19 March 2019

Full year results for the year ended 31 December 2018

"Returning to growth and delivering strong operational cash generation"

"Wood delivered good organic growth in 2018. We completed the integration of AFW at pace, increased cost synergy targets by 24% and unlocked new opportunities across our broader range of capabilities and sectors to secure revenue synergies of over $600m. We have delivered strong operational cashflow which has supported both a reduction in net debt of $450m since completion of the acquisition of AFW, and the payment of $231m in dividends in 2018.  We have built a unique platform and are in the early stages of what we can achieve.  Our performance in 2018 has strengthened our conviction in Wood's potential and we are excited about our prospects.  We are confident of achieving further growth in 2019."

Robin Watson, Chief Executive

Financial performance

Operations and integration

Outlook for 2019

Notes:

Wood is a global leader in the delivery of project, engineering and technical services in energy, industry and the built environment. We operate in more than 60 countries, employing around 60,000 people, with revenues of around $11 billion. We provide performance-driven solutions throughout the asset life-cycle, from concept to decommissioning across a broad range of industrial markets including the upstream, midstream and downstream oil & gas, power & process, environment and infrastructure, clean energy, mining, nuclear and general industrial sectors. www.woodplc.com

For further information contact: 

There will be an analyst and investor presentation at the London Stock Exchange, 10 Paternoster Square, EC4M 7LS at 09.00.  Early registration is advised from 08.30.

A live webcast of the presentation will be available from https://www.woodplc.com/investors/financial-events-calendar

Replay facilities will be available later in the day.

Chair's statement

2018 was a year of significant progress for Wood that included the important milestone of the first anniversary of the completion of the Amec Foster Wheeler transaction. Under Robin's leadership, the two companies have been brought together to create one leading business in project, engineering and technical services delivery, accelerating the Wood Group strategy to broaden its service, sector and end market portfolio.

At the start of the year a clear set of financial and operational objectives were established for Wood and Robin, together with his leadership team have been focused on delivering against them. Integration and cost and revenue synergy delivery formed an important part of these objectives.  With support from the Board integration has progressed at pace with the process completed in October.  This clear focus has allowed the business to access cost synergies ahead of schedule and to capitalise on its broader capability set to realise significant revenue synergies and demonstrate the strength of the combined business.

Wood returned to growth in 2018 with good momentum in trading and a significant impact from cost synergy delivery.  Results benefitted from relatively favourable conditions in the wide range of energy and industrial end markets Wood now operates in, despite a slower sector recovery in oil & gas.  The quality of earnings is demonstrated by Wood's cash generation performance in 2018 which has contributed to a reduction in net debt of $450m since completion and progress towards our deleveraging target.  The Board is confident that as an integrated business Wood has a strong operational platform capable of delivering growth from a sustainable cash generative model.

Wood remains committed to its progressive dividend policy which takes into account future cashflows and earnings. This is a key foundation of the Wood investment case which has been sustained through the challenging conditions in our core markets through the downturn. There is no change to the policy going forward. The Board has recommended a final dividend of 23.7 cents per share, which makes a total distribution for the year of 35.0 cents, representing an increase of 2% on the total distribution for 2017. Dividend cover is strong at 1.6 times.

Looking ahead, there is a very positive medium term outlook for Wood's broader end markets. The Board is confident that Wood is well placed to deliver good longer term growth both organically and by a return to acquisition led growth that aligns with our long term preferred capital structure.

Ian Marchant, Chair

Chief Executive Review

In October 2018, we completed the integration of Amec Foster Wheeler ("AFW") and celebrated our first anniversary as Wood. We have brought together the complementary capabilities and operational cultures of Wood Group and AFW and taken the best of both to create one leading business in project, engineering and technical services delivery in energy, industry and the built environment. We have a simple, effective delivery model with a multi sector full service capability across a broad range of energy and industrial markets. In 2018 we focussed on unlocking the anticipated deal opportunities, mitigating the well flagged risks and delivering against a clear set of operational and financial priorities:

Returning to growth: revenue including joint ventures up 12%, adjusted EBITA up 5% vs 2017 proforma

Wood returned to growth in 2018 and we saw good trading momentum throughout the year. Relatively favourable conditions in the wide range of energy and industrial end markets we now operate in have contributed to growth in 2018 across our business.

Completing integration of AFW ahead of schedule

Wood's simplified organisational structure was established before Day 1 and we completed the integration in October 2018, twelve months after completion of the acquisition. Our actions during the year focused on establishing our organisational structure, high-grading management, integrating business development functions and merging bidding pipelines, implementing enhanced processes for management of contract risk and working capital, establishing common ERP systems, rationalising IT systems and consolidating real estate to co-locate offices in key hubs. The operational cultures of the legacy businesses were already well aligned allowing us to roll out our Vision, Values and Behaviours which are the foundations of our cultural framework, in the first quarter.

Delivering increased costs synergies: 3 year target up 24% to $210m and $55m in-year benefit delivered

Integration at pace enabled us to deliver cost synergies ahead of schedule and the in-year benefit of cost synergies was $55m in 2018. As integration progressed we identified opportunities for further savings and in August 2018 we increased our target for annualised synergies by the end of the third year following completion to at least $210m, up from at least $170m previously, with no increase in the c$200m anticipated costs to deliver synergies.

Enhancing our risk management framework and project delivery governance

Recognising the change in risk profile of the combined business, a key element of our integration process was a review of significant contracts with profit at risk. As we improved our understanding of some legacy AFW contracts, and in line with accounting requirements, we took a view of the likely outturn which led to a number of opening balance sheet adjustments, although the risk profile inherited was in line with our overall expectations. We identified opportunities to simplify the process for managing risk and enhanced our governance structures, project and tender review process and contracting policy as a result. We also took the decision not to pursue certain higher risk lump sum work in the legacy AFW business and have exited the Guam project in the Pacific in the E&IS business. Only one of these legacy contracts remains active and we have taken steps to ensure close monitoring of progress and active management of the contract.

Securing >$600m in revenue synergies

Our revenue synergies delivery programme is now embedded in a cross-selling culture across our entire business. To date we have secured multi year contracts worth over $600m that are clear examples of revenue synergies, reflective of our enhanced capability set and ability to deliver a wider range of services to our customers. Orders won include our engineering, procurement, construction and commissioning contract with Saudi Aramco and SABIC to support their integrated crude oils to chemicals complex.  We are also seeing a number of awards that leverage our involvement in the earlier stages of projects, as well as our strong in-country presence and enhanced capabilities.

Strong operational cashflow validating quality of earnings

Against the backdrop of a growing business we have generated strong operational cashflows, having delivered significant improvements in working capital management.  Cash conversion, calculated as cash generated from operations (after exceptional items) as a percentage of Adjusted EBITDA, improved significantly to 102% (proforma 2017 14%). We are confident that we have an operational platform capable of delivering strong cash generation, validating the underlying quality of earnings and underpinning our long term investment case.

Deleveraging : Net debt reduced by c$450m since completion

We have reduced net debt from $2bn at completion of the AFW deal in October 2017 to $1.5bn (2.2x Adjusted EBITDA) at 31 December 2018. In addition to generating growth in earnings, delivering strong cashflow from operations and maintaining our capital discipline, we also made progress on our non-core asset disposal programme.

Retaining a progressive dividend: payments of $231m up 2%

Growth in our earnings and strong operational cashflow enabled us to grow our dividend in 2018. There is no change to our progressive policy and the dividend is well covered at 1.6 times.

Improved safety performance

Our focus on safety is undiminished and throughout 2018 we focused on developing a consistent health and safety framework as part of the integration.  Our safety performance has shown strong improvements, with total recordable case frequency (TRCF) and lost work case frequency (LWCF) down 28% and 20% respectively compared to 2017. 

With integration complete, we have created an excellent operational platform across energy and industrial markets that positions us really well for future growth. The value added range of capabilities, variety of end markets and lack of customer concentration means we have an operational structure with the flexibility to continuously deploy human and financial capital in the most appropriate manner; leveraging our differentiated service offering to meet customer requirements. Our agile teams deliver exceptional execution, while remaining commercially astute, and utilise our technical advantage to create new and innovative solutions.  We have a well established investment case underpinned by an asset light, cash generative model; a financially prudent approach and a measured risk appetite.  I am excited by the next stage in our evolution as Wood as we realise this sustainable growth opportunity, unlocking our potential and delivering superior outcomes for our customers, our investors and our people.

Financial performance in 2018

Trading performance  

Performance in 2018 was at the upper end of guidance and ahead of market expectations and reflects good organic growth led by our Asset Solutions Americas business and the benefit of in year cost synergies of $55m. We saw higher activity across all business units with revenue including joint ventures up 12% compared to proforma 2017. Revenue excluding joint ventures was up 86% compared to 2017 due to the inclusion of a full year contribution from AFW.

Adjusted EBITA and Operating Profit before exceptional items benefitted from cost synergy delivery helping to offset a continued competitive pricing environment and a slower than anticipated sector recovery in oil and gas.

Operating profit before exceptional items is stated after non cash amortisation charges of $249m (2017: $141m) which includes $126m (2017: $32m) in respect of amortisation of intangibles arising on the acquisition of AFW.

The loss for the period was impacted by exceptional costs of $183m net of tax.  As anticipated, exceptional items include $42m of costs to deliver synergies, $24m in respect of redundancy and restructuring, $6m of charges relating to onerous leases, $26m in respect support costs related to regulatory investigations and an arbitration settlement provision of $10m. Exceptional costs also include non cash items including an impairment in the carrying value of EthosEnergy of $41m, which was recorded in H1 2018, other write-offs related to EthosEnergy of $10m and a $32m charge related to guaranteed minimum pensions following a court ruling in October 2018 affecting defined benefit pension schemes.

Synergies

We delivered increased cost synergies with an in year benefit of $55m in 2018 equating to an exit run rate of $85m, the exit run rate being the annualised forward benefit. In year costs to deliver were c$65m, including c$23m of capex and intangibles spend. We expect to deliver synergies in FY 2019 with an in year benefit of around $60m and remain confident of delivering against our upgraded annualised cost synergy target of >$210m by the end of the third year following completion of the AFW acquisition in October 2017.

Net debt and cashflow

Strong operational cash generation contributed to a reduction in net debt to $1.5bn at 31 December 2018. The ratio of net debt to Adjusted EBITDA of $694m reduced to 2.2x at 31 December 2018 (2.4x at 31 December 2017).

We have delivered a significantly improved working capital position compared to proforma 2017 having implemented a range of initiatives.  Cash conversion, calculated as cash generated from operations after exceptional items as a percentage of adjusted EBITDA, improved significantly to 102% (2017 proforma: 14%).  This includes the $154m impact of our receivables facility which provides working capital funding at a cost lower than our other facilities. Excluding the impact of exceptional costs, cash conversion was 126% (2017 proforma: 63%).

Cash exceptional items of $142m offset the strong cash generation from operations. Cash outflows in the year in respect of exceptional items include $42m of costs to deliver synergies and other redundancy and restructuring costs of $15m, $38m in respect of onerous leases, $14m in respect of transaction related costs, investigation support costs of $15m and arbitration related costs of $18m.

During the year we paid interest costs of $97m and dividends of $231m.

Capital structure and allocation

We remain committed to a strong balance sheet foundation and achieving our target leverage policy. Net debt to Adjusted EBITDA reduced to 2.2x as at 31 December 2018 (31 December 2017: 2.4x).  Based on 2018 Adjusted EBITDA, committed facilities provide funding headroom of $0.9bn vs. covenants set at 3.5x. Total facilities headroom is $1.3bn.

We have reduced net debt by c$450m since completion in October 2017 and over the course of 2018 we delivered strong free cashflow. Deleveraging has been driven by Adjusted EBITDA growth of c5%, significantly improved working capital performance (cash conversion after exceptional items is up from 14% to 102%), delivering cost synergies of $55m, maintaining our capital discipline and proceeds of $35m from non core asset disposals.

Debt reduction and maintaining our progressive dividend, which is covered 1.6x in 2018, remain our preferred use of free cashflow.  Further deleveraging will be primarily driven by continued earnings growth in 2019, which is supported by strong revenue visibility; a further $60m of cost synergy delivery and delivering cash conversion after exceptional items of around 80%-85%.  We will also retain our discipline on capital expenditure and expect exceptional items to reduce as we deliver the cost synergies.

Since completion, the pace of deleveraging has been adversely impacted by a slower sector recovery in oil and gas compared to that anticipated in our May 2017 prospectus, working capital commitments on the legacy AFW AEGIS contract and slower progress on non-core assets disposals given our focus on value. As a result, while we are confident in the strong free cashflow generation of our business, deleveraging to our target of 1.5x Net debt to Adjusted EBITDA will be more gradual than originally anticipated.

In addition, the timing of further potential asset disposals identified following a strategic view of our portfolio, will impact the pace of deleveraging. These will be governed by appropriately competitive sales processes and are expected to generate proceeds in the range of c$200m-$300m.

Financing

In December 2018 we took the opportunity to secure a $140m part-refinancing of our term loan from an existing US private placement debt provider which further diversifies our financing structure. This comprises a mix of eight and ten year redemption dates at a fixed rate of around 5% and was drawn in February 2019. In 2019, we expect to complete a full refinancing of our remaining term loan which is due to mature in 2020, which will further diversify our sources of long term finance at competitive rates.

Update on regulatory investigations

There have been no material developments in the previously disclosed investigations in the UK and US, details of which are included in the contingent liabilities and provisions notes to the Financial Statements. Wood continues to cooperate with and assist the relevant authorities in relation to their respective investigations into the historical use of agents and in relation to Unaoil. 

Order book

Our order book, comprising secured work and estimates of activity under long term agreements, currently stands at c10.3bn⁴ this is broadly in line with the position in June.  We saw a reduction in STS order book as we progressed towards completion of the Gruyere Gold contract and the STS led scope on TCO, offset in part by awards across the broad STS business.  In E&IS, the slight reduction reflects progress to completion of our waste disposal contract in Guernsey and our decision not to pursue certain overseas capital projects.

We take a conservative approach to order book recognition, only recording work that is supported by signed, enforceable contracts or anticipated work releases under frame agreements, and as such we have a high conversion rate of opportunities. 

Wood's business model operates on a relatively short cycle with much of our work being won and executed in the same period rather than relying on a flow of large multi year awards. Order book is consistent with our business model and also reflects the current stage in the oil & gas cycle in particular which is characterised by early stage awards and timing of renewals of long term contracts. Approximately 60% of 2019 forecast revenues are secured, in line with expectations at this point in the year, giving us confidence over continued revenue growth into 2019.

The shape of our order book reflects our measured risk approach; approximately 90% of our order book comprises reimbursable and <$100m fixed price contracts (H1 2018: 89%). Reimbursable work is the largest element of this; c70%. Only c10% of our order book comprises fixed priced contracts over $100m. This consists of ten contracts with an aggregate value remaining in order book of c$800m.

Simplifying profit reporting in 2019

Wood will simplify its reporting for the reporting periods ending on 30 June 2019 onwards. These changes align Wood's principal reporting metrics with IFRS measures and facilitate comparison across peers.  There will be no reduction in the level of accounting disclosure at the Wood or business unit level.

At the Group level Wood's primary reporting metrics, and the management discussion and analysis of those metrics in reporting, will align with IFRS definitions of revenue and profit, that is, Operating Profit (pre-exceptional items). Wood will no longer report proportionally consolidated results.

Adjusted EBITDA (pre-exceptional items, including joint ventures) will be adopted as an additional non-statutory /'non-GAAP' measure of profit. This will be presented at the Group and Business Unit level to report underlying financial performance and facilitate comparison with peers. 

Adjusted EBITDA in 2018 was $694m. As in previous years, Note 1 to the accounts includes details of Adjusted EBITDA at the Wood and business unit level together with comparatives for 2017.

Adjusted Diluted EPS will also be presented, defined as "earnings before exceptional items and amortisation relating to acquisitions, net of tax, divided by the weighted average number of ordinary shares in issue during the period. In contrast to previous reporting, the measure will be stated before amortisation arising from acquisitions only and not amortisation relating to other intangibles such as software costs. On the new basis, AEPS in 2018 was 46.6c.

Adoption of IFRS 16

IFRS 16 Leases will be effective from 1 January 2019. The most significant change for Wood is the accounting for property leases.  Rental charges which were previously recorded in operating costs in respect of these leases will now be replaced with depreciation and an interest charge. We have chosen to apply the modified retrospective approach on adoption of IFRS 16 and using this approach there is no restatement of 2018 comparatives in 2019. We anticipate that 2019 adjusted EBITDA will increase by c$170m and adjusted EBITA will increase by c$30m. In the balance sheet a lease liability of around $650m will be recognised and we expect no material impact on operating profit or our EPS measures. Our bank covenants are set on a frozen GAAP basis, so will not be impacted by the adoption of the standard.

Outlook for 2019

We are well positioned for growth trends emerging across a broad range of industrial markets and have good visibility with approximately 60% of forecast 2019 revenues secured in order book, typical for our predominantly short cycle business model.

Revenue growth in the region of 5% will deliver organic earnings growth which, together with the impact of cost synergies of around $60m, is expected to lead to growth in Adjusted EBITA in line with market expectations, which are formed on a pre-IFRS 16 adoption basis^3.

Deleveraging will continue in 2019 and we expect cash conversion after exceptional items to be around 80%-85%. The timing of disposals will impact the pace of deleveraging. These will be governed by appropriately competitive sales processes and are expected to generate proceeds in the range of c$200m-$300m.

Asset Solutions Americas

Markets: c65% oil & gas, c35% industrial/other energy

ASA generated strong revenue and earnings growth from increased activity and the delivery of cost synergies. Revenue in 2018 increased by 18% on proforma 2017 due to increased activity on capital projects in power, downstream & chemicals and in US shale facilities and pipelines.  This is more than offsetting a reduction in operations solutions following the completion of commissioning work on the Hebron project in the second half of 2017.

EBITA margin was up on proforma 2017, reflecting the growth in revenue whilst ensuring cost discipline and delivery of cost synergies partly offset by cost overruns in heavy civils and competitive pressures in the Gulf of Mexico. Proforma 2017 Adjusted EBITA included the release of amounts previously provided in respect of prior year acquisitions in the legacy Wood Group business of c$13m.

Capital projects accounts for c70% of segment revenue. We have seen increased EPC activity on projects in power and in downstream & chemicals, and these are the largest contributors to capital projects revenue. Improvement in US shale continued, with significant growth in the Permian in infrastructure and pipeline work. In offshore upstream we remain active on a number of greenfield projects.

Our operations solutions work accounts for c30% of segment revenue. Challenging conditions in the Gulf of Mexico and the completion of commissioning work in 2017 have offset gains in US shale and improving modifications activity. In US shale, we are seeing an improvement in maintenance activity as expected. We have made good progress on revenue synergies, securing the engineering, procurement & construction, commissioning and operations scope for upstream assets in Trinidad.

Order book is approximately $3bn with c50% of 2019 revenue secured; reflecting the progress towards completion of a number of offshore projects and coal combustion residual treatment projects offset by new EPC awards in downstream & chemicals and early stage offshore engineering projects together with the benefit of EPC projects in power.

Outlook

We expect growth in ASA in 2019 weighted to the second half. In downstream and chemicals, work secured on our EPC scope for a Gulf Coast plastics manufacturing facility and the YCI methanol plant is expected to increase in 2019 and we remain well positioned for further opportunities. Momentum in US shale is also expected to continue with activity focused on facilities and pipelines in the Permian and Niobrara. We have retained our market leading position in offshore engineering and have improving visibility on early stage concept and FEED projects. We are encouraged by awards in early 2019 in power related to solar and wind projects, which are offsetting the completion of coal combustion residual treatment projects and will contribute to increased activity in H2. In operations solutions, activity levels are expected to remain broadly in line with 2018.

Asset Solutions Europe, Africa, Asia and Australia

Markets: c85% oil & gas, c15% Industrial

Revenue is up 9% on proforma 2017, largely led by growth in Operations Solutions which accounts for c45% of segment revenue. We are seeing strong growth in the Middle East due to increased activity in Iraq with Exxon and Basra Gas Co and in Asia Pacific with Exxon.

Capital Projects accounts for c40% of segment revenue and benefitted from increased activity levels including the ongoing work on the Antwerp Oil Refinery, PMC work in Kuwait, our engineering and project management scope on the Marjan field for Saudi Aramco and our rejuvenation project for Brunei Shell Petroleum. We are encouraged by recent wins including the Saudi Aramco/SABIC integrated crude oils to chemicals complex and the engineering, procurement and construction management scope for the TEVA biotech facility in Germany.

EBITA is down on proforma 2017 due to the $70m positive impact of a contract dispute settlement in 2017 and currency devaluation in Angola in 2018, which offset margin improvements from positive trading momentum and the benefit of cost synergy delivery. 

Turbine joint ventures account for c15% of revenue which is up on proforma 2017 with increased activity across each of the joint ventures. Despite improved trading performance in EthosEnergy in the second half of 2018 and relative strength in RWG, earnings are down on 2017.

Order book in ASEAAA is c$5.0bn, with c60% of expected 2019 revenue secured. Order book reflects the current stage in the oil & gas cycle with contract extensions being secured and also the timing of renewals for long term North Sea contracts. This is being offset by increased activity in Australia and Asia Pacific.

Outlook

We anticipate growth in AS EAAA in 2019.  In Operations Services we see opportunities in Middle East driven by Iraq and also in the Caspian while growth in Asia Pacific is expected to be focused on Papua New Guinea and Australia. We see a positive outlook for modifications work in the North Sea. Activity on the FEED and project management consultancy scope for Aramco on both the Marjan field and the integrated crude oils to chemicals complex is expected to contribute to growth in capital projects. Further cost synergy delivery will underpin earnings growth in 2019.

Specialist Technical Solutions

Markets: c45% oil & gas, c30% minerals processing, c15% nuclear, c10% industrial/other energy

In 2018 we saw strong revenue growth led by increased volumes in minerals processing and automation & control, the largest contributors to STS revenue. Activity in subsea & export systems and technology & consulting remained robust.  EBITA margin is down slightly on proforma 2017 due to the commercial close out of a minerals processing project in 2017.

In minerals processing we remain active on work in South America and in Australia, including the Gruyere Gold EPC project, and are encouraged by recent wins including the Tasiast gold mine expansion project in Mauritania.  Growth in automation and control was led by procurement activity on the TCO project and a full year contribution from CEC, acquired in May 2017.  Activity in nuclear improved and we were recently awarded system design work supporting projects and decommissioning at Sellafield. Subsea activity on early stage and tie back work remains steady.

Order book is approximately $1.0bn with c50% of expected 2019 revenues secured, consistent with the short cycle nature of contracts in STS. We saw a reduction in STS order book as we progressed towards completion on a number of mining contracts including Gruyere Gold and the STS led scope on TCO offset in part by recent awards across the business.

Outlook

We expect moderate revenue growth in 2019 as the Gruyere Gold contract in minerals processing and the STS led scope of the TCO project in automation & control reach an advanced stage of completion. Our technology & consulting business remains well positioned. 2019 earnings are expected to benefit from a focus on further margin improvements initiatives.

Environment and Infrastructure Solutions

Markets: c95% Industrial/government, c5% oil & gas

2018 revenues are up 8% on proforma 2017 with increased consultancy activity in the US and Canada. EBITA benefitted from cost overruns on projects experienced in 2017 not repeating offset in part by a lower than expected benefit from contract completions.

E&IS saw good activity across environmental remediation consultancy and engineering & construction project management services predominantly in North America. Full year performance benefitted from increased activity as a result of US government and industrial spending.

Order book is $1.2bn, giving us good visibility over revenues for 2019 with c70% of expected revenues secured. Order book reflects the typical, short cycle nature of contracts in E&IS, the slight reduction compared to June 2018 reflects progress to completion of our waste disposal contract in Guernsey and our decision not to pursue certain overseas capital projects.

Outlook

We expect further growth in 2019. We see good opportunities as government and industrial spending increases in the US and Canada although the US government shutdown may impact the pace of awards in early 2019.  Having taken the decision not to pursue certain higher risk lump sum contracts, we have exited the legacy US government capital project in the Pacific. As a result, the Aegis project is the only legacy contract of this nature remaining which is due to be operationally complete towards the end of 2019 and commercial close out expected in 2021. The full amount of the expected loss at completion of $75m has been recorded as a fair value adjustment.

Investment Services

A number of underperforming legacy activities in AFW are managed in Investment Services. This includes the activities Industrial Power and Machinery business in addition to interests in a number of infrastructure projects. Operational performance in the Transmission and Distribution engineering business has been successfully improved and this business will be managed within Asset Solutions EAAA going forward. Investment services generated revenue including joint ventures of $252m in 2018 (2017 proforma: $374m) and adjusted EBITA of $32m (2017 proforma: $28m). During 2018, as part of our non-core asset disposal programme, Investment Services entered agreements to dispose of its interests in four joint ventures, Voreas S.r.l., RMS A13 Holdings Ltd, Power Machinery Ltd and Centro Energia Teverola S.r.l and Ferrara S.r.l for consideration of approximately $54m.  Wood's share 2019 EBITA from the four joint ventures was forecast to be c$8m.

Financial Review

Trading performance

Trading performance is presented based on proportionally consolidated numbers, which is the basis used by management to run the business.  Revenue including joint ventures and Adjusted EBITA include the contribution from Joint Ventures.  The trends between these alternative performance measures and reported measures are similar. The balance sheet and cashflow information is presented on an equity accounted basis, consistent with the Financial Statements.  A reconciliation to statutory measures of revenue and operating profit from continuing operations excluding joint ventures is included in note 1 to the financial statements.  

The review of our trading performance is contained within the Chief Executive Review. 

Reconciliation to operating profit

The table below sets out a reconciliation of Adjusted EBITA to operating profit per the group income statement.

Revenue including joint ventures and adjusted EBITA

The financial performance of the Group for 2018 and 2017 is presented below. The 2017 results are on a pro-forma basis and include AFW's pre-acquisition results for the period from 1 January 2017 to 6 October 2017 but exclude the results of businesses disposed. The 2017 results are unaudited and are included to provide a better insight into the underlying business performance. The table below includes the results of joint ventures on a proportional basis.

Amortisation

Total amortisation for 2018 of $248.8m (2017: $141.3m) includes $126.4m for AFW and $38.1m of amortisation relating to intangible assets arising from prior year acquisitions. Amortisation in respect of software and development costs was $84.3m (2017: $61.3m) and this largely relates to engineering software and ERP system development. Included in the amortisation charge for the year above is $2.5m (2017: $1.9m) in respect of joint ventures.  

Net finance expense and debt

Net finance expense is analysed below.

Interest cover⁴ was 5.6 times (2017: 7.5 times).  

The above table excludes net finance charges of $8.1m (2017: $3.4m) in respect of joint ventures.

The Group negotiated new bank facilities in order to complete the acquisition of AFW in 2017. The facilities comprised a $1.0bn term loan repayable in 2020 and a 5 year Revolving Credit Facility of $1.75bn repayable in 2022. The term loan has subsequently reduced to $0.9bn following repayments arising from the disposal of AFW's UK upstream oil and gas business.

At 31 December 2018 total borrowings under these facilities amounted to $1,542.3m with $1,091.4m undrawn. A further $162.2m of overdraft funding is available under the Group's other short-term facilities. The Group also has $375m of unsecured loan notes issued in the US private placement market which mature in 2021, 2024 and 2026. In December 2018, the Group took the opportunity to secure a $140m part refinancing of the term loan from an existing US private placement debt provider. As a result, a further $140m of US private placement debt, which matures in 2027 and 2029, was added in February 2019.

Net debt to adjusted EBITDA at 31 December was 2.2 times (2017: 2.4 times) against our covenant of 3.5 times. The Group remains committed to achieving its targeted leverage policy of net debt to adjusted EBITDA of 1.5 times.

Exceptional items

Redundancy, restructuring and integration costs of $71.7m have been incurred during the year. The total includes $41.8m of integration costs in relation to the acquisition of Amec Foster Wheeler, $23.8m of redundancy and restructuring costs, and $6.1m of costs relating to onerous property leases.

A charge of $10.4m was recorded in relation to a legacy contract carried out by the Group's Gas Turbine Services business prior to the formation of EthosEnergy. An arbitration hearing was held in relation to a dispute between the Group and a former subcontractor and this amount represents the additional provision required to cover the settlement and related legal costs, $19.2m having already been provided in 2017.

Investigation support costs of $26.3m have been incurred during the year in relation to ongoing investigations by the relevant authorities into the historical use of agents and in relation to Unaoil. See note 33 for full details.

A court ruling passed in October 2018 provided clarity in respect of GMP equalisation in relation to UK defined benefit pension schemes. As a result, the Group has allowed for GMP equalisation in determining its UK defined benefit scheme liabilities with the increase in liabilities arising of $31.9m being recorded as an exceptional charge in the year.

In June 2018, the Group carried out an impairment review of its investment in the EthosEnergy joint venture. The recoverable amount of the investment, based on management's estimate of fair value less costs of disposal of $29.0m, is lower than the book value. An impairment charge of $41.4m along with $9.6m relating to the Group's share of exceptional items recorded by EthosEnergy during 2019 has been booked in the income statement (see note 11). A tax credit of $8.5m has been recorded against exceptional items.

Taxation

The effective tax rate on profit before tax, exceptional items and amortisation and including joint ventures on a proportionally consolidated basis is set out below. 

The tax charge above includes $16.4m in relation to joint ventures (2017: $14.5m).

The effective tax rate reflects the rate of tax applicable in the jurisdictions in which the group operates and is adjusted for permanent differences between accounting and taxable profit and the recognition of deferred tax assets. Key adjustments impacting on the rate in 2018 are restrictions on the deductibility of interest in the UK and US offset by increased deferred tax asset recognition, the release of provisions in relation to uncertain tax positions and branch and withholding taxes in excess of double tax relief. Despite challenges in relation to interest deductibility and the new US legislation around base erosion, we currently anticipate a rate in 2019 of in the region of 23 - 24%.

In addition to the effective tax rate, the total tax charge in the income statement reflects the impact of exceptional items and amortisation which by their nature tend to be expenses that are more likely to be not deductible than those incurred in the ongoing trading profits. The income statement tax charge excludes tax in relation to joint ventures.

Earnings per share

Adjusted diluted EPS for the year was 57.4 cents per share (2017: 53.3 cents). The average number of fully diluted shares used in the EPS calculation for the period was 683.0m (2017: 451.3m).

Adjusted diluted EPS adds back all amortisation. If only the amortisation related to intangible assets arising on acquisition is adjusted and no adjustment is made for that relating to software and development costs, the figure for 2018 would be 46.6 cents per share (2017: 42.9 cents).   

Basic EPS for the year was (1.3) cents per share (2017: (7.4) cents). The loss for the year attributable to owners of the parent of $8.9m is lower than the $32.4m loss reported in 2017 due to increased EBITA partly offset by higher amortisation, interest and tax.

Dividend

The progressive Wood dividend policy which takes into account cash flows and earnings, is a key element of our investment case and compares favourably against peers in the global engineering and construction sector. The Board has recommended a final dividend of 23.7 cents per share, which makes a total distribution for the year of 35.0 cents, an increase of 2%. The final dividend will be paid on 16 May 2019 to all shareholders on the register at the close of business on 26 April 2019.

Cash flow and net debt

The cash flow and net debt position set out below has been prepared using equity accounting and as such does not proportionally consolidate the assets and liabilities of joint ventures.

Cash generated from operations pre-working capital increased by $68.1m to $334.1m and post-working capital increased by $375.3m to $625.3m as a result of improved working capital management.

Cash conversion, calculated as cash generated from operations as a percentage of EBITDA (less JV EBITDA), improved to 102% (2017: 69%) due to improved working capital performance partly offset by the cash impact of exceptional costs.  Excluding the impact of exceptional costs cash conversion is 126%.

Expenditure on acquisitions largely relates to payments in respect of companies acquired in prior periods. 

Cash from divestments of $33.4m relates to the disposal of the Group's interests in the Voreas wind farm and the Road Management Services (A13) joint venture.

Net payments for capex and intangible assets were $87.5m (2017: $73.9m) and included software development and expenditure on ERP systems across the Group. $24.0m of this amount related directly to the integration of AFW.

Summary Balance Sheet

The balance sheet below has been prepared using equity accounting for joint ventures, and as such does not proportionally consolidate the joint ventures assets and liabilities.

The Group acquired Amec Foster Wheeler on 6 October 2017.  At 31 December 2017, the Group had not fully finalised its assessment of the fair value of certain AFW assets and liabilities and the 2017 financial statements reflected the provisional assessment of the fair values at the acquisition date. During 2018, the Group has reassessed those fair values as a result of new information obtained about facts and circumstances that existed at the acquisition date, and recorded measurement period adjustments of $159.4m in provisions, $12.9m in trade and other receivables and $17.4m in trade and other payables. A $40.7m deferred tax asset and a $16.9m reduction to income tax liabilities have also been recorded in relation to these adjustments and $132.1m has been added to goodwill. The 2017 balance sheet has been restated accordingly. In total, $294.2m of fair value adjustments have been booked in relation to the acquisition around half of which relates to revised estimates of contract losses which existed at the date of acquisition. The balance relates to provisions for legal fees associated with legacy disputes, onerous property and amounts not considered recoverable.

A significant element of the fair value adjustment relates to the Aegis contract in Poland. This legacy AFW project involves the construction of various buildings to house the Aegis Ashore anti-missile defence facility for the United States Army Corps of Engineers.  The project was around 65% complete by value at 31 December 2018 and is expected to be operationally complete towards the end of 2019.    Management's latest estimate is that the loss at completion will be $100m including liquidated damages and legal fees.   The full amount of this loss has been included in provisions. In reaching its assessment of this loss, management have made certain estimates and assumptions around the date of completion, productivity of workers on site and the costs to complete. 

Non-current assets includes $4,766.7m of goodwill and intangibles relating to the acquisition of Amec Foster Wheeler.

Asbestos related obligations

Largely as a result of the acquisition of AFW in 2017, the Group is subject to claims by individuals who allege that they have suffered personal injury from exposure to asbestos primarily in connection with equipment allegedly manufactured by certain subsidiaries during the 1970's or earlier. The overwhelming majority of claims that have been made and are expected to be made are in the United States. At 31 December 2018, the Group has net asbestos related liabilities of $398.1m (2017: $430.0m).

The Group expects to have net cash outflows of $35.1m as a result of asbestos liability indemnity and defence payments in excess of insurance proceeds during 2019. The estimate assumes no additional settlements with insurance companies and no elections to fund additional payments. The Group has worked with its independent asbestos valuation experts to estimate the amount of asbestos related indemnity and defence costs at each year end based on a forecast to 2050.

The Group's adjusted EBITA is stated after deducting costs relating to asbestos including administration costs, movements in the liability as a result of changes in assumptions and changes in the discount rate.

Full details of asbestos liabilities are provided in note 19 to the Group financial statements.

Pensions

The Group operates a number of defined benefit pension schemes in the UK and US and a number of defined contribution plans. At 31 December 2018, the schemes had a net surplus of $242.7m (2017: $167.7m). In assessing the potential liabilities, judgment is required to determine the assumptions around inflation, investment returns and member longevity. The assumptions at 31 December 2018 showed an increase in the discount rates which results in lower scheme liabilities and broadly similar inflation rates. Full details of pension assets and liabilities are provided in note 31 to the Group financial statements.

Contingent liabilities

Details of the Group's contingent liabilities are set out in note 33 to the financial statements. During 2018, the contingent liability that existed in relation to pollution at the Mount Polley dam in British Columbia in Canada was settled by the Group's insurers.

Divestments

During 2018, the Group disposed of its 50% interest in the Voreas S.r.l wind farm for a cash consideration of $25.9m. In December 2018, the Group signed a sale and purchase agreement to dispose of its 25% interest in Road Management Services (A13) Holdings Limited for $11.5m, $2.8m of which was deferred.  At 31 December 2018, the disposal remained subject to minor conditions precedent with the deal being completed in February 2019.

In December 2018, the Group signed a sale and purchase agreement for the disposal of its 52% interest in the Amec Foster Wheeler Power Machinery Company Limited, a fabrication and manufacturing facility in China. This disposal was completed in March 2019.  In January 2019, the Group sold its 41.65% share in the Centro Energia Teverola S.r.l and Centro Energia Ferrara S.r.l combined cycle gas power plants in Italy. 

New accounting standards

The new accounting standard on revenue recognition, IFRS 15 became effective on 1 January 2018. No material changes resulted from the adoption of the standard. IFRS 16, the new standard on leases becomes effective on 1 January 2019. Under IFRS 16, the Group is required to recognise 'right of use' assets and lease liabilities in respect of its operating leases for property, vehicles, plant and equipment. For 2019, we currently anticipate recognising lease liabilities of around c$650m. In the income statement this will result in an increased depreciation charge of c$140m and higher financing costs of c$30m and reduced operating costs of around $170m. As a result we anticipate that 2019 adjusted EBITDA will increase by c$170m and adjusted EBITA will increase by c$30m although we expect there will be no material impact on operating profit. We also expect net debt to increase by $630m on recognition of the lease liabilities.

Footnotes

JOHN WOOD GROUP PLC

GROUP FINANCIAL STATEMENTS

FOR THE YEAR TO 31st DECEMBER 2018

Company Registration Number SC 36219

Consolidated income statement

for the year to 31 December 2018

The notes on pages 29 to 113 are an integral part of these consolidated financial statements.

The Group has applied IFRS 15 and IFRS 9 for the first time from 1 January 2018. Under the transition methods chosen, comparative information is not restated. See notes to the financial statements.

Consolidated statement of comprehensive income/expense

for the year to 31 December 2018

Total comprehensive (expense)/income for the year is attributable to continuing operations.

Exchange movements on the retranslation of net assets could be subsequently reclassified to profit or loss in the event of the disposal of a business.

The Group has applied IFRS 15 and IFRS 9 for the first time from 1 January 2018. Under the transition methods chosen, comparative information is not restated. See notes to the financial statements.

The notes on pages 29 to 113 are an integral part of these consolidated financial statements.

Consolidated balance sheet

as at 31 December 2018

The financial statements on pages 24 to 113 were approved by the board of directors on 18 March 2019 and signed on its behalf by:

The Group has applied IFRS 15 and IFRS 9 for the first time from 1 January 2018. Under the transition methods chosen, comparative information is not restated. See notes to the financial statements.

*the December 2017 balance sheet has been restated to take account of the finalisation of the acquisition accounting in respect of Amec Foster Wheeler. In addition, the Group has reviewed the classification of provisions and made adjustments to align the treatment of balances between legacy Amec Foster Wheeler and legacy Wood Group as well as adjusting for the immaterial classification impact of certain balances following the adoption of IFRS 15. See the table and accompanying notes on page 30.

The notes on pages 29 to 113 are an integral part of these consolidated financial statements.

Consolidated statement of changes in equity

for the year to 31 December 2018

The notes on 29 to 113 are an integral part of these consolidated financial statements. 

Consolidated cash flow statement

for the year to 31 December 2018

Closing cash and cash equivalents includes $24.2m presented in assets held for sale on the Group balance sheet (see note 29).

The notes on pages 29 to 113 are an integral part of these consolidated financial statements