John Wood Group PLC (OTCPK:WDGJF) Q4 2021 Earnings Conference Call April 20, 2022 4:00 AM ET
Company Participants
Robin Watson – CEO
David Kemp – CFO
Conference Call Participants
Henry Tarr – Berenberg
James Thompson – JPMorgan
Mark Wilson – Jefferies
Robin Watson
Good morning, everyone. Welcome to our 2021 results presentation. And obviously these results are a lot later than expected. So thanks to everyone for your patience.
So firstly, let me begin with some introductions of the Wood team. Simon McGough, our new President for Investor Relations is with us today, as is Paula Murphy, Chief Communications and Marketing Officer; Ken Gilmartin, so you hand up, Paula, Ken, Simon and Roy — Ken is our Chief Operating Officer and Roy Franklin, our Chair is also here today.
So given a bit of an overview of what David and I will cover this morning, performance in 2021, will take over the headlines from me then a detailed financial walkthrough from David. We’ll get into in some depth de-risking our projects business, that’ll be a deep dive into how we’ve reduced our exposure to lump sum turnkey contracts and therefore reduced the risk in this part of the business. We’ll talk about improving business momentum.
Our order book at year end was up 19%. And we’ve got a return to organic growth in both our consulting and operations businesses in the second half of 2021, which we’re pleased about. And we’ll give you an update on the sale of our Built Environment business which is progressing very well. And we’re on course to announce a sale in the second quarter of this year.
That is also a significant opportunities ahead, so we’ll highlight how well placed Wood as for helping our clients solve challenges across energy transition and industrial decarburization, while maintaining energy security, which is something that’s more important than ever, in today’s changing world.
On that very note, we announced a few weeks ago that we decided like many others to exit our operations in Russia, we’re actively engaged in efforts to do so while safeguarding the safety and welfare of any colleagues affected. Of course, we continue to keep the people of Ukraine at the forefront of our thoughts.
You’ll have seen this slide before. Our capabilities span the entire asset lifecycle from conceptual engineering, planning through design, build and operate all the way to what we call asset repurposing. For Sale of our Built Environment business, we will continue to operate right across this lifecycle with enduring services across consulting projects and operations, more of which we’ll cover later in the presentation.
Here’s a summary slide showing this how we service different end markets across our business units. Our work in conventional energy is mostly upstream and midstream oil and gas work increasingly including the elements of decarburization and carbon intensity reduction for our customers.
Our solutions across process and chemicals touch many markets from refining and petrochemicals through bio-refining, synthetic aviation fuels, to specialty chemicals and polymers, we’ve got a range of solutions across hydrogen from gray to blue, to green, and in carbon capture.
We show these and processing chemicals here. But in reality, they actually touch every part of our business from helping to develop green hydrogen as a clean fuel source through to catch on carbon for conventional energy operations.
Our work in renewables and other sectors includes activities across solar and wind, as well as a rock and minerals processing various industrial processes and power. And finally, you can see the Built Environment as I said, this is around 27% of the group. The business is primarily and our consulting business unit, and this subset of our consulting business is a portion of the portfolio of which we are selling. And I’ll come back to in more detail a bit later.
I would also note here that the consultant business post sale remains a very material part of the group offering crucial solutions across all our other markets and enduring significant synergy opportunities.
So now a brief overview of our 2021 performance. It was quite a challenging year operationally, the pressures of COVID-19 continued to impact the business and challenges in our project business and partly revenue and cash performance, which David will go into in some more detail. We did however, make good progress in our efforts to de-risk our projects business through reducing our exposure to lump sum turnkey contracts, and I’ll come back to this later in the morning’s presentation. And we’ve ended the year with improving momentum with a growing order book and good win rates.
I’ll now hand over to David to take you through our financial review.
David Kemp
Thank you, Robin.
So good morning everyone. 2021 was a challenging year with the ongoing pressures of the pandemic, mix market conditions and challenges in our projects business. Despite this, we saw margins improve trading momentum increased in H2 and significant growth in our order book.
Revenue of $6.4 billion was down 14% on a like for like basis. We saw growth and consulting and operations, but also a significant decline in our projects business.
Revenue performance improved during the second half, up around 4% overall on the first half, with projects stabilizing and continued growth in consulting and operations.
We delivered EBITDA of $554 million and a margin improvement with EBITDA margin up 0.4% on a like for like basis to 8.6%. And that was a result of cost efficiencies, revenue mix and improved overall execution.
There was a free cash outflow of $398 million due to a significant working capital outflow in our projects business and continued high exceptional cash costs, primarily a result of investigation payments and restructuring costs.
We’ve seen strong order book growth throughout the year, up 19% to $7.7 billion, led by growth in consulting and operations and a stabilizing of order book and projects. Within our order book, the revenue to be delivered this year is up 6%on last year.
Revenue has reduced 14% like for like compared to the prior period, and that reflects post COVID recovery more than offset by reduced projects activity.
After accounting for the $63 million revenue impact of the nuclear disposal during 2020, consulting grew by 2% with a strong second half of trading led by higher activity across the Built Environment market.
The main driver of lower volumes was in our project’s business, which is down 34% year on year, as larger EPC contracts such as YCI came to an end and these have been replaced by smaller often earlier stage scopes. Activity was also impacted by some of our customers postponing or delaying investment decisions.
As Robin will cover in more detail, we have made purposeful changes in the year, to reduce the level of contract risk in projects.
Revenue grew by 4% and operations again reflecting a stronger second half as market conditions and conventional energy continued to improve.
We have seen improving momentum in our business as markets recover with H2 revenue up 4% on H1 2021. Revenue performance in consulting and operations has continued to improve since H2 2020, reinforcing our expectations of higher activity levels in 2022.
Consulting was up 4% comparing H1’21 to H2 2020 and then up a further 4% in H2 ’21 over H1 ’21. Operations was up 6% comparing H1 ’21 to H2 2020 and then up a further 10% in H2 ’21 over H1 ’21. In projects, H1 ’21 revenue was down significantly on H2 2020. And then we saw stabilization in the second half of the year, with H2 revenue broadly flat with H1 ’21.
Revenue phasing has moved back towards our usual profile where activity is slightly weighted towards the second half and 2021 revenue phasing was 49%, 51%.
Adjusted EBITDA was down 10% on a like for like basis, and this is mostly being driven by reduced activity in projects. And that was partly offset by improved margins. In operations, we had a lower EBITDA despite higher activity due to favorable contract close outs in 2020, which were not repeated to the same extent in 2021.
Against the backdrop of challenging market conditions, we’ve continued to make progress in improving our margin. Group margins increased by 0.4%. With improved margins in consulting 0.3% and projects 1.5% offset by lower margins in operations, which were down 1.4%.
Margin improvement has been held by cost efficiencies across the business, including $40 million of benefit from our future fit initiative. Consulting margin has been supported by cost efficiencies and increased utilization in the second half.
Projects margin improvement is a result of improved overall project execution. A lower level of losses on underperforming contracts, a shift in mix towards higher margin contracts and profit upsides from contract close outs. The operations margin reflects a lower level of profit upside from closing out contract obligations in the year. And that’s compared to high level in 2020 across multiple contracts.
During 2021, the total Aegis contract loss increased by $99 million. The majority of this loss relate to the reduction of expected recoveries from the client, together with higher anticipated costs to complete. For some context, the Aegis contract is a legacy AFW contract awarded in 2016 for the construction of an anti-missile defense facility in Poland. Our latest total project loss estimate is $222 million, of which $99 million was charged to the P&L during 2022.
We are confident the project will complete in the second half of 2022 and expect cash outflows of around $45 million during the year. In addition, we incurred $78 million of restructuring costs which broadly fit into two categories. We have spent around $30 million of various initiatives, which is support the improved efficiency and enhancement of group profitability in the medium to long term. And these include the conclusion of our Future Fit program.
Complementary to this, the Group has sharpened its focus on markets, where we know we can make an impact and deliver higher margins. This has resulted in the strategic decisions to exit certain locations and end markets that do not fit this profile, the most material of which we’re our Paris office, the parent industrial large EPC sector and our ATG automation business. Our order book is up 19% year on year, with strong growth in consulting and operations, which are up 24% and 27%, respectively.
We ended the year with strong book-to-bill ratios in both consulting and operations, with operations showing particularly strong performance. And this was due to a number of multi-year renewals, which are mainly in conventional energy and include over 500 million of contracts for oil and gas operations of the North Sea, acid optimization in the Norwegian North Sea and an engineering and project management in the Middle East.
The work we are performing across conventional energy increasingly as elements of helping our customers decarbonize optimizer operations and increase production efficiency as well as supplying renewable energy to operations
Order book in projects was up 2% year on year having improved from Q1 throughout the year, highlighting that our project business has continued to stabilize after the roll off of some significant contracts. It’s worth mentioning that the growth in our projects order book is partly constrained by the continued work we’re doing de risking our contract portfolio. And Robin will cover that in more detail shortly.
In addition to the year on year growth we’ve seen in total order book, we’ve also seen an increase in visibility of our order book beyond the next 12-months. With the proportion of our revenue due for delivery beyond 12-months up by around 45%, and that’s almost $1 billion on the prior year. Revenue of $4.7 billion for delivery in 2022 supports our expectations for increased activity. And that represents a growth of 6% compared to last year.
As mentioned in the previous slide, we continue to reduce the risk in our projects business. And I’ve made significant progress on this in recent years. To give you a sense of how we’ve evolved our order book profile at December 2018 the split was around 70% reimbursable 30% fixed price and within that 30% 10% was from large scale over $100 million contracts. By comparison, at December ’21, order book profile was 80% reimbursable, with 20% fixed price, and with less than 2% of fixed price from large scale, over $100 million contracts.
I’ll now take you through each of the BUs in a bit more detail.
So starting with consulting, revenue was up 2% year on year, revenue growth was led by higher activity across the Built Environment market. Adjusted EBITDA grew by 4% with revenue growth supported by margin expansion to 12.7%. And that margin expansion reflects efficiency improvements and increased activity in H2, which was up 4%.
Order book at 31 December was up 24% to $2.2 billion driven by Built Environment, circa 20% and conventional energy circa 30%. Highlighting the positive trends, we’re seeing in the energy part of our consulting business.
Revenue for delivery of $1.5 billion in 2022 is up 14% from 2021 and supports our expectation of strong growth. It’s also worth noting that post the sale of Built Environment, there will remain a sizable energy focused consulting business that generated revenue of around $600 million in 2021 and grew backlog by around 15%.
Moving on to projects, revenue was down 34% in the year, reflecting the completion of some larger EPC contracts and processing chemicals and our steps to de-risk our contract portfolio. H2 revenue was flat on H1.
Adjusted EBITDA was down 18%, reflecting the decline in revenue offset by higher margins. The margin improvement partly reflects improved overall project execution, with strong performance outside North America weighing losses in North America. Margin did also benefit from the completion of some underperforming contracts.
Order book was up slightly at 31 December, with new wins being equal to work off during the year. At December ’21, revenue for delivery in 2022 of $1.3 billion is down 13% on 2021. So we’ve seen some good wins in recent months and have a significant value of selected but not booked that sits outside order book. In 2022 we expect modest growth weighted towards H2 as market conditions continue to improve.
Operations; so revenue grew by 4% on a like for like basis, with a stronger H2 up 10% on H1, as market conditions in conventional energy continue to improve. Overall, adjusted EBITDA was down 8% despite higher revenue due to favorable contract close outs in 2020 not repeating to the same extent in ’21. 2021 included one-off benefits of around $12 million that will not repeat in 2022.
The disposal of TCT in Q4 2020 and Sulzer Wood in Q1 have had a negative impact on our reported EBITDA growth. Order book at 31 December ’21 was up a significant 27%. And that was driven by multi-year renewals in conventional energy, and with $1.8 billion for delivery in 2022, and that’s up 18% on ’21. And again supporting our expectation of higher activity levels.
Turning to cash flow. Our definition of free cash flow includes all cash flows before M&A and dividends. There is a free cash outflow of $390 million due to a significant working capital outflow in our projects business from lower activity and from the de risking of our portfolio.
The higher tax paid primarily reflects the timing of payments in Canada as activity levels recovered. We’ve been in provisions in 2021 is higher and includes $30 million related to asbestos. It’s exceptional cash outflows totaling $159 million included payments in respect of investigation settlements, costs associated with future fit and exiting underperforming operations, and costs related to prior period onerous leases.
Net debt has increased by $379 million, reflecting the working capital outflow and projects and continued cash drags from legacy investigations asbestos an onerous leases. At 31 December our net debt to EBITDA on a reported basis was 3.3 times within our covenant level for the Group’s borings, which are set at 3.5 times.
Our free cash flow was disappointing in 2021, with a significant outflow driven by three principal reasons, firstly, performance and projects, Aegis, and finally a continued high level of exceptional cash costs. Across all three of these areas, we expect improvement in the next couple of years.
Post the sale of the Built Environment, we are considering options to lower exceptional cash costs by for example, paying down asset or liability early or selling our asbestos liability.
Looking into 2022. We expect cash outflows from Aegis and asbestos to remain at a similar level to ’21. Exceptional cash outflows from investigation settlements, restructurings, and onerous leases will reduce in 2022.
The Group had total facilities of $2.6 billion at 31 December 2021, of which $1.7 billion are drawn, leaving a headroom of $1.3 billion. Total available borrowings comprise $800 million of US private placement notes, with maturity dates out to 2031 weighted towards later dates. We have a $600 million term loan backed by UK under the revolving credit facility of $1.2 billion, and both of these mature in 2026.
Turning to outlook, because of the impact of the proposed sale of the Built Environment, we have not given detailed guidance at this stage. However, the strength of our [indiscernible] gives us confidence of revenue growth in 2022 relative to 2021.
Cash performance will continue to be impacted by exceptional cash drags. And as such debt reduction will be driven by the Built Environment sale. As usual, we expect a working capital outflow in H1 and this will result in higher net debt at 30th of June.
And with that, I’ll now pass back to Robin
Robin Watson
Good. Thank you, David. I’ll now pick up on some of the key topics in a bit more depth.
So firstly, I want to cover the enduring steps we’ve taken to de risk of contract portfolio. So let’s start with some of the other contract types across the group.
83% of what we do is either cost reimbursable or fixed price consultancy work, very little risk. 17% is therefore fixed price EPC work. Of this the vast majority is service led limited scopes very defined and predictable work packages. And this part of the contract portfolio has generally seen profitable outcomes over many, many years.
This leaves a lump sum turnkey work which was around 5% of revenues last year. These are projects where we take on the full project delivery risk, we include here projects where we take on risk until either mechanical completion or complete project commissioning.
I’ll touch on that in a bit more depth on the next slide.
So this slide shows a reduction in lump sum turnkey risk over the last few years. On the left, you’ll see the large circle and this is all the revenue from 2018 to 2021. This has reduced year after year due to deliberate actions to limit the enterprise exposure to this type of work. Included in these years just for complete clarity as the Aegis contract, some large scale chemical plant projects, multiple power process and renewables, as well as some smaller projects as a complete portfolio.
The performance across these contracts is actually varied from actually very good returns through two loss making projects most notably Aegis and some of the power process and renewable contracts in North America.
So what changes have we made? Well, firstly, let me just say this has been a long journey of portfolio stabilization and de risking and let me summarize that. In 2018, we ceased to allow any events on any project over $500 million on a lump sum turnkey basis.
In 2018, we discontinued and exited that business from the OCONUS market. This is the overseas military lump sum turnkey projects. Some of you may remember that at the time, there were three projects from the Amec Foster Wheeler transaction within this portfolio.
Space fence, which was at claim stage and is now complete. WAM [ph] which was a very early stage and that was a JV which we extracted ourselves from. And Aegis, this was a project that was inflight and had no credible commercial extraction available to us. And as David touched on, we expect to complete it in the second half of this year.
Between 2018 and 2020, we made a variety of management changes across this portfolio both operational and functional to achieve more outcome predictability. And during the period we also severely limited the bidding activity and reduced lump sum turnkey portfolio and overall risked revenue.
In 2020, we created the global projects business unit through restructured and in doing so improve their operational and commercial governance regime, and in 2001, we exited the large scale power and industrial lump sum turnkey market entirely.
So we’ve now got a very limited number of power and renewable projects in the portfolio, and we’ve kept a revenue exposure below $350 million US.
The opportunity pipeline has also been extensively divest over this period and calibrate it across a lump sum turnkey opportunities to remove any opportunities that would have the wrong risk return and or contractual exposure to the company. And this in itself has led to over 2 billion of factored opportunities being taken out of the projects pipeline.
So where are we now with lump sum turnkey projects, the bidding activity and approval to bed threshold is exceptionally high. And we’re extremely selective on what we decide to bed and on what terms and with whom.
Lump sum turnkey will be a diminishing part of our portfolio and only taken over the risk return and contractual terms are appropriate. And we’ll manage the risk by minimizing our exposure to it only ever managing our limited portfolio fully on the ever low single percentage of revenue moving forward.
It’s important just to clarify, we do have examples where managed well these contracts provide good value for us and help us to support our clients as they expand into new markets themselves. But we will limit the company exposure.
Now to look at the moment and we saw at the end of last year. The chart here shows the order book recovered as the year progressed, it was up 20% at $7.7 billion supported by good win rates. And I’m pleased to say with gross margin levels and bids maintained.
On to the sale of the Built Environment consulting business. This is progressing well and we expect to announce a sale agreement in the second quarter of this year. We believe that sale will deliver significant value to our shareholders, as well as strengthening our balance sheet. We’re exploring a range of options for the proceeds from improving the free cash flow of the group by paying off some of the legacy cash assets we’ve gotten our balance sheet through to looking at shareholder returns and how we can potentially invest and strengthen our position across the energy transition in industrial decarburization.
And we look forward to seeing more in these areas over the coming months. And we’ve planned on the capital markets day once we’ve completed the sale and in doing so, commence our next strategic cycle.
I now want you to take a look at the market opportunities ahead of us. And this is perhaps best done by framing energy around the twin pillars of energy security at one end and sustainability at the other. And we are well pleased across both.
Net zero pledges cover 75% of global Co2 emissions. Like everyone estimates this will be a significant investment level a $100 trillion US is required to meet that sort of pledge. And it would weave decades, decades of experience across hydrogen, carbon capture and storage, renewable energy and bio-refining highly relevant markets to capture a chunk of that investment.
In terms of energy security, OECD secure and affordable energy supply chains and increasingly policy central for a variety of reasons and our core conventional energy basins that are already experiencing a pickup in investment, some of that momentum coming through to 2022.
At Wood, we’ve got decades of experience in delivering secure and predictable energy for our clients. And one thing that stands out is how increasingly, these are very interlinked and very aligned to the UN Sustainable Development Goal number seven in providing affordable and clean energy to all.
This is a very important slide for us as we look ahead. Our solutions across the energy market help customers address the themes on the previous slide. We’ve highlighted five major growth drivers, low carbon energy from wind and solar through to hydrogen, plus work on the transmission and distribution of clean energy.
Resourcing the energy transition through for example, helping our mineral processing clients, sustainably extract the minerals needed for the electrical vehicle revolution. Industrial decarburization as we help clients reduce emissions from their operations, carbon intensity reduction with our technical expertise and know how can help make a huge difference towards a net zero, and reducing the carbon intensity of conventional energy assets. And of course energy security playing a crucial role in ensuring the world has access to secure and affordable energy.
And we’re seeing a distinct increase in new project opportunities in relation to energy security coming into pipeline again for fairly obvious reasons.
We’ve pulled together here just some examples of what we’re doing across the energy transition today. In terms of low carbon energy were supporting ADNOC and Pre-FEED and design of the new blue ammonia facility and disease building hydrogen supply and using ammonia as a low carbon fuel across a wide range of industrial applications.
Here in the UK we’re supporting the high net and one of the world’s leading hydrogen storage and distribution projects that will save 10 million tons of carbon dioxide by 2030. Just last week, we announced the new contract in Chile with total Iran, where we will provide conceptual engineering on a large scale green hydrogen production facility.
And we will look at resource and energy transition will be the owner engineer on the UKs first large scale commercial lithium refinery for green lithium. We’re partnering with Honeywell and a new carbon neutral aviation fuel for which we see tremendous potential. And with the Renewable Energy Group, we’re helping them to expand their renewable diesel bio refinery in Louisiana.
When you look at decarbonizing industry, we’re seeing growing opportunities to help our clients decarbonize and industrial portfolios, including with Shell and Acorn [ph] as outlined here. But this is prevalent across many of our long serving energy clients.
Decarbonizing operations, we predict that carbon intensity reduction will become and remain a central priority for many of our clients as they grapple with the delivery of their own net zero pledges. Nevada Gold illustrated here includes the deployment of a solar plant to offset conventional power production. Chevron, have commissioned the solar micro grid to decarbonize an unconventional asset in US Shell, which we’ve been awarded.
And finally, as I said in the last slide, energy security has become very much back into the spotlight recently, we’ve always maintained in the need to ensure continued secure affordable energy supply as we transition to you cleaner lower and no carbon sources. And we’re seeing greater opportunities in energy security, including recent ones with gas core to renovate their gas receiving facilities in the UK and Europe with Turkish Petroleum and the Sakarya gas field, and with ADNOC and Aramco in the Middle East to name but a few.
Finally, I just wanted to highlight the progress we’ve made on our ESG strategy in the year. And it’s really important to read and something I’m very proud of that despite the challenges we face in ’21, we continued the momentum across all of the areas to which we’re committed.
Some particular highlights for us where we maintained our AA leader rating from MSCI, we increased female representation in our senior leadership roles. As we head towards at least 40% of that gender balance for 2013, we saw a 31% reduction in our scope, one and two emissions.
So to conclude, we have improved in business momentum with a return to organic growth in two of the three businesses better quality and lower risk revenues ahead and an order book 19% higher than last year. The sale of our Built Environment business is progressing very well. And we expect to announce the sale agreement in the second quarter of this year, we believe this sale will deliver significant value for our shareholders as well as strengthening our balance sheet.
We see significant growth potential and secure and sustainable energy and industrial and decarburization using our skills experience and heritage, we’re very positive about the future we’ll be able to unlock with the breadth for the end markets that we now have that are fully aligned with the investment priorities of our clients.
I’ve also shared with the board that I consider the sale of the Built Environment businesses marking the start of the next strategic phase where would and is appropriate time for me to step down as Chief Executive. I announced as now to allow the board time to select the successor, I’ll remain in role until my successor is appointed and of course fully committed to delivering the business, progressing the Built Environment sale to completion and establishing a smooth transition and handover.
So with that, we’ll now hand over to any questions. Thank you.
Question-and-Answer Session
Q – Henry Tarr
Hi, thanks guys. Henry Tarr, Berenberg. A couple of questions.
The first, just around order intake. So backlog clearly up strongly through last year, but sort of flattish through the second half. Could you share a little bit how order intake looked through the first quarter?
And then as we think about this year, I understand the Built Environment sale will have a material impact. But if we were to ignore that for a second, underlying revenue, do you think would be growing somewhat similar to what we see in backlog for execution this year? So mid to high single digit is that a sensible place to be?
And then just secondly, on cash? There’s very helpful slides in there on the provisions in the exceptionals. I think, could you just kind of lay out again, where we might end up for 2022? So think for ’21 provisions plus the cash exceptionals coming out at about $235 million. For 2022, where do you expect us to come out relative to that? Thank you.
David Kemp
Any other questions Henry?
Henry Tarr
That’s clear. [Indiscernible]
David Kemp
Let me let me start with perhaps the guidance, which I think was a lot of your question. So, as you’ll have picked up as a result of the Built Environment sale, we’re not giving out any detailed profit guidance. But there’s some useful pointers within the presentation, and within the prelims that would highlight.
Firstly, as you picked up the strength of our order book, so it grew 19% in total last year. But then when we look at 2022, the revenue in the order book grew by 6%, compared to last year, and that’s what’s given us confidence around the top line growth that we expect, from that top line growth, we’d ordinarily expect to benefit EBITDA from some operational leverage.
And then finally, within the BU elements, you’ll see we’ve highlighted some benefits to profitability in 2021 that we don’t expect to repeat in 2022, specifically in operations, where we had about 12 million of contract closeout benefits that we don’t expect in 2022. And then in the center, we had a property sale of $11 million. So hopefully that’s helpful in terms of you working through your numbers from the profit side.
In terms of moving on to cash and net debt, maybe just to cover a range of that. The first I’ll start is just maybe talking about our 2021 cash performance. Because, clearly overall, it’s been disappointing. But if I look at our operational cash performance in 2021, and if I start with a consulting and operations business, there, we’ve had really good cash conversion, really good cash performance, as we’ve had almost every year. And so that’s a high performing part of the business from a cash perspective.
And then on the other side, we’ve clearly had a disappointing year in projects where we’ve had a significant outflow, working capital outflow, as we de risked the business. And so we’ve taken on less EPC activity in our business, and we’ve run off larger contracts. And that’s had an impact on our projects business.
So if we look at outside of our operational cash, we’ve clearly had significant exceptional items, in terms of investigations and restructuring costs, principally. If I look forward into 2022, we still expect that same good operational cash performance from our operations, and our consulting business and we expect significant improvement from our project business, because we do believe that de risking is largely in the rearview mirror.
In terms of the exceptional cash outflows, we’ve highlighted what we expect will happen in 2022. And we’ve highlighted investigations, restructuring will come down to a relatively small level, things like Aegis and its best us will persist. If I go beyond 2022, then things like, the investigations will persist, we make $40 million of payment in ’22, which we made in the first half, we then make a similar payment in ’23 and ’24.
But some of the other things start to roll off. So onerous leases roll off as we get to ’24. And in terms of Aegis, we expect to complete Aegis in ’22 and that obviously will then roll off into ’23. So overall, you’ve got a picture of we still got significant exceptional costs in ’22 and these start to trend downwards as we move forward to ’23 ’24.
I think what the Built Environment sale gives us, we’ve talked about this before, is the opportunity to reset. And so that financial reset for us is in two forms. One, obviously, in terms of net debt, that allows us to significantly strengthened our balance sheet, and then also gives us options around our free cash flow. Clearly, there’ll be a significant interest benefit. But we then have options around what we do with things like the SFO payments, you will have the option to pay that early, which will then significantly strengthen free cash flow in ’23 and ’24.
We’re looking at our asbestos liability, could we sell that and appropriate price. And again, that would improve free cash flow as we as we go forward.
So that’s the overall picture looking forward, the short and medium term in terms of cash guidance. And then I think this was your last question, which was around order book in Q1. We continue to progress order book in Q1, we’re happy with how that’s playing out. We’ve not given out any numbers, we’re still closing our books for March. It’d be a bit premature.
What we have seen is that continued build in our project backlog. Clearly we’ve entered the year with less backlog for the current year than we did have last year. Part of that is where we were in terms of order intake, part of it is looking back to 2020. We still had some of the stuff around YCI, for example, that we then burnt off. So we’re continuing to see our projects order book have built, we’ve got significant amount, over 500 million in selected not booked. And again, that’s supportive to our confidence. And we do see an improving macro environment in projects.
That said, we expect the recovery in our projects business to be weighted more towards the second half. So hopefully that makes sense. Thanks Henry.
James Thompson
Good morning. This is James Thompson from JPMorgan. Just following up on that one, just on the cash conversion side of things, David. In terms of good project’s business that’s clearly been a drag I mean, post Built Environment projects is going to be a bigger bid of the business. I was wondering maybe you could give us a flavor or an idea about what you think is the sort of cash conversion level you want to get to in that business? One can actually start contributing, will be the first question.
And then just Secondly, obviously the Built Environment sale is imminent, which is good to see that it’s still on track. I was just wondering if you could sort of remind us about the sort of defining features, if you like, of that business, and what makes it kind of so attractive to the wider industry and why we should be confident around the potential valuations, we’ve been thinking about the business.
David Kemp
Okay, I guess, in terms of the cash conversion in our projects business. If I look, operations consulting, we have high 90% plus cash conversion. The de risking that Robins taking you through is all about getting a more sustainable, predictable projects business, where we can start to achieve predictable high cash conversions, similar to the rest of our business.
When we’ve had a high lump sum EPC in our portfolio, we’ve seen big swings. So for example back in 2019, we had a large inflow from advances. And we saw that unwind in 2020 and ‘21 that will just be much less of a feature in our business going forward, because we are taking less lump sum activity into our portfolio. So we still will get those swings, as we go through cycles, but just much less of a feature of our business. And clearly, the work that we’re doing around execution and improving execution, and getting that more predictable outcome will also support the cash performance of the business.
So in terms of your second question around the Built Environment sale, how to say, one, we’re really pleased it continues to progress well, we still expect it to say in a sales agreement late in Q2, so it’s still on track from that perspective. In terms of the Built Environment, you’ll see, as you go through your booklet, we’ve given out some of the financials around the business, it did about $121 million of pre-IFRS 16 EBITDA in ’21, which hopefully be helpful for your modeling.
Some of the attraction of the business is obvious. As I talked about, its high cash conversion, it’s good margin, it’s in a very attractive sector in terms of environmental and engineering consultancy. Its US based, it will benefit significantly from infrastructure bills, principally in the US, but not just in the US.
I think it’s worthwhile, even maybe in terms of that Built Environment sale, just reminding people, why we’re doing the sale. One, we think it has the potential to unlock significant shareholder value, that’s not recognized in our share price just now.
It also is an enabler for the rest of the business, I touched on financial reset, the financial reset in terms of strengthening our balance sheet, and also the opportunity to improve and improve our free cash flow. That also simplifies our business so that we can focus on energy security, and energy sustainability and invest behind those two very important themes.
So we do look at the sale as one being an enabler, but also hopefully unlocking significant shareholder value as we go forward.
Robin Watson
I think maybe one thing I would just add in terms of the market out there for projects, James, there is no top line pressure on the business unit. We could come in here with a bigger order book, frankly, with revenue that’s not attractive revenue, given the risk reward profile. We’ve not done that, we’ve never really done that. So in terms of the focus really being in bottom line and doing the right projects. I think there’s two aspects, the legacy projects, the agencies of the world are in the rearview mirror of kind of operationally, if you like.
And from an operational lump sum turnkey portfolio, which probably says everything we need to it is very, very selective in terms of what will be taken on. So we do feel moving forward, that it’s the right positioning of the projects business. But we also feel the market reflects that, there are attractive projects in the market that you don’t need to take lump sum turnkey risk for frankly.
What I actually see in the macro is a pretty healthy, we’ve got some good project wins not booked. So there’s some work that we’ve actually we have concluded but it’s still not in the backlog and to David’s point, the second half of ’22, we do see an emergent pickup in terms of the opportunities that are coming into a pipeline with good risk return profiles for them.
I think the conventional market, the minerals processing business, and the low carbon markets in particular look pretty healthy as we come in 2022. So there’s an operational dimension to this, there’s a market dimension, and there’s a client dimension for us as we have an increasing portfolio of projects moving forward in the post BE sale world.
Mark Wilson
Thanks, good morning. Mark Wilson from Jefferies. I just wanted to dig into projects a little more square the circle here, because it’s spoken to as being a tough year the past year in projects, but EBITDA margin is up 150 basis points to 7.5%. And unless I’m mistaken, I think that excludes a just because you’ve taken an exceptional that.
And you speak to a much lower risk profile in the project order book going forward. And that’s an order book that has replaced revenue on a book to bill basis in the past year. So what am I missing in terms of the expectation of having a further step up in margin? In 2022 it would seem like that is should be the expectation?
David Kemp
Let me maybe start with the margin question. So our 2021 margin was nuanced. So as you say we’ve seen a good, a significant uptick in our projects margin, still below the rest of the, the business.
It’s really quite nuanced. We’ve been flagged that in the presentation. So if I look outside North America, we have really excellent performance in terms of projects. So almost an over delivery outside of North America. In North America, our performance was poor. And so we had significantly lower margins in North America.
So actually the overall improvement, mass, both of those elements. And so, we’ve done a significant amount of work in terms of trying to improve those North American margins. Some of that involves closing businesses, we’ve talked about we’re no longer betting around large, industrial EPC activities. And that’s been part of the broader de risking, and we’re also limiting the lump sum turnkey risks that we take into the business. And that’s all designed with improving margin in North America.
And so we’ve not given out any detailed profit guidance going forward, Mark, but, we do have higher expectations around our project business, certainly in the medium term in terms of improving project margins. We don’t see the portfolio mix that we’re putting in as being detrimental to our margin profile going forward, either.
I don’t know Robin, do you want to pick up the book to bill, that question.
Robin Watson
Yes, I think I mean, the confidence we have in the book to bill, is the predictability, we’ll get in terms of the EBIT return, the dangerous to David’s point, you blend on EBIT for the overall projects where you’ve got an eastern hemisphere that I’ve went very well actually in terms of the returns, and you’ve got a Western Hemisphere, the Americas business, it’s been a bit more challenging.
The project portfolio we see moving forward should give us, a margin position philosophically in a place that it’s not as high as consultancy, but it’s a bit higher than operations that is why we do projects and capture the capital investment cycle as it comes in.
Just be repeating, we do see the macro very good, we do see the position that we’ve got for the project business across these markets very well positioned, the client relationships, very good. And, frankly, we don’t see the need to be taken on the volume of lump sum turnkey risk that has been in the business, three, four or five years ago.
Mark Wilson
Okay, thank you. And then just to get a view on that mix. As projects becomes more reimbursable weighted. Should we have a view on how that order book is split? Blue collar versus white collar type work? Because consulting largely office based operations, largely people on the ground based, how would we think of projects now you’re moving away from fixed lump sum?
David Kemp
Yes, no, I think it’s a really good question Mark. So we’ve been on a journey of more white collar less blue collar. As an organization, we do see — if I look at some of the work that we’ve won. We’re doing everything from owner’s engineer, a project management consultancy, as well as EPC from a construction management perspective. So EPCM, we see that trend, and that market opportunity has been quite prevalent in our end markets.
So from a conventional energy perspective, we would tend to EPCM and preference to direct delivery, construction. And I think the bias that you should have in your mind would be an increasingly white collar position that we would have across projects, as well as a lower risk element we have in projects.
Frankly, the lump sum turnkey projects are the ones that we tend to have the direct construction delivery focus on. The slight nuance without getting too complex on it as within operations, we do modifications work, we do that almost entirely on a reimbursable basis. And we use blue collar labor to deliver that for those that are generally employed by us. So there’s, there’s a slight nuance there with it, it tends to be modifications orientated. It tends to be with our global energy clients, and it tends to be very low risk.
Mark Wilson
Thank you, and I appreciate the opportunity. So one, a couple of final points that you have in the past, given out headcount, for the divisions, but in recent years, you focus more on order book. And yet, we’re moving away from fixed price lump sum. So have I missed anywhere in the results? Is the headcount are given out? Just that’s the first point. And why wouldn’t it be? The second.
And then lastly, on the Built Environment? Can I ask is that the sale agreement you’re looking to is that negotiations with a single seller? Or is there an auction process going on?
Robin Watson
In terms of headcount, Mark, nothing to see here. So if it’s a piece of information that you have missing, our headcount remained pretty flat through the year around 40,000, for just over 42,000, including our JVs and it was flat December ’20 to December ’21, so there’s ups and downs within that, and it’s split across the business, a distribution is pretty much as its as it consistently as.
In terms of the Built Environment sale, with material that well, we’re pleased with the progress we’ve made. We have a range of interested parties, very, very credible, interested parties very enthusiastic about the business. And we will look to concluding an SBA lead in q2, and completing a transaction later in the year. And we’re very confident we can do that.
David Kemp
One of the things maybe just to build out that headcount that makes it slightly less straightforward going forward, in terms of when you look at the BU headcount, because we’re doing an increasing amount of shared services, right across all of our functions. It’s, looking just at the BU alone, doesn’t tell you the picture that you’re trying to build up around, are we increasing headcount, and then increasing revenue, because some of that is being transferred into central functions now, hundreds of people into central functions that are no shared across the group, for example, in finance, IT, even things like HSE. So part of our future fit was extending shared services, it probably wouldn’t give you the information that you’re looking for, in terms of the BU announcements.
We’ve got the microphone off, Mark.
Henry Tarr
Hi, so it’s Henry Tarr again. Two other questions, I guess, on the conventional business. The old price is back at $100. It feels like we’ve gone through a period of underinvestment and potentially there’s a bit of catch up to come through. Where are you seeing the most interest, activity urgency? We can see rig count rising in the US, et cetera. In your conversations, is it kind of too early for some of the international companies to be coming back and planning programs of work to do have you really seen that kind of pickup in interest? I guess that’s the first one.
David Kemp
Yes, it’s a short answer. Henry, we’ve seen as you say the rig count top in the US. That’s one major of activity in the US. What we’re also seeing as the end of the beginning of your like of an appetite to capture methane and reduce flaring and process facilities. So again, we feel that is not inextricably linked necessarily to rig count as such, but as the US, firstly ensures the secure domestic supply chain, but also do it in a sustainable manner.
We do see some really great opportunities there. And as I say, we’re getting some emergent opportunities in our pipeline in that respect.
I think the Middle East has been — the Middle East was actually going fairly well, in 2021. We picked up quite a lot of long term contracts, firm agreements and modification works. There’s a bit of a mix there, some of it isn’t necessarily sustainability space, but a lot of it’s an energy security and maximizing production volumes from conventional upstream assets. And we’re seeing that pretty much across other Middle Eastern footprint, Iraq, Saudi Arabia, right through United Arab Emirates, et cetera. So there’s a good range there.
And then in the North Sea, actually we’re up on headcount in the North Sea. We’ve won a significant volume of work in the North Sea, both in the UK side, and in the Norwegian side. And again, I blend, they’re off some of it, frankly, on the conventional, as you see a bit of underinvestment but a modification work, maximize production, and probably a flavor that we are increasingly seeing coming through even if you’re maximizing production, can you reduce carbon intensity reduction, and that fits very well with some of the stuff we’re doing, our JV makes us offer, envision where we can do cloud emissions reductions for clients, et cetera. So there’s that additional capability that we now have to do that.
So conventionally, I would say from our perspective, firstly, we see the footprint is helpful. Energy security is definitely driving investment in a way that that’s much more balanced than it perhaps was in Q4 2021 for fairly obvious reasons. And in real terms that maps on to the Wood footprint as the North Sea, the Middle East and North America as they’re going our dominant beneficiaries.
Henry Tarr
Okay. Thank you. And then just one question on working capital. So going into this year, with projects coming a bit lower, and perhaps not the large scale projects as well. What does that mean for working capital and potentially less prepayments to come through? Is there any more cash to come out from the projects beyond the Aegis business? How do you see that playing out?
David Kemp
Yes, we’ve not given any detailed guidance around working capital, other than we expect a normal working capital, like fluid in the first half, and then an inflow in the second half. And it’s worthwhile just reminding why do we have that, we do have a seasonal nature of our business, so our peak revenue is spring, summer, through autumn. And that drives into the working capital profile around the first half.
If you look at our 2021 working capital outflow, you can almost break it down into two elements. So you have the projects outflow, and you had Aegis. So Aegis was roughly about $40 million, absent that our working capital was flat. As we’ve said, as we go forward, we feel we’ve done a lot of the de risking of our business, you can — the proportion of lump sum activity in our business is considerably less. We don’t see that being a big step up so we don’t see the big inflow and advances, equally we don’t see it being a big step down going forward.
Any final questions?
You want to ask a question James or no?
Okay. We’ll leave it there. Thank you very much for your time, apology for the overall delay, and we’ll look forward to seeing you in August.
Robin Watson
Thank you.
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