Amec Foster Wheeler announces today its second half trading update, increasing its cost cutting targets, reducing future dividend payments and providing guidance for 2016, amidst continuing tough market conditions.
- Underlying Scope Revenue year to date in line with expectations
- Ongoing weak markets: H2 margins now expected to be below H1
- New group cost savings target increased by $55m to $180m (£120m) by 2017
- Renewed focus on improving performance in, or exiting, low growth areas
- Reducing ordinary dividend by 50%
Amec Foster Wheeler is a high quality and diversified business, and its financial performance remains relatively resilient, as the performance so far this year shows. However, we are not immune to the ongoing tough market conditions and we are managing the business on the assumption of an extended period of weakness.
For more than a year - across many parts of our business - we have seen customers reducing capital expenditure and putting more pricing pressure on the supply chain. We see no sign of these trends changing.
At our half year results, I said our priorities were to adapt to challenging markets and to stay lean and efficient. We have decided to intensify our actions. We have identified, and continue to seek, further cost savings. We are committed to increasing our focus on higher growth markets. In parts of our business we need to do better - so we are progressing plans to improve performance or exit those markets. We believe that taken together these actions will underpin our performance.
In light of the ongoing market conditions, we are taking the prudent step of cutting our ordinary dividend payments by fifty per cent, starting with the final dividend for 2015.
Year to date trading update (unaudited):
In the nine months to the end of September 2015, Scope Revenue was £3,871m (2014 pro forma: £3,940m), 1.8% lower than last year’s pro forma result, and 3.4% lower on a like-for-like basis.
The order book stood at £6.5bn at the end of September, compared to £6.6bn at the half year.
Trading margin trends have continued from the first half, with ongoing pricing pressure from customers and dilution from mix.
Contracts announced in the second half to date include:
|SKS||O&G||Feasibility study for new refinery and petchem complex in Kedah State||Malaysia|
|Fortnum Zabrze||Clean Energy||Design, supply, construction and commissioning of the boiler island (220MW CFB boiler) with flue gas cleaning for combined heat and power plant||Poland|
|Isolux||Clean Energy||Design and supply of air quality systems at Altamira power plant||Mexico|
|Canadian Nuclear Laboratories||Clean Energy||Long term remediation project, including building waste management facility at Port Granby||Canada|
|UK MoD||E&I||3-year contract to supply regulatory, technical and training services to MoD nuclear safety authority||UK|
|Sonatrach||O&G||Consultancy project to de-bottleneck Hassi R’Mei gas field||Algeria|
|Zadco||O&G||3-year extension to PMC services contract on Upper Zakum project||UAE|
|Hanwha Energy||Clean Energy||Design and supply 100MW CFB boiler||S Korea|
|US Air Force||E&I||6-year contract to support the AFCAP IV program||US|
|Maersk Oil||O&G||3-year integrated services contract||UK|
|Vietnam National Oil & Gas||O&G||FEED for Dun Quat refinery upgrade||Vietnam|
|Felguera||O&G||Detailed engineering for Zeebrugge LNG terminal expansion||Belgium|
|Shandong Yuhuang||O&G||Engineering, project management, procurement and early construction services for new methanol plant in Louisiana||US|
|CERN||Clean Energy||Various contracts to provide radiochemical testing||Switzerland|
|BP||O&G||2-year EPC contract to improve living quarters in Eastern Trough Area Project||UK|
|NFF||Clean Energy||Study into managing radioactive waste at Fukushima||Japan|
We have made good progress on winning the new Clean Energy business that we highlighted at the half year results. Since then we have signed three significant solar projects worth over $650m. The majority of this is not in the order book at the end of September, and none of them have been announced yet. The pipeline of awarded, but not yet sanctioned, projects within GPG remains above $500m – but with limited recent progress.
Restructuring and cost savings:
Following a further review of our costs, we have identified additional savings of $55m from SG&A and support functions. We now expect total cost savings of $180m (£120m) from these and the previously announced integration savings of $125m per annum by 2017.
We are on track to deliver £40m of savings, and take an exceptional charge of around £80m, in 2015.
In addition, we are reviewing low growth parts of our business with a view to driving an underlying improvement or an exit of those positions.
As previously disclosed, we have been involved in arbitration with Kvaerner North American Construction Inc arising from GPG’s role in the construction of the Longview power plant in West Virginia, US in 2011.
On 18 October 2015 the arbitration panel awarded Kvaerner approximately $74m (approximately £48m). Any payment made will be charged to provisions and will not impact Trading Profit.
We will refinance our debt in the next six months, either through a bond issue in the capital markets or via bank debt. Earlier this year, the bridge element of the original Foster Wheeler acquisition facilities was extended to February 2017.
In light of the ongoing market conditions, we have taken the prudent step of signalling our intent to reduce our future ordinary dividend payments.
The interim dividend of 14.8p per share, which was announced at the half year results, will be paid, as previously announced, on 5 January 2016 to shareholders on the register at the close of business on 27 November 2015.
The Board now expects to recommend a final dividend for 2015 of circa 14.2p, half of the equivalent declared in 2014, at the full year results in March 2016. This would make a full year dividend for 2015 of 29p.
It is the current intention of the Board that ordinary dividends in 2016 will be approximately half that declared in 2014, with approximately 1/3rd paid at the interim, and 2/3rd as a final dividend.
For 2015, we expect to see a continuation of recent revenue trends – with growth in downstream and Middle Eastern Oil & Gas markets being offset by tougher conditions elsewhere, notably in upstream Oil & Gas and GPG.
We continue to expect 2015 underlying Scope Revenue to be modestly lower than last year’s pro forma result. Based on current forecasts there is no longer any year-on-year net benefit from the translation of North American revenues into Sterling.
The changing mix of work in execution and continued customer pricing pressure, particularly in the Oil & Gas market, lead us to believe second half margins will be below those achieved in the first half of 2015.
Cash generation remains solid, and conversion from Trading Profit is expected to remain in the historic range of 80-100%.
Year-end net debt will be circa £1.1bn. This includes the impact of weaker H2 trading, adverse currency translation and assumes that the full payment for the Longview arbitration mentioned above is made.
Looking ahead to 2016, we expect to see the same trends impacting our business as in 2015. Growth in the order book towards £7bn between now and the year-end will support low single digit Scope Revenue growth. The anticipated benefits of the additional cost saving measures referred to above will partially offset the continued customer pricing pressure and mix – leading to further modest Trading Margin dilution.