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

Good day, and thank you for standing by. Welcome to the Full Year 2023 Trading Update for Wood Group. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ken Gilmartin, Chief Executive Officer. Please go ahead.

Thank you. Hello, everybody. Happy New Year, and welcome to our full year 2023 trading update call. So I'm here in London with David Kemp, our CFO, and we're pleased to talk with you about the highlights from today's trading statement ahead of taking your questions. So starting with the key highlights for this period. Trading was in line with our expectations. Revenue was up 9% with good growth across all business units and adjusted EBITDA was slightly ahead of our guidance at $420 million, to $425 million, thanks to a slightly higher margin performance. We continue to see good momentum in the delivery of our strategy. Our order book is up 4% and underpins our growth expectations for 2024. This was following some significant wins in the quarter, and I'm pleased that around 40% of the work in our pipeline is sustainability-related, which enables us to continue to grow our sustainable revenues by helping our clients to decarbonize and digitize. We continue to review our portfolio in line with our strategic focus on select markets, and as a result, we have started the sales process for our stake in the EthosEnergy joint venture. And we continue to see an improvement in the underlying cash flow generation. So operating cash flow in 2023 was $275 million higher compared to last year. So turning to the financials in a little bit more detail then. As I said, revenue was around $6 billion, up 9%. And this includes revenue growth across all of our business units with particularly strong revenue growth in consulting, driven by client demand for front-end work and decarbonization and digitalization solutions. Projects saw good growth across oil, gas and chemicals, while Operations benefited from higher activity levels during the year. Adjusted EBITDA for the group was slightly ahead of guidance at $420 million to $425 million and up around 9% on last year. So net debt, excluding leases, was around $680 million. This included a significant improvement in our operating cash flow to around $210 million and exceptional cash flows in line with our guidance at around $140 million. Net debt was also impacted by foreign exchange and the timing of customer receipts in December that we flagged previously. Crucially, we have a clear pathway to sustainable free cash flow as we set out in our Capital Markets Day, and we remain on track to deliver modest positive free cash flow in 2024 and significant free cash flow from 2025 onwards. We won many key contracts in the fourth quarter, a few I would like to pull out. So Wood will deliver detailed engineering design for Woodside's Trion, which is the deepest semisubmersible facility in the U.S., Gulf of Mexico and a noteworthy energy security project. We're working with Dragados Offshore in Germany to deliver engineering design for one of the world's largest offshore wind to grid connection clean power projects. In energy transition terms, we've been appointed the owner's engineer for a world-leading hydrogen project in Spain. In the U.K., we won a major brownfield engineering project for BP's Murlach development in the North Sea and secured a 2-year contract extension with Equinor for the Mariner field in the basin. And in Life Sciences, we won an engineering contract in Europe, helping to produce active pharmaceutical ingredients for medicines. So to conclude, we continue to make good progress in delivering on our 3-year growth strategy. We're well positioned for continued growth in the right markets with the right clients and we're winning higher quality work at better margins as well as increasing the amount of sustainable work we do. We continue to be focused on our core energy and materials markets and making decisions to support that growth. In turn, continually delivering financial results in line with expectations. We have delivered the first year in our 3-year strategic journey and look forward to continued growth and momentum in 2024. So with that, David and I will now take your questions.

[Operator Instructions] We will now take the first question from the line of Alex Smith from Investec.

Just on the slightly higher-than-expected margin number. You mentioned slightly above 7% despite the OpEx investments. Can you give a bit more detail in what is driving that? I can see central costs are only marginally up. I guess, a solid result given inflationary pressures. But then maybe just a bit more on what are those OpEx investments in the business? And could you elaborate where you're investing and where you expect to see benefits?

Yes. Sure, Alex, and thanks for the question. So I think we had that. Obviously, as you outlined correctly, our 2023 number that we were continuing to invest some OpEx money into some of the businesses that we were trying to grow, predominantly in Consulting. And I think you'll have seen from a consulting standpoint good performance and as we started to see that materialize into winning more work from a consulting standpoint. So that's positive. That investment is starting to pay fruit. And we see that investment continuing to bear fruit as we go into 2024 and Consulting continues to grow. We are seeing pricing improvement across the board in all of our business units. What I would say as well, Alex, also that we are a large organization. It takes time for pricing improvements to start to drop through into increased performance because there are large contracts, and they take a period of time to run through the books. But starting to see positive momentum there, and there is a backdrop of that pricing improvement. Again, as I said, across all of our business units.

Yes, Alex, just to add to that. We were very pleased with the margin performance because you need to set it against an increase in our pass-through revenue, which generally is close to 0 margin for us and the investments that we made. So the improvement in margin that we've seen coming through pricing and through the work we've done in our central costs and keeping them flat is pleasing to us.

We will now take the next question from the line of Guilherme Levy from Morgan Stanley.

I have one question, please. Looking to 2024, can you walk us through the expectations in terms of your free cash flow generation profile? What can you share with us in terms of working capital account dynamics throughout the year, disbursements of the remaining exceptional cash flows as well as CapEx and overall investments? Just for us to have a picture of how that is expected to evolve during the year.

Thanks, Gui. Yes, the headline is there's no real change to our expectations in '24 and '25. We set out almost a 3-year journey at our Capital Markets Day in November '22. We're really pleased with how our operating cash has grown this year. As Ken mentioned in his remarks, it's up $275 million year-on-year, and H2 is about $140 million better than H1. So we're seeing the improvement in our operating cash. And the second leg of that cash story was controlling our exceptional costs. And as we said for '23, we expect those still to be around $140 million. And the only change from the Capital Markets Day is the additional $5 million we had in the total cost. But obviously, we couldn't foresee at the time of the Capital Markets Day. So when you pull all of that together, there's no change in overall guidance. It's positive free cash flow in '24, and we expect more significant free cash flow in '25. And so we think we're 1 year into that 3-year journey, and we're heading along the right track.

We will now take the next question from the line of Richard Dawson from Berenberg.

And my first one is maybe just sort of following up on the first question on the central costs. They were maybe slightly better than we'd expected. Is that $75 million a reasonable run rate as we look into 2024? Or are you expecting some inflation to come through this year? And then secondly, on the contract award with BP, the major award. Is the size of the award in line with your previous comments that a large award is in the region of sort of $100 million plus? And how will this contribute to the medium-term EBITDA targets or the sort of medium-term growth on that?

In terms of the central costs, yes, you've picked up to the competing pressures. We've constantly looked -- as we said before, we've looked to keep our central costs flat as we've grown. We continue to look at how we can be more efficient, and we'll continue to do so. And the other, particularly this year, the competing pressure was obviously inflation. A lot of the costs are people related or they're service related, such as audit fees, et cetera. So there are significant inflationary pressures. But we'll look to compensate for those with becoming more efficient, and that will continue to be our focus. In terms of guidance for '24, we'll come back to that in detail in March and set out where we are.

Yes. Maybe on the question around the contract and the contract size. Look, I think back to the question around a $100 million contract for us would be very large in terms of where we were talking about this. Across our whole portfolio, we are in that mode, and we'll continue to have that discipline in where we play and how we play, staying away from the lump sum turnkey element of the larger awards that you're out there and really focusing in on what is and what will continue to be very much a cost reimbursable type engagement that we have, right, in order to mitigate the risk as well as making sure that the returns that we have are consistent with the strategy that we're doing. So look, in an overarching piece, 1 individual contract or 1 award really impacting kind of bottom line for us from an overarching standpoint and a $6 billion company that we have really isn't where we're playing, Richard, right? We're very consistent, very clear on the strategy that we have. And I think just on the outside making progress against all of our end markets and all of our businesses units as well, which is good.

Maybe a couple of other things just to add to that, Richard. Just in terms of step back. If you look at our overall backlog, it's up 4% to $6.1 billion. And within that, we've seen good growth in Operations, of which the Murlach contract fits. Part of that backlog is actually in terms of the pricing. And so we talked about it quite a few times in the recent past. We are seeing improving pricing throughout our business. And so when we look at our backlog, the margin within our backlog is better than it was this time last year. And you're starting to see that come through in terms of the business's margin performance. And as Ken mentioned, there is always going to be a lag to that. And so we've always talked about '24 and '25 being a margin improvement story for us and '23, our expectation was flat margin. And so that's come in slightly better than we expected. And the area -- one of the areas where it's been better is Operations. And so we are winning work at better margins in Operations.