Amec Foster Wheeler (AMCBF) Q4 2015 Results - Earnings Call Transcript

| About: Amec Foster (AMCBF)

Amec Foster Wheeler plc (OTC:AMCBF) Q4 2015 Results Earnings Conference Call March 10, 2016 3:30 AM ET

Executives

Ian McHoul - Interim CEO and CFO

John Connolly - Chairman

Analysts

Mick Pickup - Barclays

Christyan Malek - Nomura International

Neill Morton - Investec

Alex Brooks - Canaccord

Daniel Butcher - JP Morgan

Dave Thomas - Mirabaud

Nick Mellor - Haitong

Unidentified Company Representative

Okay. Ladies and gentlemen, thanks for coming. Before we start, just a quick safety briefing, there are no alarms planned for this morning. So, if one does go off, it does mean that there is an alarm. Rather than rush out, if you could make an orderly queue out through that door and just leave, and there will be members of staff who will show where to congregate if goes for a fire call or a roster whatever it is about.

We’ve got today for the presentation, we’ve got Ian McHoul, our Interim CEO and Chief Financial Officer. We’ve got John Connolly, our Chairman. And we’ve also got in the room various presidents and people from the Company, including Roberto Penno, John Pearson and Jeff Reilly, so for the questions and afterwards.

But, having done the safety briefing, that’s my bit over, so I’d like to hand over to John Connolly, the Chairman, just to kick off proceedings, please. John?

John Connolly

Okay. Good morning. As you can see, it’s a very lonely life as an Interim CEO. Nobody wants to sit with you. But, anyway, we will hear from Ian shortly. I just want to welcome everybody to this announcement of our 2015 results. It’s the first set of results since the merger, the acquisition of the Foster Wheeler Group. So 2015 is the first full year in which the enlarged Group has been in operation.

Clearly, it’s been a year of real challenge. It’s been a year of very, very difficult markets. We obviously would have preferred the markets to be better than they have been in that first year. But notwithstanding the complexity and the challenging markets we’ve had, the Board certainly remains very confident that the transaction was a good transaction and was strategically the right kind of transaction for the Group and will pay dividends in the future, particularly when markets improve. But even in these down-markets, it is beneficial to have the combination in place.

There has been change. In January, we did announce that after nine years as the Chief Executive, Samir Brikho would step down from that role, and Samir left the Company then. And we did announce that Ian would take over as an Interim CEO for the period during which we sought to appoint a new CEO. That process is well advanced. We’re not surprised to find that we’ve attracted very, very high caliber, very strong candidates for the role. And I look forward in due course to announcing that appointment to all of our investors and to the market.

But meanwhile, let’s push ahead with these announcements. Ian is going to make the presentation. So, Ian, over to you.

Ian McHoul

Thank you, John, and good morning to everybody and welcome. There are I guess two hats I’m wearing and two areas that I want to cover today therefore. Firstly, of course the numbers, the financial results for last year and, secondly, our priorities for 2016; what are we looking at right now to ensure near-term delivery whilst at the same time establishing a platform for longer-term success.

Before we get to the numbers, let me give you a snapshot of those priorities. Firstly, of course we are dealing with the challenging markets we’re facing. And you’ll hear later about our business development, our work with customers, our order book, our projects and our progress on cost reduction.

Secondly, we’re well on with the review of our portfolio. We’ve earmarked a number of non-core assets and that includes the Global Power Group, where advisors have been appointed and a disposal process is underway. Thirdly, strengthening the balance sheet; as you know, we’ve completed the refinancing of our bank debt to give ourselves greater tenure and headroom, and reduced the dividend. We’re aiming to halve our net debt over the next 15 months through a combination of disposal proceeds and free cash flow. And lastly, as John has already said, we’re well on with the process of appointing a new Chief Executive. So these are our priorities.

So now the results for 2015. First of all at the headline level, with comparatives for 2014 as we reported them last year, so with legacy Amec for a full 12-months and legacy Foster Wheeler included for only the seven weeks post acquisition.

Revenue is £5,455 million and there is a statutory loss before tax of £235 million. This is after a £300 million write-down out of goodwill within GPG, amortization of intangible assets and exceptional charges, mostly related to integration activity. In line with the announcement in November, the Board has proposed a final dividend of 14.2 pence per share, which brings the total dividend for the year to 29 pence. And note that the full impact of the dividend reduction will be in this year, 2016.

We closed the year with net debt of £946 million with a strong working capital performance in Q4. But please note that the long view arbitration settlement of some £50 million had not been paid at the year end. Here, perhaps more helpfully, you can see the 2014 comparatives on a pro forma basis for the combined Group. The £5,455 million revenue is down 6% on the pro forma numbers and down 7% on an underlying basis after adjusting for currency movements and bolt-on acquisitions. Currency has been volatile over the period, but the overall impact on translation in the year ended up being very small. Note that we will be using one revenue measure only from now on, just total revenue, and have dropped the concept of scope revenue, as many of you have suggested. There is a back-up slide, however, which shows the scope revenue picture and historic reconciliation for those of you who want that.

Trading profit is £374 million, including our share of joint ventures. And this gives a margin of 6.9%, down from 7.9% from the year before. And order book closed the year at £6.6 billion, up on the position from December 2014 giving us confidence for delivery of the numbers this year. Returning to revenue and margins let me go through headlines. Revenue on an underlying like-for-like basis is down 7%, as I’ve said. And you can see here how that breaks down by business unit. Here is the same picture, this time cut by market. On a like-for-like basis, oil and gas is down 8%, with a very weak upstream market, particularly in the oil sands, which is down over 30%, but a much stronger performance in downstream petrochemicals and brownfield and hook-up activity in the UK.

Mining is off heavily with the market. But following the weak first half, clean energy, you can see, is in line for the full year, and this is on the back of a strong second half in the Americas, where solar activity is particularly buoyant. GPG is down 20% and, again, the pipeline remains good but the timing of project start-ups continues to move to the right. And environment and infrastructure is up 14% underlying, with particularly good growth in AMEASE on the back of increased U.S. government activity. On margins, here’s the breakdown of the Group-wide 6.9% and the 7.9% from the previous year. The numbers are calculated using total revenue, as I said, not scope revenue, but again there’s historic reconciliation in the back-up slides for those of you who want that. There are some significant movements in these numbers, as you can see, and I’ll go through each in turn now, starting with the Americas. So here you can see revenue by market for each of 2015 and 2014, with the underlying movement on the right-hand side, so adjusted for currency differences and for bolt-on transactions.

Oil and gas revenues are down 7%, with a heavy fall in upstream, particularly the Canadian oil sands, as I said, but a much stronger performance in downstream petchem. Mining’s clearly very weak, down with the market 20%. Clean energy is up 3%, with a very strong second half, driven by solar. The pipeline remains good and we remain very positive about prospects, particularly given the extension to the renewables investment support regime granted in December. Environment and infrastructure has had a good year too, up 7% like for like and benefiting from a strong market, particularly in the U.S. Looking at margins, you see a big decline to 6.1%. As at the half year, this comes both from activity mix, which is significant growth in lower-margin procurement and construction as we do more downstream oil and gas work, and from market pricing pressures, again within oil and gas.

On now to NECIS, the underlying revenue is down 13%, as you can see. In oil and gas, which is down 15%, greenfield activity has clearly taken a dip, although much of the reduction is in pass-through procurement, which was particularly high in 2014. On the upside, we have benefited from a number of hookup and commissioned projects as well as our strong position in brownfield. Clean energy is down 6%, with a decline in nuclear. And environment and infrastructure is also down but from a small base. Margins are up in the period to 9%, benefiting from mix with the reduction in procurement and cost savings and also from the timing of favorable contract settlement, all of which have more than offset the impact of market pricing pressure in oil and gas. For 2016, note that the dissolution of nuclear management partners, the Sellafield joint venture, will adversely impact margins by around 100 basis points.

This is the picture for Asia, Middle East, Africa and Southern Europe. Revenue is dominated by oil and gas, which is up 2% like for like, as you can see. Other markets are small right now, but we see this as an opportunity and are increasing our business development focus accordingly. You can see this in particular within environment and infrastructure, which has benefited from increased U.S. government activity. Margins have progressed well, and this is down to both cost savings and favorable contract profit development. AMEASE is a business where project decisions and ramp-ups have been slower than anticipated, but we remain optimistic about prospects given the order book development and the status of the pipeline.

Lastly now Global Power Group. Underlying revenue is down 20% as the solid fuel market remains challenged. But despite that, the pipeline is good and we have been awarded over $0.5 billion dollars of projects that are yet to commence. These awards are not in the order book and will only be included once go-ahead for the projects is given.

Margins are 14%, which is down on last year, which itself was flattered by the £20 million one-off license fee settlement that we discussed at the half year. As stated previously, on average we expect margins in GPG to be in the low teens. As I’ve already said, we have taken a £308 million impairment charge against the carrying value of the business and we are exploring sale.

So moving on now, this chart shows the movement in net debt over the year, from £803 million at December ‘14 to £946 million at December 2015. This £946 million number is significantly lower than guidance, partly due to the deferral of payment on the Longview arbitration settlement, as I’ve said, and partly due to a very strong working capital performance in the last quarter, which you see reflected in the trading cash flow of £388 million.

After this, there are outflows, £114 million for interest and tax; £38 million -- £36 million, sorry, for investment; £85 million from exceptional items, which principally cover integration and restructuring activity; and £45 million from settlement of asbestos and other legacy liabilities. Total free cash flow is then £155 million. And after £51 million to buy out the Foster Wheeler minorities in January, dividend payments and foreign exchange movements on opening debt brings closing debt to the £946 million number. Looking forward for 2016, we expect the year-end debt to be around £1 billion prior to the impact of course of any disposals.

The analysis of trading cash flow looks like this. Trading cash represents conversion from current trading activities and you can see that the £388 million in 2015 is a conversion from trading profit of over 100%. In the chart on the right, which historically is for old Amec only, you can see how full-year cash conversion from trading profit is consistently over 80% and averages over 90%. And the cash flow characteristics of the enlarged Group are very similar to old Amec in terms of both phasing and conversion levels. And we continue to expect therefore that full-year trading cash conversion will be strong, whilst H1 will be weaker.

Refinancing; we are very pleased that we’ve completed the refinancing of our core debt facilities to give us £1.7 billion of secure funding for the medium term and greater headroom on the leverage covenant. The interest cover of 3 times is as it was before. But the net debt to EBITDA covenant has increased to 3.75 times for the first two years and to 3.5 times thereafter. Pricing is in line with market, giving a cost of funds which is in line with our previous guidance, which I’ll cover on this next slide.

2015, there was a total charge for financing of £40 million, including our share of joint ventures. And you can see the analysis of that on the chart. The margin payable on the new facility varies with leverage, and of course the all-in cost will depend on currency mix, fixed/floating mix and the mix between gross debt and cash. On a blended basis, however, you should assume a rate of around 5% on net debt, with a total financing charge for the year of around £60 million. Again, this includes joint ventures and is obviously prior to any disposals.

On to tax, well, there is no real change. And we are targeting a sustainable rate for the Group in the low to mid 20s. Our underlying rate, that’s our weighted geographic rate, is currently around 27.5%, which you can see. Against this number, however, management of our affairs gives us a rate for 2015 of around 22%, including joint ventures. And this is a sensible rate for you to assume going forwards into 2016 as well.

Looking now at the Foster Wheeler acquisition, we have impaired the value of the Global Power Group by a little over £300 million. The results for GPG for 2015 and the forecast looking forward are well down on earlier expectations, giving rise to a lower net present value and subsequent write-down in the value of goodwill. The net present value of the E&C businesses remains ahead of book value and as such there is no impairment.

Also, as we are required to do, we have reassessed the fair values of all assets and liabilities acquired with Foster Wheeler and have reduced net tangible assets by £175 million. This covers provisions and contingencies for claims and litigation, old receivables, uncertain tax positions and fixed asset carrying value. Some 20% of this reduction is non-cash and the balance is a cautious estimate of potential liabilities that in some cases may extend for many years. The Longview arbitration settlement is part of this adjustment.

On amortization and exceptional items in total, there is a charge of £513 million. The largest element, of course is that goodwill impairment in GPG whilst amortization of intangible assets is up significantly at £136 million, reflecting the assets acquired with Foster Wheeler. On exceptional items, Amec Foster Wheeler merger-related costs are £110 million to cover restructuring, integrate and financing. This is higher than previously guided, reflecting the acceleration and deepening of the cost reduction program that we discussed in November. On the Foster Wheeler historic asbestos liability, at December 2014 we provided for a position, net of insurance, of around £300 million. Changes to this through exceptional items are modest only, as you can see.

Okay. That brings to a close the more financially focused part of the presentation. Moving on, I see my number-one priority as Interim Chief Executive is simply to keep the Company driving forward. In the next few minutes I’m going to highlight some of the detail behind the important items on my to-do list. Right now there is an awful lot of focus on the CapEx cycle for upstream oil and gas and mining markets where conditions are particularly challenging. But let’s not lose sight of the fact that more than two thirds of what we do is not in those markets. We are a diversified and flexible business, adapting to changing circumstances, being able to offer a range of services, opening up new opportunities. This has always been part of our model. And this means that there is plenty of opportunity for us, both to maximize efficiency internally and to grow in those markets where conditions are favorable and we already have good positions. And we’ve made good progress since November reviewing those positions across our portfolio.

Next chart, please. We have identified a number of businesses and assets that are no longer core to the future of the business. And over the next 15 months we are looking to raise several hundred million pounds of proceeds from selected disposals. I’m not going to give you a list of those assets today for obviously reasons, although I can confirm that the largest piece is GPG. We have initiated the process and we’ve appointed advisors. But we are still at a fairly early stage so I cannot give you much more, although we are targeting a deal in the second half. Other assets will be brought to market in due course and I will update you as appropriate. So operational initiatives, we launched our new operating model in January 2015, and the past 12 months have seen a number of initiatives, targeting marginal gains across the business. We have refocused our efforts on safety.

Operational excellence starts with safety. We have continued to reinforce our business development team. And More4Less, the name we have given to our fundamentally lower-cost way of delivering small projects in the UK North Sea market, which we launched last year, is now moving quickly into a new phase, with customers asking us to show it can work on larger scopes on an international basis, including for new-build projects. We’re also making good progress with the integration and cost saving program. Remember, this is primarily about improving efficiency and generating scale benefits from across the Amec Foster Wheeler platform. From now on we expect to see the retained benefits outweigh the initial investment. And I am very confident that we are on track to deliver £130 million of savings each year by the end of 2016, with the full benefit coming through therefore in 2017.

Beyond that of course we will keep looking for further efficiencies and further opportunities to streamline the organization. During 2015 we recruited more than 12,000 people and we saw a similar number leave the business. So we ended the year with around 40,000 people, as we’d started the year. The critical factor is to maintain high utilization levels. What matters is that we have the right people at the right cost in the right place to fulfill the work we have. In many places we’ve cut back on headcount because activity levels have fallen or because the traditional way of operating was no longer cost-effective.

The charts on this slide are two good examples of how we are managing market conditions, keeping our utilization high in Canada despite falling activity and growing our offshore headcount in Aberdeen to fulfill the hookup work that we have. There is no end to cost effectiveness and flexibility. There’s always more we can do. In 2016 we will carry on reducing overheads and we need to ramp up our use of low-cost engineering centers.

Fishing where the fish are, was a phrase I used at the half-year results, and I still think it’s very relevant. Our end markets are not all the same and our approach is tailored to each one carefully. If we look at the chart on the right, as expected, we’ve seen significant declines in pure engineering revenues over the past 12 months. We’ve reduced headcount accordingly, cutting capacity but not capability. This has been mitigated by our ability to expand further into fuller-scope contracts, project delivery, particularly in downstream oil and gas and renewables, and by the growth of our consulting businesses, characterized by thousands of smaller contracts and longer-term relationships.

The pie chart here on the left is an analysis of the largest 50 contracts we have signed in the last few months. More than 80% is outside of upstream oil and gas. And the statistic is even more striking if you split upstream between CapEx and OpEx.

On the right is a list of the largest contracts out of thousands we’ve signed over that same time period. Not all of these have been announced so we’ve not put up the customer names. But the list highlights the high-quality contracts across a range of sectors that we’re winning. We are not dependent on oil price recovery. And our access to a wide range of markets and our ability to continue winning attractive business means we are not seeing the top line shrink by some 20% to 30%.

So we’ve seen progress in the order book through 2015, up to £6.6 billion. Although not quite as much as we’d hoped for, it still gives us confidence for 2016, as I’ve said. Recent downstream E&I and clean energy wins have been partially offset by a reduced scope on work for Enterprise on the PDH plant. And while the confirmation that U.S. tax incentives for wind and solar are being extended out to 2022 is great news for our renewables business, in the short term it reduced the urgency to register projects.

So, 2016. Our financial guidance for 2016 reflects all the themes that I’ve been talking about. We are not depending on an oil price rise, as I’ve said. We are making the most of our diversity and we’re seeing some very good things. We are focusing on rightsizing the business and increasing our operating efficiency still further and, as I’ve said, we expect to hit the run rate of £130 million per annum of cost savings by the end of the year.

This means we are confident that we will see only slight like-for-like revenue decline in 2016 and a reduction in trading margins this year significantly less than the decline we saw last year. With continued strong cash management, lower dividend payment and lower levels of restructuring charges being offset by the payment to Longview, we expect net debt to be circa £1 billion at the yearend before any disposable proceeds. And if we look out a little further, over the course of the next 15 months we have a plan to see that net debt is halved through disposal proceeds and free cash flow generation.

My final slide is the same as my first. I want to remind you that I have three clear priorities to keep Amec Foster Wheeler moving forward before the appointment of a new Chief Executive. Firstly, to ensure we are fit and able to meet the challenging markets we’re facing, but also to take full advantage of the stronger sectors. Two, dispose of those non-core assets. And three, therefore, to further strengthen the balance sheet.

Thank you very much for listening and I am now very happy to take your questions, but I’m going to sit down. Okay, so, yes, one right at the back. Hello. Sorry, I didn’t see. You’re in the dark there, Mick.

Question-and-Answer Session

Q - Mick Pickup

Hi. It’s Mick here from Barclays. It’s the technology, obviously. A couple of questions for me. Can I say thank you for the slide on the net debt bridge and all the non-recurring items below trading profit? Could you just give us an indication of any items you expect to be continuing in 2016 as well, just so we can get a handle on real cash flow this year?

Ian McHoul

Yes, okay. We’re still carrying on with our restructuring program, obviously, so restructuring cash flow, about £40 million. I think you should assume asbestos costs of about the same number, £20 million. You should probably assume a similar amount for other legacy liabilities, £20 million. You’ve got to assume the Longview settlement in there the 50 million that gets paid in the first quarter of this month. Dividends will obviously be reflective of the change we’ve made. Interest, we’ve guided to. Tax, I think is clear. What foreign exchange does is anyone’s guess right now with sterling all over the place. But I think those are the main items. And then of course we overlay that with any disposals.

Mick Pickup

Okay. And the second question, you mentioned in the AMEASE region, growth in the Middle East oil and gas. Having just been out there, for the first time I’ve heard them talking about renewables and solar and I think the Saudi energy minister talked about big solar plants out there. Are you seeing anything of that?

Ian McHoul

Yes, it’s early days. I think people think Middle East and you automatically think oil and gas and indeed that’s a major part of our business, but we do see opportunities both within clean energy, as you say, and within the environmental side, which has picked up well. So we are in discussions, early days I have to say, on solar, a little bit on nuclear. So it is early but, yes, there’s a definite appetite for discussion amongst the MOCs.

David Farrell

It’s David Farrell from Macquarie. It’s a quick question on GPG. In terms of the $0.5 billion of potential new orders, could you just explain in a bit more detail what is holding up those projects reaching FID?

Ian McHoul

Look, it’s a range of things. They’re projects, there’s no one reason. They’re in Asia. They’re in the Middle East. They’re in Eastern Europe. Some, it’s permitting. Some, it’s financing. Some, it’s purely other priorities within the customer. So there’s no systematic reason. I expect and there’s probably six or seven contracts. I expect most of them to proceed at some stage. We’ll probably lose one or two; they just won’t happen. So it’s just a range of different things within customers, unfortunately.

Jess Alderson

It’s Jess Alderson here from Morgan Stanley. I was just wondering if you could give us a little bit more color around your 2016 guidance. So the slight like-for-like revenue decline, would that be in the region of less than 5%, say? And the decline in the trading margin, less than 100 basis points decline in 2015, would that be, say, less than 50 basis points?

Ian McHoul

Slight means slight, I don’t quite know what else. There is sufficient uncertainty and volatility still in the marketplaces, where we quite deliberately didn’t guide numerically, which is why you see the language and you’ve asked your question. But there’s nothing tricky or opaque, and you can assume slight means the Oxford Dictionary definition I guess, small. Okay. On margin reduction, yes, you’re right, 100 basis points down from 2014 to 2015. We’ve said that will, we expect a decline significantly less than that and I think it is fair for you to assume that will be less than 50 basis points because that wouldn’t fulfill the Oxford Dictionary definition of significantly I would guess.

Christyan Malek

Hi. Good morning, Christyan Malek from Nomura International. Two questions, please. First, just going back to the profit warning last year and the drivers of why you had to revise your estimates down for 2015, what makes it different this time, because if it’s performance-related or KPI-related, how do you mitigate it in 2016? The second question is, assuming you don’t deliver on your divestments, would plan B be an equity issuance?

Ian McHoul

Okay. On the first of those, it’s a good question. What caught us out, if you like, last year, as we’ve explained, is the further margin squeeze than we were anticipating, particularly around KPIs, where there’s always a negotiation. And bluntly and simply put, the negotiations are harder, tougher than we were anticipating and we got paid less on KPIs. So it reflected a general build-up of pricing pressure through the year, particularly crystallizing on the back of KPI discussions, that’s not deteriorating. I think the trends that we’ve seen through 2015, we are not, in, our forecast looking forward we are not assuming any improvement in those. I think the market’s going to remain very tough from a -- I’m talking oil and gas in particular -- from a margin perspective. We’ve reflected those in our guidance. So do we see a sea change again up or down? No. And that isn’t what we’re seeing in the marketplace and that’s what’s reflected. So is it a guarantee? Of course it’s not a guarantee, but I think, we think we’ve given guidance to a set of numbers that we are content with.

On disposals, I think going back to that November plan again we set out a position. We have a bunch of operating profits and cash flows going forward. They’re the same today as they were back in November. We halved the dividend, as you know. We set out a plan to refinance the business and that’s what we’ve done. So we set out a plan to have a stable business going forward and an intention to de-lever. We fully intend to implement that plan through a disposal. If those disposals take longer rather than less time, which we’re not expecting, we have the stability now. We have headroom on our refinancing. And that’s the beauty of that refinancing; it gives us time. Can I imagine a scenario where everything goes very wrong? Well, of course I can imagine it. We can all imagine that. But that’s not the plan and that’s not what we’re expecting.

Christyan Malek

Just to come back on the first question, several of your peers seem to be able to manage these KPIs and haven’t had to renegotiate down. Is it a reflection of performance last year? Not to go back to last year, but I guess the risk to your target for 2016, to what extent have you de-risked your margin guidance, in that in six months’ time we’re not going to see another revision there because the conversations you thought you’d have, haven’t had, haven’t been successful? Where are we in that?

Ian McHoul

I’m more content with the margin guidance now than I’ve been before. Obviously given the unfortunate disruption, the profit warning we had, we’ve taken great care, with caution, to try and get us in the right place. Also, as I’ve said, we’ve got the increasingly cumulative benefit of the cost savings coming through and that gives us, that self-help gives us a degree of underpin. So your question is a fair one, but obviously we’ve thought about that hard and that is reflected in the guidance we’ve given.

Neill Morton

Neill Morton from Investec. A couple of questions please. The first is slightly unfair. It’s with regarding to future strategy. I appreciate that you have a new Chief Exec to come in, hopefully sometime this year. But I assume the Board would have to agree with his or her plans for the Company. So is the current thinking, you clearly give a vote of confidence to Foster Wheeler ex-GPG, but is the future strategy to become more diversified, less diversified, bigger, smaller change in geographical focus? And then the second question is with regards to net debt. You talked about having it over the next 15 months, £0.5 billion. Is that an interim target? Is that where you’d like it to be in the long term or would that be likely to move lower over time? Thank you.

Ian McHoul

Thanks, Neill. You’re right in pointing out that we are awaiting the appointment of a new Chief Executive. I don’t think the Board are thinking about any dramatic swings and roundabouts in strategy and I’m not even sure that we’re thinking about becoming more diverse or less diverse. Don’t think about it like that. We are diverse. That affords us the benefit of being able to go fishing where the fish are, as I’ve said. So I had a question earlier on today, are we deliberately trying to move out of upstream? No, we’re not. We have capability in upstream, downstream, midstream, solar, wind, mining, blah di blah, and we deploy greater or lesser resource depending on what a particular market in a sector is doing. So we don’t make active decisions to move out. We’ll position our resources and our capability in line with market demand and therefore benefit from the upturn, and clearly suffer in the downturn.

But these things can change with a new Chief Executive on their way, but as I sit here today, should you assume any dramatic change of strategic direction? I think not. On net debt, I’ll be pleased to get down to 500 million as a first step. I think I look at it more in terms of the leverage. This year, 2015, leverage will be, well it was 2.5 times, give or take. That’ll go up a little next year. I’ve already flagged, prior to disposals, that’ll go up. That’ll go up a little bit as well, as I’ve said. Versus consensus EBITDA is off a little bit, but clearly leverage goes up. Overlay the disposal proceeds and the debt reduction that I’ve talked about, that brings, that should bring leverage down to well under 2. And at well under 2, I’m singularly more content, absolutely.

Alex Brooks

Yes, hi. It’s Alex Brooks from Canaccord. My question really is on the fourth-quarter working capital because clearly you’ve had a strong inflow. It’s been common across the whole industry. And I’d just be curious as to some color on the shape of that and whether this, as I fear it is, is effectively prepayment.

Ian McHoul

Yes. I think, being technically bookish about it, if you have, if your revenue’s down, and our revenue was down, you ought to have a working capital inflow. That’s what ought to happen and that’s what has happened. So are there prepayments in there? Not to any great degree. Things ebb and flow, but are we sitting on great swathes of customer money? We’re not. I think obviously in our position with our balance sheet, we give huge attention to working capital, and it’s worked well. I would expect that to continue. So all in all, the guidance I gave around cash flow and trading cash conversion, the swing in there is working capital. Are we seeing deterioration in payment terms? No, we’re not. One or two customers always push a bit of course. In general our payment terms are pretty good. So it’s about focus it’s about management effort and expect that to continue.

Alex Brooks

Are there any differences between sectors or is it pretty much across the board?

Ian McHoul

There’s no real difference between sectors. No. Mick?

Mick Pickup

Yes. Ian, it’s Mick here again from Barclays. A couple of just quick follow-ups, firstly, on your covenants on your new facilities, what happens with the restructuring charges and the EBITDA within those?

Ian McHoul

Restructuring charges are not part of EBITDA. So the debt and the EBITDA definitions are exactly as we describe them in presentations like this.

Mick Pickup

Okay. Thank you. And secondly, you talk about more for less, and obviously your business is a multiplier of the less within that. Why are there no impairments outside of GPG?

Ian McHoul

Say again, sorry.

Mick Pickup

Why are there no impairments outside of GPG given the way parts of the market have moved?

Ian McHoul

Well, there are two answers to that. Firstly, it’s that the E&C businesses that we acquired with Foster Wheeler don’t exist anymore. They are amalgamated within larger E&C businesses that we call Americas, NECIS and AMEASE. Okay. So there’s a definitional point. Overlaying that, the fact is that the Foster Wheeler business that we acquired was very largely a downstream business and downstream, as you would have seen today or heard discussed today is performing a lot better than upstream. So if we look at the forecasts, as far as we can pull them out of the total business for Foster Wheeler, if we pull the forecasts out and discount them back, we’ve got headroom simple as that. GPG standalone business very clearly revenues are down, cash flows are down, impairment.

Daniel Butcher

Daniel Butcher from JP Morgan, if that’s okay.

Ian McHoul

Sorry. Yes.

Daniel Butcher

I’ll just go and he can go next, if that’s okay.

Ian McHoul

Sorry. There we go. Sorry, yes, and then I’ll come to you in a moment.

Daniel Butcher

Sure. Sorry. Could you just maybe explain a bit more about your margin decline in the North Americas because obviously your margins are up in AMEASE and Northern Europe? How much of that was due to low margin procurement being the larger part of the projects and how much was construction being a larger part of the mix? And how much would your high-value engineering hours have declined in the Americas? And my second question is just on your chart on page 26 of the slide pack. Can you explain a bit more about your assumptions about your North Sea workforce decline and what you see happening there? Is that largely O&M related or…

Ian McHoul

Sorry, which slide were you on?

Daniel Butcher

Slide 26 of the slide pack, the bottom right chart with the North Sea workforce adaptation, you’ve got a forecast in there. I’m just curious about the assumptions behind that, please.

Ian McHoul

Okay. Yes, in the Americas, 300-and-something basis points reduction. How much is structural, how much is mix? I’m guessing, but it won’t be very far from half in the half. The point of the Americas is it is that part of the business in which the expansion of EPC work has been greatest. So downstream big volumes, solar, wind, clean energy in general, which is EPC work. So procurement and construction, P&C, are lower margins than E, and therefore it is that part of the business that has most suffered from mix. So again, are we, it’s the same point about the strategy. Are we pursuing EPC work per se? No. But if the volumes are there in EPC, we can make margins/money at acceptable risk and we have the capability, then clearly that’s what we’re going to do. And that’s what you see reflected in the margin. The other half is purely related to general pricing squeeze in oil and gas, as we’ve talked about.

On the headcount in the North Sea, that chart is looking offshore and it’s based on the brownfield strength we have and the hookup activity we have. So we’ve carved out a bit of a niche for hookup activity with BP and with GDF in the year just gone, there are more contracts in the pipeline. There are more contracts, hook-up contracts under consideration for suit. And I’ll say again, we’ve carved out a bit of a niche, so those headcount numbers reflect the work we expect to be doing.

David Thomas

Yes. Dave Thomas at Mirabaud. I just want to ask a question around the GPG disposal and the comment here that the intention is to retain the asbestos liability. What is the rationale for that? Is that just to maximize the cash income? And just can you remind me what the NAV assessment is of that liability at the moment?

Ian McHoul

Yes. So the asbestos liability is about 300 million. That’s after insurance proceeds, for which we have partial cover, and it’s a discounted number. The rationale is simply that that is the way we maximize overall value. So we have this liability. I would suggest that anyone else taking over that liability would put a biased premium on it because why wouldn’t they? I think that we simplify the process, demystify the process and maximize value by retaining that liability. And it sounds an odd thing to say, but we are content with that liability, by which I mean I’d prefer we didn’t have it, but I think it’s well managed, we have good records, we’ve got a strong legal process, we’ve got a machine now who run that liability, so I think it would involve a discount, a loss of value to include it.

David Thomas

And on the question of the value of GPG, I’m sure that there’ll be many who will be asking, particularly the press, about the price expectations. But without asking you that question because you obviously can’t answer it, you must have a minimum threshold that you won’t accept. Can you just reassure us that that is the case, that you’re not going to be seen to be giving away value?

Ian McHoul

Yes. We have both a minimum threshold and we have an expected threshold. But, as you suggest, I’m not going to let you know either of those numbers. But of course, yes. Again, it comes back to the benefit we have from the refinancing. We have a three-year window before any repayments are required. We’re not in a fire sale situation so we have time to manage the business, including disposals, in a controlled sensible way.

Neill Morton

It’s Neill Morton again. Just a follow-up on those disposals for obvious reasons you can’t identify them, but you’ve indicated that it would be best part of £0.5 billion, with GPG being a fair chunk of that. Just for modeling purposes, can you maybe just give us the likely revenues and EBITA or trading profit foregone from those disposals in aggregate?

Ian McHoul

I’m not going to do that. I think there are too many variables with that. Even the Global Power Group, the perimeter of what’s included in the sale is not yet clear because different buyers may want different pieces. There are some joint ventures to build and operate assets that may or may not be included. So the revenues and trading profits and multiples associated with that, it’s too granular and too detailed to give that out. What I would say is that all the other assets we’re looking at are modest in size. They would all be non-strategic I think it’s fair to say. It’s not going to be shaking any strategic agenda, from what we’re looking at. From the modeling perspective, I’m pretty sure I haven’t given you much guidance, but I hope you can come up with something that’s going to work.

Neill Morton

No, it was a nice try. Just to clarify though, is that disposal number risked i.e. is there a longer tail of assets that total more than 0.5 billion?

Ian McHoul

Yes, there is.

Neill Morton

You’ve risked it. Okay. Great. Thank you.

Ian McHoul

One from the phone?

Nick Mellor

Thank you. This is a question from Nick Mellor of Haitong, two questions actually. The precise nature of the timing on the disposals, does that suggest you have several other deals lined up which we haven’t announced today? And second one, are you expecting further write-downs across the rest of the business?

Ian McHoul

Okay. On the timing, I think I’ve been quite imprecise on timing and that was quite deliberate. Global Power Group, we simply said we expect to have a deal done in the second half. On the other assets, some of them we are actively looking at, some of them we are not yet. I think the point is around, again, it comes back to we have time. We have a plan. We have stability afforded to us through the refinancing and therefore we’ll approach these things in a measured, sensible structured way. No, I’m not expecting further write-downs. I’m very content with -- content was the wrong word perhaps, but I support the write-downs we’ve taken and I’m not expecting there to be further write-downs. Are there any further questions?

Ian McHoul

All right. It sounds like then it’s time to say cheerio. Look, just before we do, let me just give you the priorities one more time. Our absolute focus is on running the business we have. Plenty of opportunities in markets and sectors that are stronger than upstream and stronger than mining and we’re pursuing those opportunities hard, whilst at the same time focusing very hard on cost reduction and efficiency. As we’ve talked about with a number of questions, the debt is an important issue for us. We’ll work hard over the next 15 months to get that debt down through disposals and free cash flow and thereby give ourselves a much stronger balance sheet.

So, thank you all very much for listening and attending and for you questions. And see you soon. Thank you.

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