WS Atkins's (WATKF) Q3 2016 Trading Update Call (Transcript)

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WS Atkins PLC (OTC:WATKF) Q3 2016 Trading Update Conference Call February 8, 2017 3:00 AM ET


Heath Drewett - Group Finance Director


Heath Drewett

[Technical Difficulty] We expect our full year results to demonstrate very good progress in the region with strong revenue growth and an improved operating margin.

Looking forward beyond that, we’re encouraged by positive momentum in infrastructure spend and are focused on securing larger scale opportunities within our pipeline.

Turning now to the Middle East where performance in the third quarter has been in line with our expectations. As we’ve discussed previously, we’ve combined our transport and infrastructure businesses to form a large team, enabling both overhead efficiencies and a more focused market facing approach. This is increasingly competitive market, in which we remain disciplined it terms of both pricing and contract conditions, and wherein particular we benefit from our ability to move work to our global design centers in India.

In addition, we are recognized as being technically, and increasingly digitally differentiated by our delivery on large complex projects which serves us well. As mentioned previously, we’re demobilizing on our key metro projects, and are very hopeful on our role on the delayed Makkah metro in KSA.

As you would expect, cash generation remains a focus for the region. And while we’ve seen some individual debt recoveries in the period, we expect to see an increase in lock-up at March, but this is expected to remain below the historic peak of around six months revenue.

The acquired Howard Humphreys business is being integrated. And given the plan, future investments in roads, rail and water in East Africa is expect to deliver attractive diversification opportunities going forward. So overall, despite the challenging market conditions, we expect to deliver a good performance for the year as a whole with Middle East business.

Regarding currency effects, which in terms of movements in the dollar obviously most impacts our North American and Middle Eastern businesses, we continue to benefit from the weakness of sterling on the translation of both revenue and profit in these regions. With the closing dollar exchange rate at the end of December of £1.23 the average for the quarter sitting around £1.24 against £1.52 in the prior year.

And should this rate be maintained in terms of the December close to the - remainder of the year, we estimate that this benefit on currency tailwinds year on year of £150 million on the Group’s revenue and just over £8 million at the PBT level.

Moving further east, the performance of our Asia-Pacific business has been stable in the period. We’re pleased to have secured further Hong Kong airport work and some small property wins in Vietnam. We’ve seen some early signs of improvement in market conditions in Mainland China with some confidence returning to the property market.

Our strategy in geographic diversification continues, and in particular, our new Acuity business will enhance both our Southeast Asian focus and our relationships with outbound Chinese contractors.

On the subject of Acuity, we’re pleased with the response of many of our target markets to our proposition. We brought together an impressive team of both internal and external experts with a particular focus on the Middle East and Asia-Pacific markets. With the team now in place, our attention is on near-term work winning. We anticipate the level of investment in this new business of around £4 million to £5 million this year.

Finally, our Energy business has enjoyed improved trading in the third quarter, after first half is impacted by oil and gas restructuring, and product sale delays. The major restructuring of our energy business globally, which as we spoken about before moved us from a service line to a geographic leadership structure, has bedded in well.

In oil and gas, we believe the market is stabilized and are now gradually restoring full working weeks to the oil and gas stock previously retained on shorter working weeks. And further, we have been [pointed this] [ph] as major oil and gas frameworks in the period.

In Nuclear, in the UK we’re encouraged to see an improved project flow at Sellafield. We made good progress on the PP&T product sales into Asia and we continue to be well positioned in the attractive U.S. tier 1 nuclear decommissioning market that we spoke about at our Capital Markets Day.

Overall, we expect the Energy business have shown improved second half performance and we remain encouraged as we look into the new financial year.

Turning now to the balance sheet, the Group’s financial position remains strong, reflecting the proceeds from the M25 sale, the net loan notes of £20 million that I spoke about earlier. We expect to maintaining a neutral net debt net funds at the end of March plus or minus £10 million.

Finally, guidance for the Group’s effective tax rate for the current year remains at around 25%. Just before I conclude [this analyst meet and] [ph] a couple of dates for your diaries. We’ll be hosting an analyst breakfast on Tuesday the March 28, in which we’ll discuss our UK business and this will be hosted by our UK CEO, Nick Roberts.

Furthermore, we plan to issue the usual pre-close trading update on the April 12. However, on this occasion, we won’t be holding our conference call around that pre-close although obviously Kate and I will be available for any questions on the day or following the announcement.

In summary, before I hand back to the operator for any questions you may have, let me just repeat the headline message of our trading statement this morning, which confirm that overall the Group has traded in line with our expectations in the period to date and the outlook for the full year remains unchanged.

And then, I’m happy if the operator jump passes over to questions.

Question-and-Answer Session


Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Alex Mies [ph]. Please ask your question. Your line is now open.

Heath Drewett

Hi, Alex.

Unidentified Analyst

Yes. Hi, guys. Couple of questions for you, please. Just on the U.S., obviously a good year of growth with Project NEON and Purple Line in play. I wondered if you can just confirm how long those projects are going to go for and then give us some color into the pipeline in the U.S. after that and whether you were pursuing more in urban freeway and rail transit projects or broadening out?

And secondly, could you just give us some information around the pensions timing and when do you expect that to be finalized?

Heath Drewett

Yes, so NEON and Purple Line. NEON is the smaller of the two projects that are at the highway. Well, that will be completed during this financial year. Purple Line will extend into next year. It’s about $100 million design program for us, will be about 60%, 65% of the way through that in the end of March. So we’ll have some of the revenue into next year.

If you take the two together, and look at the delta between revenue book this year, into next year, that’s probably about $60 million reduction just coming of those two projects year-on-year 2016-2017 into 2017-2018.

And I mean, I think as the statement said, we’re encouraged by significant sort of focus on infrastructure. I wouldn’t yet say we’ve seen the $1 trillion is still down to RFPs and opportunities coming out into the market. But there is definitely a momentum building in our key infrastructure markets, and transportations, that’s sort of strong, say, whether that’s aviation, rail or road.

I think the important piece about Purple Line for us is really - one, is that it’s a pretty signature project in terms of scale in the light metro market in the U.S. It’s proven that we can deliver for a major contractor flow, is the contractor over there. And we really won that contract by marshalling our global CV and global capability in rail together with our relationship in the U.S. and indeed around the rest of the world with flow.

So it’s very much a kind of relationship plus global capability win. However, it proves on the ground in the U.S. that we’ve got the ability to deliver a significantly enlarged program in the rail market. And as a consequence, it gives our U.S. team a CV with which to pursue further opportunities.

And I think the roads market will continue to offer opportunity. But the rail market, having penetrated it with Purple Line, certainly now I think we go forward with both the local CV as well as obviously the very strong global CV. And as our strategy has been over the last year, 18 months, two years in the U.S., looking for those larger opportunities to grow the business organically faster and rather than just the sort of very local smaller type contract. So it’s obviously in terms of winning those and finding sort of larger scale opportunities within the pipeline going forward.

Just on the pension, yes, look we were silent in terms of the statement this morning, which tells you that we’re not quite there in terms of reaching agreement with the trustees. You shouldn’t take anything sort of negative around toward from that. We’re just going through that process.

We set out an objective both with the trustee and indeed externally, this time last year, so before the March 16 date where the company would serve its objective which was to come through the 2016 tri-annual with the 2013 repayment plan intact, effectively rolling that forward for another three years and just continuing to make those payments with an end date of March 2025.

I’m still confident that we can achieve that. That remains our prime objective. We’re just not quite there yet, as soon as we get through file negotiations and everything documented we will announce that. Whether we’re there before the pre-close, slightly after the pre-close talk, but we’ll see. But I’m not troubled by the fact that and we’re not able to say anything to that. I think we’re still on track to achieve the objective.

Unidentified Analyst

That’s perfect. Thank you.

Heath Drewett



Thank you very much. And the next question is from the line of Christopher Banbury [ph]. Please ask your question. Your line is now open.

Unidentified Analyst

Good morning, Heath.

Heath Drewett

Hi, yes, Chris.

Unidentified Analyst

Hi, I just have three areas of questions, if I may. Just looking for bit more flesh in the points with regard to the nuclear product sales to Japan. If I remember in the first half the kind of profit impact was maybe a couple million looking at £5 million to £6 million for the full year. So where are we now and what slips into 2018?

Secondly, what kind of working capital flow you’re expecting for the year and then the key factors behind that? And finally, there were some one-offs in the first half in terms of, say, kind of £3 million of Middle East bad debt provisions and £2 million of oil and gas restructuring. What are you looking for in the full year in these areas? Thank you.

Heath Drewett

Yes, okay, just been scribbling those down. So the product sales, we did anticipate against our - if you go back sort of 12 months, what we might have expected to deliver on product sales this year, £5 million to £6 million down, you’re right. We’ve confirmed some sales in Q4, which means that we are now comfortable that that is indeed the impact in terms of the delay into next year.

I’m not going to give you a product sale number for next year. However, just to say that we secured some deliveries in Q4, which sort of reinforce and confirm our forecast outlook for the segments of this year with a significantly more clearly product sales coming into the full year next year. So good progress, but over the quarter to get confirmation that we can make some deliveries this year and the bulk will go out in 2017-2018.

In terms of working capital, in some ways if you work back from a net funds position, of broadly neutral for the year, making sure that the M25 kicks in sort of £40 million, £45 million of improvement against prior forecast. If you put that three, you’ll see that the kind of the balancing item will generate the appropriate working capital movement for you in your models. Most of the other cash flow items are pretty consistent, dividends and share pledged as CapEx et cetera.

I mean the big story on the working capital I think for the full year is what’s going on in the Middle East, where we’re seeing both - at the half year we saw an extension of debtor days. So in absolute lock-up actually, there wasn’t a material movement between March 2016 and September 2016. But clearly, if you do a trailing-12-month revenue, revenue would come off, and therefore, you would have expected [the bringing book] [ph] for the lock-up to come down. That didn’t happen at September, as we saw payment terms extend.

That continues through the second half, it maybe actually that we see an absolute increase in the dollar value of lock-up through the second half. But we’ll certainly see an extension in terms of the lock-up days through the second half.

So as I said in the script, it doesn’t mean that not cash flowing. It’s sporadic. It depends project by project, client by client. It’s clearly an issue not just for us, but our clients and indeed their end-clients; some of the government ministries trying to balance the cash flows through their major program.

So I think that will be there. When we get to the summer and we look back on the full year, the Middle East will be the key issue in terms of working capital. Elsewhere, clearly where we’re growing our business, there in the U.S. we’ve got significant step-up in revenue year-on-year through these major projects. That will inevitably drive working capital, not in terms with debtor days, but in terms of absolute value.

So we talked a little bit actually about the half year. This disconnect between growing businesses like the U.S., most significantly where that’s absorbing naturally working capital. The counter is the shrinking of the Middle East business, but that’s not in the realm [ph] of working capital given the market conditions.

So I think that will be the story. By the time we get to the end of the year, I’m hopeful that there is no other working cap issues, there’s no other reason for us to have working capital moving out of step with revenue up or down elsewhere.

The Middle Eastern and sort of oil and gas one-offs, et cetera, look, we identified the fact that we were taking some debt provisions in the Middle East in the first half to the extent that debt further ages will continue to make sure that we’ve suited provided on those through the second half.

The oil and gas restructuring largely done to be honest, there will be a little bit coming through Q3. But the market is now stabilized, our work flow stabilized. And as I said, we’re actually putting people back on to full working weeks that have been scaled down. So I think the cost of the oil and gas restructuring is behind us. As a consequence you’ll see energy performance through the second half will lead the product sales in nuclear, the Sellafield projects flowing through and leaving behind restructuring costs.

So, look, the debt provisions, restructuring cost, they’re all part of daily life of responding to growing, shrinking businesses. And so we just will take them in the ebb and flow. The Middle East, we see that as a 10% of margin business. When we’re in a period of either a major project delivery and/or debt recovery you’ll see our margins above, significantly above last year. And if you go back two or three years, we’re up in the 16%, 17% as we collected the cash from the previous liquidity crisis.

My expectation this year is we will be sub-10%, but this is a very respectable margin. And the comments I made around the quality of our team in the Middle East gives us confidence that we’ll bid for the right things. We’re bidding at the appropriate margins for the region, for the complexity of the projects. We’re bidding on the right commercial terms. You got good delivery in the region. So, yes, will ebb and flow around that 10% as we absorb debtor provisions in this current year, but with strong business on the delivery side which is important in that region.

Unidentified Analyst

Thank you very much.

Heath Drewett



Thank you. And our next question is from the line of Joe Ben [ph]. Please ask your question. Your line is now open.

Heath Drewett

Good morning, Joe.

Unidentified Analyst

Good morning, Heath. I actually have three as well, but maybe take them one at a time.

Heath Drewett


Unidentified Analyst

Firstly, can you just elaborate on what the timing of likely Middle East rail contracts is?

Heath Drewett

Yes. I mean, the only one that we spoke about, Joe, obviously, if you go back to - goodness, it’s probably 2014 where we had around this breakfast and we set out the ones that were up and coming. The one that we got our eyes in terms of we think next to mobilize and will have a role on is Makkah metro. I do anticipate that starting until toward the end of calendar 2017 at this stage.

There are others out there Jeddah metro, Cairo metro, more difficult to say in terms of time. We’ve been tracking Makkah, because it’s been on the stocks for some time now. I think that will be the first of the most significant ones coming in backend of 2017.

Part of the reason that we pulled together our infra team with transportation was actually to just slightly broaden the focus of the team in transportation, who’s become very metro focused. Look, they’ve been an extremely profitable market for us. We clearly demonstrated that ability back in Dubai on Dubai metro. And that serves us well in terms of winning the cutler [ph] lines up in Qatar and the Riyadh metro in KSA.

But actually, we’re starting to now slightly broaden our perspective in terms of both geographies. So for example the Cairo metro in Egypt, following some of the contractors that we worked well with into that market, but actually also looking more broad in the aviation market, defense, et cetera. So we have to broaden our sector focus beyond the metros, simply because we know that as with Makkah they get delayed.

Unidentified Analyst

Thank you. And secondly, on the PP&T product delays which sounds like there are some coming through a little bit in Q4. Could you talk us through what’s actually sort of going on in the ground, what’s sort of changing and how we’re optimistic that will come through next year?

Heath Drewett

We’re optimistic, because we got an agreement with the client to purchase them. It’s the sort of bottom line. As you know, there were delays in terms of their need for the products, because they were essentially holding up their cleanup process while they were in discussions as to when they would ultimately release the cleaned up water from the base of the reactor back into the sea.

They’re sufficiently confident that that will progress and therefore they’re taking delivery of orders through the back quarter of this financial year and into next. So I think if you take from the fact that they’re committing to orders that they’re confident that actually the cleanup will resume and they will need those containers to continue to process forward. So was being cleaned up in the basement of the facilities there.

Unidentified Analyst

Thank you. And finally for me, just on the Purple Line and NEON movement [ph] for 2018. You said 60 million, was that dollar or sterling, please?

Heath Drewett

That’s dollars. Yes, so if we just look at the revenue, we book on those two this year versus revenue book next year, there’s a $60 million delta. I tell you, we’ve worked hard and don’t expect that to be the delta on our top line, as we’ve been looking to replenish that. We said, I think in the half year, there is not another Purple Line at that scale, but there are number of opportunities more in line with the size of a NEON, which is sort of $30 million, $40 million.

So we’re working hard for the team to identify bigger opportunities in the pipeline to make sure that we don’t experience that sort of [one to look for] [ph]. I’m pretty confident based on our work in hand in the pipeline that we won’t see the [full effect of that] [ph] by means in terms of going into 2017, 2018.

Unidentified Analyst

Thank you very much.


Thank you very much. We have no questions at this time. [Operator Instructions]

Heath Drewett

Well, look, thanks again guys for joining the call. Hopefully, kind of a consistent message in terms of how the business is performing. I think a number of you noted in your note this morning the sort of undercurrent and the sort of positive sentiments. I think that’s probably right to draw that out as we come towards the end of the year, clearly, our visibility in terms of our expectations for how we’ll land the year. And indeed our visibility into next year improves. And hopefully, you’re picking that up through the narrative of the call and also the statement itself will be a relatively short one.

So just to reconfirm the headline message this morning, Group’s traded well through that last quarter in line with our expectations. Outlook for the full year remains unchanged. And we will have a pre-close on the April 12. There won’t be a conference call. But Kate and I will be around. And if in the meantime we finalize on the pensions, we will let you know as soon as that happens.

So thanks again, and I’ll speak to you all soon. Thanks very much indeed.


Thank you very much, and that does conclude our conference for today. Thank you all for participating. You may all disconnect. And, speaker, please stand by.

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