1 billion worth of revenue due to be delivered in the second half. Our activities in both energy transition and the built environment markets have been strong, and we expect this to continue. And book-to-bill at June was 1.3x, giving us confidence of delivering further growth in the second half. We've secured some great wins in 2021, which aligns squarely with our strategic focus areas in our Consulting growth plan. We already have strategically important senior appointments aligned to key growth areas, including a Vice President of Hydrogen and a Global Director of Decarbonization. Moving on to Projects. This is a part of the business that really has been most impacted with the uncertainties created by the pandemic, but there were still some strong positives to take in the first half of the year. We delivered revenue of $1.2 billion and, as David highlighted, a significantly improved EBITDA margin of 7.5%. This is a full 220 basis points margin improvement on the first half of 2020. From an order book perspective, the early months of the year were relatively quiet as investment decisions continue to be delayed. But through Q2, we've observed encouraging signs of growth, and we anticipate this to continue in the third quarter and in 2022. And in line with improving order intake, we're seeing improvement in our book-to-bill, which has steadily grown through the end of the first quarter and into Q2, and it's now just before 1. We're also pleased with the level of diversification in our order book, reflecting the balance of exposure in our Projects business across renewable and other energy, process and chemicals and, of course, conventional energy. As with Consulting, we're pleased with the quality of projects we've secured this year and how well they align with our strategic priorities. And finally, Operations. This delivered circa $1 billion worth of revenue in the first half of the year and an adjusted EBITDA margin of 10.7%. Our Operations business is typically characterized by long-term contracts with clients who hold enduring relationships with us. This means it delivers stable, predictable returns, largely OpEx-orientated in origin, that provide a helpful counterbalance to some of the more cyclical parts of our business. The order book in Operations is excellent, up 34% compared with December 2020, with about $1 billion worth of revenue due to be delivered in the second half. Our strong book-to-bill rate of almost 2x reflect our excellent customer relationships and market position, enabling us to secure renewals and multiyear contracts and, very encouragingly, to continue to win work from our competitor set. This has also given us good visibility of our future revenues with the majority of order book due to be delivered from 2022 onwards. Where the majority of revenues and operations still comes from conventional energy projects, we are making good progress in diversifying this business with new ones in power generation and activities related to reducing the carbon intensity of conventional energy assets as well as late-life asset solutions. I'll now talk a little bit more about the key themes in our end markets, which are linked to our BU growth plans. For Consulting, in energy transition, industrial decarbonization and the integration of renewable energy into industrial facilities is a key near-term focus area, and we're already winning significant work in this space. In sustainable infrastructure, we're recognized as a leader in climate resilience consultancy in North America. And we will continue to capitalize on the stimulus spending with around $900 billion worth of U.S. infrastructure bill, well aligned to core areas of our expertise. In Projects, investment in renewables will continue. As mentioned earlier, we're investing in standard block design and lean execution capabilities building on our early market entry and strong position. Economic recovery will be positive for downstream investments, and we see significant opportunities in biofuels and bio-refining. This development of more sustainable fuel solutions will be vital for a range of industries to meet their net zero targets. Energy transition will impact capital investment in developing new assets, but we're already seeing significant opportunities around decarbonizing conventional energy and industrial activities as well as on processing chemical facilities. Finally, in Operations, conventional energy will remain a material part of the energy mix for some time to come, and returning demand will see an uptick in activity levels. The type of work will continue to evolve with a strong focus on cost optimization, emissions reduction, digital solutions, late-life management and decommissioning of mature fields. Our long-term relationships means that we will be a partner of choice in helping IOCs as they evolve into IECs that work across the conventional and low-carbon energy markets and projects. While IECs divest their interest in the mature business to independent operators, we also expect to see more demand for integrated asset management services. Industrial and power facility modifications across energy market will focus on both carbon emission reduction and modernization, creating opportunities for our operations business. I've just spent a bit of time walking through the outlook for each BU. But for me, the real power comes when we collaborate. Let me share a few examples of collaboration wins in the first half of the year. In the U.S., our Projects and Consulting team have worked together to win Nevada Gold, where we will deliver a 100-megawatt solar plant, and that will result in net zero emissions mining project. In Asia Pacific, our Operations team have opened the door for our Consulting team to carry our asset integrity and decarbonization studies to help and operate our client to reduce their emissions associated with offshore activities. And finally, in the Middle East, our Consulting and Projects teams have worked with ADNOC to deliver the pre-FEED and design for a cutting-edge blue ammonia project. This ability to cross-pollinate opportunities and pool expertise will continue to be a differentiator and a foundation for future growth. To close, I'll just reiterate the key highlights. In the first half, we were pleased to have delivered strong margin improvements across all parts of our business. We're very encouraged by the growth we're seeing in our order book and are confident to returning to full growth in the second half of this year. We're reaping the benefits of Future Fit. It's delivering exactly what we wanted it to, and there's more to come in the second half of 2021 and into 2022. We have an increasingly strong ESG position, and our breadth of capabilities means this will grow even further in the future. It's been an unprecedented last 12 to 18 months of challenge, but we've come through it well. We're energized about the future as we enter a compelling growth phase. With that, I'll now close and invite any questions you may have.

[Operator Instructions] And your first question comes from the line of Nick Konstantakis from Exane.

Thank you for the information -- presentation and incremental color on the division. Very, very helpful. A couple, if I may, please. Firstly, clearly, very strong momentum in new energies, and I appreciate the color on your commercial success there. I think you break out 35% of revenues in renewable and other energy. Can you just help us understand the quantum of the two, i.e., the pure renewables and the other energy? And just discuss, if you could, how you're thinking about renewables evolving in the mix over the next 5 years or so, say, the medium term. And then could you please discuss a little bit the status of IECs? It feels like completion slipped a bit from December into -- by mid-2022. So can you just give us some color there. And then lastly, could you just help us a bit understanding the exceptionals in 2022? Just so we understand a little bit the cash momentum that we are talking about, how to think about it in clean terms.

Okay. Why don't I take the exceptionals and the Aegis question and let Robin talk about the momentum around new energies and renewables? In terms of Aegis, we're currently anticipating completion to be in August 2022, and that has slipped largely due to COVID. There's been difficulty in getting effectively U.S. teams into Poland because of COVID, so that's delayed commissioning work and stretched out the completion date. So we're into the final phase of it, but it is delayed. In terms of the exceptional looking forward to 2022, we do expect to see a rundown in the exceptional as we move from '21 to 2022. The most significant item we have this year is obviously the regulatory payments of $70 million. That will reduce down to $40 million in 2022 and will be $40 million in '23 and '24 as well. So that will drop down. In '21, we've also got the closure of an office, which is roughly about $20 million, which we've no plans in 2022 at this point for an office. In terms of Future Fit, again, we've got significantly exceptional in terms of Future Fit in '21. We would expect that to be much less significant in 2022. Program is an 18-month program, but largely the exceptional relates to redundancy and reorg costs, which have happened in '21.

Just picking up on your renewables and other energy question, Nick. We don't break it down in a component part, and one of the reasons for that is there's an increasing bridge right across decarbonization, alternative energies, carbon capture and storage and the renewable energy alternatives. In terms of the scale and pace of it, however, we really are encouraged. We did trail today in the presentation. We're seeing a pipeline that's got over $1 billion worth of carbon capture and storage and hydrogen projects combined. That has grown exponentially in the past 18 months, even in the past 12 months, and we've been very active in that area. And frankly, a number of clients now, when they do look at assets, either existing stock and look to decarbonize it, there's usually a bit of a blend in terms of the range of solutions. Sometimes we've got -- we trailed our Middle Eastern solar project for Shell, and we're doing electrification offshore using renewable wind generation for Equinor. And increasingly, that decarbonization scope on existing stock revolves around our carbon capture and storage element. It may well be part of the decarbonization right through to just process optimization, reducing flaring and venting from the industrial asset, onboard electrification through renewable sources. So as we keep them together and try and just simplify it by capturing it from the 4 market prognosis that we provide, what we are probably seeing and it might help you just in terms of your modeling, we are actually seeing material projects coming through in some of these renewable areas. We've always had it in solar and wind, particularly in North America, but we are actually seeing that $1 billion plus unfactored pipeline on CCS, and hydrogen obviously relates to material projects as well as study work and front-end design work. So that's an increasing activity level that's a bit broader we see coming through.

And your next question comes from the line of Victoria McCulloch from REC (sic) [ RBC ].

If you could just start on the net debt and go a bit more into detail, I guess, in the second half of the year. You've talked about the, obviously, offsetting the exceptional number in the second half from operational improvement and also the working capital reversing. Should we -- so your biomass numbers, that's $175 million, which is a big improvement. Should we expect to see more than that? I can't quite tell if you were suggesting that we should see more than that coming out in terms of advances and for the sort of momentum and awards that you secured in the first half of the year that's starting second half, which you see there. And if we could -- secondly, if we could kind of -- I guess, as an extension of this, obviously, your margin guidance for the second half of the year is significantly higher, not only in the first half of the year, but the last year as well. This is obviously a higher consultancy work combined with Future Fit. How sustainable is this, particularly given the operations, I guess, the new awards and sitting in your backlog of operations is sort of a higher proportion? And if I can ask an additional follow-on to that, how are you seeing in terms of these sort of energy transition opportunities? What do the margins look like? Where do they sit on a relative basis to -- are they closer to Consulting margins? Or does it really depend on where the work sits within your business?

Okay. A few questions there, Victoria. So I guess in terms of the net debt guidance, overall, we expect net debt to reduce in the second half from where we are now. And really, the drivers of that are going to be the improved profitability. We expect to return to growth in the second half relative to the first half and also relative to the second half of last year. And so that improved profitability will come through in our cash flow. We also expect a working capital inflow. And that inflow is going to be driven by principally 3 elements. So firstly, we normally expect the second half inflow. December is typically a lower activity-type month for us. We do have a seasonal element to our business where we typically build working capital into the summer. So we'd expect our normal 2H inflow will also benefit from the receipts that we received in July that were originally due in June. And then the third component is around advances, as you picked up. In the first half, we had an outflow of $61 million as we completed some of the big contracts such as YCI. As you've seen from the presentation, we're getting some good momentum behind our project order intake. We had a very good June. July looks another good month. And Q3, we've got good visibility over potential awards. And so we would expect those, such that they are EPC, to generate advances. So we expect a positive inflow from advances in the second half, and that's largely reflecting the inflection point we've seen around projects order intake. In terms of where we end up, overall, we expect the net debt to reduce. We don't expect it to be lower than it was at the end of last year, if that helps in terms of coming to a gauge. And principally, the negative and the cash flow is around the exceptionals in the second half. We'll have about $60 million related to regulatory investigations that we paid in the second half of about $15 million related to Future Fit, with $20 million related to an office closure that was booked to the P&L in the first half, and we'll pay the money in the second half and then $16 million related to onerous leases that we've had from prior periods that are running down that run out towards '24. In terms of the second part around the guidance, the sustainability, we do think our margins are sustainable and improving. We've seen good growth in the first half. We're up 80 basis points compared to 2020 first half. And for the full year, we expect a further increase in margins. I think when you look at the first half, second half margins, it's important to remember we do have a seasonal element to our business. And so we typically expect our margins in the second half to be higher than our margins in the first half. And if you think around Consulting, Consulting is a good example, so is consulting activity. It is supporting, in many cases, construction-type activities. So whether it's program management, so any benefit from increased utilization in the second half versus the first half. Our Consulting business, typically, their utilization is lowest in the first quarter. And some of that is weather-related, for example, in Canada. So if I look at full year to full year, we do see those margins as being sustainable. We do have a medium-term target of 9.6%. And we've made good progress to it in '21, and we expect further progress in 2022. Some of the things are around Future Fit continuing to deliver and continue to take out efficiencies, particularly in Operations and Consulting. But the biggest opportunity we have around margin is in our Projects business. So our margins in projects have recovered significantly in the first half. We're up 220 basis points, but we still think there's further room to go there in terms of pushing up that margin. So over the medium term, we'd expect that to show the biggest improvement. In Operations and Consulting, frankly, we think we've got excellent margins in both of those businesses just now. There's more we can do, but the potential is less as we go forward. So in terms of relating that to the new work, I think one of the things that's been consistent over the pandemic period is we've not seen the same pressure on pricing. And so we probably -- there's a generalization to this. We'd be fairly neutral about pricing across our business. In some parts, we think there's potential for uptick in pricing, particularly in some parts of our Consulting business. Equally, in things like U.S. shale, we have had pressure on pricing. But generally, it's been a neutral pricing story over the pandemic period. So we've not been winning work at effectively lower margins. That's not been the story for us. And then I think your last question was around margins and energy transition opportunities. And I think you largely answered it yourself. It does depend on the type of activities that we do. Our margin in renewables and EPC projects is lower than Consulting. In our Consulting business, we get excellent margins around studies, FEEDS and that -- those type of activities. So it does more relate to the type of service that we're delivering rather than the market that we're in.

Actually, helpful. If I can be really incredible cheeky, can I just ask one thing? Where is the sort of the upside opportunity in Projects? Is it delivery? Is it something you can add value in?

I think Projects, there's a bit of a mix. Victoria, we've derisked significant with the projects we go for. So actually, we go into the project portfolio. And just -- I don't know if you picked that up, but when we first acquired Amec Foster Wheeler, we were about 65% reimbursable. Like that number this year is 80% reimbursable. So that's a significant shift that we've seen. From a Projects perspective, we're running off the remainder of the kind of large legacy projects there, which is why the revenue has been coming down. We're very selective in the market in which we approach. We've been really pleased with the reorg that we've put in place. The operational excellence driver. We've got the new outcome with the Chief Operating Officer really kept that focus. So that's been a big part of the driver. Firstly, we're selecting better projects with better commercial terms. And secondly, getting the outcomes globally that we were always getting in the Eastern Hemisphere, we've effectively put that team across our entire portfolio across the globe. So that would be the 2 key constituent parts to the projects improving over time.

And your next question comes from the line of Mark Wilson from Jefferies.

Yes, the growth in order book year-to-date seems to be largely driven by operations. And therefore, I'm thinking conventional energy awards regarding these contract renewals. You mentioned indirect. Is it fair to categorize that my observation like that? Or are you actually adding new contract renewals in line with these decarbonization metrics that you've mentioned on some of the existing assets like in the REC?

Let me start and then let Robin add. I think we're really pleased that our backlog is up 18%. I think it would be wrong to characterize it as being in Operations. Our Consulting business is up 15%, which we think is an excellent performance. It's been consistently growing throughout the year. And as we look forward, particularly in that built environment space, we think there's a very favorable macro coming down the line in terms of the U.S. stimulus where we think our capabilities align very well with where they're planning to spend the money. So we're really encouraged by where we are in terms of Consulting, but also in terms of the macro picture. Equally, in Projects, we've added significant projects across the energy spectrum, and you've seen that in our growth in order book in May to June, and we're encouraged with July and we're encouraged with the projection for Q3 as well. So I don't think it's just an Operations story. But if you look at Operations, again, they've had an excellent first half. We've had several renewals, but we've also picked up new work in conventional energy and also in process and chemicals.

So my follow-up actually is on Consulting, because your order book is up nicely there, as you speak to. Revenues slightly down on last year. And also, the headcount is as well in consulting. But you speak to some strategic appointments in certain growth areas or strategic growth areas. So would you expect Consulting headcount overall to be increasing from here?

Yes. We do see a very healthy pipeline, Mark. We've -- actually, if you look at where we are in our energy business, we've trailed well and I think quite clearly, how enthused we are with the growth in both carbon capture, hydrogen, renewables. We're doing increasing studies across actually both operations and water consultancy business on decarbonization of existing industrial clusters and energy assets. So I think that's quite an encouraging part of it. We've not seen any evidence to date of the stimulus coming through in the built environment market. And again, as you may know, our environment business is orientated very heavily to North America and Canada. And we're very confident that, that stimulus funding will see that market grow still further through the second half of this year and certainly in 2022 as the money cascades through the system.