Wood Group maintains expectations after decent first half

The FTSE 100 energy services provider said its operational margin improvement had been led by “relative strength” in energy-related activity in its Asset Solutions EAAA business, and in-built environment activity within its Environment and Infrastructure Solutions operations, together with further cost synergy delivery.

Excluding the impact of IFRS 16, adjusted EBITDA in the first half was expected to be up around 7%, with operating profit rising around 25% year-on-year.

“Our full year outlook is unchanged, despite the impact of disposals completed in the first half which contributed EBITDA of over $20m in 2018,” the Wood Group board said in its statement.

“Revenue growth in the region of 5% weighted to the second half, together with the benefit of cost synergies of around $60m, is expected to lead to growth in adjusted EBITDA in line with market expectations.”

As it had expected, Wood’s board said net debt - excluding the impact of IFRS 16 - at the end of June would be around $1.6bn, broadly in line with the 2018 year-end position.

That reflected the benefit of first half earnings growth and the company’s continued focus on the active management of working capital, offset by the final dividend payment of $159m in May, the payment of known exceptionals, and cash outflows on contract provisions including Aegis, as anticipated.

“There is no change to our expectations on cash conversion and net debt guidance for the full year.

“We expect a modest reduction in absolute net debt excluding the impact of disposals.”

In its Asset Solutions Americas (ASA) business, which accounts for around 35% of revenue, Wood Group said that as it had anticipated, revenue was up on the first half of 2018.

EBITDA was “slightly down” due to cost overruns in heavy civils and pipeline work, related to weather delays and execution issues in the first quarter.

The company said it was seeing increased activity in downstream and chemicals from its EPC scope for a Gulf Coast plastics manufacturing facility and the YCI methanol plant.

“There is good activity in US shale focused on facilities and pipelines in the Permian and Niobrara.

“We have improving visibility on early stage concept and FEED projects in offshore upstream work.

“Solar and wind project awards will contribute to increased activity in the second half.”

The board said operations solutions activity levels were expected to be up on 2018, although the market remained competitive.

At Asset Solutions Europe, Africa, Asia and Australia (ASEAAA), which accounts for around 35% of revenue as well, revenue was in line with the first half of 2018, with “good” EBITDA growth delivered.

The board said underlying margins in the division benefitted from good execution, changes in the revenue mix including lower procurement revenues, and cost synergies.

It said it saw relative strength from operations solutions work in the Middle East, driven by Iraq and the Caspian and growth in Asia Pacific - from Papua New Guinea and Australia - which was expected to continue.

“We also delivered stronger performance in our turbine joint ventures including EthosEnergy.

“Capital Projects performance in the first half reflected lower procurement activity and benefitted from work on the FEED and project management consultancy scopes for Aramco, on both the Marjan field and the integrated crude oils to chemicals complex.

“Increased activity is anticipated in H2 across ASEAAA led by Capital Projects, Middle East and Caspian.”

Wood’s Specialist Technical Solutions (STS) operations, which bring in about 15% of revenue, the board said revenue and EBITDA performance was in line with the first half of 2018.

It said it was seeing “good” revenue growth in its subsea, and technology and consulting activities.

Activity on the STS-led scope of the TCO Automation project was said to be reducing as expected, as the contract progressed towards the next phase.

“We continue to expect earnings to benefit from margin improvement initiatives.

“These will more than offset the reduction in earnings following the disposal of Terra Nova Technologies in May, which contributed adjusted EBITDA of around $7m in 2018.”

Finally, the firm’s Environment and Infrastructure Solutions (E&IS) division, which also accounts for around 15% of revenue, delivered “good growth” in revenues and an improved margin performance in the first half of 2019, benefitting from government and industrial spending increases in the US and Canada, which the board said were expected to continue supporting activity.

EBITDA was benefiting from improved performance in capital projects due to the company’s decision not to pursue certain higher risk, fixed price contracts.

It said it was continuing to expect the Aegis project to be “substantially complete” around the end of 2019, with commercial close out expected in 2021.

Looking at its capital structure, Wood said it remained committed to a “strong” balance sheet and achieving its target leverage of 1.5x net debt-to-adjusted EBITDA on a pre-IFRS 16 basis.

There was no change to its full year guidance, with the board reiterating that it expected a modest reduction in absolute net debt excluding the impact of disposals.

“We continue to expect cash conversion, post exceptional items, to remain strong at 80%-85% for the full year, taking into consideration the structural improvement in working capital management, lower cash exceptionals of $100m and the anticipated cash outflows on Aegis of $80m.

“Cash exceptionals and cash outflows on Aegis are expected to reduce significantly in 2020.”

Wood said it had made further progress on disposals in the period, with proceeds of $38m relating to the sale of Terra Nova Technologies received in May.

A number of active sales processes were underway, and the directors said they remained confident of generating proceeds in aggregate of between $200m and $300m.

As it had expected, net debt - excluding the impact of IFRS 16 - at the end of June would be around $1.6bn, broadly in line with the 2018 year-end position.

That reflected the benefit of first-half earnings growth and the company’s continued focus on the active management of working capital, offset by the final dividend payment of $159m in May, the payment of known exceptionals and cash outflows on contract provisions including Aegis, as expected.

On the financing front, Wood said that following a $140m part-refinancing in the first quarter, it had made further progress with the refinancing of its existing term loan facility which was due to mature in October 2020, securing $364m from US private placement providers in June.

That extended the maturity of its debt profile, and further diversified its sources of long-term finance at competitive rates, with the majority comprising a mix of seven-to-12 year redemption dates at a fixed rate of around 5%.

The refinancing had no material impact on the company’s expectations for the full-year interest expense.

Looking at its accounting, Wood said IFRS 16 leases became effective on 1 January, with the most significant change for the company being the accounting for property leases.

The board explained that rental charges that were previously recorded in operating costs in respect of those leases would now be replaced with depreciation and an interest charge.

It said it had chosen to apply the modified retrospective approach on adoption of IFRS 16 and, using that approach, there was no restatement of 2018 comparatives in 2019.

Wood said it anticipated that 2019 adjusted EBITDA would increase by around $170m due to the accounting changes.

Overall, it said it expected the impact on the profit or loss for the year from continuing operations to be “immaterial”.

A lease liability of around $570m would be recognised on the balance sheet, with all of the firm’s financing covenants set on a frozen GAAP basis, so would not be impacted by the adoption of the standard.

“Our first half performance is ahead of prior year,” said Wood Group chief executive Robin Watson.

“We have delivered significant growth in operating profit together with EBITDA margin improvement.”

Watson said that had been led by the company’s activities in energy markets in the eastern hemisphere, and its environment and infrastructure operations in North America, together with the delivery of further cost synergies.

“Our expectation of revenue growth, strong earnings growth and cash generation in 2019 is unchanged.”