Amec Foster Wheeler's (AMFW) CEO Jonathan Lewis on Q2 2016 Results - Earnings Call Transcript

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Amec Foster Wheeler Plc (NYSE:AMFW)

Q2 2016 Earnings Conference Call

August 9, 2016 3:30 AM ET


Rupert Green - Head of Investor Relations

Jonathan Lewis - Chief Executive Officer

Ian McHoul - Chief Financial Officer


Fiona Maclean - Bank of America Merrill Lynch

Mukhtar Garadaghi - Citigroup Global Markets

Phillip Lindsay - Credit Suisse

David Farrell - Macquarie Capital

Rob Pulleyn - Morgan Stanley & Co.

Jamie Maddock - Deutsche Bank

Amy Wong - UBS

Mick Pickup - Barclays Capital Securities

Mark Wilson - Jefferies


Ladies and gentlemen, welcome to the Amec Foster Wheeler Half-Year Results Call. My name is Chris, and I'll be the coordinator for today's call. You'll have the opportunity to ask a question on today's presentation. [Operator Instructions]

I'll now hand over to your host, Rupert Green, to begin the call. Rupert, please go ahead.

Rupert Green

Thank you, Chris, and good morning, everyone, and welcome to Amec Foster Wheeler's first half 2016 results. I'm joined today by Jonathan Lewis, Chief Executive Officer; and Ian McHoul, Chief Financial Officer. Our results announcement was released at 7 o'clock this morning, and together with this presentation, is available on our website at

Before getting started, I'd like to refer you to the Safe Harbor note regarding forward-looking statements, which is summarized on the screen in front of you at the moment. There is more detail on this disclaimer in the appendix of the presentation under the heading Important Information. Thank you.

And now, I'd like to hand over to Jon.

Jonathan Lewis

Well, thank you, Rupert, and good morning, everyone. And welcome to the Amec Foster Wheeler 2016 results call.

As this is the first time I'm speaking with many of you, I thought I'd begin with a couple of comments on my background. As I think some of you will be aware, for most of the last 20 years, I worked for Halliburton primarily out at Houston in a variety of leadership roles with responsibility for such things as strategy, business development, P&L operations, mergers and acquisitions, and technology management. And in 2011, I joined the Executive Committee of Halliburton Company. In my last role, I was responsible for the larger of Halliburton's two divisions. It's a global Completion and Production division.

Now, my career at Halliburton arguably provided me with a broad range of experiences. But, obviously, as an upstream oilfield services company, operating 24/7 in challenging and cyclical markets, it was an exceptional school in which to hone operational excellence and cost discipline skills. And I have no doubt these skills will serve me well as we work to improve the operational and financial performance of Amec Foster Wheeler.

I will tell you that I have really enjoyed my first 60 days at the company. A period that has validated my belief that our consulting, engineering, project delivery capabilities represent a very strong franchise and a platform upon which to grow. I look forward to getting to know those of you who I have yet to meet as I engage with all our key stakeholders over the coming weeks and months. And I very much hope you will find me transparent and candid and committed to delivering shareholder value.

We will split today's presentation in two. Ian will cover a review of the first half financial results, which once again, show the value of our diversified multi-segment revenue base. First half trading was mixed with record revenue from our solar business in the U.S. and hook-up projects in the North Sea, and very strong year-on-year growth in our E&I business in the Americas.

This was offset by ongoing challenging market conditions in Americas' oil and gas, which was compounded by delayed action to right-size that business. Something actually I'll come back to later on in the presentation.

I will also talk to the actions I have taken to address this, as I said, later. I will then talk about my priorities, my first impressions of the business, the actions already taken, and those planned to leverage what are clearly areas of strength, and address what we see as our primary challenges.

I have initiated a wide-ranging review of the business. We're halfway through that. And while I don't have all the answers for you today given it is 60 days in, I am making a commitment today that I'll update you on this on November 15 at an investor event we will hold on that day.

Let me now hand over to Ian for the first half financial review.

Ian McHoul

Thank you, Jon, and hello, good morning to everybody. As is typical this morning, I'll take you through the financial results for the first six months of the year, and I'll also give you some key guidance for the full year. So, first of all, the headline numbers on a statutory basis.

Revenue for H1 is £2,842 million and expectations for the overall trading result for the year are unchanged. There is, however, a statutory loss before tax of £446 million. This is after a £440 million charge for impairment and write-off of intangible assets and goodwill, mostly associated with the Global Power Group and the Oil & Gas business in the Americas. As expected, there is also amortization of intangible assets and exceptional charges largely related to restructuring activity.

We closed the half with net debt of £1,084 million impacted by seasonal working capital outflows, the Longview arbitration settlement of some £50 million, and adverse currency translation of over £50 million, with a weakness of sterling following the Brexit vote.

Next, you see the key trading numbers with both headline and underlying trends I adjusted for currency movements. The £2,842 million revenue is up 7% from 2015, and up 4% on an underlying basis. Note that as in March, we are using total revenue only and have dropped scope revenue. There is, however, a backup slide, which shows the scope revenue picture and historic reconciliation for those of you who want it.

Trading profit is £177 million including our share of joint ventures, which gives a margin for the half of 6.2%, down from 7.1% in 2015.

Earnings per share are £0.282. And as anticipated, the board has declared an interim dividend of £0.074 per share. The order book closed the half at £6.2 billion, down 5% but 9% underlying. And I'll show you the analysis later.

Please note that for H2, we expect the revenue trends to be significantly weaker than H1, but the margin trends to be better, and we've not changed our full-year expectations for trading profit.

Turning to the first half, let me go through the detail. Here you see the analysis of revenue by business unit, with an aggregate underlying increase of 4% as I've said. Next, it's the same revenue picture, this time by market. On a like-for-like basis, Oil & Gas is down 24% with a particularly weak market in the Americas, but a strong performance in the UK especially around hook-up activity.

Mining is of 11%, down with the market, but an improving trend from that which we saw last year. Clean Energy E&C is up 83% with revenue in the Americas more than doubling on the back of a buoyant market in solar.

GPG is up 6% underlying, but execution of the pipeline remains uncertain for the time of project start-ups continuing to move to the right. And Environment & Infrastructure is up 13% underlying, a continuation of the trend we saw last year both in the Americas and AMEASE on the back of the increased U.S. government activity.

On margins, here's the breakdown of the group-wide 6.2% and the 7.1% from 2015. Last year's numbers were calculated using total revenue, not scope revenue. And again, there's a historic reconciliation in the back-up slide. There are some significant movements across the business units as you can see, and we'll go through each of these in turn shortly.

The order book has reduced over the last six months to £6.2 billion. Oil & Gas has held up well, but we have seen some significant project deferrals. The largest part of the decline has come from Clean Energy in the Americas, while we had a record order book in December with customers sanctioning renewables projects ahead of what was expected to be the cessation of the subsidy regime. In fact, the regime was extended out to 2022. So, whilst we have had a near-term dip in project approvals, the outlook for investment is positive and our pipeline is strong.

Let me now take a closer look at each business unit in turn, starting with the Americas if you flip slide deck. Here, you can see revenue by market with a currency-adjusted underlying movement on the right-hand side. Oil & Gas revenues are down over 50% with a heavy fall in both upstream, particularly the Canadian Oil Sands, but also downstream as the business has been hit by a number of significant delays on projects already awarded. Jon will discuss this further.

Mining clearly remains a weak market with revenue down over 20%. Clean Energy has more than doubled, if I said, driven in particular by sale and a strong order book at the end of 2015, but flattened, to some degree, by a weak comparator. As discussed, we remain positive about the longer-term prospects for investments in the sector. And positive trends to continue in Environment & Infrastructure, up 9% like-for-like and benefiting from a strong market in the United States in particular.

Looking at margins, you see a decline to 4.6%. This comes in part from activity mix that is significant growth of lower margin procurement and construction, but mainly from excess capacity and heavy underutilization in the Oil & Gas business, where revenues have fallen sharply, as I've said, and we are now restructuring.

In the second half, in Americas, we are anticipating a significantly worse revenue performance, down heavily on the first half and year-on-year, with the weak market and project delays continuing in Oil & Gas and much tougher comps in both Clean Energy and Environment & Infrastructure. The year-on-year margin trend, however, should improve as we restructure the Oil & Gas business and remove costs. Finally, as a consequence of the low and Oil & Gas forecast, we are writing down the value of intangible assets in the business and have taken a charge of £125 million.

On now to Northern Europe and CIS where underlying revenue is ahead 3% as you can see. In Oil & Gas, which is up 4%, Greenfield activity remains weak, but we continue to benefit from the breadth of our activities with hook-up and commissioning particularly strong. Clean Energy is up 3% with a decline in nuclear offset by growth in transmission and distribution.

Margins are down in the half to 7.3% with the main drivers for the fall being the timing of favorable contract close-up settlements in the first half of last year as we discussed at that time and a dissolution of Nuclear Management Partners, the Sellafield joint venture, which as flagged previously, would adversely impact full year margins by about 100 basis points.

In H2, we anticipate broadly similar revenue trends and an improved margin trend although still down year-on-year as a consequence of the Sellafield situation.

This is the picture for Asia, Middle East, Africa and Southern Europe. Revenue is dominated by Oil & Gas, which is down 15% like-for-like with slower project approvals and delayed ramp-ups. Other markets are smaller, but we see this as an opportunity and are increasing our business development focus accordingly. You can see this with both Mining and Environment & Infrastructure, the latter benefiting from continued strong U.S. government activity.

Margins have progressed well in the period, and this principally down to cost savings and efficiencies. Despite a slower-than-anticipated slowness, we remain optimistic about prospects and expect slightly strong revenue trends in the second half with continued progress on margins.

Lastly now, GPG. Underlying revenue is ahead 6%, but the solid fuel power market remains challenged with project approvals and contract bookings continuing to move to the right. The pipeline for future work remained uncertain with over $0.5 billion of projects awarded but awaiting go ahead. These awards are not in our order book.

Margins are 15.4% up from 2015 reflecting strong project execution and favorable contract close outs. As a consequence of a significantly-weaker market outlook, however, we have taken a £246 million impairment charge against the value of GPG operations. The sale process is ongoing but inevitably challenging given the market backdrop. Nonetheless, we expect to conclude the process in the coming months.

We are making good progress with the cost reduction program, but as you will hear later from Jon, there are big opportunities to go much further. On the existing program that we have spoken about in several occasions previously, compared with 2014, we are on track to deliver £130 million run rate savings each year, with the full benefits coming through in 2017. In certain areas, particularly in the Americas, we're going faster and deeper than originally envisaged, a response to a situation there that I've described. And we will come on in November to give you full details of the further cost reduction target that we see, their timing, and the cost to achieve them.

Moving on now, this chart shows the movements in net debt over the first half. From £946 million at December 2015 to £1,084 million at the end of June. This £1,084 million is higher than expected, largely due to the weak pound at the end of the half.

Trading cash flow, which I'll show you in a minute is £125 million, after which there are outflows of £41 million interest and tax, £14 million for investment, £33 million on exceptional items, which covers integration and cost reduction activities, and then £60 million for legacy items, principally the settlement to the Longview power plant arbitration nearly £50 million as we flagged in March and historic asbestos liabilities.

Total free cash outflow is then £24 million, which after dividend payment and the foreign exchange movement on opening net debt brings closing debt to the £1,084 million. Looking forward, we expect year-end debt to be around £1.1 billion prior to the impact of any disposals. This assumes greater restructuring and cost reduction activity than we've previously anticipated and no major change in currency rates from where we are positioned today with the U.S. dollar at around $1.30 to the pound.

The analysis of trading cash flow looks like this. Trading cash represents cash conversion from current trading activities. And you can see that the £125 million in the first half is the conversion from trading profit of 71% ahead of last year.

On the chart on the right, you can see how full year cash conversion from trading profit is consistently over 80% and averages over 90%, but also how the first half is typically weaker than the full year, reflecting seasonal trading. We continue to expect, therefore, that full year trading cash conversion will be good.

Looking now - excuse me. Looking now at the balance sheet. As you know, we completed the refinancing of our core debt facilities in March, to give us £1.7 billion of secured funding into the medium-term and greater headroom on covenants. At June 30, against the net-debt-to-EBITDA covenant of 3.7 times, we were at 3 times.

Our target remains to deliver £500 million cash from disposals by June 2017. And as I've said, the process for GPG is ongoing. Furthermore, we are actively engaged in processes on a number of smaller assets. In aggregate, from GPG and these smaller assets, we anticipate realizing around £300 million.

In addition, we are reviewing the portfolio further to conclude on the list of other non-core businesses, which we expect further value of at least £200 million. We will update on this in November.

On now to financial items and on interest, there is a total charge for H1 of £37 million including our share of joint venture costs. And you can see the analysis on the chart.

The margin payable on the new facility varies with leverage and its all-in cost depends on currency mix, fixed floating mix, and the mix between gross debt and cash. On a blended basis, however, we currently have a rate for net debt including fees of around 5.25%.

For the full year, you should expect a total financing charge in the £70 million to £75 million range including joint ventures. And this is obviously prior to disposals.

On tax, the charge for the first half is 21%, and you should assume a similar rate for the full year, maybe a little higher. Going forward, we continue to target sustainable tax rates for the group in the low-to-mid-20%s.

Looking now at impairments, amortization and exceptional items, overall that was a charge of £545 million. I have already discussed GPG and America's Oil & Gas, where results and forecast are down than earlier expectations giving rise to a write-down in the value of intangibles and goodwill. Further, we had impaired certain assets that have been held-for-sale, and we've written down our financial ERP systems as we intend to invest in one harmonized group Web application to drive efficiency and reduce costs.

Amortization of intangible assets is £66 million and the restructuring charge is £55 million to cover cost reduction activities. The full cost charge for the full year is uncertain right now as it reflects to some degree initiatives that we have still to fully assess, and we'll brief you fully on these in November.

Lastly, on the Foster Wheeler historic asbestos liability, at December, we provided for a net position - net of insurance that is, of around £300 million. There is no experiential movement to this provision, and the charge of £24 million simply reflects changes to the long-term discount rates.

So, finally from me, our financial guidance for the 2016 full year, which reflects the themes that I've been talking about. We are seeing significantly reduced investment across our natural resource market. But equally, we are benefiting from our diversity and seeing some good things in Clean Energy and Environment & Infrastructure.

Including the translation benefit of weaker sterling, our expectations for the full year trading result are unchanged. In the second half, we expect like-for-like revenue to be down double digit compared with 2015. This is derived from the Americas where we have the full impact of the [indiscernible] of the Oil & Gas project deferrals and tougher comps in both Clean Energy and Environment & Infrastructure. On margins, we expect the result in line with H1.

And lastly, as I said, we expect net debt to be around £1.1 billion at year-end before any disposal proceeds and assume currency markets stay where they are today.

Thank you very much. And now, back to Jon.

Jonathan Lewis

Thank you, Ian. I had spent my first 60 days getting around much of the business. I've spent time in a number of our offices in the UK, the U.S., Canada, across the Middle East and India, both with colleagues, key customers, and a number of our shareholders. And my first impressions are that this is a business with very strong and established brands, excellent engineering capabilities, and a broad international footprint with a healthily diversified revenue base, both by customer and by segment.

We have multiple sector-leading positions, such as our world-class Brownfield and hook-up offerings, and in quid, the market-leading completions and commissioning offering. We're the market leader in large-scale solar farms in the U.S. where we have now installed approaching 5 million panels across dozens of projects and built really quite a substantial business. We are world leader in feasibility and technical consulting in mining and have a fast-growing U.S. government business.

I have been particularly impressed with the caliber of our people and their can-do culture and their openness to change. We have industry-leading technical skills and very strong customer relationships actually across all of our markets. By way of example, our global engineering agreements with blue chip companies such as BP, Shell, ExxonMobil, Dow Chemical, and Honeywell speak to the role we play in providing engineering expertise.

Our customers rely on us to deliver some of the world's largest and most complex capital projects. And in the last 12 months alone, we have been involved in projects with more than $100 billion worth of customer capital with over half of that in the Middle East. The Al-Zour refinery and Clean Fuels Project in Kuwait where we provide project management consulting, represent two of the largest mega projects in the Gulf, which we are responsible for project managing.

We're also leading the hook-up for Clair Ridge, the largest Greenfield project in the UK North Sea and project managing Shah Deniz 2 in Azerbaijan, BP's single largest project in development. We are just now completing our scope at Husab, the largest uranium mine in the world, and are ramping up on the largest gold project in construction today for Anagold in Turkey. And looking forward, we currently have more than 20-multimillion-dollar FEEDs in execution across our portfolio.

So, we clearly have a strong franchise, but what we are not doing is taking maximum advantage of these capabilities to address stalled growth, declining margins, and very importantly, debt reduction. Yes, tough Oil & Gas and Mining markets are absolutely a part of this, but many of the challenges we faced are, quite frankly, self-inflicted, and more importantly, they are manageable. We have underinvested in business development. And in our Oil & Gas business in the Americas in particular, lived off a project portfolio that is biased to high dollar barrels. Our semi-autonomous organizational model has limited the extent to which we have streamlined costs and taken advantage of innovation across the group.

For example, our highly competitive More4Less value engineering approach gives us a real solution to reduce customers' CapEx and OpEx cost, in some cases, by as much as 40%. But such capability has not been effectively internationalized, representing a lost opportunity that I review, that I'll come on to later, will address head on.

We also need to become more cost competitive. And encouragingly, where we have focused on this, reducing our cost per engineering hour, for example, we have seen more than a 30% reduction in that metric. But again, as a function of our organizational model, this has frustrated the adoption of this across our international operations.

We have a multitude of back office IT systems, which bring extreme complexity and inefficiency to our operations. Indeed, I'd argue the way we are organized with multiple management levels and duplicated functions represents a material cost reduction opportunity unto itself.

We have also been slow to right size the business in light of market conditions particularly true of our U.S. Oil& Gas business and our corporate overhead. And of course, as already stated, we need to reduce our debt. We're overly leveraged and reducing debt again will be a key priority of mine.

Lastly and very importantly, I also want to convey a real sense of urgency that I and the rest of the leadership team feel to address the challenges I've just mentioned. So, there is a strong platform here on which we can build and a lot of self-help measures we can imply. The operational and cost discipline I gained from my time at Halliburton is already being applied, sleeves are rolled up, and we're getting after it.

We need to focus on where customer spend is strongest, markets where demand remain strong, projects that are economic at lower commodity prices and increasing our exposure to OpEx and mature assets. And indeed, our recent win with Repsol Sinopec in the North Sea demonstrates our ability to do just this.

I'm also pleased to say that this is an organization that feels like it's ready for change. And this, frankly, gives me confidence that Amec Foster Wheeler with the operational and cost discipline I will instill is an organization that can deliver much more.

To build on this last point, let me now cover the actions taken in my first 60 days. Two things have really been top of mind since I started June 1. Firstly, uncovering, understanding and addressing the issues in the Americas Oil & Gas business, and secondly, initiating a wide-ranging review of the business as a framework for addressing our stalled revenue growth, the margin decline, and our need to reduce debt.

As the incoming CEO, one of my first tasks was to look under the hood, so to speak, of our Americas business. This revealed strong Clean Energy and Environment & Infrastructure businesses both growing well and ahead of their market, as Ian has indicated. It also revealed a Mining segment that has shrunk in line with the market, but retained strong technical capability and remains the market leader in Canada with capability across multiple mineral types.

However, it also uncovered an upstream oil and gas business with significant exposure to high cost barrels in the Oil Sands and Deep-water Gulf of Mexico, and a weak order book. The downstream market has held up better, but is now experiencing more project delays. And overall, our Americas Oil & Gas business is having mixed project execution track record.

This failure to diversity the project mix to address project delivery issues and a slow response to rightsizing our cost base in light of declining utilization has led to the impairment charge in the results we've announced today.

Now, to address the situation in the Americas, I have taken a number of proactive steps, changing a number of the leadership team with John Pearson, one of our most experienced executives now running the Americas business out of Houston. We have consolidated offices and operating units to improve our cost base and shorten the change of command. And we have completed a comprehensive review of the Americas forecast for this year and next. And I now feel confident we now know where this business is.

This updated assessment of projected work volume, frankly, one that is now more realistic, means we can tackle the low resource utilization in this business and take out redundant costs. There is no quick fix here, but with the change in leadership I have made, our investment in business development resources, and our focus on cost competitiveness, we will stabilize and ultimately grow our Americas Oil & Gas order book.

My second priority has been to initiate a wide-ranging review of the overall business, focused on addressing our stalled revenue growth, our margin decline and our need to reduce debt. To ensure we execute the review efficiently, we have appointed a seasoned Amec Foster Wheeler executive with strong project management expertise to lead this process. And naturally, this strategic refresh will also influence our future organizational structure and cost base.

One early decision we have made is to significantly reduce our cost base and our head count and office space at our London corporate facility. We're partway through this review of the business, and it's already clear to the leadership team that we have a material cost-out opportunity. We'll talk more to this on November 15.

But I also want to balance this expectation with the need to make some selective investments in business development resources and IT systems. And to drive this latter aspect of our business, we appointed a Chief Information Officer this month. So, I'm encouraged by the insights and results to-date that this review of the business is generating and I look forward again to sharing the outcomes of this with you on November 15.

While we have a taste of what to expect on the 15th, this slide covers the themes which are really driving our thinking toward delivering on our full potential. Firstly, it's clear we need to get closer to our customers. That has organizational ramifications. It has implications for our business development organization.

We need to show how we become or in some cases remain the go-to partner when the customer is thinking of doing a project that is still, we need to develop the mindset where we go to customers and show them a solution before being asked. And indeed, there are examples where we do this across the business, but it's not uniformly applied.

And on every project, we need to package our capabilities and services to maximize the opportunity for us. So, by illustration, last week, I heard about two environmental impact assessments we're doing on projects in the U.S. where one of our competitors is doing the engineering design and project delivery. This isn't good enough. We should be using our front-end environmental activities as an ability to become more aware of the pipeline of opportunities we see in the markets we serve.

I was similarly struck by the number of new revenue opportunities available to us when I visited the Middle East recently. And there is clearly scope for us to gain increased share of wallet.

Secondly, we need to be more competitive. We need to address our internal inefficiencies and ensure we never lose work on cost. It starts with basic such as making sure we are set up to execute work in our lowest cost offices and that each offices run as efficiently and as effectively as possible.

Today, we have more than 20 HR systems, 27 finance and procure systems, and therefore, a significant cost to this complexity. We will simplify this as a matter of priority and introduce enterprise-wide systems as a necessary building block to taking advantage of our scale and becoming more cost competitive. And we will also improve our competitiveness by investing in business development and making greater use of the excellent resources we have in India.

Thirdly, we need to be more consistent in our project delivery. We need to ensure we adopt the best practices from around the world, everywhere and every time. We clearly have examples of outstanding performance with respect to project delivery, but we're not always as consistent as we could be. We, therefore, need to invest in improve project delivery systems that allow us to take more real-time decisions and become more agile and proactive.

So, the formula is simple, we need to do a better job of knowing what customers really want. We need to provide that more efficiently and more reliably than anyone else. And as our U.S. solar business demonstrates, that approach is a very clear example of the benefits of a deeper understanding of our customers' needs and effective delivery against those can deliver. If we plan this right and implement it correctly, I believe the size of the prize is significant. We will then be close to delivering on our full potential for customers and shareholders.

So, to wrap up, a quick reminder of the key messages I'd like you to take away today. Firstly, while it's still early days, I'm encouraged by what I see and it's clear to me that I'm inheriting a solid platform. But we need much stronger operational and cost discipline, nor are we taking maximum advantage of our capabilities to address stalled growth, declining margins, and debt reduction. There is also much more self-help, I believe, we can be applying to the business.

I want to reiterate my sense of urgency. As I said, sleeves are rolled up and we're going after it. And if we get this right, this is an organization that, as I said, can deliver much more. And I look forward to sharing our plans to achieve just this at our Capital Markets Day on November 15.

I thank you for your interest this morning in Amec Foster Wheeler. And, operator, we would like to take the first question, please.

Question-and-Answer Session


[Operator Instructions] Our first question this morning comes from Fiona Maclean from Bank of America Merrill Lynch. Fiona, your line is open. Please go ahead.

Fiona Maclean

Thank you. Yes, it's Fiona Maclean from Merrill Lynch here. I have three questions this morning. Firstly, when you've been looking across the business and looking at how it's been operating over the five years, 10 years. Do you think when we look forward maybe three years or four years, people would look at Amec Foster Wheeler and think of it as an engineering company? Or are we going to go back to the days where the ultimate focus was - it was an oil services company with a heavy level of exposure to the oil and gas industry across all of the different level? That's the first question.

Secondly, when you look at the ambition over the next few years, do you think your focus is going to be more around volume? You mentioned market share a few times. Or are you, actually, going to focus more into the level of profitability that you're going to be looking to capture? And then lastly, I was just looking at your management page on your website, and I see that there have been a number of changes on divisional and regional heads. I would just like to get a little bit of clarity on how that fits and ties-in with your [indiscernible]? Thank you.

Jonathan Lewis

Fiona, good morning, and thanks very much for the questions. So, let me address them in order. Firstly, your comments about where our focus will be by segment. Look - and I think we can address the second question in the same response. My focus is going to be on shareholder return. That means we're going to focus on those segments of the market where we can grow the profitability of the business.

We have a very strong oil and gas franchise today. Clearly, that market is challenged. But due to our differentiated capabilities in a number of those segments, I'm very confident that we can continue to grow that. And some of the recent wins, as I mentioned, our Sinopec - Repsol Sinopec win demonstrates our ability to do that. So, we will continue to focus on oil and gas, but at the same time, I like the model of diversified revenue and particularly given what's going to happen to commodity prices over the next couple of years. It's going to be a slow recovery in upstream oil and gas in particular, and our ability to continue to invest in differentiating capability on the back of really quite encouraging growth in E&I, and so I actually think is a competitive advantage.

With regards to management, we're going through a business review currently. That business review will define ultimately the right organizational structure we need to execute effectively on our strategy and to get closer to our customers. And at that point I will ensure that we have the right leadership in place to maximize our execution against that strategy. And that's probably all I want to say about leadership decisions at this point in time.

Fiona Maclean

Okay. I'll leave it there. Thanks very much.


Our next question this morning comes from Mukhtar Garadaghi from Citi. Your line is open. Please go ahead.

Mukhtar Garadaghi

Hi. Good morning, gentlemen. Thanks for the detailed presentation and for taking my question. My first question, Jon, having looked at the business for a bit, is there - is the full business restructuring on the cards? What I mean by this is does the integrated model work in your view from the sense that having businesses with different risk profile and very different end market kind of bunched together, as an example, I'm just surprised with how U.S. margin in Oil & Gas has [indiscernible] for a company that has multiple cost-cutting programs and resizing over the last 12 months. Is it so hard to have this together and still maintain that hands on approach that you spoke about? That's my first question. Thank you.

Jonathan Lewis

So, good morning, and thanks for the question. Look, very clear message, the business review that we're undergoing is about evolution not revolution, and there is going to be no large-scale restructuring of the business. We will continue to serve the markets we serve today for the reasons I have already articulated around the benefits of having a diverse revenue base. So, evolution versus revolution.

I'd also suggest that there's actually much more in common in terms of the competencies and capabilities required to serve the different segments that we serve from an EPC perspective and Engineering & Consulting perspective than there are differences. And due to the cyclicity in the different markets and the different geographies we serve again advantage to that level of diversity.

Now, what I do think we can do - and I mentioned this in my prepared remarks - is that in the individual market segments, I think we can get much closer to our customers, get closer to understanding globally how they operate, what their needs and challenges are, and be more effective at serving those and sharing best practices across the individual segments in a more effective way than we have done today.

I gave an example of that in my prepared remarks. We have some outstanding capabilities that are developed somewhat in silos and our organizational model today haven't facilitated the, if you like, the sort of global adoption of those, and that's lost opportunity for us.

Ian McHoul

I mean one point of clarification, Mukhtar. You talked about the U.S. and a surprise that given all the cost-cutting regime that we've had that the margins kind of deteriorated so badly. It's a different point really.

I mean, in the U.S., what has happened is revenues have fallen sharply through oil and gas deferrals as we've said. We have simply failed to right size the business. So, it's not overhead that's caused the problem, it's front-end overcapacity and underutilization in the phase of sharp revenue decline. So, that's bad because that's self-inflicted, to use Jon's language, but good because it's very flexible. So, that's been the cause of the issue in U.S. Oil & Gas.

Mukhtar Garadaghi

Okay. Thanks. Thanks for the answers. And hopefully, two short questions for Ian. Ian, any color on the GPG divestment process and sort of your levels or certainty that it will be sold in the next few months and what the interested parties are? And one short one on FX and debt. Could you just clarify why FX works against you in terms of size of debt given it's a pound debt and it's reported in pounds? Thank you.

Ian McHoul

Yeah. So, the GPG process is ongoing. We remain in discussions with a number of parties. Obviously, I'm not going to give you details as to who they are because that reflects [indiscernible] competitive tension, but there are a number of discussions ongoing. And, yes, we remain confident that we will realize this asset in the coming months as we've said. Also, just to add, there are a number of other smaller assets where there's a process that's commenced and is ongoing, and I expect to come to fruition in the coming months also.

Yeah. I mean, the point on the debt is, it's drawn in sterling but then we swap the debt into different currencies, into U.S., into Canadian, into euro such that service of the debt is matched by the operational cash flows of the business. So, the exposure is effectively multi-currency. So, when the debt is exposed in multi-currencies [indiscernible] translate that the debt as reported in sterling goes up and the tune is £50 million, £60 million as you'd see.

Mukhtar Garadaghi

Right. And both your revenue guidance and debt guidance, do they include the FX adjustment?

Ian McHoul

The guidance on the debt of £1.1 billion excludes the FX adjustment as we can judge it today. I mean, the markets have clearly been very volatile. I'm not going to take responsibility for what goes on in global FX rate. As it sits today, I'm looking at the forward curve that that guidance takes it into account.

When we've given revenue guidance, we've given like-for-like guidance, so excluding the impact of currency fluctuations. But you can see in the back of the chart, we give guidance for the impacts of currency both in the first half and for the full year. So, we would expect to benefit further both from revenue and trading profit in the second half on translation effects, yes.

Mukhtar Garadaghi

Thank you. Cheers.


Our next question comes from Phillip Lindsay from Credit Suisse. Phillip, your line is open. Please go ahead.

Phillip Lindsay

Felipe? Okay. It's actually Phillip, but good morning, everyone. I've got two main areas of questioning for me. The first one is around debt and capital structure. This first impression, Jon, that you got the debt is too high, I think we'd all agree that a business like Amec should not be carrying this level of debt. So, can you discuss where you'd like to see capital structure? And do you think you'll rely solely on disposals to delever or are you considering other options? That's the first question.

And the second question, was really about the management team, it follows on from Fiona's question, really. But you talked about strengthening the management team. Presumably, you're talking about John Pearson now running Americas plus the other appointments that you've made. But then you also talk about the need to de-layer the organization, so it's a little bit of a contradiction. I just hope you can elaborate on what you're driving towards. Thank you.

Jonathan Lewis

Phil, thanks for the questions. Firstly, let me talk to debt. Reiterate, debt reduction is a clear priority of mine. We are evaluating what will be an appropriate capital structure for the business as part of our review of the business. And right now, we believe we can achieve an appropriate capital structure through our divestiture process.

Ian has talked in his comments about where we are on the divestiture of GPG. We also have some other capital assets for divesting. And as we go through the business review, it's already becoming apparent that our other businesses that are non-core that will ensure that we deliver against the £500 million in debt that was committed to in March of this year, and that's the current intent. And on the back of that, we see no other need to secure other capital for the business.

In terms of the management team, I'm really referring to what we call the group leadership team. I don't see any contradiction with de-layering and having a strong group leadership team around me. We have five layers or six layers between me and a project director delivering a project for our customer today. That is at least one, if not too many two layers, and that's really what I'm referencing, Phil, when I talked about de-layering the organization and taking cost out.

Phillip Lindsay

All right. I understand that. Can I have just one unrelated follow-up, please? So, this might be more for Ian, but I'm just looking at Note 15, can you just provide a bit more detail on that, the notice of default on an EPC contract in the U.S.. I see that you provided for this in 2015, but clearly, the legal situation has changed post the balance sheet date. Can you just maybe talk about how you expect to deal with this, please?

Ian McHoul

Yeah, look, [indiscernible] of the businesses, we've got a job in U.S. where we think we've executed well and it's a previous Foster Wheeler job. I think we've done a good job. The client is less than fully happy on certain aspects and wants to take it to mediation. That's part and parcel to what we do.

We have made provisions for that last year. And I'm not trying to say too much because obviously, there's a process that will go on. But, we'll keep the market appraised of that as we go through. But, we believe we aren't fully prepared obviously.

Phillip Lindsay

Okay. All right. Thanks so much.


Our next question today comes from David Farrell from Macquarie. David, please go ahead.

David Farrell

Hi. Thanks very much for taking my question. I just wanted to ask about the repositioning of the company both in the Americas moving away from high-cost barrels and in the AMEASE region away from oil and gas. Is this something that you can think can be done organically? And if so, kind of what kind of timeframe is that going to take? Or is it - not the kind of action that's actually going to require some kind of acquisitions.

Jonathan Lewis

So, firstly, I would not use the word repositioning. That may suggest broader change than we have in mind. I mean, what we're doing in our Americas business - Oil & Gas business right now is rightsizing it to the opportunities we have in downstream. So, that's the first action that's been taken.

And then more globally, what we're doing is striving to achieve a superior balance between a portfolio of projects that are focused on large capital project execution versus the OpEx spend associated with the management of Brownfield or mature assets. So, we need to get that balance better than it's been historically.

I feel and I'm very encouraged by the strength of Brownfield offering we have. It speaks again to this More4Less capability where we've demonstrated for a number of customers now that we can take significant cost out, perhaps as much as 40% of the cost out associated with the management of these assets and dramatically improve a key metric such as wrench time, the time our engineers and work force spend actually doing value-adding productive work for our customers on those assets.

So, the Repsol Sinopec win again, I think, is a very tangible example of execution on that strategy. And I'm confident with the investment in business development, I've already referenced that we can continue to get that balance a little healthier.

With respect to the need for inorganic activity, I feel - I'd come back to saying what I said earlier on. There is lots of scope for self-help here, firstly. Secondly, the issues we face as a company, there's lots of goodness, but the issues we face is manageable and we can address internally. I see absolutely no need to do anything inorganically at this point in time.

David Farrell

Okay. Thanks. And then, can I just ask a follow-up in terms of order intake? Obviously, the backlog continues to drift down. Could you give any kind of guidance on where you see the year-end backlog and particularly any major projects that you might be bidding on in the second half of this year?

Ian McHoul

It's a tricky one. I mean, I think I'd sum it up by saying the pipeline is decent enough. The theme through the conversations today was that the timing of projects start coming to fruition remains uncertain. We're seeing both delays in full approval, FID, and then perhaps having been FID'ed slower ramp-ups than we're used to historically. So, I'm not going to give guidance on a year-end order book. Because it's too tricky. I put it this way. I'm not expecting it to be up, the full year, but where it is, we'll keep you updated but I can't put a number on it.

David Farrell


Jonathan Lewis

David, the only guidance we could probably add to that is the relative position of the order book in our - the different segments. So clearly, upstream, downstream Oil & Gas is most challenged. We're starting to see some green shoots in parts of our Mining business, and we are positioning on a number of significant tender opportunities that I don't want to get into specifics for obvious competitive reasons. But we are - I'm encouraged by what we're seeing in Mining. I see absolutely no reason why over the next couple of years we can't continue to grow our E&I and our solar business. In fact, I - as an oil-and-gas guy, I'm coming to love E&I and solar.

David Farrell

Okay. Great. Thank you very much.


Our next question today comes from Rob Pulleyn from Morgan Stanley. Rob, please go ahead.

Rob Pulleyn

Yeah. Good morning. Rob Pulleyn from Morgan Stanley. Just one question. So, considering your front-end engineering business particularly in oil and gas and with regards to your comment about offering solutions to clients earlier, how would you see the future of independent engineering such as Amec currently does versus the integrated solutions being pushed by the likes of FMC and Technip? I'd be interested in your thoughts there. Thank you.

Jonathan Lewis

Well, firstly, Rob, thank you for asking that question. I have yet to meet a customer that wishes to procure everything from one supplier. The kinds of cost savings that I think can be delivered, I know it can be delivered through a more integrated solution, can be achieved without an operator going to a single provider of the services. And as I talked to our customer base around the world, I see very, very limited appetite for going to a single provider.

Rob Pulleyn

Okay. That's very interesting. Thank you very much.


Our next question today comes from Jamie Maddock from Deutsche Bank. Jamie, please go ahead.

Jamie Maddock

Good morning, everyone. Thank you very much for taking my question. Just really - and sorry to harp on at this, but just trying to understand - you talked about the sort of GPG disposals. I mean from an outsider looking in backlog for further write-downs, it doesn't have what you might describe as characteristics about how we would, as third-party observers, get increased confidence about being able to achieve a sale of this in line with something around book value. I'm just wondering, how can you give confidence to somebody or what confidence can you provide to try and help us feel the way you do about being able to achieve that target. Thanks.

Ian McHoul

Thanks, Jamie. Yeah. I mean, look, the thrust of your comment there, I have sympathy with, it is a difficult market solid fuel that is reflected in the market forecast, it's reflected in the outlook. [Indiscernible] notice we've written the asset down, it is now on the books. So, it's something a little under £200 million.

So, I'm sitting here looking at the value as we assess it, looking at the interested parties we have looking at the values they are discussing, the T's and C's they're touching, their body language and they are making that assessment. And I think that assessment [indiscernible] here today is a robust one. I can't give you any more than that, but that's how we see it today. And just to reiterate two things, commitment to that target of £500 million overall disposal proceeds and firm belief that we'll - GPG will be a part of that in the coming months as it says in the release.

Jamie Maddock

Okay. Super. And then, just looking to the - sorry.

Jonathan Lewis

Jamie, the only thing I'd add to that is Ian did a good job at summarizing where we are. I don't think we should underestimate the interest in some of the IP, some of the technology associated with that business. And as Ian said, there are number of parties who are interested in that.

Jamie Maddock

Okay. Thank you. And then just looking to the U.S., just trying to help me understand the capabilities, which you have in-house to try and move - so this is our thinking about oil and gas - to try and move to these little cost barrels. It doesn't intuitively strike me that your existing customer base would necessarily be exposed to those low-cost barrels. And therefore, your cross-selling capabilities might be somewhat diminished versus some of your competitors, but perhaps that intuitive understanding is wrong. So, if you could just clarify that for me. Thank you.

Jonathan Lewis

Well, Jamie, you're absolutely right. Our historic buyers in our Americas upstream Oil & Gas business in particular has been to the IOCs. Operating in expensive barrels, as we said, the ExxonMobils of this world in Canada and a number of IOC operators in the Gulf of Mexico. So, we have to transition the focus from those expensive barrels, as I call them, to more competitive barrels that may involve taking a much harder look than we as a company have traditionally at unconventionals, which as you will know - as you know, from my background, is an area of the business I know and understand very well.

Jamie, are you still there?

Jamie Maddock

No. I'm still here. But just to try and understand, I guess, your ability to cross-sell because I presume that's ultimately the way you would want to do it, or just trying to understand what it is that you feel you can gain that entry to these low cost barrels?

Jonathan Lewis

Well, I'm going to be circumspect in terms of what I say there. This is an integral part of the business review we're undertaking, and the strategy refresh is a key part of that. So, we will speak more robustly to that in November, number one. Secondly, I don't really want to be messaging where we're going to be focusing our business development resources to our competitors.

Suffice to say, there is opportunity in unconventionals in North America, not just upstream but arguably in midstream as well. And then in our downstream operations, clearly, the U.S. is going to benefit over the next decade or so from very competitive energy prices and raw materials, and that is going to create significant market opportunities for us in which we can leverage the very strong Foster Wheeler brand and capability.

Jamie Maddock

Okay. Super. And then just lastly, sorry, on the trends that we're observing in Clean Energy, can you talk about some of the fundamentals which could continue to support that or which, I guess, in your presentation, you've said, will continue to support that albeit more modestly?

Jonathan Lewis

Well, firstly, and I'm sure everyone's aware of this, the extension of the tax credits to U.S. utility companies for investment in solar, the extension of those in various forms ultimately up to around 2023 has meant that we're continuing to see a very healthy pipeline of projects in that space. That would be my first comment.

So, we were a little worried when those uncertainty around the continuity of those at the back end of last year, what that would mean, but we saw a spike in activity then. But looking forward, I think we will continue to see a healthy pipeline of opportunities in that space. So, that would be first comment.

My second comment would be that I actually point internally to that business as a very good example of how we should go about building a new revenue stream. And we had zero revenues in this space six years ago. As you can see from the numbers today, it is now a substantial part of this business, and we did that by taking a very considered approach.

We hired people who understood the solar business from a customer perspective intimately, understood the supply chain, understood the technology, understood the metrics that drive performance if you are a solar utility company. So, we really bid on work. And we continue to bid on work with what I would argue is a much deeper understanding of what drives the customer decision-making process and some of our customers can achieve.

And on the back of that, we've built a very healthy franchise. We've also done a very good job of executing that work. It's lump-sum turnkey, I hasten to add, and it proves to be very profitable for us. So, I actually feel very, very encouraged by that business and its future prospects.

Jamie Maddock

Okay. Thank you very much for your time. I appreciate it.


Our next question this morning comes from Amy Wong from UBS. Amy, your line is open. Please go ahead.

Amy Wong

Good morning. I had a question since you talked about stemming the margin deterioration as kind of one of your key priorities. Can you give us an idea in the short-term, how we should see your margin? Are we going to - do we expect to see more margin decline coming from pricing pressure from your customers in the near term? Have we seen the worst of that now? And then secondly, kind of in the longer medium term, how do you expect that margin mix to develop going forward? Are you going to mix more P&C in there, which naturally dilutes your margin, or you're going to try to go for more high value-added activities, which will naturally try to bring your - improve that margin mix going forward?

Jonathan Lewis

Amy, good morning. Thanks for the question. You know what you're really asking here is a part of one of the key questions I posed that we answer through the business review, that as I said, were currently ongoing and we will speak to on November 15. I will say today, however, and I've already said it this morning that we're going to be very focused on those segments that can deliver the optimum profit growth for the business.

In terms of pricing pressure, yes, it's still there, it's very strong. I don't see that going away anytime soon. And anytime soon, I mean potentially out with some kind of major geopolitical event that spikes commodity prices, I think we're going to be in this environment for a few years. So, our challenge is to get more efficient. And I see just lots of opportunity for us as a business to be more cost disciplined, whether that's leveraging engineering resource in India, whether that's de-layering the organization, whether that's taking complexity out of our back office systems. Just lots of opportunity to apply the kind of cost discipline and operational discipline I've grown up with to the business that is Amec Foster Wheeler. So, yes, we'll come under market pressure. Our challenge is to respond to that by being more efficient in how we operate and I see multiple places where we can go do that.

Ian McHoul

Yeah. If I can just add to that. Hi, Amy. I think there is - I mean, there is no pricing pressure clearly. I'm not sure it's deteriorating. I think it's stabilized in a pretty tricky place. I mean, just to give some context to it, our margin guidance today is probably a little worse than it was back in March. But to scope it, the problem in Americas has probably cost us 50 bps across the year. And I know that's a problem we have and we have to deal with. But absent that our margin would be a lot stronger. Now, I know it's an easy thing to say that. But I think with a stabilizing pricing environment with a strong impetus behind significant further cost reduction that Jon talks about, I think we'll be - we are bottoming, put it that way.

Jonathan Lewis

I mean, Amy, the only other thing - and I very much hope this came over in the prepared remarks - there is a real sense of urgency on my part and on the part of the leadership team here to take cost out of the business. And we will do just that.

Amy Wong

Great. Thank you very much. Really look forward to November 15 then.

Ian McHoul


Jonathan Lewis

As do we.


Our next question today comes from Mick Pickup from Barclays. Your line is open. Please go ahead.

Mick Pickup

Good morning, everybody. To follow-up a bit from Amy's. Jon, just fundamentally, this business has been taking on more lump-sum over the previous year’s especially after Foster Wheeler. What's your first impressions of lump-sum versus reimbursable?

Jonathan Lewis

Well, I would preface this comment by saying I remember very well the days at Halliburton when KBR was a part of that business and was challenging execution, if I'm kind, did for Halliburton's stock price, et cetera. So, I have personally experienced the implications of poor execution on large lump-sum turnkey projects from those days. I think it's important that you all know that.

Secondly, do remember that even in the well services business, an increasingly large part of the work that that segment executes upon today is on a lump-sum turnkey basis. Whether it's for customers like Aramco in Saudi, whether it's the PEMEX in Mexico, Petronas in Malaysia. A good chunk of the revenue base that I experienced in my last company was lump-sum turnkey. So, the concept of lump-sum turnkey is absolutely, Mike, not new to me.

I also treat it with a degree of caution. Now, all of that said, does that mean we shouldn't participate in lump-sum turnkey? Absolutely not. We've built a solar business the last six years that's based on a lump-sum turnkey commercial model. We have a number of other projects we're executing around the world today that are based on lump-sum turnkey.

What I can assure you we will do, however, is be very circumspect, very thoughtful about the risk we take on. We will wish to know the customer intimately. We will wish to have executed that kind of project scope previously. They will be smaller projects. It is very unlike we will engage in lump-sum turnkey for major offshore investments, and in certain geographies around the world where there's high political risks. So, yes, I think it's inevitable there is a shift in our customers' buying pattern towards more lump-sum turnkey EPC contracts, but we're going to be very, very thoughtful about how we embrace those.

Mick Pickup

Thank you. And can I just ask on the integration cost and the cost saving cost. You spent £55 million in first half. I think the full-year target was £40 million. I'm assuming the difference is the U.S. that come out as a surprise. Is there any guidance for the full year and what benefit should we make from the additional impact you've already done?

Ian McHoul

Well, I mean, you're right, the difference is pretty much response in the U.S. to the problems we've discussed there. No. I can't give you any [indiscernible] guidance. We're kind of slightly on the cusp of two pots we're saving at the moment. We've got the [indiscernible] integration, £130 million, coming to an end successfully.

We've got the new regime and new pot, which will be determined that Jon's been talked about, a new pot, which will be defined November. And then we've got the Americas kind of whole emerging in the middle. So, I can't give you any more guidance right now, but - because we have yet to fully assess what that will be, but obviously we'll give you further guidance on the situation in November.


Our final question on the phone today comes from Mark Wilson from Jefferies. Mark, please go ahead.

Mark Wilson

Hi. Good morning, gents. Just a quick one. The operational guidance is unchanged, but I don't think that contained guidance on the dividend. So, what can you say about that for the second half of the year in respect to the aim to reduce net debt?

Jonathan Lewis

Very strong message. We have no plan to cut the dividend. I know from the engagements I have had with our shareholders to-date that this is very important to many of you. And for that reason, we will continue with the dividend.

Mark Wilson

That's very clear. Thank you.


We have no further questions on the phone lines.

Rupert Green

We have one question here from the Web. Jon, this one's for you, I think. Why are downstream Oil & Gas projects seeing delays now? And do you expect this trend to reverse? And if so, when?

Jonathan Lewis

I think the factor there is really driven by many of our customers being circumspect with regard to management of their cash flow, and circumspect with regard to final investment decisions on major downstream projects. That really speaks to some of our larger IOC customers in terms of some of the independent customers. In many instances, they're not being able to secure financing for their downstream investments. I think over time, that is going to evolve obviously, but quite honestly, I don't really have a strong opinion on that today.

Jonathan Lewis

With that, we'd like to thank everyone for joining us today. As I said in my prepared remarks, those of you who I've yet to meet, I very much look forward to meeting you over the next several weeks and hope you've got a taste of the candor and transparency that you will find in me as we go forward. Thanks very much.

A - Ian McHoul

Thank you.


Ladies and gentlemen, thank you for joining the Amec Foster Wheeler half year results call. This call has now concluded, and you may disconnect your lines.

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