Edited Transcript of WOR.AX earnings conference call or presentation 23-Feb-20 11:30pm GMT

Moving to Slide 4. There are many key achievements this half. We have delivered double-digit revenue growth in the base business and on a pro forma basis to the prior corresponding period. We’ve delivered increase in both underlying EBITDA and NPATA from the prior corresponding period. The balance sheet remains strong, supported by strong cash flows from improved cash collection across the group. Our business mix has shifted with increased construction revenue from North America, while our consistency of earnings has improved through diversification, OpEx and a larger contribution from chemicals. Our DSO has improved by 10 days over the past 12 months, and our backlog continues to increase. Our cost margin and revenue synergies are being delivered, while our cost synergy target as shared has increased to $175 million, to be delivered within 30 months post completion.

We now have common systems and process in place for safety, sales and operations. We are at the forefront of delivering projects that provide solutions to our customers during the energy transition. Our investments in offshore wind and distributed networks further strengthen our ability to support our customers, and our business is well positioned to pursue the opportunities for the growth that the energy transition provides.

Moving to Slide 5. We have a short history of our half-on-half performance in terms of aggregated revenue, EBITDA and also with pro forma numbers for the FY ’19 half showing the impact of the ECR acquisition. Aggregated revenue has increased approximately 20% from pro forma half year ’19 and reflects the achievement of revenue synergies and organic growth across the lines of business. EBITDA is up 9% from pro forma half year ’19, reflecting an increased revenue mix from fabrication and our Integrated Solutions business. The positive impact of diversification into OpEx contracts and the chemical sector has delivered increased resilience in earnings, and we are delivering on our cost synergy commitment.

Moving to Slide 6. Our backlog position has continued to improve over the last 6 months. Backlog continues with stronger contribution from Integrated Solutions with some large wins in Europe. We provide further details on sector and regional backlog details on Slides 51 and 52.

Turning to Slide 7. This slide highlights the outcome of our strategy over the last 3 years to increase earnings diversity and resilience through 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 45% in the first half of FY 2020.

We have made these changes without any shift in our risk profile. We continue to have approximately 80% of our revenue from reimbursable contracts with 20% from lump sum services and construction. We are not a lump sum turnkey contractor.

In terms of revenue split by sector, we have balanced the contribution from the energy sector, moving it from 78% of earnings in the past to 47% in the latest results due to the growth in revenue from the chemicals sector. In terms of regional mix, North America and Europe now contribute over 70% of aggregated revenue.

Moving to Slide 8. I will not — now talk about some of the highlights in our health and safety performance. Key performance indicators suggest our safety performance remains one of the best in the industry. Our total recordable case frequency rate for the 6 months for both employees and contractors has slightly increased when compared to June ’19. We continue our focus on field health and safety. We remain vigilant, and going forward, our priorities for FY ’20 include embedding life, our safety and well-being approach, which are common benchmarks across industries to implement our standard life-saving rules across the business and implement our harmonized health and safety processes.

Turning to Slide 9. We take responsible and sustainable approach to our business and have been recognized as one of the top-20 ASX companies for reporting on the United Nations’ Sustainability Development Goals — Sustainable Development Goals. We are aligning with the global initiatives consistent with our sustainability ambitions, such as the Task Force for Climate-Related Financial Disclosure and building responsibly, which supports worker welfare principles, in addition to our long-standing support for the United Nations Global Compact and Sustainable Development Goals. Further detail will be provided in our FY 2020 annual report and separate sustainability report later this year.

Worley’s technical and project delivery expertise are essential to deliver the projects and infrastructure necessary to decarbonize the energy system, and this is where we can make the biggest contribution to sustainability.

Moving on to Slide 10. I’ll now provide a sector and energy transit update, moving on to Slide 11.

So on Slide 11, I’d like to start by addressing the energy transition we are witnessing around the world, including here in Australia. The dual challenge of supplying energy to a growing population while addressing the risk of climate change is one of the greatest challenges the world is facing today. As the largest global engineering and project delivery company in the energy sector, we certainly have a significant role to play. To date, we’ve been involved in all aspects of the energy transition. We have assisted our customers throughout the world by increasing the delivery of electrification and the delinking of energy growth from GDP growth to energy efficiency, fuel switching and renewables.

Our experience and expertise supports industry and governments both naturally and globally in implementing carbon replacement systems in their decarbonization initiatives, delivering on community expectations of dealing with climate change. This, Slide 11, demonstrates the depth and breadth of our energy transition experience and expertise. New energy is not new to Worley. We have delivered over 1,500 new energy projects globally, ranging from over 290 solar projects, including the world’s largest concentrated solar project in Dubai; over 420 onshore and offshore wind projects, including Africa’s largest wind farm, where we erected 365 turbines in 362 days. We are a world leader in the emerging hydrogen economy, and we also have world-leading expertise in hydroelectric and nuclear programs.

Turning to Slide 12. While we have a strong track record in established technologies, we are also an active participant in new and emerging technologies. Worley is undertaking some of the world’s firsts in areas such as integrating green hydrogen production into an operating facility in Australia and Europe’s first green aviation fuel refinery which will convert household waste into clean-burning sustainable fuels for aviation and road transport. We are delivering this project in partnership with Velocys, a leading clean fuels technology provider, and we will see 70 — that will see a 70% reduction in greenhouse gas emissions compared to regular aviation fuel.

Turning to Slide 13. The next few slides take a deeper look at each of our sectors, specifically addressing the market outlook and energy transition opportunities.

Looking at upstream and midstream hydrocarbons on Slide 13, investment is growing as depicted in the chart on the right. Gas is the transition fuel, is the fastest-growing fossil fuel and is set to become the main fuel in the global energy mix by the mid-2030s. Asia accounts for half the global growth in gas demand, and this is fueling the investment cycle in LNG, estimated at 120 — at $215 billion by 2025, as you can see on the chart to the left.

To support the growth in LNG and coal-to-gas switching, opportunities exist in our pipeline business, particularly in North America and Asia, which accounts for almost 50% of global spending. Oil still has a role to play, with growth expected in selected areas, including U.S. shale, Middle East and deepwater. We are well positioned in all 3 growth areas.

In U.S. shale, we are seeing the customer mix change with the increased participation of the majors. Our oil — our internal capabilities have changed with ECR, industrial water and blue-collar delivery offering.

In terms of the energy transition in this sector, we are seeing significant opportunity in supporting customers to decarbonize and reduce carbon intensity, and we are doing this in many ways, including carbon capture, use and storage technology, electrification of facilities with renewable energy and the development of processes to minimize fugitive emissions.

Turning to the refining and chemicals desk on Slide 14. The sector has experienced major market shifts, as you can see in these 2 charts. Demand for refined products is moving towards emerging economies. This is opening new opportunity in the Middle East and Asia in new builds, brownfield expansions as well as the integrated refining and petrochemicals to chemicals facilities as customers seek to diversify their traditional portfolio by value-adding their crude reserves and taking greater control of the supply chain.

As the demand for petrochemicals continues to grow, even in the Paris-aligned scenarios, we are seeing significant opportunity in the production of biofuels, natural gas liquids and other lighter feedstocks required to fuel the industry. In chemicals, growth is being driven by increasing population and urbanization led by China with specialty chemicals expecting rapid growth. The energy transition is driving emissions regulations, presenting significant opportunities in low-sulfur, low-carbon fuels, including renewable diesel. The circular economy is unearthing opportunity in plastic recycling, and we are defining technology roles, building on our long history of waste-to-energy experience.

Turning to Slide 15. Resources, which captures mining, minerals and metals as well as our resource infrastructure work. We are seeing strong customer cash flows with investor confidence returning across all — almost all commodities with a strong outlook for base metals and bulk commodities. As a result of the emissions targets, customers are seeking to reduce energy intensity by electrifying mines and powering with renewables. The energy transition is also causing increased demand for energy transition commodities such as lithium and cobalt.

We’re also seeing emerging opportunities in technologies delivering improved efficiencies. One example of this is NextOre. NextOre is an innovative mine — mineral sorting and processing technology that rejects large volumes of waste rock before entering the plant, significantly reducing the amount of energy and water needed for processing. This technology is unlocking complex ore bodies and transforming the economics of mine assets.

Moving to our power sector on Slide 16. As the world continues to electrify, we are seeing shifts in power investment, particularly towards renewables but also across all low-carbon technologies. Coal-fired plants are in decline, while announcements of new gas-fired plants are slowing. Offshore wind technology has experienced high growth in demand, and power networks require significant investment to respond to the changing loads and supply patterns. If the Paris-aligned targets are to be achieved, global investments into our energy mix needs to increase by over 50% by 2040, amounting to an annual investment of $3.2 trillion.

Several technologies, including distributed energy systems, renewable energy with storage integration, nuclear, green hydrogen and carbon capture utilization and storage, will play an increasingly important role in decarbonizing the energy mix. Our power business is deliberately focused on growth areas of high complexity with low risk of commoditization.

I would now like to turn to some of the recent corporate moves we have made, starting with the acquisition of 3sun Group on Slide 17. This acquisition strengthens our strategic presence in the sector and broadens our role in the energy transition. 3sun is a U.K.-based installation, inspection and maintenance specialist in the offshore wind sector and is a great fit with Worley’s onshore maintenance modifications and offshore business, providing entry into the world’s largest wind market in Europe. It will also help accelerate growth in the emerging markets of North America and Asia Pacific.

3sun has existing customer relationships and projects with all of the leading OEM managers, such as Siemens Gamesa and Vestas, and embeds data analytics capability to enhance optimization of O&M, adding greater value to our customers.

Turning to Slide 18. During the period, we entered into a U.S.-based joint venture with XENDEE called VECKTA, a distributed energy and microgrids and storage business. This allows us to assess, design and deploy microgrids and distributed energy systems. VECKTA has the capability to link core energy configuration digital platforms with equipment, finance and project delivery services. It’s a key value proposition and as an industry — and is an industry-leading decision platform that allows us to access and design, optimize energy systems up to 90% faster than traditional methods. In essence, it gives us access to distributed energy systems that reduce emissions, improve power quality and availability as well as reducing costs.

Turning to Slide 19. Before I hand over to Tom, I wanted to leave with 2 slides that capture our leadership role in the energy transition. From a global perspective, we are actively involved in energy transition projects in every region, supporting customers in all sectors we serve. One example is the work being commenced on the conversion of a refinery in the U.S. from one — from crude oil feedstock to an organically derived feedstock, making it 100% renewable diesel operation. There are many more examples where we have capability across all major aspects of the energy spectrum that drive the transition to our energy future. We can and currently do bring that expertise back to Australia across a wide number of projects.

Turning to Slide 20 and our home of Australia, from where we launched the business for almost 4 decades ago. We are supporting customers in all aspects of the energy transition with major roles in well over $100 billion of energy and resource investment. Worley, with our joint venture partner, operates and maintains 1/3 of Australia’s existing power generation fleet and 3 critical gas pipelines. We are the largest operator of wind farms in Australia.

We are supporting our government navigate its pathway toward a hydrogen economy and are leaders in the deployment of decarbonization technologies. We are proud of this role in helping the Australian industry. As Australia’s largest exporter of high-value services, we are a major conduit for Australian businesses into the international markets, enabling growth for hundreds of registered Australian businesses.

I’m now going to hand over to Tom, who will run through the financials in more detail.

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Thomas F. Honan, Worley Limited – CFO [3]

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Thanks, Chris. Before I start on the financials, I should congratulate you, Chris, on your appointment today as CEO of this great company.

I’ll begin by focusing on our statutory financials. On Slide 22 is the statement of financial performance outlining our statutory results. This has been released in the financial report lodged with the ASX earlier today. A few 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 the addition of ECR for the full 6 months as well as improved underlying performance.

Moving to Slide 23. Consistent with what we did at the full year, we have moved to reporting our results, excluding the impact of amortization of acquired intangibles so as to better reflect the operating performance of the company. You’ll see quite a few references on this basis to EBITDA and NPATA throughout the document. So after taking into account a number of adjustments, which are mostly focused on transaction and integration costs of $81 million and the amortization of intangibles at $53 million, we derived an underlying net profit after tax and before amortization, or NPATA, of $216 million, up 110% from $103 million in the prior corresponding period.

On Slide 24, we have highlighted both the statutory and underlying key financials for the first half of 2020. We achieved improvement in revenue due to 6 months’ contribution from ECR in addition to improved market conditions. Not surprisingly, due to the same reasons, our EBITDA and NPATA results also improved. At the underlying level, our NPATA margins declined slightly, reflecting the change in revenue mix from procurement and also North American construction revenue, mostly due to the proportion of these items coming from the ECR acquisition.

The effective tax rate increased from 22% to 25% compared to the PCP, reflecting the higher proportion of earnings coming from relatively high tax jurisdictions like the U.S.A., Canada and Western Europe. We see this level continuing as a greater proportion of earnings comes from these parts of the world.

Our underlying operating cash flow of $277 million is up significantly from last year and, of course, reflects the contribution from ECR. However, I would note that there has been real improvement in cash collections and a pleasing reduction that Chris has talked about in DSO. I’m sure this is not unrelated to the point I’d made earlier about the higher proportion of earnings coming from U.S.A., Canada and Western Europe.

These comparisons are to statutory or underlying PCP results for WorleyParsons. Many of you will have seen the announcement of pro forma results for FY ’19 published recently. Compared to the pro forma, revenue was up 20%, and EBITDA increased 9%. Revenue mix drove the differences in these percentages, consistent with the differences between reported results.

Slide 25 provides further analysis to demonstrate how the underlying business is performing versus the pro forma. This slide provides transparency around the factors causing our earnings to increase across the 2 most recent halves.

Firstly, we have shown the impact of synergies on this half. You will note that $6 million of benefits were already delivered in FY ’19, and the half year run rate of those benefits is $22 million. Later, Chris will present the annualized impact of FY ’19 synergies as being $43 million. With rounding, this is twice the 6-monthly run rate of $22 million. The benefits from actions delivered in the most recent half is $14 million. Chris will talk later about the annualized run rate of these actions being $56 million, but the impact on the first half of FY ’20 was $14 million.

Next, you will note the impact in the current period from actions relating to the historic SOE receivables. These are either provisions taken or legal expenses incurred in pursuing the 3 remaining SOE receivables. Given they are expenses relating to historic receivables issues, we believed it will be important to separate them from the in-period business growth.

To assist the reader, we have also estimated the impact of seasonality on earnings. This estimate is only based on the most recent view of our earnings mix and shouldn’t be used as some form of longer-term proxy for overall Worley seasonality. As can be seen on this slide, business growth was around 7.5%. However, that growth climbs to over 15% if synergies are included. As I said earlier, Chris will provide further details on synergies later in the presentation.

Moving on to Slide 26. Overall, aggregated revenue was up by 134% for the period, which was driven by reporting 6 months of the ECR business in addition to broader improvement. Segment incomes are up against all lines of business. The strong increase across major projects in Integrated Solutions reflect a strong underlying performance and 6 months of the ECR acquisition. Margins improved in ECS services, the MMM segment and Advisian. The MPIS margin was impacted by increased volume of lower-margin construction revenue in North America as well as increased procurement activity.

Moving to Slide 27. Our headcount is approximately 59,000 in over 50 countries. We spoke of the announcement of the transaction about the increased level of construction, fabrication and OpEx-based work demonstrated by craft labor, which is now at 11,800 people. We continue to manage our staff utilization rate on target. The target has increased slightly post ECR due to the increased exposure to high utilization, construction fabrication and OpEx-based work.

On the announcement of the ECR transaction, we talked about increasing our corporate-wide utilization target. After the first 8 months of combined operations and given the level of mainly North American-based construction and fabrication activity, we are looking at whether we need to further increase that target.

Slide 28 provides a summary of the progress over the past few years on our P&L metrics. A slight decline in EBITDA margin reflects the increased mix of revenue from lower-margin fabrication and Integrated Solutions as per the acquisition model. The NPATA margin was also impacted by the higher effective tax rate outlined earlier.

I’ll now discuss capital management, starting on Slide 30. On Slide 28, I spoke of the movement in key P&L metrics over the past few years. Slide 30 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 take out of this slide is the improvement in leverage and gearing over the past couple of years, delivering a stronger balance sheet even while we invested in over $4.9 billion of acquisitions.

Traditionally, the business has performed much better on cash metrics in the second half. I’m pleased to report that the first half of FY ’20 has not followed that trend. In fact, the first full half of the combined business cash flow has been excellent. $277 million of underlying cash flow from the business is beyond the expectations we set for ourselves at the start of the period. There is no breakthrough practice or technology involved, just good old-fashioned hard work: firstly, for our teams to deliver quality work, then to invoice accurately and on time and, finally, to follow-up and collect the cash. The improvements in these practices since the time the businesses came together is a credit to all those involved.

Net debt on a covenant basis remained flat at $1.6 billion. The increase in statutory net debt is driven by the implementation of AASB 16. I’m very pleased to report stable balance sheet metrics of gearing at 21.3% and net debt-to-EBITDA of 2x.

Turning to Slide 31. Our gearing ratio at period-end calculated on the net debt to net debt plus equity basis was 21.3%, flat on the previous period, well below our target of 25% to 35%. Interest cover has declined to 8.5x, while leverage ratio, as I said, is reasonably stable at 2.0x. Our average maturity of debt is 2.8 years. We are currently examining various longer-term debt options given movements in longer-term debt yields, plus the greater stability in our earnings post acquisition.

As described earlier, DSO improved in the period. Three SOE receivables remain noncurrent following the trigger of dispute resolution mechanisms. Collection from the fourth SOE continues with, 65% already collected, and that’s in line with our expectations.

Moving to Slide 32. As I’d previously mentioned, our debt facility completed in February 2019 had improved terms to the previous facility agreement. The facility consists of a $500 million multicurrency revolving facility and an USD 800 million term loan maturing in February 2024. We have secured additional bilateral facilities of USD 175 million for working capital and to improve — further improve liquidity.

I’ll now hand back to Chris Ashton.

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Robert Christopher Ashton, Worley Limited – MD, CEO & Director [4]

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Thanks, Tom. Look, I’ll now provide an update on the ECR acquisition before providing some concluding remarks.

So just moving on to Slide 34. I’m happy to say that we are on track, and the integration is largely complete. The remaining activities now form part of normal operations.

In terms of achievement, we now have common global platforms in place for safety, sales and operations with financial systems in progress. Our cost synergy target is up from $150 million to $175 million over a 30-month post-acquisition period. GID utilization is growing in line with the expectations, and revenue synergies are being realized in line with the acquisition business case. The new organizational and functional structure is running smoothly, and as a result of this good progress, we are now shifting our focus to accelerating our transformation.

Turning to Slide 35. We are pleased to have achieved some important milestones of working as one organization on common platforms. We are all — we are now all on a single sales platform, CSP, which was successfully launched in January this year. We have our new safety and well-being approach, life; and a single knowledge and management system which defines our new ways of working to better support project and operations. Our back-office system integration is on track, and we will have the finance, ERP, expenses and core HR applications in place by September.

Looking at the cost synergies on Slide 36. We will deliver as we committed $150 million by 2 years post acquisition completion. We now expect to progressively deliver $175 million within a 30-month period from the acquisition completion. This is a $45 million higher number than our initial synergy estimate at the time of acquisition announcement. This increase comes from a broad review of the cost synergies with the 3 main buckets continuing to be IT, property and G&A or overhead rationalization. We’ve already delivered an annualized run rate of $99 million as at the end of December 2019. For IT, this includes infrastructure rationalization and scale benefits in our significant software expenditure. In property, it includes co-locating into single offices where we have multiple operations, such as Houston, Perth, Singapore and Santiago, to name but a few. Overhead savings are within the operational functional areas where we can get more efficiencies servicing the operations for IT, finance, admin and HR. The estimated one-off costs associated with delivering the synergy targets are approximately $125 million, with an additional $15 million of CapEx. There are modernization cost of $40 million plus about $35 million of CapEx.

On Slide 37 to 42, we have provided examples of some of the revenue synergies that we have been — that have been identified and secured. I’m not going to go into these slides in detail other than to say they provide great examples across all our segments, where 2 companies have come together as 1 and developed opportunities which could not have been available without the acquisition taking place.

On Slide 35 (sic) [Slide 37], we have provided an example in the ECS segment, where we secured a 3-year contract to provide technical services with Oman Oil Refineries and Petroleum Industries Company, one of the largest and rapidly growing Middle Eastern oil businesses. We were able to leverage off Worley — the Worley relationship and bring ECR expertise in to secure that contract.

Slide 38 is another example in the ECS segment, where we secured a 5-year agreement to the Sasol Secunda Synfuels facility. In this example, we were able to leverage both sides of the relationship with Sasol to secure this 5-year contract.

Slide 39 is an example of an ECS contract for the precommissioning, commissioning and start-up support services for the YCI Methanol One plant in Louisiana. We were able to leverage Worley’s long-term relationship with YCI and ECR’s local knowledge and plant commissioning track record.

On Slide 40, we have an example of a revenue synergy with the combined expertise from MPIS and ECS segments. We will collaborate on delivering services to all Neptune Energy’s offshore assets in the Netherlands. Worley brought the offshore relationship with Neptune, while ECR brought its presence in the Netherlands to the table.

Slide 41 is an example where our MMM business secured a 2-year feasibility study of Vale’s most important brownfield nickel ore bodies. ECR brought its long-term relationship with Vale and its underground mining expertise, while Worley has undertaken capital works for Vale previously. Combined, we bring expertise, experience in developing underground projects in North America, particularly in challenging brownfield environments.

Moving to Slide 42. While our focus has been and continues to be on delivering the benefits of the ECR acquisition through realizing cost, margin and revenue synergies, the integration is substantially complete, with the remaining activities being delivered as part of normal operations. We will now shift into accelerating our transformation. Our transformation strategy encompasses the following key aspects: Enhancing the company’s leadership position in energy, chemicals and resources. To do this, we will work with our customers and stakeholders, both in Australia and around the world, as they navigate through a period of change, capturing the opportunities presented by the global energy transition and by changing the way we operate by leveraging automation into existing and new delivery models and the development and deployment of digital products. We will do this by working with our customers using new commercial models, which reflect the changes in offerings and technologies of the future. Details of the transformation strategy for the business will be provided at Investor Day later this year.

I would now like to make some concluding comments before turning to our outlook starting on Slide 44. I believe we’ve made some significant progress with the acquisition and integration of ECR and delivered strong interim results for the integrated business. Our revenues were up 134%; and EBITDA is up 126%; and NPATA, up 110%. We now have a more consistent and resilient earnings profile through the increased OpEx and contribution from the chemicals sector.

We delivered improved cash flow. Our balance sheet is strong. Our backlog has increased, and the integration is on track and nearing completion. The cost synergies are being delivered, and we see further upside with a target of $175 million within 30 months.

We’re an industry leader on a global scale in the energy, chemicals and resource sector and are delivering solutions for our customers during this period of change. We are well positioned to deliver on the opportunities of the energy transition. And we have a critical role to play in the future, supporting our customers and governments, both nationally and globally, and delivering on their energy transition goals.

Moving to Slide 45, in terms of group outlook. The energy, chemicals and resource market indicators and growth in backlog provide evidence of continued strength in our market conditions. The energy transition provides expanded opportunities for growth. As the result of the ECR acquisition, we have enhanced the diversity and resilience of our earnings, and Worley has the global technical and financial strength to support its energy, chemicals and resource customers as they navigate a changing world. We continue to deliver the benefits of the acquisition of ECR, including the realization of cost, margin and revenue synergies.

Thank you for your time. I would now like to open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from James Byrne from Citi.

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James Byrne, Citigroup Inc, Research Division – Research Analyst [2]

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Chris, congratulations on the appointment to CEO. Now I presume that you would have presented to the Board when I elected you as CEO, and I’m wondering if you wouldn’t mind sharing with us your — effectively, your strategy. I presume that there’s not going to be material differences in how you intend to run the business?

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Robert Christopher Ashton, Worley Limited – MD, CEO & Director [3]

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Well, I think that — look, obviously, the details of the Board, what I can share is that, no, there’s not going to be any right turn on strategy. What I’ve outlined here, and what I’ve talked about at the half year results or the full year results — in fact, what I talked about at Investor Day when I presented last year, yes, the energy transition presents a huge opportunity for us, and the energy transition is going to touch every aspect of our business, every sector, the energy, the chemicals and the resource sector.

If you also look at the digital — the nature of the digital disruption that the world is facing across every aspect of our life, not just the industries and sectors and geographies within which we work, I think those 2 are fundamental or were fundamental to what I shared at the Investor Day and remain fundamental to our strategy going forward.

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James Byrne, Citigroup Inc, Research Division – Research Analyst [4]

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Yes. All right. Slide 25, the SOE receivables. Would I be right in assuming that the majority of the $18 million there is provision?

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Thomas F. Honan, Worley Limited – CFO [5]

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That’s about half and half, James.

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James Byrne, Citigroup Inc, Research Division – Research Analyst [6]

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Half and half. Got it. All right. Now I presume that the provisioning there is just a requirement under accounting as opposed to a reflection of not expecting to collect the remaining receivables. Is that interpretation correct?

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Thomas F. Honan, Worley Limited – CFO [7]

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I wouldn’t divorce the 2 concepts, James. I think accounting should follow our expectation. And so I wouldn’t say it’s driven by one or the other. I think both things would drive us towards that conclusion.

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James Byrne, Citigroup Inc, Research Division – Research Analyst [8]

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Okay. That makes sense. Now if you were to be successful in getting the receivables, over how long of a time frame should we anticipate that to occur?

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Thomas F. Honan, Worley Limited – CFO [9]

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Well, the fact that we’ve classified them as noncurrent would suggest that we’re not optimistic of the next 12 months.

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James Byrne, Citigroup Inc, Research Division – Research Analyst [10]

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Fine. Yes. Okay. Lastly, there’s been a $33 million increase in the share-based payments. And I presume that, that’s just a reflection of the acquisition. But is this a sort of sustainable run rate going forward that you would anticipate? I think it was $40 million in the half?

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Thomas F. Honan, Worley Limited – CFO [11]

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The answer to the first — the answer you gave, firstly, about it being a reflection of the acquisition is correct. I wouldn’t give an outlook statement on a particular line in the P&L. But there were costs that we needed to incur to bring the ECR leadership, the previous leadership that had been within Jacobs ECR, into the Worley programs.

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Operator [12]

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Our next question comes from Richard Johnson from Jefferies.

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Richard Johnson, Jefferies LLC, Research Division – Equity Analyst [13]

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Just following on the first of the previous questions, Chris. I mean I was going to ask pretty much the same question but, albeit, in a different way. Given that your focus up to now must have been almost entirely on the integration of ECR, and you — presumably you’re now going to take a bit of a step back and look at the business in a more holistic manner, I was just really wondering what’s on your immediate to-do list?

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Robert Christopher Ashton, Worley Limited – MD, CEO & Director [14]

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Well, since I took on the role of COO in October ’18, my focus has been both on the integration planning and then the implementation but also on the transformation strategy. So I’ve been working with the leadership team over the last sort of 18 months on both of them. Yes, a lot of the emphasis has been on integration planning, on the integration implementation. But not a small amount has been based on the transformational strategy.

So it’s really — now it’s about shifting the emphasis now that the integration is substantially complete. It’s now moving to finalizing the aspects of the transformational strategy, which we’ll share the details of at Investor Day.

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Richard Johnson, Jefferies LLC, Research Division – Equity Analyst [15]

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Perfect. So you’re confident that the — that, that strategy has positioned the business to exploit the energy transition opportunity that you’ve talked about?

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Robert Christopher Ashton, Worley Limited – MD, CEO & Director [16]

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I think we have — we’ll share more at Investor Day, but I think we have a solid strategy, a sound strategy to allow a company of our size, geographic spread, technical breadth and depth to take full advantage of the opportunities that the energy transition presents in all of our sectors. Not one of our sectors is going to remain untouched by the energy transition. And I’m actually really looking forward to Investor Day, check with everyone what that’s going to look like.

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Richard Johnson, Jefferies LLC, Research Division – Equity Analyst [17]

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Great. And how much exposure, if any, have you had to your major shareholder?

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Robert Christopher Ashton, Worley Limited – MD, CEO & Director [18]

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Look, I’ve met them. I’ve met them both here in Sydney and in the Middle East.

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Richard Johnson, Jefferies LLC, Research Division – Equity Analyst [19]

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Okay. Great. And then, Tom, I was just thinking about the mix of the business and the way it’s changed, obviously, post ECR and wondering whether the capital structure of the business at all needs to be any different to the way we would have thought about it historically.

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Thomas F. Honan, Worley Limited – CFO [20]

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I think if you think of — Richard, if you think about the tax rate being higher because of our exposure into less risky markets, if you look at our growth in OpEx-related revenue also reduces the risk, that does lead you down that track. I — we haven’t certainly had any kind of long-term discussions about that, but it’s certainly — it’s on the agenda, Richard.

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Operator [21]

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Our next question comes from Rohan Sundram from MST.

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Rohan Sundram, MST Marquee – Gaming and Contractors Analyst [22]

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I might just start with a comment on coronavirus. I’m not sure if there was one in the release, sorry if I missed it. But can you just talk about how the — well, any potential impacts or how you’re seeing it so far or whether there’s no impacts?

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Robert Christopher Ashton, Worley Limited – MD, CEO & Director [23]

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Well, it’s interesting. I mean it’s an evolving situation. What I can say is that we’re not seeing any material impact on our business at the moment. Obviously, there are some travel restrictions that everyone’s aware of. But if you look at a lot of what we do, the service nature of what we do, working remotely, we’re able to adapt pretty readily to a situation should it worsen from hereon in. We actually have a team, what we call our R3 team, readiness — ready response recovery team, who is set up for understanding how to manage and respond to these kinds of events. So look, we’re monitoring it. There is some — obviously, we are subject to some travel restrictions, but we’re not seeing any material impact currently.

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Rohan Sundram, MST Marquee – Gaming and Contractors Analyst [24]

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Okay. Chris, just to confirm, do you not do any fabrication work out of China? Just pardon my ignorance on that.

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Robert Christopher Ashton, Worley Limited – MD, CEO & Director [25]

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No, we don’t do any fabrication in China, not — certainly, not that we — and we may be involved with fabrication sites off, but we don’t do any fabrication in China directly.

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Rohan Sundram, MST Marquee – Gaming and Contractors Analyst [26]

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Okay. And just finally, just in general, how are you seeing the customer CapEx environment? We’ve been through a round of oil major CapEx guidance, and it looked benign. How did you see that around it? How are you just seeing the customer CapEx space at the moment?

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Robert Christopher Ashton, Worley Limited – MD, CEO & Director [27]

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Look, I think the customers are — obviously continue to spend. What they’re having to do is understand where that spend goes. The energy transition is — the rate at which they are bringing the energy transition in their capital deployment strategies is what we’re seeing. So all of the customers we have interfaced with even just up till a few weeks ago before I came down to Sydney very much focused on understanding what that means to their plans. So not seeing a major — any major impact.

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Rohan Sundram, MST Marquee – Gaming and Contractors Analyst [28]

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Okay. Is delays or just slower decision-making an issue at all? Or is the pipeline just continuous?

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Robert Christopher Ashton, Worley Limited – MD, CEO & Director [29]

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Not — well, we’re so diverse, but not seeing any material slowdown in the pipeline.

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Operator [30]

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Our next question comes from John Purtell from Macquarie.

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John Purtell, Macquarie Research – Analyst [31]

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Look, just — sorry, just picking up on a couple of those questions. I mean just in terms of — and you may have already covered some of this, but just trying to get a sense of where, I guess, you’re particularly seeing the pockets of strength at the moment? And I know you talked about the Middle East before. What you’re seeing in markets like Canada. And also on the chemical side, what are you seeing there? I mean there appears to be a bit of a slowdown on the North American side but a lot of strength on the Middle East side.

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Robert Christopher Ashton, Worley Limited – MD, CEO & Director [32]

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Look, I think on the Canada side, we continue to see spend on the CapEx and the OpEx side, not seeing any — some significant pipeline work going on there. Europe is probably the most advanced if you think of the energy transition and some of the commitments that the various countries across Europe have made, and that’s translating into decisions that our customers are making. So look, it’s varied. The drivers shift across the business.

But look, Europe, we continue to see the spend there in the energy transition space. At Canada, we continue to see a couple of investment there. Look, the Middle East is always going to invest given the petrodollar nature of their economies. Some of them are looking at how can they monetize the oil or the chemical investment to sort of trap — or retain value in the hydrocarbons chain. So yes, a broad question, John, but we’re seeing continued optimism across the areas and markets that we’re operating in.

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John Purtell, Macquarie Research – Analyst [33]

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And just a second question on margins. I mean I appreciate the change in the mix of the business. We’ve seen a very strong revenue outcome here, but obviously, margin mix is lower than PCP. Would you expect margins to improve going forward as synergies are realized and rolled through and as the mix sort of embeds itself?

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Thomas F. Honan, Worley Limited – CFO [34]

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Yes, John, I think if you’re talking EBITDA margins, yes. I think we need to incorporate the impact of the higher tax rate on NPATA margin and how those 2 things offset each other. But certainly, EBITDA margins, we would imagine would — we would expect them to improve over time as synergies are realized.

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John Purtell, Macquarie Research – Analyst [35]

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And Tom, sorry, the go-forward tax rate, it was 26% this period?

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Thomas F. Honan, Worley Limited – CFO [36]

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Yes, I think in that sort of 25%, 26%.

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John Purtell, Macquarie Research – Analyst [37]

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Okay. And just the last one, Tom, again, just touching on an earlier question. But the $40 million of performance rights that were provisioned there in support costs, I mean, would you — presumably, you wouldn’t expect them to recur at that sort of level, that sort of quantum?

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Thomas F. Honan, Worley Limited – CFO [38]

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No. That’s right.

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Operator [39]

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Our next question comes from Alex Karpos from Goldman Sachs.

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Alexander George Philip Karpos, Goldman Sachs Group Inc., Research Division – Equity Analyst [40]

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A couple on my end. First of all, on ECR, kind of the business for about 10 months now. And Chris, you’ve obviously been intimately involved in the integration there. Any just high-level takeaways just in terms of what surprised you to the upside or the downside, getting full control of the business over these past 10 months?

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Robert Christopher Ashton, Worley Limited – MD, CEO & Director [41]

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Well, I think the — I’ve got to say, we’ve not seen any downside that — and I say that openly. What’s been really encouraging is the energy and positivity with which the 2 organizations came together, and the real catalyst for that, the catalyst to release that energy was a commitment made on the — very early on in the announcement when we made a commitment to have a deeply integrated organization, which would be made up of leaders from both organizations. And what that did, that set in place an expectation that as we delivered on it — so Andrew, when he announced his direct reports, it was balanced between both organizations. When each of us then released our organizational structure, it was a balanced, the leadership was a mix of both organizations. And suddenly, both organizations saw the commitments were being delivered on, and that built confidence, it built energy, it released more. And that, in turn, built more confidence, and that, in turn, built more energy.

And so what we’ve seen is bringing these 2 organizations together is — it took 6 months of planning and say — we’re 10 months of actually doing. But the positive approach to bringing the 2 organizations together has absolutely gone beyond anything we could have imagined. It’s something that you want and you hope for, but it’s exceeded all expectations. The positivity coming from both teams to create the new Worley has been a real delight to see. And I think that’s gone — I’d say all of the leadership team would say that’s gone a huge way to making the — to getting us to where we are and getting the businesses successfully brought together.

And on the downside, truly — look, 2 large organizations, complex, but nothing that was material, nothing that we didn’t identify as a potential risk but, again, nothing that has caught us off guard.

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Thomas F. Honan, Worley Limited – CFO [42]

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Probably, Alex, just from my perspective, maybe from the lousy CFO perspective, a slightly higher tax rate. Although, as that drives into a lower cost of capital, maybe long term, that’s actually a positive for the company.

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Alexander George Philip Karpos, Goldman Sachs Group Inc., Research Division – Equity Analyst [43]

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And on the 3sun acquisition, I don’t want to steal any thunder for the Analyst Day here. But obviously, that offshore wind markets are big and growing quickly market over there in Europe. Any early takeaways since the deal closed in October? And how do you think about that opportunity over the long term?

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Robert Christopher Ashton, Worley Limited – MD, CEO & Director [44]

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Look, if you look at what the projected capital spend is in the offshore wind sector, it’s huge. It’s a huge opportunity for us. If we look at the success, when we did the AFW acquisition in ’17, the ability to leverage that into opportunities around the world, we see the same with 3sun. We’ve got an incredibly strong reputation in that space in the U.K. Being able to leverage that into the U.S., into Asia, we believe, is a great opportunity for us to expand and take full advantage of the increased capital spend in the offshore wind sector.

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Alexander George Philip Karpos, Goldman Sachs Group Inc., Research Division – Equity Analyst [45]

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And one more just quick accounting one. Apologies if this was disclosed somewhere and I missed it. But have you all called out the accounting impacts on the P&L from AASB 16, maybe at the EBITDA line and NPATA line?

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Thomas F. Honan, Worley Limited – CFO [46]

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Yes.

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Robert Christopher Ashton, Worley Limited – MD, CEO & Director [47]

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Yes, Tom’s just said we have.

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Thomas F. Honan, Worley Limited – CFO [48]

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Yes, we have. It’s about $9 million in the half at the EBITDA line. At the NPAT line, it’s immaterial.

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Operator [49]

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Our final question will come from Nathan Reilly from UBS.

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Nathan Reilly, UBS Investment Bank, Research Division – Executive Director & Research Analyst of Industrial Materials [50]

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All right. My one question, I’ll ask it around the EBITDA performance. So I’m just looking at the pro forma growth around 9%. And just breaking that down, obviously, you’ve got the synergies coming through with some partial offset — or actually totally offset by these provisions and SOE costs. Now I know you don’t look at it like this anymore, but if we were looking to separate the performance of ECR and the legacy Worley businesses, what would the underlying EBITDA growth rates be? Is that overall sort of 9% pro forma that we’re seeing helpful?

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Thomas F. Honan, Worley Limited – CFO [51]

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We wouldn’t be able to tell you because we don’t know. We don’t look at the business as separated. It’s a combined business.

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Nathan Reilly, UBS Investment Bank, Research Division – Executive Director & Research Analyst of Industrial Materials [52]

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Got it. Okay. If you will indulge me, one final question, just on the pro forma revenue growth, 20%. Can you just give us a sense of what the shift has been in terms of the contribution of low-margin procurement revenue half-on-half as in pro forma on pro forma? Is it reasonably stable? Or has there been an increase there?

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Thomas F. Honan, Worley Limited – CFO [53]

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There’s been a definite increase and an increased proportion in the current period compared to the pro forma numbers and not just that, Nathan, but also at a lower margin.

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Nathan Reilly, UBS Investment Bank, Research Division – Executive Director & Research Analyst of Industrial Materials [54]

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Yes, understood. So what — can you guide me to where I might be able to sort of just pull that out on a pro forma basis?

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Thomas F. Honan, Worley Limited – CFO [55]

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We’re using estimates in the pro forma numbers, so it’s difficult to do.

Okay. Thanks, everybody.

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Robert Christopher Ashton, Worley Limited – MD, CEO & Director [56]

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Thanks, everyone, for your time. I appreciate it. And I look forward to interfacing, meeting many of you as I take on the new role. I’d also just like to end by thanking Andrew, who is in the room with us, and wish him well on his next endeavor.

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Andrew Wood;Former Chief Executive Officer, [57]

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Thanks, Chris.

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Thomas F. Honan, Worley Limited – CFO [58]

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Thank you.

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Operator [59]

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Thanks so much. Ladies and gentlemen, that does conclude the call for today. Thank you so much for your attendance. You may now disconnect.