Wood Group's (WDGJF) CEO Robin Watson on Q4 2015 Results - Earnings Call Transcript

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Wood Group (John) Plc. (OTCPK:WDGJF)

Q4 2015 Results Earnings Conference Call

February 23, 2016 04:00 AM ET

Executives

Robin Watson - CEO

David Kemp - CFO

Analysts

Alex Brooks - Canaccord Genuity

Nick Mellor - Haitong Securities

Mick Pickup - Barclays

Rob Pulleyn - Morgan Stanley

Michael Rae - Redburn Partners

Fiona Maclean - Bank of America Merrill Lynch

Mukhtar Garadaghi - Citi

Christyan Malek - Nomura

Neill Morton - Investec

Mark Wilson - Jefferies

Daniel Butcher - JPMorgan

Operator

Robin Watson

Good morning, everyone, and welcome to our full year results presentation. I've met a lot of you over the last few years as Chief Executive of Wood Group PSN, and latterly as Group Chief Operating Officer, but this is my first full year results presentation as Chief Executive of Wood Group. With me today I've got David Kemp, our CFO; and our Investor Relations team.

In 2015, the Group delivered in line with our expectations, despite challenging conditions in oil and gas markets as oil price fell by 30% and E&P capital expenditure by around 20%. We took actions to reduce cost, improve efficiency and broaden our offering, and throughout the year we've controlled what we can control. The results demonstrate the business's delivery across each of these areas.

Firstly, we've removed significant cost from the business. We've delivered an overhead saving of $148 million, and we'll discuss the detail of this in the course of today's presentation. We do expect these cost savings to sustain throughout 2016. Secondly, we've retained our focus on utilization whilst maintaining our capability. The nature of our business is that we always actively manage our utilization levels as projects vary. This means we're used to flexing our workforce and our organizational structure. This versatility remains one of the key elements of our business model. And thirdly, we've continued to invest in the business, both organically and through acquisition, positioning ourselves to be a stronger company as we come out of the current cycle.

At the start of last year, we also realized, due to the challenging market conditions, there was likely to be a subdued market for new awards. However, we have continued to win new work through 2015, which demonstrates a strong demand for our differentiated services. And I'll return to some of these awards later. We've also continued to generate value for our shareholders. In line with our intention, the total dividend for the year is up 10% on the 2014 dividend.

I'll now pass you over to David, who'll take you through the 2015 full year financials.

David Kemp

Thank you, Robin, and good morning, everyone. As Robin noted, the Group performed in line with expectations in 2015, benefiting from the flexibility and diversity of our asset-light model and the delivery of significant and sustainable overhead cost savings, while continuing to invest in strategic acquisitions and organic growth.

Our focus on utilization and overheads contributed to our relatively resilient financial performance in 2015, despite a 23% fall in revenues. Against a backdrop of significantly reduced activity across the oil services sector, the Group delivered EBITA of $470 million; down 15% on 2014. EBITA margin reflects our focus on self-help and rose by 0.8%. Adjusted EPS of $0.84 was down 16%. The Board has recommended a final dividend of $0.205 per share, which makes a total distribution for the year of $0.303; an increase of 10% in line with previously stated intentions. The dividend cover ratio was 2.8 times.

Our trading performance overall reflects our breadth, resilience and flexibility in very tough conditions. This is reflected in absolute terms with EBITA down only 15% and also in the EBITA margin, which was particularly strong in 2015. EBITA margin grew by 0.8% to 8%. Our overhead cost savings and strict management of utilization in the face of reduced volumes and pricing pressure was key to achieving this. As stated in our December trading update, we've revised our expectation of near-term performance in EthosEnergy, and this has resulted in a non-cash impairment of our carrying value of $159 million. Full details of the exceptional items are set out in the appendix.

We don't consider the 8% margin to be representative of the underlying margin performance, so it's worthwhile bridging from the 2014 achieved margin. The first column shows the impact of volume and pricing pressure; currency movements, especially the strength of the U.S. dollar, also provided some headwind. We benefited from the delivery of overhead cost savings of $148 million, together with the strict management of utilization. There was little impact from M&A, so on an underlying basis you can see the margin is broadly in line with the 2014 position. We also benefited from some nonrecurring items. The loss on the Dorad contract in 2014 was not repeated in 2015. And in 2015, we had credits related to the successful close-out of some lump sum projects in engineering, and the release of a provision for deferred consideration relating to previously completed U.S. onshore acquisitions in PSN.

Turning to our segmental performance. In engineering, revenue decreased by 19% with significant falls in activity in upstream and subsea due to project deferrals and cancellations; this was partly offset by growth in downstream, process and industrial and robust performance in onshore pipelines. EBITA decreased by 7.5%; however, EBITA margin increased by 1.5% to 12.4%. This reflected our focus on utilization, overhead cost reduction, margin improvement in onshore pipelines and downstream, and the successful completion of lump sum projects in downstream, process and industrial.

Upstream benefited from the significant Ivar Aasen and Stampede projects, which will continue into 2016, albeit diminishing through the year. Robin will pick up some of the new significant awards later, but generally, the market for detailed design scopes has been subdued, as you know. Successful FEED work on a number of projects, such as Statoil, Peregrino Phase II, and TCO, give us some visibility for detailed design. And we secured a six-year contract to deliver maintenance and modification services in Norway with Statoil, further developing that relationship. In subsea, we continued with the BP Shah Deniz, Quad 204, Tullow TEN, and Chevron Gorgon, and continue to win a number of FEED work scopes.

Developing on our long-term customer relationships and operational capabilities, we secured a five-year global operations contract with BP in October, and progressed to detailed design on the Greater West Flank 2 for Woodside in Australia, after the successful completion of the FEED work. Our U.S. onshore pipelines business has performed robustly, with activity on the ETC Dakota access pipeline expected to continue throughout 2016. We delivered significant growth in downstream, process and industrial, which was positively impacted by one-off contract close-outs in the first half. Detailed engineering on the Flint Hills project will progress throughout 2016. Looking to 2016, although our order book revenue coverage is at similar level to 2015, we see fewer significant upstream and subsea projects; and a competitive pricing environment for those that do progress.

In PSN production services, revenue decreased by 26% and EBITA decreased by 25%. This decrease in turnover predominantly reflects lower activity in the North Sea and the Americas. Activity in other international markets remained relatively robust. EBITA margin was steady year on year, as utilization management, significant overhead cost savings and the release of deferred consideration provisions helped to offset pricing, pricing pressure from customers and foreign exchange hedges. Excluding the impact of businesses acquired in 2015, headcount was down by around 6,000 people.

In Americas, following strong performance in 2014, our U.S. onshore business was impacted by significant pressure on volumes and pricing in 2015. The pressure was most pronounced on our well-side activities which are highly correlated to the decline in rig count, with our infrastructure development and production-related operations and maintenance activities being less affected. We continue to have a positive view of the longer-term opportunity onshore U.S., and Robin will cover the acquisitions that provide us with greater access to the petrochemical sector and the Marcellus and Utica basins.

In the North Sea, volumes fell due to the reduction in project and non-essential maintenance work and efficiency initiatives, including changes in offshore rotation patterns. Our industrial services business, established with the acquisition of Pyeroy in 2013, has performed well and has been awarded several new contracts with existing and new customers. We remain fully aligned with customers looking to improve efficiency. And we believe our record of cost leadership will be key as we address the operational challenges our customers are facing in this tough environment.

Performance in our international business has been robust, with increased activity in the Middle East, offsetting lower performance in Africa. We continue to increase our presence in the Middle East and have moved further into the Caspian region. In December we were also awarded a Brownfield engineering contract with Conoco in Australia, including work on the Darwin LNG plant. Looking ahead, although our largely OpEx-related work in PSN should ultimately provide a base level of activity, market conditions remain very challenging, particularly in our core onshore U.S. and North Sea markets. Recent acquisitions will allow us to extend our scope to new basins and sectors in the Americas.

In turbine activities, revenue fell 20%, and EBITA fell 1%. Poor performance in EthosEnergy saw a reduction in major maintenance and low equipment sales was offset by improved performance in RWG and TCT. In 2016 we anticipate turbine activities to remain challenging and we'll continue our efforts to improve the performance of EthosEnergy. The Group has maintained a very strong balance sheet during a difficult 2015. And we are comfortable with the flexibility, diversity and maturity of our funding, following the extension earlier this year of our $950 million bi-lateral facilities to 2020.

We believe this solid financial position is a good differentiator at this point in the cycle. Cash flow generation was strong in 2015. Cash conversion was 119%, calculated as post-working capital cash flow, divided by EBITDA. Working capital management remains a key focus and we have increased our attention on receivables and monitoring of customer exposure. Net debt at the year-end was $290 million. At the bottom end of our typical 0.5 times to 1.5 times EBITDA range. Our solid funding position facilitates productive reinvestment in the business in the coming year.

Organic investment, strategic M&A and dividends remain our preferred use of cash. We continue to invest in our business with 83 million of CapEx spent in the year on plant and infrastructure, design software and investment in the ERP systems. And this has allowed us to consolidate and simplify our back office processes, to improve service and reduce cost. We've maintained our strong focus on strategic M&A in 2015 as Robin will discuss. Our total spend was $234 million in 2015, in line with our broad objective of investing 200 million to 300 million per annum on strategic M&A. There's no change to our approach on dividends. Our intention is to increase the dividends per share for the full year 2016, by a double-digit percentage, in line with the increase in 2015.

I'll now hand over to Robin.

Robin Watson

Thank you, David. Over the coming slides I want to take you through what we have controlled in 2015; what we have in terms of the broad foundations of our business; and why we believe this help gives us relative resilience, even in this difficult market; an overview of some of the new awards we've won in 2015; and what we're focusing on, not only in terms of working within the current climate, but also in terms of positioning ourselves to be an improved, and therefore, stronger business coming out of this cycle.

During 2015, our principal focus has been on controlling what we can control. And this has been a key to the protection of our EBITA margin. We have two fundamental elements to our cost base; direct costs and overhead costs. The direct costs represent costs which have a direct impact on our customers. As we work on a primarily reimbursable basis, the benefit of these savings is passed directly to our customers. I spoke earlier around our strict focus and active management of utilization in our business, whilst maintaining our core capabilities. We will continue this focus as we progress through another challenging year.

We've had 20% reductions in the U.K. contractor day rates, as activities slowed down. Last week we've reduced these rates again, ensuring we remain competitive and respond quickly to the market conditions. The use of our high-value engineering centers has been a key in our ability to respond to pricing pressure from customers, and, in many cases, has been a key differentiator on how we've actually won work. We've been able to offer our customers reduced rates for the same high quality of delivery. When considering overhead costs, over the year we've delivered overhead cost savings of $148 million, compared to 2014. This is significantly in excess of our original target and reflects the flexibility of our model and our early focus on cost reduction.

However, it does also point to the increased challenges we faced through 2015. These savings have been a mixture of structural savings in discretionary expenditure with a large element being headcount. In this regard, we've resized our support functions to fit a lower revenue business and streamlined our management structures. We started the process in 2014, partly in reaction to the engineering downturn, and partly as a focus on back office efficiency. For example, we started shared service initiatives in HR in the U.K. and finance in Delhi and Houston, together with addressing our property and IT&S spend.

These were accelerated through 2015 and we learnt to do more with less. In addition to these organizational changes, we've had a strong focus on squeezing spend in discretionary areas. These overhead costs savings are structured, enduing and will sustain through 2016. Although the challenge will be greater, we will continue to manage our cost base as market conditions dictate. I want to now talk a little bit about the broad foundations of the business and where we are heading. Wood Group remains an asset-light provider of technical solutions to our customers and the oil and gas sector remains our core market.

We will also stay positioned across the life cycle of our customers' assets. This means we've a range of exposure to both operating and capital expenditure. This service breadth also allows us to offer cradle to grave capability; the opportunity to support customers at any, or all stages of concept, development, through operations to decommissioning. As a result, we're able to mix and match to different customers and/or at different stages of enterprise life.

All that said there are advancements we can make within these established parameters. My principal focus for the Group as we become even more aligned with customers and this is likely to involve some continued reorganization of the business. I want us to be a simpler and more efficient organization that is easier to do business with, and even more consistent in our service delivery. Not only will this help us retain our position in this challenging market, it will also enhance our position as the cycle changes and allow us to come out of this downturn stronger.

Across our three businesses that means we'll be looking at delineating our discrete services better, together with further standardization and simplification. We will accelerate and work in these areas through 2016. This slide also looks at geographies, customers and market segments. We feel the breadth we have achieved across them strengthens the relative resilience of the business and our focus is to ensure that we retain the appropriate breadth of platform.

Looking in a little bit more detail around our customers and our geographic spread; we've a good balance of customers and have actively reduced our reliance on IOCs over the last three years, while still retaining our longstanding relationships with majors dating back over 30 years, particularly with Shell, BP and Exxon. Our customer relationships are founded on a track record of delivering on key contracts and this is reflected in a very strong contract renewal performance and continued new contract awards.

We are pleased to have increased our NOC relationships, both in domicile and as they have internationalized and vice versa. Following the work with TAQA in the North Sea, we're now working with them in the Middle East. Saudi Aramco and Statoil are NOC relationships, which have further matured through 2015 and into 2016.

Our geographic strategy is not about getting dots on the map but manage growth in the right markets with the right customers. At present we have more concentrated positions in the U.K. and U.S. than we have in the eastern regions, so customer-led expansion, where we can closely follow and support customers to establish a presence in new regions, is key to our success. Lastly, we will retain our measured risk appetite. We've traditionally been a largely reimbursable business with no more than 10% of our revenues derived from contracts with fixed-price elements. This will continue to be key and provides us with room to move in our core markets where risk is being pushed down the supply chain.

This doesn't mean taking on large-scale, fixed-price EPC projects, but it does mean being commercially versatile and being comfortable with performance-based elements and contracts where we've a strong level of knowledge and expertise. Our current contract portfolio has a lump sum derived component, which is significantly less than the 10% incidentally.

We maintained our focus on strategic M&A in 2015, and the environment for completing acquisitions certainly improved in the second half of the year. Our total M&A spend in the year was $234 million, for businesses which we believe will deliver EBITA of around $43 million. We screen and analyze multiple acquisition targets, however, only move forward where we see good strategic opportunities to broaden our service offerings and/or our geographical segment presence, and which also generate a healthy return on capital.

Let me take you through our 2015 strategic acquisitions and our rationale for acquiring them. Beta Machinery broadens our range of services. Beta is a Calgary-based engineering consultancy, which specializes in advanced vibration analysis, enhancing our integrity management offering across all sectors. We see significant growth opportunities leveraging off Wood Group's global footprint. Automated Technology Group, a U.K. provider of control and power solutions, provides our sector footprint extension. This is a strategic advance for an already well-established automation business, which is predominately centered in the U.S. and in oil- and gas-derived markets.

The largest acquisition of the year was Infinity Group completed in December. Infinity is based in South Texas and delivers maintenance and modification services primarily to the petrochemical market. Infinity has strong customer relationships, especially with Dow and BASF, and it will provide us with an excellent platform for growth opportunities in the U.S. petrochemical market. The acquisition also gives us the potential to support process plant and industrial offerings from our engineering business.

Enhancing our U.S. onshore footprint, the acquisition of Kelchner gives us greater access to the Marcellus and Utica basins, where the business provides construction field services. We specifically like the fact that Marcellus is a very large gas basin and that Kelchner had positioned themselves to have an upstream, midstream and non-oil and gas exposure while still operating in this geographic sweet spot. These acquisitions reflect our direction of travel broadening our services, balancing our market and segment exposure and managing our growth geographically in the right areas with the right customers.

Within this challenging business environment we continually ask ourselves some fundamental questions, which include are we retaining our market share? Are we able to attract new customers? Are we able to deliver performance from the parts of the business outside upstream oil and gas at this point in the cycle? We show here a selection of contract awards; these awards are the result of our leading position and track record with customers and highlight the breadth and diversity of our operations. I'll expand on a couple of them.

Relationships are the key to the extension and extension of our contracts. In 2015, in the North Sea, we've secured extensions with customers, including Total, Chevron and EnQuest. We will continue to focus on cost leadership and simplification and, whilst activity levels across this particular basin are down, our relationships with customers remain solid. Also in 2015, we were awarded a greenfield and Brownfield contract with Saudi Aramco. The offshore maintain potential contract is to provide the engineering work necessary to maintain production from the offshore facilities in the Arabian Gulf for six years with options for two year/three year renewals. This is a great example of winning a key award with an established customer.

We have referenced the subdued market in subsea and we have discussed previously competitor companies performing strategic alliances and joint ventures. We have, however, continued to win a number of FEED awards including Shell and Woodside and the Browse project in Australia. We continue to believe that our technical capability, independence and impartiality remained key differentiators. We see these awards as an encouraging endorsement of this.

In terms of new customers, having successfully completed the FEED for Statoil Peregrino 2, we are optimistic of progressing to detailed design on this particular project. When Statoil came to Houston to complete the Peregrino 2 FEED, Wood Group experience was key in awarding this work to us. Developing on the relationship with Statoil in Brazil, in 2015 we've also started work on a six-year maintenance and modification services contract in Norway. This was another key strategic win for us.

Antin Oil & Gas are a new entrant to the U.K.; we needed a partner with experience to operate the CATS pipeline and terminal. This is a good example of deploying our well-established duty holder service in a well-known geographic region to assist a new entrant deliver against their own business model. Whilst we have seen a slower market for award of upstream and subsea projects, we have highlighted the growth in our downstream process and automation businesses. One of the larger projects is the detailed design work for Flint Hill resources. This project is roughly the same size as Hess Stampede, and work will continue on it throughout 2016.

As indicated in the prior slide, we have increased and strengthened not only the breadth of our service but in mitigation of oil price, we have deliberately created new sector opportunities. The Infinity acquisition extends our relationship with Dow as we are currently providing them with onshore pipelines engineering also in the U.S. And the ATG acquisition, although relatively modest in size, brings with it key blue-chip customers and growth opportunities, which are cycle independent of oil and gas.

In summary, our technical expertise, operating model and longstanding relationships continue to position us well with customers and we continue to win new work and remain strategically focused in our acquisitive activities. Performance in 2015 demonstrated the resilience and flexibility of our business in a very challenging market. We took actions to reduce cost, improve efficiency, and broaden our offering. And throughout the year, we controlled what we could control.

The markets continue to be very challenging in 2016, and there remains a considerable degree of uncertainty around the outlook. We're not in a position to provide quantitative guidance for 2016 trading, but what we can say is customer expenditure and activity levels in our core markets will continue to be constrained, and CapEx spending will reduce. We've demonstrated the resilience of our business model, and we do remain well positioned. Our strong balance sheet provides us with a very solid platform for the business. And it is our intention to increase our 2016 dividend by a double-digit percentage.

Our continued focus to reduce cost, improve efficiency, and broaden our service offering through organic initiatives and strategic acquisitions, positions us as a strong and balanced business in the current environment. It is very much our intention to come out of this cycle as a better business than we went into it. And we do feel our broad service footprint, strong reputation, longstanding relationships, and focus on delivery, differentiate us.

I would now like to thank you for your attention, and open the floor to questions.

Question-and-Answer Session

Q - Alex Brooks

It's Alex Brooks from Canaccord. You say you want to come out of this a better business. Can you elaborate a bit on what would count as being a better business, given that we're not talking -- given that we're not quantifying any of these things?

Robin Watson

Yes. So I think it's, I've got a very clear purpose for the business. And it is about us providing smart technical solutions that add value to our customers. So I think that's the foundation of the business and has been for a number of years. So it'll be an evolution, Alex. And I think, primarily, we need to sustain what we have. We've got a great foundation of the business, and we do need to sustain that. As I said in the presentation, oil and gas will remain our core market. But we do need to broaden what we do. So we do need to be thoughtful about the services that we provide, and can we provide more services? And then, I think you saw, from an acquisitive perspective, yes, oil and gas will remain the core market, but we are open-minded to broadening that footprint. I think Infinity is probably a good example of the largest scale part of that. And ATG and Beta, whilst they provide good service expansion, are relatively modest in size.

David Kemp

I think we'd also talk about the overhead cost savings. We've made significant savings this year, just under $150 million. And we expect these to be sustainable. So actually, coming out of this cycle, we expect to be a significantly more efficient business than we went in. So things we've established, such as shared services and the other structural changes we've made to our business will endure.

Nick Mellor

Nick Mellor, Haitong. I've got three questions. Working capital down materially this year, what drove that? And what can we expect, going forwards? Second question is you guys mentioned you're moving into the Utica and Marcellus in the PSN business. Appreciate it's a new acquisition for you. Can you give us some color on what specifically is attractive about those basins relative to other ones? And third question, really just about Ethos. Looking at the value written down versus the EBITDA produced, clearly, that was sitting at a very large premium in terms of EBITDA on the balance sheet. Are there any other businesses held at significant premiums on the balance sheet?

David Kemp

Do you want me to take the working capital and impairment? So I guess, in terms of the working capital, the largest driver is the decline in revenue. So as the revenue declines, we liquidate working capital, so you typically should see more cash produced. So that's the largest impact. In terms of Ethos, it's obviously very disappointing we've had a significant impairment there. And that reflects the near-term performance expectations we now have for Ethos. In terms of the other parts of the business, we're pretty comfortable with the goodwill we have in the balance sheet. And we've got significant headroom against that when we ran our impairment tests at the year-end.

Robin Watson

In terms of Marcellus and Utica, that's really the third part of a jigsaw we had to have our onshore footprint South Texas basin, New Mexico basin. We've got a good presence in Colorado and Dakota. And this was the eastern flank of that. It was opportunistic, the acquisition itself. We liked the fact that they were not wholly reliant on upstream oil and gas, they had actually diversified themselves pretty well. So the construction services that they actually provided Kelchner as a business, they had an upstream element, yes, but they also had a midstream, and they had a non-oil and gas element. So that's a key play for us. We like the fact it's a large gas basin. And that eastern flank, we do see as being part of a longer-term future, in terms of economic possibilities from a U.S. perspective.

Mick Pickup

Mick Pickup from Barclays. Couple of questions, if I may. On your cost saving for this year, you haven't given a specific target. Is that just a reflection of it's getting much harder to take them out, after the actions you've done? And secondly, you said you had a strong purpose. But looking at the color of the presentation, you don't seem to have the values any more. Can I just ask why you pulled back from that?

Robin Watson

So in terms of -- I'll start with the second one, Mick. So and I like the tie, incidentally. So the values we take, it's been a tremendous effort over the last five years to embed values in Wood Group. We take them as a given, actually we do, we still use them internally, we still have them at the core of everything we do, and every decision we make. And we feel we're at the right evolutionary point to just broaden that conversation beyond the values and into some of the strategic areas that we're operating the business. So, nothing [sinister] in it at all, it's very much an embedded part of our business and our DNA of the business. In terms of the cost savings, we're not giving guidance -- trading guidance in 2016. We will remain having the flexible asset-light model that we've always had. We'll respond to the market conditions and whilst we've talked about headcount reduction, that's part of the cost savings that we've had. Another big part of the cost savings that we should reflect on is the fact we've been investing heavily in ERP systems for the past three years. That has allowed us to accelerate our shared services and back office capabilities. So actually, we see that as, to David's point, making us a more efficient business as much as anything else. And we will continue to respond to the market conditions. There will be the cost reductions that we need to make, we'll make and positioning for growth that we need to do, we'll position for growth in those areas that we see activity levels on the up.

Rob Pulleyn

Hi gentlemen, Rob Pulleyn from Morgan Stanley. Just continuing on the cost savings theme. Could you give a little bit of colors to where the extra headcount reductions came from, since what you talked about at half-year? Secondly, on that basis, shouldn't -- if that is in your support and management functions, which you talked about earlier, shouldn't you have more cost savings annualized in '16 than '15, simply because you'll get the full benefit, rather than part of it? And also, I know 20% headcount reduction is never easy to do. Having said that, in 2009, the engineering division, you cut headcount by 26% already. So, at what point do you need to take more people out of the business if the work doesn't come, to replace what you're currently executing? Thanks.

Robin Watson

So in terms of the engineering -- I'll answer the second one first. In terms of the engineering division, we're very thoughtful on -- and it's an iterative process. When you look at the market, you look at utilization, Rob, and you also look at capability. Because obviously, we don't want to cut into our capability if we can at all avoid it. So yes, there's a headcount reduction piece of that. But also, when we've got very specialist services, we look at full-time equivalents. So we do reduce working weeks and things like that, so as we don't lose our capability. So we've done that successfully through '15 and that's the approach we're taking as we go into 2016. So get the balance between utilization, the market requirements and capability right, which is really important to us. In terms of the costs savings, David, do you want to elaborate?

David Kemp

The first part of your question is about since the half year. And really what we saw at the tail-end of the year, particularly in the last quarter, was the biggest impact in the U.K. in terms of the change in rota so we had a significant reduction in the U.K., particularly in the last quarter. And that was probably the biggest single delta. In Americas, we obviously face volume pressure. We also came out of our business in Colombia so there was a headcount reduction there. In terms of costs and the level of headcount savings we've made in the past, as Robin says we constantly try to manage our utilization and we focus on that intensely. So really we have target levels of utilization and we've talked about that before, mid to upper 70% and that's what we strive to maintain, while protecting our capability.

Rob Pulleyn

And on the cost savings presumably slightly larger in '16 and '15, just in terms of pricing effect?

David Kemp

There clearly will be an element of that as we go through to 2016. We haven't given out guidance in terms of the level of cost savings. What we have said is we expect the 148 million to endure and we're going to continue our focus on self help. Clearly, we didn't make all of the cost savings on 1st of January, so we'll get some benefit from full year as well.

Michael Rae

Hi, Michael Rae from Redburn. Just two questions. First can you give a bit more color on the oil price scenario that you use in your M&A screening, and so if I see you complete an acquisition, should I think about that being predicated on the forward curve or $60 oil, or do you stress test a lot lower than that? And then second, just thinking about the downstream cycle, onshore U.S. which has performed pretty well for you, when you look at the things like U.S. Gulf Coast refinery refurbs do you think that's something that will roll over in the next couple of years or is that a multi-year source of growth?

Robin Watson

So firstly, in terms of the analysis we do, Michael, from an acquisitive perspective, so, oil price if it's an oil-related business is obviously a factor that we put in to it. We look at the services they provide. We look at the geography they're in and we look at the market segment that they're in. So we will have a view and we've had a view certainly in 2015 that we've looked for less upstream oil and gas exposure for very obvious, very obvious reasons. So it's a factor, the macro is always a factor when considering an acquisition but there are a whole range of other factors to determine whether an acquisition's strategically robust or not. And actually that discipline that we have, we do walk away from a number of acquisitions if we feel that there's either too much volatility or uncertainty and/or it fails to meet internal hurdles. In terms of the onshore downstream market, what we have been impressed with is the level of plant refurbishment and committed capital that we do see, certainly in the short to medium term. One thing that attracted us to Infinity was actually their customer base as well with Dow and BASF, and where they are in terms of the local infrastructure investment that they're actually making in the plants in which we operate.

David Kemp

I think Kelchner's a good example of us; we don't just make acquisitions for the immediate and the short term. One of the attractions about Kelchner was the multiple price. So we had looked at how do we build a position in Marcellus and Utica for at least the last couple of years and we haven't found the right mechanism to get there. Kelchner came along; clearly it's a challenging market just now but actually in terms of positioning us where we want, it was at an attractive price to be able to do that.

Fiona Maclean

Hi, it's Fiona Maclean, Merrill Lynch. I have a couple of questions. Firstly, Robin you mentioned that you're looking to make your business a bit more standardized and simpler. We've heard these comments from the oil companies over the last couple of years. Are you starting to see any examples of that actually coming back from the oil companies into the way that they're looking to do projects going forward? And then secondly, on the M&A strategy that you have, I'm assuming that your metrics haven't changed in terms of how you're willing to spend that money and what you're willing to do with the balance sheet.

Robin Watson

So in terms of standardization and making things simpler, what have we seen from oil companies? I think we've got some, a couple of good demonstrable examples. If you look at Lucius and Heidelberg that we designed for Anadarko, it was effectively design one, build two. And it really allowed an accelerated program and significant cost savings in Heidelberg, which is in the process of being completed as a project just now. The benefit that that got as a project on the back of Lucius already having been designed and commissioned and all the learnings from it, so that's a really good example of a specific customer doing something. It's a bit different to the norm. Not entirely different but a bit different to the norm.

I think what we're also seeing is we're getting a lot of smaller studies. So I think one thing we are seeing in the market is not only you're doing a study in terms of the technical solution but also doing a study to determine how would it then manifest itself as a project? Is there a simpler way to do the project? What design codes would be used; would it be standard design codes or company specific design codes? So there's much more of that. If we look at the volume of projects, for example, we do in engineering, it probably went up, but the materiality of them is diminished quite significantly. So there's a bit more thought getting in at the very start of a project as to is there a better way of not just designing it but also the implementation? And can we use more standard designs, something that looks like that, would that work in this environment? And these are real, very much real conversations, probably across a good percentage of the customer base.

In terms of the M&A strategy, yes, no, we've kept our discipline internally. As David touched on with Kelchner it's a good opportunistic opportunity in terms of the multiple and the fact that they had de-risked the business themselves by working across different sectors. So I think we're seeing some of that and certainly the second half of 2015 was more active than the first half of 2015. But our discipline remains very much intact. We haven't changed anything in terms of what we look at. Probably have, we've probably emphasized up doing some more robust downside analysis, been a bit more comprehensive in our downside analysis, just given the sensitivities with the market just now.

Mukhtar Garadaghi

Could you please in the context of your pricing environment comments, could you please comment on the new work you're bidding for in both engineering and PSN? And with your cost savings, how the margins there compare to what you are executing today and how meaningful the decline is, if there is one? And my second question is your customer base in the U.S., again in the context of RBL redeterminations. How concerned are you about the liquidity of some of your customers? Thank you.

David Kemp

I guess in terms of our U.S. customer base, a large proportion of that is still majors, in terms of our activity levels but we do have a tail of independents. I think as we said in our script, we are putting increasing attention on our receivables and our customers. We did so in 2015 and the reality is we haven't suffered any significant exposure and we've probably been slightly surprised about that. I think 2016 is going to be a challenging year for that U.S. independent sector and we've increased our credit risk analysis accordingly.

Robin Watson

In terms of the pricing environment, it is an aggressive pricing environment so we certainly have seen pressure on margins we continue to see that. The work we are tendering for of course we've got the cost savings that are in that. So our overhead costs are lower which makes us more competitive. And equally some of the direct cost we've taken out, actually the cost to customer, it's just a straight benefit to the customer that we're operating on a lower cost platform. So, we do see that pressure on pricing continuing. What we also do across the business, and I touched on it earlier, in terms of the level of risk that we tend to take on, we do feel we've got enough headroom for some commercial versatility without by any manner of means getting nearer risk thresholds. So that is again a bit like having a good balance sheet. That is a good parameter that we actually have that we can continue to flex in that pricing environment. And finally, really in '15 we did focus very much on earnings. What we wanted to have internally with the business was a real focus on ensuring we continued to win work and ensuring that we continued to have earnings coming in. But equally, in managing the cost base, a dollar's a dollar in terms of cost versus earnings. And I think we've managed to sustain that through the 2015 trading period.

Mukhtar Garadaghi

Just as a follow-up on the margin question. Do you see your strategy in terms of diversification in structurally or geographically [in terms of consolidation] or where the capital is given the current capital environment of this industry is?

Robin Watson

Well I think, actually, so firstly I wouldn't the diversification word, I would use balance. So it's balance and broadening. So it's evolution of all the business. And in terms of where we are, we see the services we provide are in a spot where we've got anticipated returns. And that's part of the analysis we do when we go into an acquisition conversation to ensure that we've got it. But in upstream oil and gas, margins are depressed in '15 and will continue to be depressed in '16. David, you want to add anything there?

David Kemp

I think when you get into that breadth of diversity in our business -- you look at our engineering business, 35% of that is now downstream process and industrials. And where previously I think we've talked about the margins in that being slightly lower than the typical upstream, that's no longer the case. Our downstream margins were ahead of the average and so we've been getting robust margins in downstream process and industrials, equally the onshore pipeline. So, one of the things I would point, particularly in the engineering business, is that breadth of operations we now have.

Christyan Malek

Christyan Malek from Nomura. Three questions, please. First, you've touched upon M&A and would you consider large-scale M&A or a merger, given arguably your stock price and the fact your valuations are richer than some of your peers? Would that tempt you to do something on a large-scale basis or what were you thinking in terms of the size of acquisitions? The second question, just to understand, you haven't given '16 guidance, but you've clearly given dividend guidance. And you've also talked about wanting to maintain utilizations above 70%. If you want, and you've also said you want to maintain your critical mass, you don't want to cut deeper, what's the give, if there's not work in six months? How do you prioritize your physical framework around those variables, if I can ask that?

Robin Watson

So in terms of M&A, we're very much focusing on the opportunities that we see in front of us. We know what we do well and we know what our track record is, from an M&A perspective. So we look at every opportunity on a case-by-case basis. And we do the ones that look sensible to do from a shareholder perspective. We don't go near the ones that we don't think sensible from a shareholder perspective. And that discipline is what we have. In terms of 2016, we will always flex our cost model to reflect the market conditions. There are different, and we touched on it earlier, there are different more versatile ways that we can do that with minimizing the disruption to our capability. But it will always reflect our cost base for our business and the delivery of our business, will always reflect the market that there is there in buying our services. So we won't be waiting till mid-year to determine, oh, we're a bit quieter than we thought. We're very dynamic in terms of keeping a finger on our pulse on a daily, weekly, monthly basis. We look at utilization levels, for example, on a weekly basis. So we're very dynamic in terms of reacting to declining utilization levels, or increased cost.

Christyan Malek

Just to be clear on, just back to the first question. So you wouldn't dismiss large scale, if the discipline is there?

Robin Watson

We look at any opportunities in the M&A world that would add shareholder value and that's our focus. Our focus is not looking at large scale, but we look at any opportunity there that adds accretive shareholder value.

Christyan Malek

And just to come back to the second question. Would you, just the priorities to maintain the dividend. So it would be that you would take cost down, as you talked about in the context of less work. But the key focus is the dividend. I don't want to put words in your mouth, but could I assume that is your priority thinking in terms of your fiscal?

David Kemp

In terms of the dividend, we've obviously stated our intention. We stated that intention 18 months ago to grow the dividend by double-digit percentage in '15 and double-digit percentage in '16. In terms of making that commitment, clearly we run lots of different scenarios. Our dividend coverage is pretty good. We've got a really strong balance sheet and we're sitting at the bottom end our net debt range. We're not the company that would throw out an intention if we didn't intend to stick by it. So we're really comfortable with putting that out.

Christyan Malek

So just one more follow-up. What's your assumption in 2016 on subsea CapEx versus '15? I know you won't give guidance but what's your underlying industry assumption?

David Kemp

In 2016?

Christyan Malek

Yes.

David Kemp

We haven't given out quantitative guidance. What we've said for subsea is there's a lack of visibility on detailed design awards. What we see in our subsea overall in engineering, our backlog level is sitting slightly ahead of where it was at this time last year. What we've seen is, particularly in our subsea business, is that's made up of many, many smaller awards rather than larger awards.

Robin Watson

I think the only thing I'd add to that is we do ask ourselves continually, are we losing market share? Or is the market flat? And we do feel in subsea the market is flat. It's a lack of opportunities there. And I think the FEED work that we've won has underpinned it, when work is there, we're very much in the mix.

Neill Morton

Thank you. It's Neill Morton from Investec. I had a couple of questions, please. The first is just trying to tackle this year-on-year, '16 over '15, cost base in a differently. Your admin costs fell from 590 million in '14 to around 500 million in 2015. And if you were to take the December number and annualize it in '16, where would admin costs look for the coming year? Then, just secondly, just some housekeeping points, I suppose. Perhaps David, just guide us on CapEx, tax rate and any earn-outs due in 2016? Thank you.

David Kemp

So in terms of the cost base, I'm going to sound a bit boring here. We've not given out quantitative guidance. Clearly the arithmetic of what you're describing is right. We've made significant savings throughout 2015. What we have said is, those will endure and we're going to continue that focus on self-help. So what we have said is we expect activity levels in upstream and subsea to be difficult. And clearly we'll manage our cost base accordingly. In terms of the CapEx point, I wasn't sure quite…

Neill Morton

Some guidance for '16 CapEx, tax rate, earn-outs

David Kemp

Yes, I think in terms of the tax rate, we've said we'll be about -- we expect to be about the 26%, where we were this year. In terms of CapEx, again we expect to be broadly in line with where we were this year.

Mark Wilson

Hi, thank you. Mark Wilson, Jefferies. Just one for David, you said your coverage was slightly ahead of where you were, heading into this year, revenue cover. Can you be more specific of where you were heading into 2015?

David Kemp

Sure, so this is in relation to engineering solely. So typically we talk about a range of six to nine months coverage of revenue. In 2015 we were on, or about, six months. As we stand just now, we're slightly ahead of those six months but only slightly. So we've not seen that much variability, it's been slightly up, slightly down.

Mark Wilson

And if I may to Robin, there's very little on branding in the presentation. Just to frame that, if I was an oil company thinking of Wood Group, would you like you to be pictured as white-collar, behind-computers design, et cetera or more branded coveralls on the well side, let's say?

Robin Watson

All right, so I do think actually the strength of Wood Group is that we do both, Mark. So the defining is smart technical solutions cannot catch-all to get all aspects of it. Actually it's a very insightful question. We are working actively just now, in terms of our organizational structure and some of the brands that we do have within the business and looking at how best to make leverage from it. And then evolving Wood Group coming through the cycle, how are we going to resurface at the other side of this particular downturn? So, it's something that is very much at the forefront of our thoughts. But we do think the -- that one differentiator we have is that we get engineering solutions that you can construct and we've got smarter construction than just construction. So, I do think there's something in that space, as well as the whole asset life cycle but probably a bit of work we need to do in making it a bit crisper than it is just now.

Daniel Butcher

Thanks, Daniel Butcher from JPMorgan. Just to clarify firstly on the backlog question you just alluded to. Can you just clarify, when you say six months of coverage for engineering, is that on a lower base, given that engineering's down 20% year on year? So the absolute figure is down 20%, or is that steady in absolute terms? Secondly, just -- you've given a few splits for CapEx and OpEx, like you usually do. Can you maybe elaborate on what's your split of engineering business because it looks like that would be increasing? And whether that creates any additional challenges in utilization of your staff? Thanks.

David Kemp

So I think in terms of FEED/detail design, we typically don't give out that level of guidance. What we have said, and I think it's been consistent through 2015, we've seen an increasing level of FEED drill to detail design. In upstream and subsea particularly, we've got less visibility of the larger projects. During 2015 we worked on some very significant projects; Ivar Aasen, Stampede, Chevron Gorgon, Shah Deniz. And these will all continue into 2016, but will start diminishing. In terms of your first question, around backlog that's forward-looking, Dan, so it's based on the revenue we anticipate.

Daniel Butcher

Okay, thanks. And there's just one follow-up, maybe I can, on PSN. Some of your competitors have mentioned, they say more efficiency's able to be gained in terms of rotas and ways of working. How much more scope for top-line decrease, in terms of efficiency you can offer customers, do you see in the PSN business this year?

Robin Watson

I think the, so an obvious one is rotas and work. You need less people to do the same amount of work. There are actually different operating models as well, so as you get in the late life environment, say, in the North Sea, for example, we've got a very good track record of late life asset management, for example, at lower cost within that regulatory framework. So there is something there that is just discrete, here-and-now cost savings; and rota changes, U.K. contractor cuts is part of that narrative. There is, however, that broader context around, okay, where are the assets going to in terms of their life cycle? And is there a different way of operating them? And I think in that area, Wood Group's actually quite well positioned.

Mick Pickup

It's Mick Pickup, Barclays. Couple of follow-ups, if I may, firstly on subsea, you talk of lots of smaller contracts. Can you just give the nature of those? Are they smaller fields? Are they reinventing the wheel on bigger fields? Or are they tie-backs for when the market does come back for rapid acceleration? Secondly, Peregrino you mentioned a couple of times. Can you just put that into context? I know you're not going to give dollar number, but you have Ivar Aasen, Stampede, Flint Hills. So what sort of size could that be if it comes? And finally, just on Fiona's question on standardization. Have you looked at what the impact could be in the longer term versus your assumptions for the longer term?

Robin Watson

So in terms of subsea, Mick, I think what we're seeing is subsea element on developments can be quite a costly part of it. So we're seeing a bit of a mix of pseudo FEED and consultancy-type work in the Kenny business. So sometimes it's a wash-down of a project that had an execution plan that was fairly well defined. And then it's just really looking at it, to see if there's a different way to do it; part-complete it, accelerate some elements of it, rather than going after a full project. So it's quite a range, so it does tend to be smaller, discrete packages of work, a bit more in that conceptual space. In terms of standardization, actually we're working internally, and I used earlier the example of design one, build two, with Anadarko. Also some catalog engineering examples, where you get a fairly standard design, and you could, the actual benefit of that is partly saving the design cost of starting from scratch, but actually it tends to be an acceleration of the package itself, in terms of timeframe. We've got some good track record there, in Snorre in the Norwegian sector, where we use some Gulf of Mexico design aspects to really accelerate, simplify, and add value in terms of that particular project. And in terms of Peregrino, relatively modest-sized top sides, reasonable scale, more like a Hess Stampede than an Ivar Aasen, in that kind of general scale of things.

David Kemp

Maybe add, just on the subsea; one of the things we are doing more of, is operations-type work. So we talked about the BP contract. All across the globe we're generally doing more operations work in terms of subsea, which is typically smaller packages.

Christyan Malek

Just, sorry, one more follow-up, if I may, how much of your backlog could you quantify as framework agreements or projects -- agreements that were set over the last few years that you successfully bid for? Is there any way you can spread that out? And I guess where I'm going to with this question is what risk is that you see these frame agreements renegotiated, canceled, in the next 12 months?

Robin Watson

So, I think there's a couple of things there so backlog we're pretty religious, in terms of how we define backlog; and it is a committed element of work. So that's one thing, and that's you're being thoughtful about that. That is a committed element of work. In terms of frame agreements, what we have seen is the frame agreements can be in place, but the work activity level goes down. So again, it comes into that market share or subdued marketplace. So there certainly has been -- and you see it in some of our North Sea numbers in Wood Group PSN, where typically you had an integrated service contract, or a modifications contract. The actual activity, the actual work that came off it in 2015 was less than you would traditionally have assumed. So there's certainly some of that, there's no doubt at all. The frame agreements we think are very good, and they do give you a positioning point. It probably -- then we take some analysis on what it means in terms of real prospects. So that's different than backlog. So when you look at prospects, you determine what does the workflow look like from a given frame agreement, et cetera. And has there been opening of frame agreements to discuss rates over the past year? Yes, there generally has. Not always, not all of the time, not with every customer, but as a general rule, yes. The rates have come down in most of the frame agreements, where we have one in discussions in 2015, or they've been up for renewal or extension.

Christyan Malek

Quantify it as well, or quantify the percentage?

Robin Watson

It's difficult to take a 1%, it's difficult to take a single percentage number. There's just a general pricing pressure on it.

David Kemp

If you looked at where we typically have longer-term agreements, in PSN, outside of the U.S. is typically longer-term agreements. In the engineering space it's more project-based, although we do have exceptions. In subsea we frame agreements with BP, for example.

Neill Morton

Just another follow-up, please, just based on your earlier comments about balancing the business, I just wondered what proportion of your revenues from either engineering or PSN, so ex-turbines, is not from the oil and gas business, i.e., upstream, midstream, downstream, petrochemicals? And where could that be say, in a few years' time?

Robin Watson

So just now, Neill, it's probably, if you take upstream, midstream, downstream, it's probably in the 85% to 90% of our business is in that space. And there is quite a significant part of that that is midstream, downstream, and onshore pipelines, industrial -- not industrial, that would be in the 10%, so in that sort of order of magnitude. I think what I will say is, in the short-to-medium term, it will still be substantially oil and gas. That's for sure. There will be a bit of rebalancing, and it's difficult to get any kind of generational changes, to be perfectly candid. But it's that order of magnitude. And over total business, probably about 60% to two-thirds is upstream oil and gas, across the SPUs.

Neill Morton

Thank you.

Robin Watson

Excluding turbines.

David Kemp

Any final questions?

Robin Watson

Thank you.

David Kemp

Thank you very much, guys.

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