U.S. Markets closed

Edited Transcript of WOR.AX earnings conference call or presentation 21-Aug-19 12:30am GMT

Full Year 2019 WorleyParsons Ltd Earnings Presentation

North Sydney, NSW Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of WorleyParsons Ltd earnings conference call or presentation Wednesday, August 21, 2019 at 12:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andrew Wood

WorleyParsons Limited - CEO & Executive Director

* Robert Ashton

WorleyParsons Limited - COO

* Thomas F. Honan

WorleyParsons Limited - CFO

================================================================================

Conference Call Participants

================================================================================

* James Redfern

BofA Merrill Lynch, Research Division - VP

* Nathan Reilly

UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials

* Rohan Sundram

MST Marquee - Gaming and Contractors Analyst

* Siraj Ahmed

Citigroup Inc, Research Division - Associate

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the Worley FY '19 results briefing. (Operator Instructions) Joining us on today's conference, we have Andrew Wood, CEO; Tom Honan, CFO; and Chris Ashton, COO. After the speaker's presentation, there will be a question-and-answer session. (Operator Instructions) Please be advised that this conference is being recorded today. I would now like to hand the conference over to your first speaker today, Andrew Wood. Thank you. Please go ahead.

--------------------------------------------------------------------------------

Andrew Wood, WorleyParsons Limited - CEO & Executive Director [2]

--------------------------------------------------------------------------------

Thank you, and welcome to Worley's full year results presentation for financial year ended 30 June 2019.

The company has been through one of the most transformative and dynamic periods in our history. By bringing together WorleyParsons and Jacobs ECR to create Worley, we've created an organization of 58,100 people, supporting the delivery of vital energy, chemicals and resources infrastructure to communities in 51 countries around the world, a company that has the resources and technical and financial strength to help our customers succeed in this time of rapid change in these markets.

Results we presented today include 2 months of financials from the recently acquired ECR business. This is the first time I've presented the results since the $4.6 billion acquisition. And I have to say that we are really pleased with the quality of the business we've bought, the people, their capabilities, their way of working and their customer relationships. Today, Tom and I will take you through our results and provide an outlook for the company. Chris Ashton will provide an update on the ECR transition and transformation.

So just moving to Slide 2, just a reminder to review that disclaimer.

And we'll move straight on to Slide 3.

Our strategy continues to deliver results. Aggregated revenue has grown 36% to $6.4 billion driven by improving market conditions, 2 months of contribution from Jacobs ECR and a 17% growth in the underlying WorleyParsons business.

Underlying EBITA is up 32% to $412.8 million and underlying NPATA is up 43% to $259.8 million. Excluding cash costs associated with the acquisition and integration, our operating cash flow was flat at $236.3 million. We have strengthened the balance sheet through the completion of the acquisition with leverage at 1.9x, below the 2.1x recorded at December in 2018. Gearing is down to 20.9%. And during the year, we refinanced our core debt facility. Our backlog continues to increase, up 10% for the combined business from 12 months ago to $18 billion. We continue to diversify our earnings through increased OpEx and chemicals revenue. The transition to ECR business is on track following completion in late April 2019. Cost, margin and revenue synergies have been identified and are being delivered.

The safety of our people remains our priority, and we have maintained our industry-leading performance.

On the back of this year's results, the Board has declared an interim dividend of $0.15 per share -- sorry, a final dividend of $0.15 per share, bringing the full year dividend to $0.275.

In summary, we've made good progress on delivering on our strategic and operational objectives during a transformative year for the company. We are excited to be transitioning WorleyParsons and the ECR business to make Worley a global sector leader across energy, chemicals and resources.

Now turning to Slide 4. There are many key achievements this year. We've delivered double-digit revenue growth in the base business in addition to the growth from ECR's contribution. Improvement in EBITA margin was offset by higher volumes of lower-margin construction work, and NPATA margins continued their trend of improvement.

We strengthened our balance sheet and refinanced our core facilities. The cost, margin and revenue synergies are being realized from the ECR transaction. At an operating level, our earnings are now more diversified through increased OpEx and chemical sector revenues. Our staff utilization remains on target, while our cost reduction program implemented in our prior financial years is proving sustainable and is delivering operating leverage. Our backlog has continued to increase across all sectors coming from both the base WorleyParsons and ECR businesses. With the ECR transaction complete and synergy realization underway, our objective is to move from transition to transformation of the organization.

Slide 5. Slide 5 highlights our HSE performance. We aim for zero harm to our people and the environment. Our key performance indicators suggest that our safety performance remains one of the best in the industry. Our incident frequency rate in the 12 months for both our employees and contractors has improved slightly when compared to June 2018, which is a pleasing outcome. However, we remain vigilant. And going forward, our priorities include such things as implementing both the industry standard life-saving rules and launching and embedding new processes and assurance systems.

So turning to Slide 6. We take a responsible and sustainable approach to our business. This year, we continue to enhance our approach and have embedded responsible business assessment requirements into standard work processes. We've continued to support our customers in navigating the global energy transition. We supported STEM education around the world via initiatives in our local offices and further developed our engagement with indigenous communities around the world. Further detail will be provided in our FY 2019 annual report and our separate corporate responsibility report, which will be issued very shortly.

On Slide 7, we have a short history of our half-on-half performance in terms of aggregated revenue and EBIT. Revenue has grown in each of the last 5 halves. This is consistent with what our customers have been telling us about being on the positive side of the investment cycle. Importantly, we're delivering operating leverage as a result of the sustained discipline from our cost-out program.

We have delivered our third consecutive improvement in both first and second half results. This indicates the strength of the underlying business, the positive impact of our cost program and our strategy of focusing on our core markets. Also impacting the latest half is the inclusion of approximately 2 months of revenues and earnings from ECR.

Now turning to Slide 8. Our backlog position continues to improve with a combined backlog position up 10% over the last 12 months. The inclusion of the ECR backlog significantly boosts the overall backlog number, with MPIS and our MMM Services primarily driving the growth during the year. We provide further detail on sector and regional backlog details on Slides 50 and 51.

So turning to Slide 9. Slide 9 highlights an important outcome of our strategy over the last 3 years, which is to increase our earnings diversity and resilience with growth in OpEx-based contracts and increased sector mix.

In terms of business mix, represented by the top graph, the company has increased the proportion of OpEx-driven contracts from around 10% of the business to now 48% in FY '19 on a pro forma basis. We've maintained a minimal exposure to lump-sum turnkey contracts. In terms of revenue split by sector, we have balanced the exposure to the energy sector, moving it from 78% of earnings to 48% with our increased exposure to chemicals.

Moving to Slide 10. While I won't go through this slide in detail, Slide 10 highlights the scope and breadth of our long-term asset contract wins in FY '19.

Our OpEx-based contract wins are supporting our backlog growth and underpin our earnings resilience. OpEx revenue are less exposed to the volatility of capital investment cycles.

If we now turn to a sector update, starting on Slide 12. Slide 12 addresses the largest part of the energy sector for Worley: upstream and midstream hydrocarbons. This sector continues to have a positive outlook with medium-term investment expected to be above recent levels in both oil and gas. This is the case for both energy transition scenarios that are shown here: one based on the current government policies, and the other being the Paris alliance scenario. Oil still has a role to play and is not going away. In fact, as you can see in the bottom chart, significant new oil investment is required right through to 2040 under both scenarios. If no new investment is made in oil from today, then the supply gap, even in the Paris alliance scenario, will be about 50 million barrels per day by 2040. Given our global leadership position in upstream, both in onshore and offshore environments, including deepwater, we are well placed to capture opportunities across the full value chain.

Moving on to our power sector on Slide 13. As the world continues to electrify, we are seeing shifts in power investment, as depicted in this IEA chart. Renewables, mainly solar and wind and nuclear, will continue to have a key role in generation under both scenarios to 2040. Grids, including micro grids and storage, would also occupy a significant share of spend as a means to integrate these technologies. Our power business is deliberately focused in growth areas of high complexity with low risk for commoditization. With this in mind, we are focused on growth by building our portfolio in offshore wind, capturing the full project life cycle offering into operations and maintenance, and leveraging our offshore expertise.

We're looking at expanding our distributed energy solutions to provide a digital platform that connects different players of the ecosystem in a mutually beneficial and efficient way, looking at playing a leading role in emerging disruptive technologies such as hydrogen, and globalizing our power operations and maintenance capability platform into other jurisdictions.

So turning to Slide 14 and chemicals. Worley has significantly expanded its capability across the chemicals value chain. Chemicals now makes up 40% of our revenues on a FY '19 pro forma basis. For Worley, this sector covers refineries, petrochemicals and chemicals. We now serve industries with different end markets, drivers and customers. Customers across these sectors operate with different business drivers from upstream customers, with multiple demand drivers, and are somewhat decoupled from oil price volatility. Chemicals investment has historically shown consistent growth linked to global GDP expansion. Worley is well positioned in chemicals across the world with our strong customer relationships in the U.S. and Europe and world-class execution capability in China, India, Europe and the U.S.

And moving to Slide 15, and turning to resources, which captures Mining, Minerals & Metals as well as our resource infrastructure work.

In terms of the Mining, Minerals & Metals sector market outlook, capital expenditure expansion continues with strong market fundamentals across key commodities. We're seeing a number of trends, including a focus on extending the life of mines and increased investment in underground mining.

In copper, a structural supply deficiency is emerging, while in fertilizers, ongoing investment is expected to be driven by global population growth and increasing food demand. In iron ore, large sustaining capital investment is expected as the market tightens with recent supply disruptions, resource replacement and demand for high-grade ore.

Before I hand over to Tom, I'd like to expand upon the role we have in supporting the delivery of vital energy, chemicals and resource infrastructure to communities in 51 countries around the world, as I mentioned in my introduction, by just -- by discussing just 2 of them.

First, looking at our home, Australia, from where we launched the business nearly 4 decades ago. Worley is an international champion for Australia and one of only a handful of Australian-domiciled companies of true global significance. We are Australia's largest exporter of high-value services. And we're also a major conduit for Australian businesses into international markets, enabling growth for hundreds of registered Australian businesses. We are very proud of this role in helping Australian industry.

As you can see here in this map, our 40-year history in Australia has shaped us into the leading engineer of record for many of Australia's critical energy and resource assets. Today, we have a major roles in well over $100 billion of energy and resource investment including, with our joint venture partners, operations and maintenance contracts for 1/3 of Australia's existing power generation fleet and 3 critical gas pipelines.

On Slide 17, we turn to our largest operation: the United States. The U.S. has been important to us since we first set up there in the early 1990s. We've continued to grow over the years. And now following the ECR acquisition, we are a clear leader in energy, chemicals and resource sector. Today, we are one of the largest Australian employers in the United States with more than 14,500 people across the country. No other peer matches our size or geographic footprint in the sector we operate. With hubs in California, Houston, Baton Rouge, Alaska and on the East Coast, our operations are strategically centered in major energy and chemicals markets of the U.S. We're currently servicing more than 100 large-scale facilities nationwide, and we are the engineer of record on approximately 17,000 megawatts of the U.S. nuclear generation fleet. We are one of the largest contractors in the country for skilled craft trades with over 80 construction and fabrication sites. These sites provide the backbone to our major projects and integrated solutions offering. I'll now pass to Tom, who will provide some details of the financials. Thanks. Tom.

--------------------------------------------------------------------------------

Thomas F. Honan, WorleyParsons Limited - CFO [3]

--------------------------------------------------------------------------------

Thanks, Andrew.

Before I start on the financials, I just wanted to reiterate what Andrew said about the first couple of months of the ECR operations. It's the first time we've spoken to the market since acquiring the business, and the results have been in line with our expectations. Chris will talk later about the progress on transition and synergy delivery. But purely from a financial point of view, the first 2 months have been aligned with our understanding of the business pre-acquisition. There has been no surprises.

Now I'll focus on our statutory financials, turning to Slide 19. This slide has the statement of financial performance outlining our statutory results. This has been released in the financial report lodged with the ASX earlier today.

Some points to note. Our statutory revenue has increased across all major lines of business and the statutory bottom line result increased significantly this year as a result of improved underlying performance, the addition of ECR for 2 months, and there was a tax charge relating to U.S. tax changes last year of around $81 million.

On paid -- we've previously advised that we would move to reporting our results excluding the impact of amortization of acquired intangibles so as to better reflect the operating performance of the company. We have now made that change, as shown in this set of results.

I'll now take you through a reconciliation of the statutory to the underlying NPATA result on Slide 20. From now on, I'll be referring to aggregated revenue and underlying earnings at both an EBITA and NPATA level as we believe that provides a more accurate picture of the operational performance of the business. After taking into account a number of adjustments, which include transaction costs and a bridge facility from the ECR transaction, which have been somewhat offset by interest and FX gains on the proceeds of the capital raising; a reduction in revenue following our lower-than-expected arbitration award in relation to a dispute with a state-owned enterprise that we discussed at the half year result; and some minor expenses from the runoff of our tax -- of our cost-out program, we derived an underlying net profit after tax and before amortization, NPATA, of $259.8 million, up 42.7% from the $182 million in the prior corresponding period.

I'll move now to Slide 21, where we've highlighted the statutory and underlying key financials for FY '19. At the statutory and underlying levels, we achieved improvement in revenue due to 2 months' contribution from ECR and improved market conditions. Our EBITA and NPATA results also improved. At the underlying level, we improved our NPATA margin. This demonstrates some of the continued operating leverage that now exists in our business. I'll talk more about this leverage later.

Our operating cash flow is $236.3 million, similar to last year when excluding items such as acquisition and transaction -- transition costs and interest and FX gains related to the ECR transaction.

Moving on to Slide 22. There has been a change to the operating segments within the new combined business. We have separated the previous Services business into Energy & Chemicals Services, known as ECS, and Mining, Minerals & Metals Services, known as MMM.

While the ECR transaction has added significant revenue to Advisian and Major Projects & Integrated Solutions lines of business, the names of those segments have remained unchanged.

Overall, aggregated revenue was up by 35.6% for the period, which was driven by reporting 2 months of the ECR business and also a broader improvement, particularly in MPIS and MMM. Segment outcomes are up across all lines of business. The strong increase across Major Projects & Integrated Solutions reflects a strong underlying performance as well as that 2 months of the ECR acquisition. Margin improvement in MMM Services is due to increased volumes and stronger project performance. The MPIS margin was impacted by increased volume of lower-margin construction revenue in North America and increased procurement. Advisian margins have improved from a low base due to the improvement in margins in INTECSEA.

Moving on to Slide 23. Our headcount has increased to just over 58,000 across 51 countries, mainly as a result of the staff coming across from the Jacobs ECR acquisition. We spoke at the announcement of the transaction about the increased exposure to construction, fabrication and OpEx-based work. This is demonstrated by the significant increase in craft labor, up from 6,600 to around 15,000.

On the base WorleyParsons business, headcount has increased by around 2,000 people, reflecting broad-based improvement in the business. We continue to manage our staff utilization rate on target. The target is likely to slightly increase post-ECR due to the increased exposure to high utilization, construction, fabrication and OpEx-based work.

Slide 24 and 25 provide a summary of the progress over the past few years on our P&L metrics and further highlights some of the operating leverage within the business.

The charts indicate the gradual improvement in our margins at both the EBITA and NPATA levels across the past few years. These charts demonstrate the benefits of the resizing and reshaping of our business we have undertaken. It is worth noting that the trend has continued with the UKIS and ECR acquisitions coming into the business.

On Slide 25, we have included separate operating leverage charts for legacy WorleyParsons and ECR businesses. The black line represents the increase in revenues while the red line charts the movement in overheads over the period for WorleyParsons on the left, while the chart on the right, the blue line, shows the same trend for Jacobs ECR. What this demonstrates is that both WorleyParsons and Jacobs ECR have exceeded in achieving revenue growth without having to embed new costs at the same rate into the business.

This is some of the material that we reviewed during our due diligence process to ensure that both teams had similar approaches to cost control. In fact, the cover page of this presentation comes from our new friends in the Baroda office in India, where I visited as part of day-1 activities and saw the most remarkable approach to cost control and therefore, margin growth. The message still holds that we will focus on maintaining costs at a much lower growth rate than revenue going forward for the combined Worley business. This discipline is now operating in the business at the performance unit level. This gives us confidence as we progress through FY '20 and beyond as the benefits of improved market conditions translate into higher levels of customer investment.

I'll now discuss capital management, starting on Page 26.

On Slide 24 and 25, we spoke of the movement in key P&L metrics over the past few years. Slide 26 performs a similar function for our key balance sheet metrics.

This slide presents a number of key parameters of cash flow, net debt, gearing and leverage. The main takeout of this slide is the improvement in leverage and gearing over the past couple of years, delivering a stronger balance sheet even while we have invested in -- over $4.9 billion in acquisitions. The underlying improvement trend in cash flow is evident, although it varies half-on-half.

Net debt increased to $1.6 billion, up from $784 million at June '18, with the increase driven by the ECR acquisition. I'm really pleased to report that net debt-to-EBITDA is down to 1.9x and gearing is now at 20.9%.

Turning to Slide 28. Our gearing ratio, as I discussed at the period end, was 20.9% calculated on a net debt to net debt plus equity basis, down from 25.7% at the end of June '18. Interest cover has improved to 11.9x while leverage ratio has improved to 1.9x. A new debt facility was established in February 2019, which has increased the average maturity of debt to 3.3 years. DSO improved in the period even with lower-than-expected payments in this period from the 4 state-owned enterprises mentioned in prior results.

During the year, 2 of the SOEs that owe Worley money have been moved to non-current receivables following the trigger of dispute resolution mechanisms, which have commenced. During the year, we received a successful arbitration ruling in our favor on one of the other SOEs. A subsequent appeal process has also been ruled in our favor with costs awarded, and we are now in the enforcement and collection process.

Moving to Slide 29. I'd like to provide some more -- some further detail on our new debt facility completed in February '19, with improved terms to the previous facility agreement.

The facility consists of an 8 -- USD 500 million multi-currency revolving facility and USD 800 million term loans maturing in February 2024 and replaces the bridge facility we announced last October. The facility has provided a number of benefits, including refinancing the syndicated bank debt facility, which was due to mature in December 2020; replacing the bridge facility and completing the funding package to purchase from Jacobs ECR; improving and resetting financial covenant headroom; and extending debt maturity to 2024. I'm happy to say the refinancing was oversubscribed and includes a mix of existing and new banks. We are now in a much more flexible funding position with the average tenor increasing from 2.2 to 3.3 years.

I'll now hand over to Chris Ashton, our COO, who will provide you with an update on the ECR acquisition and then some commentary on our markets. Chris?

--------------------------------------------------------------------------------

Robert Ashton, WorleyParsons Limited - COO [4]

--------------------------------------------------------------------------------

Thanks, Tom.

Just turning to Slide 31. I'm happy to say that the integration of the business is on track. We completed the transaction, including the major undertaking of separating out the ECR division from Jacobs' parent corporation. We got some ongoing transitional services agreements back to Jacobs for continuity of some systems while we move operations across to Worley systems. We had a very successful day 1 when we launched as Worley. We achieved our targets and goals with our initial standing up of the organization, and we're very pleased to be able to share that. We've already commenced the synergy realization. Cost synergies are being implemented. Margin synergies, particularly around global integrated delivery, are being planned, and revenue synergies are already starting to flow.

In terms of leadership, we are now running the organization with the new structure and have reported the results in this way today. The new combined culture we will develop will set us up for the next phase of our company's growth and success. Customer feedback has been very supportive, with a positive response to our expanded capabilities. We've commenced work on the transformation, which I'll talk about shortly.

Looking at cost synergies on Slide 32. We expect to progressively deliver $150 million over the next 2 years. This increase was announced at the Investor Day in June and is $20 million higher than at the time we announced the acquisition. This increase does not come from a single particular source, but from a broad review of the cost synergies with 3 main buckets -- with the 3 main buckets continuing to be IT, property and G&A or overhead rationalization across all 3. For IT, this includes infrastructure rationalization and scale benefits and our significant software expenditure. For property, this includes co-locating into single offices where we have multiple operations, such as Houston, Perth, Singapore, Santiago and several others. Overhead savings are within the operational functional areas where we can get more efficiency servicing the operations for IT, finance, admin and HR. The cost to implement these cost synergies will be $110 million, with $10 million of CapEx mainly for property fit-outs. We'll also have an additional $55 million for what we are calling system modernization to a number of areas, mainly IT.

Moving to Slide 33. We expect incremental margin synergies over the next 3 years by increasing GID uptake. This initiative to increase the level of GID in the organization is a margin synergy. While the offering is enabled through wage arbitrage, the benefit to the company is that the absolute gross margin increases on every work undertaken this way. Ultimately, this then becomes a revenue synergy as we're able to provide more attractive commercial offerings to our customers, as indicated above. We are driving the increased usage of this by -- increased usage by establishing GID champions in each region with detailed usage assumptions applied to the budgeting process. Regular tracking will be applied to GID hours with established relationship mapping between home office and GID locations to drive momentum. The benefits of utilizing GID as a percentage of billable hours is clearly demonstrated on the graph, with improvement in margins and net operating profit evident as the billable hours percentage increases.

Turning to Slide 34. We are moving quickly to implement margin synergies in shared services across 3 horizons over the next 3 years. The first horizon, which is already well progressed, is focused on the retiring of the transitional services agreements, followed by extending these services and coverage in Horizon 2, followed by the introduction of next-generation services as part of Horizon 3.

We'll expand the current shared services center to a third location in the Americas time zone to better support the expanded Worley organization. And we will pursue process optimization, robotic automation and self-service opportunities. These benefits are not included in the current cost synergy numbers.

I'd now like to provide some examples of synergy realization opportunities realized at the project level. Revenue synergies are occurring across the organization, and we are very pleased with the response from both our business leaders and our customers so far.

Starting on Slide 33. We have an example of a Major Projects & Integrated Solutions revenue synergy with an existing contract from BP for their Cat B and Cat C projects on the North Slope of Alaska. Essentially, the addition of the ECR expertise expands the scope of the offering to include the capability to deliver the fabrication and construction services beyond engineering and procurement.

Slide 36 is an example of combining the local relationship with BP with the newly added specialist asset support services coming from UKIS as well as ECR for the BP Mad Dog 2 project in the Gulf of Mexico. This synergy is particularly pleasing as it combines the UKIS acquisition skills and capability with that of ECR and WorleyParsons for a 3-way synergy win.

Slide 37 is an example of where Advisian asset advisory team are supporting refinery clients via the E&C Services business in the Hague for a number of customers where materials and corrosion technical expertise is required for investigation of failures and material selection of modifications. ECR, in this example, provide the long-term relationship and contract with the refinery, which would otherwise have been sub -- which would otherwise would have subcontracted this work out.

Slide 38 is an example of where, through a combination of existing relationships and technical expertise, we were able to extend our services to asset types that we would not have been able to provide previously with the level of confidence we can now do. The result is an expanded frame agreement with the client to cover all Worley Group consulting and engineering services.

Slide 39 is an example of a pre-FEED and FEED contract for the debottlenecking revamp to increase capacity of an existing elastomer chemical plant in Spain.

Scope includes pre-award equipment, CapEx estimates to plus or minus 10% as well as an EPC execution plan.

The final example I'd like to share is on Slide 40 and highlights the leveraging of our Sarnia office in Canada and their chemicals expertise to complete the FEL 1 and 2 for the main duct redesign project in Canada.

Now I'd like to turn to some of the aspects of the transformation on Slide 41.

The transition is moving at pace. Lots of decisions to be made. Lots of activity delivered at speed. In the transformation, we need to slow down and take a longer-term view approach and set a course for the new company, recognizing our new scale, our new capability and new contacts in our markets. We want to shape and claim new spaces in those markets we serve by combining our capabilities to create truly differentiated offerings to our customers. We want to engage and create a partnership with our customers and suppliers to develop new solutions and innovations, generating a new network of relationships across the industries within which we work.

We want to deliver a level of service that generates a step change in our reputation and that attracts a new wave of customers and business opportunities delivered by our highly engaged, motivated and competent workforce. We want to build a purposeful, innovative and sustainable culture that generates a competitive advantage in and of itself.

We will address the key macro trends and shifts affecting the way we work, embracing how markets will shift. This will include the energy transition, automation and data analytics, workforce changes and industry social license. This is going to require us to continually innovate, adopt leading technologies and develop and source diverse pools of talent to step change the value we create and deliver to our customers.

I'll now hand back to Andrew for closing remarks.

--------------------------------------------------------------------------------

Andrew Wood, WorleyParsons Limited - CEO & Executive Director [5]

--------------------------------------------------------------------------------

Thanks, Chris. So turning to Slide 43. I'm really pleased with the progress that we've made over FY 2019. We've improved our EBITA and NPATA. By bringing together WorleyParsons and Jacobs ECR to create Worley, we have created an organization capable of supporting the delivery of vital energy, chemicals and resource infrastructure to communities around the world, a company that has the resources and technical and financial strength to help our customers succeed in this time of rapid change in these markets, a company with a more diversified earnings base in OpEx and chemicals.

We are working hard on the integration of the ECR acquisition and have identified upside to our initial synergy identification. Our cost discipline is being maintained, and we're gaining operating leverage as a result. Our backlog is growing, our balance sheet is strengthening, and we are well positioned to capture market upside as a leader in the energy, chemicals and resource sectors.

So now turning to the group outlook on Slide 44.

The energy, chemicals and resource market indicators and growth in backlog provide evidence of continued improvement in market conditions. However, our markets are being tempered by macroeconomic global uncertainty. As a result of the ECR acquisition, we have enhanced the diversity and resilience of our earnings. Worley has the global, technical and financial strength to support its energy, chemicals and resource customers as they navigate a changing world. And in FY 2020, we expect to deliver the benefits of the acquisition of ECR, including the realization of cost, margin and revenue synergies.

Thank you for your time. And now I'd like to open the floor for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of James Redfern from Merrill Lynch.

--------------------------------------------------------------------------------

James Redfern, BofA Merrill Lynch, Research Division - VP [2]

--------------------------------------------------------------------------------

Two questions, please. First one is just given Worley's more diversified revenue split now post-Jacobs transaction and the relatively even split between OpEx and CapEx, I'm just wondering why or when -- I guess why Worley still is unable to provide EBITA or NPAT guidance given that would demonstrate your confidence in the company's earnings, given that they should [give you a] more stable [fleet] going forward? And I've got one more after that.

--------------------------------------------------------------------------------

Andrew Wood, WorleyParsons Limited - CEO & Executive Director [3]

--------------------------------------------------------------------------------

So I think we try to provide contextual guidance to our shareholders and to the market generally, and we believe that still represents the most important element of guidance. So at this stage in our history, we don't believe there is a need to change away from that approach.

--------------------------------------------------------------------------------

James Redfern, BofA Merrill Lynch, Research Division - VP [4]

--------------------------------------------------------------------------------

Okay. And then the second one is just given the outlook, the OpEx in [M&O] business is relatively stable with reoccurring business. And then if we look at the growth CapEx, which is more lumpy, between energy, chemicals and minerals & mining, where do you see the most growth coming from, your view?

--------------------------------------------------------------------------------

Andrew Wood, WorleyParsons Limited - CEO & Executive Director [5]

--------------------------------------------------------------------------------

Well, I think in terms of percentage growth, what we're seeing is the minerals, metals and mining sector growing quite strongly. But in terms of volume of growth, then it would be -- we're seeing certainly an improvement in market conditions across the energy sector and a steady improvement in the chemicals sector. All of it, as we've said in our outlook statement, being a little bit tempered at the moment by the level of uncertainty that exists across our markets from sort of recent international macroeconomic conditions.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Your next question comes from the line of Rohan Sundram from MST Marquee.

--------------------------------------------------------------------------------

Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [7]

--------------------------------------------------------------------------------

Just a question on that outlook and the market improvements that you've seen in the last couple of months. Can you point anything that's driving that? And is it coincidental that you have seen a pickup in new awards in the last few weeks as well?

--------------------------------------------------------------------------------

Andrew Wood, WorleyParsons Limited - CEO & Executive Director [8]

--------------------------------------------------------------------------------

I think Rohan, the -- as you know, in terms of the -- so the announcements that we make, they tend to be a bit lumpy, they come in fits and starts. But what we tried to demonstrate in the material we've presented is that we have had a very steady level of awards and a general pickup in activity. It's very consistent with the story that we've been telling over the last probably couple of years in terms of underlying demand for resources being -- driving that turn-up in both the MMM business and the Energy & Chemicals business. So it's been a steady increase in earnings pretty much right across the board. And you can see that in our backlog as well. We've seen it occur right across -- generally spread right across our business and all of the sectors.

--------------------------------------------------------------------------------

Thomas F. Honan, WorleyParsons Limited - CFO [9]

--------------------------------------------------------------------------------

The other thing I'd add to that, Rohan, is the timing of those announcements, it can sometimes be a long duration in terms of a selection of Worley as the preferred partner, contract negotiation, then getting agreement on the announcement to go out, it's quite a long process. So I wouldn't draw too much into the timing of those. And as Andrew said, because of that, sometimes they can be quite lumpy.

--------------------------------------------------------------------------------

Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [10]

--------------------------------------------------------------------------------

Okay. No problem. And what about the commentary around double-digit base revenue growth? It sounds similar to the first half. Is that implying similar organic growth second half versus first half?

--------------------------------------------------------------------------------

Thomas F. Honan, WorleyParsons Limited - CFO [11]

--------------------------------------------------------------------------------

Yes, it was, Rohan, pretty similar.

--------------------------------------------------------------------------------

Andrew Wood, WorleyParsons Limited - CEO & Executive Director [12]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question comes from the line of Siraj Ahmed from Citi.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [14]

--------------------------------------------------------------------------------

Just the first question, just on the margins in the second half. Can you just talk to the margin decline? It sounds like this was driven by ECR, but if you could just talk through this.

--------------------------------------------------------------------------------

Thomas F. Honan, WorleyParsons Limited - CFO [15]

--------------------------------------------------------------------------------

Yes. It's largely driven, Siraj, by the inclusion of ECR numbers. And there is -- as I described during the presentation, there's a large amount of construction, fabrication and OpEx, which is generally speaking at a lower margin but more repeatable business, and that's driven a slight decline in that margin in the second half because of the inclusion of ECR. And there's a pretty significant increase in procurement in the second half.

--------------------------------------------------------------------------------

Andrew Wood, WorleyParsons Limited - CEO & Executive Director [16]

--------------------------------------------------------------------------------

At very low margin.

--------------------------------------------------------------------------------

Thomas F. Honan, WorleyParsons Limited - CFO [17]

--------------------------------------------------------------------------------

At very low margin, yes.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [18]

--------------------------------------------------------------------------------

Sure. I mean just clarifying. Looking at ECR's accounts prior to acquisition, I thought it was higher margin than your base business. Is that -- is there something different in that?

--------------------------------------------------------------------------------

Thomas F. Honan, WorleyParsons Limited - CFO [19]

--------------------------------------------------------------------------------

No, we thought it was the same or slightly lower, depending on the amount of procurement revenue that went through and depending on the level of that construction, fabrication and OpEx revenue that was there.

--------------------------------------------------------------------------------

Andrew Wood, WorleyParsons Limited - CEO & Executive Director [20]

--------------------------------------------------------------------------------

It was a little difficult to tell from their previously published items because what level of overhead allocation was occurring in the business was unclear. But now we've had a good look at the business, then there's really very -- as you would expect, there's actually a very little difference in margin performance between the 2 businesses.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [21]

--------------------------------------------------------------------------------

Sure. And I mean we haven't seen the accounts, but can you disclose what the contribution from ECR was for the 2 months?

--------------------------------------------------------------------------------

Thomas F. Honan, WorleyParsons Limited - CFO [22]

--------------------------------------------------------------------------------

It's actually in the accounts, the 2 months on a statutory level is around $35 million at the bottom line. But again, that's statutory, including the transition costs and some other things. What I would say is, Siraj, is to say that the base business, we talked about sort of double-digit revenue growth and earnings growth was low double-digits from FY '18 to FY '19, if that's the sort of number you're trying to solve for.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [23]

--------------------------------------------------------------------------------

Sure. Okay. And just looking -- just the outlook for that business. I mean you would have an idea of the construction and procurement revenues. Do you use second half as a base for those segments? Just from a margin perspective.

--------------------------------------------------------------------------------

Thomas F. Honan, WorleyParsons Limited - CFO [24]

--------------------------------------------------------------------------------

It's still too early to say. And I just want to refer you back, Siraj, the business is now -- it's largely integrated, so it will be difficult for us in the future to call out the ECR component of margin versus the overall business. What I would say is that typically speaking, the legacy WorleyParsons construction/fabrication/OpEx business is at a slightly lower margin, especially when there's that procurement revenue running through it.

--------------------------------------------------------------------------------

Andrew Wood, WorleyParsons Limited - CEO & Executive Director [25]

--------------------------------------------------------------------------------

And in terms of growth, it's -- we're seeing reasonable levels of growth in our business in total now across those sectors. It's the market -- again, subject to the uncertainty we talked about, is actually the market is being supportive.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [26]

--------------------------------------------------------------------------------

Sure. Just one more on margins. Just trying to understand, the resources segment of the [energy] sector margins, they have declined by 90 basis points, while the MMM margins have improved. Just trying to understand, I mean 2 different views, but I mean one is resources, the other is metal and mining services. Just trying to understand why the margins are moving in 2 different directions?

--------------------------------------------------------------------------------

Andrew Wood, WorleyParsons Limited - CEO & Executive Director [27]

--------------------------------------------------------------------------------

I would say that the construction and fabrication and procurement revenue is largely in the E&C business. There's very little in the MMM business. You're also seeing the -- as I said, we are anticipating, and we've started to see an improved market conditions in MMM coming through a little more strongly than others, and we're seeing margin improvement off of a lower base in the MMM market. And we know when times are good in MMM, we generate higher margins than we do in the E&C business.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [28]

--------------------------------------------------------------------------------

Yes. And so -- and the decline in resources margins? I mean, so I get that. So why would resources margin decline 90 basis points?

--------------------------------------------------------------------------------

Thomas F. Honan, WorleyParsons Limited - CFO [29]

--------------------------------------------------------------------------------

So I was going to say it is projects that are not within the MMM business that are still for resources customers that are at lower margins to the business within MMM.

--------------------------------------------------------------------------------

Andrew Wood, WorleyParsons Limited - CEO & Executive Director [30]

--------------------------------------------------------------------------------

It's about the resource infrastructure business within that sector as well.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [31]

--------------------------------------------------------------------------------

Got it. Just moving to your target utilization. I know it's just 1 month, but it seems like it's dipped below your target for July. I mean is it related to your comments on the macro outlook? Or is it just 1 month?

--------------------------------------------------------------------------------

Thomas F. Honan, WorleyParsons Limited - CFO [32]

--------------------------------------------------------------------------------

No, it hasn't dipped below. It's -- across the period, we're very comfortable with the utilization. And as I said in the call, we expect our target -- our target has previously been 85%. But when you include that construction, fabrication and OpEx business, we think the number is going to be slightly higher than that as the target. We'll release that in time during the first half as we get more comfortable with the sort of the weighted average of those targets.

--------------------------------------------------------------------------------

Andrew Wood, WorleyParsons Limited - CEO & Executive Director [33]

--------------------------------------------------------------------------------

Don't read too much into July. July is a holiday period in the Northern Hemisphere.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [34]

--------------------------------------------------------------------------------

Got it. Got it. Last thing, and just on the synergies and the integration. I mean it sounds like you have -- it's actually -- you expected to deliver a bit fast, and now it's 75% in FY '20. I think at the time of the Investor Day, it was 60% to 70%. I mean it's a slight improvement there. Is that fair?

--------------------------------------------------------------------------------

Thomas F. Honan, WorleyParsons Limited - CFO [35]

--------------------------------------------------------------------------------

It's a small improvement, I think, Siraj. It's not -- nothing material.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [36]

--------------------------------------------------------------------------------

And is the run rate still the run rate by the end of the year?

--------------------------------------------------------------------------------

Thomas F. Honan, WorleyParsons Limited - CFO [37]

--------------------------------------------------------------------------------

Yes, yes. I think the important thing is we're -- given it's not much time since the Investor Day has passed, we're slightly more confident, as you would expect, just a few months later.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [38]

--------------------------------------------------------------------------------

Yes. Just on the synergy results. The GID bit, I mean I get -- we get the revenue synergy opportunity, but is there a cost synergy potential as well? I mean you talked to the budget. I'm just trying to understand if there's a cost synergy aspect as well as part of it.

--------------------------------------------------------------------------------

Thomas F. Honan, WorleyParsons Limited - CFO [39]

--------------------------------------------------------------------------------

Yes. It's more we view it as margin rather than -- gross margin rather than a cost synergy. So it's delivering the same amount of work for a lower...

--------------------------------------------------------------------------------

Andrew Wood, WorleyParsons Limited - CEO & Executive Director [40]

--------------------------------------------------------------------------------

Input cost.

--------------------------------------------------------------------------------

Thomas F. Honan, WorleyParsons Limited - CFO [41]

--------------------------------------------------------------------------------

Input cost, yes.

--------------------------------------------------------------------------------

Siraj Ahmed, Citigroup Inc, Research Division - Associate [42]

--------------------------------------------------------------------------------

And when you say you're budgeted for them, I guess just taking that a step forward, so your expectation is gross margins should be improving across the business as we...

--------------------------------------------------------------------------------

Thomas F. Honan, WorleyParsons Limited - CFO [43]

--------------------------------------------------------------------------------

Yes. If you isolate those other things, Siraj. We probably had -- I think you've taken up perhaps 7 questions there, Siraj. So it's probably time for the next one.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

Your next question comes from the line of Nathan Reilly from UBS.

--------------------------------------------------------------------------------

Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [45]

--------------------------------------------------------------------------------

Tom, a quick question for you. Just on the balance sheet metrics, I'm just looking at that leverage figure. I think you've spoken to a 1.9x. I'm just trying to look at, have you adjusted there for a full year contribution of Jacobs? And if not, does that imply that we should see that leverage figure come down even further with the full year contribution next year?

--------------------------------------------------------------------------------

Thomas F. Honan, WorleyParsons Limited - CFO [46]

--------------------------------------------------------------------------------

No. Nathan, in the past, what we talked about is that we line up that leverage calculation precisely to the bank definition. And the bank definition allows us to include a full year of ECR earnings in that calculation. So it will -- obviously, the 1.9x will change from here, but not driven by an additional period of time that ECR contributes towards it.

--------------------------------------------------------------------------------

Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [47]

--------------------------------------------------------------------------------

Got it. Okay. So we should think about it as effectively a pro forma at this point?

--------------------------------------------------------------------------------

Thomas F. Honan, WorleyParsons Limited - CFO [48]

--------------------------------------------------------------------------------

Correct, correct.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

(Operator Instructions)

--------------------------------------------------------------------------------

Andrew Wood, WorleyParsons Limited - CEO & Executive Director [50]

--------------------------------------------------------------------------------

If there are no more questions, then again, thank you for attending, and we'll close off proceedings at this point. Thank you.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

Ladies and gentlemen, that does conclude our conference for today. Thank you for your attendance. You may now disconnect.