Earnings Transcript for WOR.AX - Q2 Fiscal Year 2022

Operator: Thank you for standing by and welcome to the Worley half-year results 2022 call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] Depending on the number of questions, we may need to restrict each person to asking one initial question and one follow-up question. And the session will conclude on the hour. I would now like to hand the conference call over to Mr. Chris Ashton, Chief Executive Officer. Please go ahead.

Chris Ashton: Thank you. And welcome everyone. And thank you for joining Worley's half-year results for FY2022. I'm pleased to be presenting these today with Tiernan O'Rourke, his first as our Chief FInancial Officer, so welcome to Tiernan. Turning to Slide 2. Before I begin, I want to acknowledge the traditional owners of the land on which we meet. Their unique ability to cap a country and that deep spiritual connection to it. Here in Houston, the land I'm on has long served as a site of meeting and exchange for indigenous peoples, specifically the Apache, Coteau, Comanche, Kiawah, and Wichita nations. In Australia, the Aboriginal and Torres Strait Islander peoples have helpful and maintained for thousands of years the lands where our business provided services. I pay respect to the elders past, present, and emerging. Their knowledge and wisdom had made sure the continuation of culture and traditional practices. I extend respect to other Aboriginal and Torres Strait Islander people present on the call today. So moving on to Slide 3, I remind you to review our disclaimer shown on the slide here. Turning to Slide 4. In terms of the agenda today, I'll provide an overview of our business performance over the periods and our strategic progress in line with transformation. Tiernan will then add some further detail on the half-year results. Finally, I'll provide a market update and outlook statement before we open the floor to Q&A. Moving on to Slide 5. Today, I'd like to leave you with three key messages. Our half-year result is indicative of continued market improvement and is consistent with the outlook provided at the full year 2021 in August. Our business is positioned for long-term success and we're accelerating the execution of our strategy. We continue to benefit from the cost savings program and investment in sustainability growth over this areas. We've delivered an increase in our sustainability related work. We continue to see positive indicators and all our sectors are experiencing investment growth, which is reflected in the increase in both our backlog and factored sales pipeline. Moving on to Slide 6, I'd like to take you through some of our business performance starting on Slide 7. We've always said that our people are the most important asset and our highest priority is to keep them safe and well. Our values guide us as we support one another and we show the care, commitment and courage are exemplified in Worley's culture. We actively support the communities in which we work, including that which we do through partnerships with First Nations groups in Canada, U.S., PNG and Australia. Moving on to Slide 8. Our half year financial performance indicates continued market improvement and is consistent with our outlook provided at the full year 2021. The combined metrics from the half year indicate the quality of our earnings has improved and is set to improve further with profit margins, backlog, and pipeline, all increasing in the period. The half year results and outlook for the full year allowed us to declare a dividend at $0.25 per share. We've delivered this result with a headcount that is steep and steady through December, and we saw an increase over January as work builds from our customers increasing investment. Our backlog has increased over the last six months to $15.1 billion from $14.3 billion with growth both from traditional and sustainability projects. Sustainability work has grown and accounts for $1.4 billion of aggregated revenue at more favorable margins. And sustainable work has increased from full-year 2021 as a proportion of both our factored sales pipeline and backlog. Turning to Slide 9, it's important to me and the leadership team that we operate in line with our purpose, delivering a more sustainable world. We're evolving our environmental, social and government practices to elevate our performance and we're making good progress to deliver on our ESG commitments. This is ingrained in our culture and it's embedded into our senior leaders score costs. A diverse and inclusive workplace is critical to Worley’s success. One of our measures and a key focus area is gender diversity from the board to our graduate intake. You can see from this graphic our female graduate intake across the operation was over 50% in the half. I'm also pleased to share that we're tracking ahead of our own targets on the commitments to net zero scope 1 and 2 emission reductions. Moving on to Slide 10. The chart on the slide show our period on period trends displaying continued improvements across our key financial metrics. Against the prior comparative period our underlying EBITDA is up 21%, backlog was up 12% and our revenue has been holding. We expect our revenue to increase with both backlog and factored sales pipeline signaling growth ahead, particularly in sustainability contracts. Turning to Slide 11. As I've already mentioned, backlog continues to grow across both traditional and sustainability projects. This is consistent with the growth we're seeing across our customers end markets. And it's an example of our customers investing in their traditional business while increasing activity in the sustainability space, including areas such as decarbonization. Increased backlog is being seen across all our regions along with notable growth in the chemical sector, as demand and customer investment returns. Activity on our long-term O&M contracts has predominantly returned to pre-COVID-19 levels and we've secured significant wins in both traditional and sustainability projects. Turning to Slide 12. Overall, our factored sales pipeline continues to grow in both our traditional and sustainability work. The increasing sustainability component indicates progress toward our 75% aspiration for sustainability-related revenues within the next five years. We're seeing the average size of these technically and large, logistically-complex opportunities increasing with decarbonization opportunities comparable to traditional projects. This is in line with projects moving past the early phases. Over the past we've seen opportunities grow with each of our sectors consistent with that which we're seeing in the market as our customers continue to announce increasing levels of expenditure. Our energy and chemicals sector pipeline will reach up 10% with resources up more than 30% in the last 6 months. Turning to Slide 13. Momentum continues to build as we transform our business in line with our focus, delivering a more sustainable world. The markets we serve are transforming with governments, investors, and companies committing the net zero. Our strategy places us at the center of significant future investment and aligns with our customers own transformation journeys. We're seeing investment by our customers in both their traditional business and sustainability areas as they transition to a future that is low-carbon. We're accelerating our strategic transformation, investing in growth areas across our strategic portfolio, as well as digital enablement and process technology. Turning to Slide 14. I remind you of our strategic portfolio, which defined why we do business. We're seeing accelerating investment across our core markets and our growth markets. And we are securing strategic awards across our portfolio in both traditional and sustainability work, which I will share with you on the next slide. Moving on to Slide 15. There are three key themes which I'd like to draw your attention to. The first is that we continue to secure strategic wins and sustainability, particularly across growth areas of our strategic portfolio, such as CCUS, green hydrogen, and low-carbon fuels. And we've seen an upward trend in wins in sustainability over the half. Second, we indicated at our last result, our expectation that some of our early phase projects and sustainability would move into subsequent base this year, this is now happening. And finally, we continue to build on the strength of our traditional work through our longstanding customer relationships. We've had numerous wins with long-term service contract renewals and project awards. I'd now like to share with you five case studies which demonstrate these themes. Moving on to Slide 16. On the slide, you'll see two recent awards with our long-term customers Shell in the Netherlands. We're partnering with Shell to deliver sustainable aviation fuel and renewable diesel projects, expected to be one of the biggest and its debits card in Europe. We're also working on one of the largest commercial green hydrogen production facilities in the world. We've been involved since the early phases of both projects and our support in Shell as they move into subsequent basis. Both green hydrogen and low-carbon fuels are areas that are accelerating and our own strategic investments. Moving on to slide 17. The Humber Zero project is a strategically significant win in sustainability, specifically, in the growth areas of CCUS and industrial hubs. The Humber region represents more than 40% of the UK's industrial emission. The project has the potential to abate around 3 billion tons of carbon dioxide emissions every year. This award builds on our earliest CCUs work with Drax, the largest decarbonization project in Europe. Turning to Slide 18. Plastics recycling is a growth area within our strategic portfolio, and we're seeing increasing commitments by our customers in the circular economy space. We're pleased to be awarded the fee for this contract as a follow-on from our early phase work on this world scale chemical recycling plants in Europe with Trinseo. Moving on to Slide 19. Project wins in the growth market of energy transition and battery minerals continue. For the last three years, we've been supporting Australian lithium producing Galaxy resources of the 3Q lithium brine project in the largest lithium producing area in Argentina. Moving on to Slide 20. The final case studies demonstrate the importance of our traditional work and the role it plays and continue to play in our future. I'd like to highlight two contract with Saudi Aramco in conventional energy and chemicals. We've been worked with Aramco for many years and have secured an extension to the contract but Aramco's offshore facilities. This is an important contract that we've held for almost 20 years. The second contract is in support of the residue up way project at Aramco's Russ Tinder refinery. This will convert low-value refinery residue into higher-value products, including jet fuel and ultra-low sulfur diesel. Work on the early phase of this project by our Advisian consulting team was crucial in helping us secure the services contract for the project. Turning to Slide 21. I'd now like to talk about our strategic progress. We launched up purpose of delivering a more sustainable world and supporting our values in 2020 and strive to embody these in every interaction we have with each other, our customers, and the communities concern. At our December Investor Day, I described how our purpose is embedded in our ambition and that we will be recognized globally as the leader in sustainability solutions. That's quite a transformation and one we are committed to achieving. We're already making good headway. As we work to realize our ambition, we plan to hold ourselves accountable against a set of objectives. The next two slides set up our metrics and achievements as we deliver on this strategy. Turning to Slide 22. We're pleased with the achievements we've made in this half, our people are key to delivering our purpose and ambition. We to continue to invest in our people to build on that transferable skills and we recruit talent in line with our strategic investment priority initiatives where needed. Our portfolio articulate what our business will look like in five years in terms of sustainability-related work. We'll accelerate our growth and aspire to derive 75% of our revenue from sustainability-related business. As you can see, we continue to make good progress in that regard, increasing our revenue, backlog, and pipeline. Our transformation is gaining momentum. We've made progress in new solutions-based model. For example, our recent collaboration with IBM and ABB for an integrated digitally-enabled solution helping energy companies build and operate green hydrogen facilities more efficiently and at scale. I'm proud of the progress we're making delivering our own net zero emissions targets and that we're tracking ahead of schedule against our Scope 1 and Scope 2 targets. Turning to Slide 23. In addition to our people, our portfolio, and our finance, we've had a number of operational priorities in delivering our ambition, operational excellence, capital management, transformation, and managing our cost base, and Tiernan will talk to each of these elements as he provides further details on our financial results and achievements over the hall. Tiernan, over to you.

Tiernan O'Rourke: Thank you, Chris. Very good morning. Great to be here. I've really enjoyed my first 12 weeks in the role, even with the challenges of on-boarding during Omicron. Worley, as you know, is an iconic organization with incredible opportunities. And I really look forward to working with all of you as we deliver our strategic ambition. Since joining the team, I've had an opportunity to meet with several investors and your feedback has been valuable. So in addition to our normal fulsome content, my presentation today will be balanced between three broad areas. First, the drivers behind our financial performance and in particular, what's behind the improvement in earnings over the half. Second, how our regional businesses are responding to the emerging growth momentum. And finally, I'll provide an update on a few matters we know you've raised before. These include the rigor around adjustments we make in arriving at underlying EBITDA, details of the cost, benefits, and timing of the cost out programs that are driving efficiency into our operations, the cost of which are excluded from underlying EBITDA. Finally, a detailed slide on our strategic investment initiative of $100 million including the nature of that expenditure. So a bit to get through, so let's dive in. On Slide 25, our financial performance has improved, consistent with the outlook provided at the FY2021 results in August last year and the Investor Day in December. Our aggregated revenue of $4.4 billion is steady on the second half of FY2021. However, there continues to be clear evidence from customers that the momentum post COVID-19 is gathering pace. We're seeing stronger investment activities from our customers across all our core markets. Importantly, as Chris outlined, our revenue numbers are set to grow with both backlog and factored sales pipelines, signaling positive momentum, particularly in sustainability contracts. This demand is translating into profit growth. We've delivered an underlying EBITDA of $251 million up from $207 million on the first half of FY2021, and a margin of 5.7% up from 4.6%. Importantly, in this half, we included all of the $13 million spent on strategic investment costs in underlying EBITDA. This total $100 million investment over three years will deliver its full benefit in the medium to long -term EBITDA margin, excluding this strategic cost was 6%. And I'll speak more in detail about this cost on a later slide. We've taken a lot of cost-out of the business as you know and as we scale it for growth. A later slide sets out the costs, the benefits, and the remaining timing of these projects. Our capital management position continues to be supportive of our growth plans with gearing below the target range and leverage well within our covenant definitions. We have good liquidity and continue to enjoy access to flexible debt capital sources at attractive pricing. On Slide 26, let's look at the some of the key highlights from each of the regions. The Americas represents 45% of our aggregated revenue and has the largest proportion of construction and fabrication work, having completed the turnaround season at the end of the half. While we have seen activity levels return in this period, there has been a slower ramp up of a number of key projects. However, with activity increasing on the ground, these are expected to deliver in the second half of this financial year. We've won a number of significant contract awards. In sustainability, we were pleased to announce our second Direct Air Capture award with Oxy Low Carbon Ventures for the DAC-to-fuels project in Canada. This consolidates our leading market position in carbon capture, utilization, and storage. We also continue to have a leading position in the Americas for renewable fuels. Our growing backlog and sales pipeline indicate a stronger second half for the Americas, with the continued strong sustainability contribution. Let's look at Slide 27. The EMEA and APAC region represents 55% of our aggregated revenue. We've seen volume increases continue with growing market activity and investment by our customers as we predicted from our visit to COP26, having retained our low cost base and seeing the mix of work improve as the region gathers momentum, margins have increased. Efficiency contributions such as increased global integrated delivery or GID usage across the region has also helped improve the result, with a 90% increase in hours compared to FY2021, and further growth expected. The sustainability contribution has strengthened across revenue and pipeline, representing 38% of aggregated revenue and 48% of the factored sales pipeline. We expect to see an improved second half with increases in our major business centers in London, the Netherlands, India, and China. Turning to Slide 28, we delivered a strong underlying EBITDA and NPATA results with underlying NPATA at $150 million up 28% from the prior comparative period. As I previously mentioned, our margins have also increased compared with the first half of FY2021. Our underlying net operating cash flow is $110 million down on the prior corresponding period of $280 million. In relation to cash inflows, we booked $4.7 billion in revenue in the half and collected $4.9 billion in cash, a 104% conversion rate, with DSO days falling by six days to 62 days. On cash outflows, movements in working capital, particularly from the reversal of higher-than-average DPO levels and trade payable balances at 30, June last year, which were temporary in nature, increased the level of cash payments made this half. This was partly due to the implementation of a new financial accounting system in FY2021, which created a backlog of accrued payments by year-end. The backlog cleared in the first half of FY2022. Our expected net operating cash flow for the second half of the year will return to more closely tracking earnings by 30 of June '22 and into FY2023. Of course, working capital will move around in future depending on mix of business and growth. But I expect cash flows to be more stable, especially as DSO and DPO are at historic and industry levels again. A couple of supplementary sides have been added on cash flow and are in the appendices. Cash will remain a very important focus for me as CFO. As our strategy shifted in recent years, we've incurred a range of costs which have been excluded from underlying earnings. We do this because when the programs are complete, these costs will no longer be incurred as they are one-off in nature, even if they are incurred over several reporting periods. This approach will continue on those programs we started in 2019. I appreciate that this can be difficult to track, but we have been consistent each year in our approach. In today's pack, we provide more information on the guidelines we always use and we'll continue to use on these and any future similar projects to allocate costs consistently, either above or below the line, so you can track our treatment, a detailed explanation of the cost and benefits that make up the amounts we have excluded from underlying EBITDA, and additional information on what to expect for the foreseeable future by way of estimate of the amounts we have committed to in order to complete the projects. This half, there has been a significant decline in the total costs excluded from EBITDA, as we foreshadowed last August, as some components of the projects have begun to complete. In terms of guidelines for items to be excluded from underlying EBITDA, there are two simple rules. First, adjustments must be individually significant, and without their exclusion, investors would not be able to view the sustainable underlying performance of the group. And second, guidelines must be consistently applied even if the costs span several reporting periods. To be really clear, costs of a business as usual nature do not meet these guidelines and are included in EBITDA. On Slide 30, we've continued to see our margins improve, taking into account typical seasonality of earnings. The key factors contributing to this are the improvements in business mix and rate, as we see more professional services work return, and the retained benefits of our cost savings program. On slide 31, as I mentioned earlier, a number of project programs are continuing to generate long-term benefits, creating an overhead platform which will allow us to achieve our ambition using a scalable business. For example, our property costs have reduced by more than half since the first half of FY2020. Our non-billable travel has reduced by more than 70% and even with the return of travel, we have planned to maintain a 50% reduction on non-billable travel when compared to pre -COVID levels. In aggregate, we have achieved our operational cost savings program target six months ahead of schedule delivering $352 million of annualized savings by end of December 2021. I've already spoken how these programs costs are excluded from underlying EBITDA, and to be clear, $46 million of them have been excluded in this half. You will notice from this result that we have begun the last part of current planned initiatives, the shared service transformation or SSC project, spending $30 million in the period. With more knowledge, we have expanded this particular part of the project. And this has allowed us to increase our total program savings target to $375 million of recurring annualized savings, estimated to be achieved by June 30, 2023. So to summarize the cumulative position of live cost-out projects, we spent $290 million on all live cost-out programs initiated since July 1, 2019, including $33 million on the SSC project. We estimate that we will spend a further $64 million between now and June 30, 2023, most of which is on the SSC to reach a grand total of $355 million when the live cost-out program is complete. For clarity, this does not include the ECR cost synergies program that completed last year, which is disclosed separately on Slide 54 in the supplementary slides. Taking all this together, let me re-summarize the decision. A total cost of $355 million will deliver $375 million of annual recurring savings, with $352 million of these savings already achieved. All live projects are expected to be complete and be delivering the total annualized run rate by 30th of June 2023. This is all summarized in the supplementary Slides 53 and 54 in the pack released today. Importantly, at the current time, no other similar projects have been commenced. Moving to Slide 32 on growth investment, we forecast to spend a $100 million on organic investment to accelerate and act as a catalyst for our strategic shift into sustainability. Approximately 1/3 of this planned investment will be made in FY2022, with $13 million recognized year-to-date at 31 December, 2021. This investment is predominantly made up of operational expenditure, recognized as a cost in underlying EBITDA to match the return that will be generated from it. There may be small amounts of capitalized expenditure along the way, but there was none in this half. The expected expenditure will largely comprise of the recruitment of employees to accelerate the focus on sustainability contract execution in our growth pathways, and in some minor digital enablement which will enhance the execution of our strategy. So in summary, we have delivered materially-improved results this period. There is ample evidence that the market is gaining momentum after a few disrupted years. We are well on track with our strategic priorities. Our balance sheet is well-positioned to support our growth ambition. Again, it's really great to be here and I really look forward to quality interactions with all of you in coming weeks. I'll now hand back to Chris to complete the rest of the presentation. Chris. Yes, thanks, Tiernan. Look, and just for everyone, Slide 33. Before I take you through the outlook for the next half and beyond, I'd like to maybe briefly focus on where we're seeing our market at the moment. So, moving on to Slide 20 -- on to Slide 34. But we're seeing an upward trajectory of capex investment across all the sectors we serve from '21 into 2022. Now, for example, originally announced aggregated capex guidance for the four energy majors

Operator: Thank you. [Operator Instructions]. Your first question comes from Daniel Levy, from Citi. Please go ahead with your question.

Daniel Levy: Hi, guys. Congrats on the good results and thanks for taking my questions. I'm just looking at the EBITA margins in that -- and the quote on the outlook you just gave, can you help me to reconcile the comments without expecting margins just to be sustained into the next half, with the increasing sustainability business mix that's opposed to net you higher margins. Are margins getting worse somewhere else in the business or is it just that strategic cost beating up all of the benefit?

Chris Ashton: Tiernan, do you want to answer that one?

Tiernan O’Rourke: Yeah. Thanks, Daniel. Good morning. Look, we -- as we said in the presentation, we've had a significant increase in margins over half-on-half, obviously slight decline on the second half of last year. But it's really a mix issue for the remainder of FY2022. The backlog and pipeline -- factored pipeline will indicate that beyond this year you will see the effect you've described. As that factored sales pipeline converting the backlog, you'll see the net impact on margins beyond FY2022. So what we wanted to make sure is you understood relative to last year where the second half revenue declined, that the margins that we did see -- the increase in margins we did see half-on-half were going to be sustained. I think it's really just a mix issue as we exit COVID -19 and a lot of the activity just comes back at a full strength.

Daniel Levy: Okay. So am I right in thinking that maybe we have to wait till FY2023 for the EBITDA margins to recover, but you're pretty confident revenue has kind of bottomed down and is going to increase second half?

Tiernan O’Rourke: Yes.

Daniel Levy: Fantastic. That's it for me.

Chris Ashton: I would reiterate that. Look, I think we've seen the bottom of the market and I think we believe that we're facing into positive momentum that will be reflected as we move into FY -- well, obviously, sustained earnings in -- the balance of FY2022, but we'll see opportunity for improved earnings beyond that.

Daniel Levy: Okay. Thanks, guys.

Operator: Our next question comes from Richard Johnson from Jefferies. Please go ahead with your question.

Richard Johnson: Thank you very much. Chris, I just wanted us to talk or get a better understanding of your thinking on top-line growth going forward, obviously taking I'm aware of what you're saying about sustainability. When you look at the aggregate and you compare it to previous cycles, are you growing at the rate you would expect or more?

Chris Ashton: Look, I think it's a -- I think as we move forward -- and it's difficult, Richard, to compare the previous cycles, given the massive shift that the markets are facing into. But look, I think that we are well-positioned for increased levels of sustainability revenue, and we see sustainability revenue growing at a rate more quickly than even the traditional market. So I think there's opportunity for us to grow at a rate, at least at the market, or slightly -- or above.

Richard Johnson: That's very clear, thanks. And then just quickly, can you confirm whether you've gotten an exposure to Eastern Europe?

Chris Ashton: We -- well, we do -- we've got people in Sofia, Bulgaria where we do our nuclear projects. We've got eight Ukrainian nationals, three of which are in the Ukraine, the other five are on rotation outside of Ukraine, they're in Egypt on different projects. So we're monitoring the situation, Richard, but from a financial revenue point of view, we don't have any exposure to the Ukraine of any materiality at all. But from a people's safety point of view, we're monitoring the situation very clearly. We do work -- we do have some work associated with Russian customers, and so we'll continue to monitor that as well.

Richard Johnson: Is that material, Chris?

Chris Ashton: Not in the broader context, no.

Richard Johnson: Got it. Thanks very much. That's very helpful. That's me.

Operator: Our next question comes from Rohan Sundram from MST Financial. Please go ahead with your question.

Rohan Sundram: Hi, guys. Thanks. Thanks for this. Question on the outlook, just following on from Richard's question. I guess my question is, with the Oil [indiscernible] is lifting their Capex guidance into '22 versus the '21 levels, are you saying that anything might come through as yet in your demand or the volumes? If not, when do you expect to say it? And is the backlog growth at these types more so reflective of deferred projects coming back online rather than the high Capex outlook, if you know what I mean?

Chris Ashton: So what we are seeing, obviously, experience our customers re-engages on projects that we're deferred or engages on new projects. It's a mix of both that you referred to -- and look, I think what we'll see as we go into the balance of FY2022 and into FY2023, we'll see that those investments and other engagements increase. The reality is the investment needs to occur just to stem the supply gap. We're obviously we're at +$90 a barrel, so it's a bit of a premium on that with the tensions in Eastern Europe. But the fundamentals are supply is declining on a non-yield basis as we've said, it's a depleted reserve. And we're going to -- and the industry going to have to invest as demand recovers and we are projecting them said demand to recover the pre -COVID levels this year. And even with the energy transition and shift to sustainability, the world itself cannot win itself off oil at a rate which would not need the level of investment that the majors are going to have to make. So conversations ongoing, some of them more about projects that have maybe been delayed, but others on new projects, new investments. We'll see that benefit roll into some of FY2022, but we'll save into FY2023 and beyond.

Tiernan O'Rourke: Rohan, just to reiterate the answer we gave to Daniel's question, we are going to see volumes in the second half increase from both traditional and sustainability contracts and from a mix of deferred contracts and new contracts, so increased activity in the second half, just to reiterate.

Rohan Sundram: Okay. Thank you. That helps.

Operator: Our next question comes from Mark Samter from MST. Please go ahead with your question.

Mark Samter: Good morning, guys. I was just wondering if you could give us a bit more clarity. I'm going to say strategic opex is a term of motherhood referenced in the equity market. I'm just curious to understand what you think side dip into this opex to what you spend year-in, year-out, and presumably about the definition, you're flagging it out to us which sounds like you want to exclude it from the way we think about the business, but presumably order system that you capitalize it because they say it is part and parcel of EBITDA business.

Tiernan O'Rourke: Well, maybe I want to go [Indiscernible].

Chris Ashton: Sorry. You go first and I'll chime in. Go on Tiernan.

Tiernan O'Rourke: Right. Mark, thanks for the question. As I mentioned, we see this as a fundamental part of assisting or acting as a catalyst for us shifting into the growth pathways that Chris talked about. So what it is, is the nature of the expenditure really meets the definition of the business-as-usual cost. It's not a question of whether the auditors allowed us to capitalize it or not, it's actually cost; it's the recruitment of people; it's some consulting costs. And even if there are digital enablement costs, applications, computer software, under the new accounting standards, Software-as-a-Service is expensed anyway. So it's natural that this cost would be -- would be put -- included in underlying EBITDA. The nature of it is such that it is helping us to get started on some of the growth opportunities we have in areas like green hydrogen and in water, in wind, offshore wind. And as a result, we're just adding a few extra skills to our kit bag to allow us to accelerate into these areas and use the fungibility of our underlying engineering teams to shift into those kind of sustainability contracts. That's why I said that it's going to deliver benefits in the medium to long term, because once we are set up and we have teams that are able to address those new technologies in those newer parts of our business, then we will allow -- it will allow us to start to deliver the increased volume from sustainability at the projected expected better margin. So definitely opex definitely included in underlying EBITDA and it's strategic costs because it actually is part of our strategic shift.

Chris Ashton: Yeah. And let me answer. So we came up -- [Indiscernible] last you had talked about investing $100 million in our strategic pivot. And so from a description point of view, it's business as usual, as in the fact it's about investing in people, bringing new people on, if we've got skills gaps that are necessary to close, if we're going to deliver the strategy pivot, it's business as usual in that regard. But we're taking Worley through the biggest transformation in its history, while it's business as usual in terms of what the money is spent on, this is the first time that we're saying, look, we're going to spend -- invest $100 million very, very deliberately and with the level of focus that we are applying in the strategic transformation, And the reason it's called out is because in August I went to the market and I shared, look, I'm going to have to invest a $100 million over three years. And we're saying $35 million this year, 13.5. But the idea is just to call it out specifically and say, we're going to be successful in this transition, and transform the business and build the capability that the world's going to need to help deploy the levels of capital that we're talking about, we're going to have to invest. And so while it's business as usual in terms of the nature, the people, it's strategic in terms of the underpinning reasons why we're doing it.

Tiernan O'Rourke: Chris, its probably worth adding, just that last thing Mark. The reason we called it out, is you can treat it how you like, but we think it's underlying. The reason we called it out is that $13.5 million didn't generate income in the half. It's going to generate income as we start to bring in new contracts in those new areas. As a result, it diluted the margin from 6% to 5.7%. That was the reason we called it out, but it's genuinely in underlying EBITDA.

Mark Samter: Yeah, I guess the point I'm curious to get your view on is that none of us know how this transition is going to play out. Completely agree with the energy industry is going through the biggest structural change it ever has and ever will see, but the reality of that means there's going to be aspects that you're going to need to retool in and detool in and no one's got a crystal ball of how this playing out. So my point to you is that if they're not a risk, that this isn't three years, but this is a perpetual ongoing level of spend, and I guess that's why the risk is that cash flow continues to disappoint versus your definition of underlying EBITDA because the transition is not going to be fixed in the next three years and you're going to have to reach out the business again to capitalize on that as you roll forward.

Chris Ashton: Let me answer that one. Look, you're right, no one's got a crystal ball. And there are varying degrees of confidence in -- with various people who position themselves as experts in the area. The fact is we are going to have to have deep carbonization, so deep -- carbon capture is going to be there. We are going to have renewables. You're going to have offshore winds. You're going to have to use water more efficiently. We know that you're going to have more copper, more nickel, more lithium. So is there a risk? Yes. Is the probability in favor of where we're taking the business? Absolutely. So is the possibility that everything that we're talking about doesn't come to fruition? Very low. Is the probably that it would come into fruition high? Yes. So I guess our view is we have enough confidence in the areas that we're investing in, that it will sustain or will help position us to grow the revenue strength. At some point, we will have natural momentum in the business where we'll have the capability, the capacity, and we won't need to invest. But what I've said to the Mark and what I've shared with is, as we kickoff this strategic transformation, we have to invest. A lot of what we're doing is, is calling out that investment.

Mark Samter: Perfect. Thank you, Chris.

Operator: Our next question comes from Adam Martin, from Morgan Stanley. Please go ahead with your question.

Adam Martin: Hey, good morning. The capex -- chemicals capex sale looks a lot better than where it'd been for the last 12 or 18 months. Can you just talk through that? Obviously, chemicals is a wide area. So what areas are looking better? Maybe you can touch on refining as well. Just, if we can start there please and I've got a follow-on.

Chris Ashton: Yeah look. So on the refining side, clearly massive structural disruption, moving to sustainable fuels, aviation fuels, diesel, low-carbon diesel, low carbon gasoline, that's the biggest structural shift we're seeing in the refining market. On the chemical side, look, there's a range of investments going on from cellulose-based plastics, which are becoming more and more important from a sustainable point-of-view, from an impact on the environment. But also, look, it's even the more conventional chemical production. But as it's been, as Capex has been considered for or by these companies, they are looking at it through the lens of sustainability. So Dow announced a net zero project in Canada. Other customers are doing the same, looking at how they can deploy Capex, but deployed in a more eco -friendly way. It's across the range of chemical products. So we're seeing, with all of our chemicals customers, renewed activity. We are seeing plastics re-cycling as an area of increasing interest and we've obviously we've talked about the Tristian Project in Europe and we're talking to other customers as well about plastic recycling, but we're seeing it across a broad spectrum of the chemical sector.

Adam Martin: Okay. And just on the oil capex side of the question, you've got an [Indiscernible] despite [Indiscernible] guide or predictions. Can you just give us your sense of what regions where you're expecting pretty solid growth and obviously a strong participant in the Shell industries. So just to see on your thoughts on conventional versus Shell capex and what areas you think you're going to grow pretty well in the next one, two years, please.

Chris Ashton: We're not -- we're not a big player in the Shell, in the U.S. Shell, which is good because there's not coming -- we don't see the general view. There's not going to be massive Capex in the Shell side. But on the unconventional, with companies like Aramco, we're looking at the unconventional gas from their side. But look with the NOCs. So the Aramco's, the Qatar Petroleum, the ADNOC group of companies, KLC, you have Kuwait. They're all investing and some of them are looking at towards the chemicals to disconnect from the demand. All global demand in the long -term desensitized and fewer petrodollars, so I think Middle East opportunities. The European majors going through a significant restructure, so Total, Equinor, Shell, BP. But they're going to continue, they'll continue to invest in the upstream side as well. So pretty much the areas that I see growth in, we're well-positioned for. And I said, we're not -- we don't really play in the shale area in the U.S., which I don't see much -- I don't see certain -- I don't see a rush of capital spend in that area. They're mostly managing their balance sheets and such so [Indiscernible]

Adam Martin: Yes. No, that's [Indiscernible]

Chris Ashton: Sorry?

Operator: Our next question comes from Saul Kavonic from Credit Suisse. Please go ahead with your question.

Saul Kavonic: Thank you, folks. Two quick questions, if I may. First one is, can you give us an update on the relationship with [Indiscernible], and if there's been any discussions or considerations about [Indiscernible] looking to exit if sufficient in interest in volume.

Chris Ashton: Now, look, we've -- I've had no discussions with [Indiscernible] at all. You know, we do with -- occasionally we will look at opportunities to work together but I've said we're not working together at the moment. In terms of their acquisition on an exit, that's the question that you have to ask [Indiscernible].

Saul Kavonic: Fair enough. My second question is, in the context of appear, would who basically looked to offload their kind of more green teams, to field environment, business and got a big bump on that. I'm interested on your thoughts on how do you see a scope for Worley to potentially speed of sorts green division where you could achieve a high multiple in the future. Or alternatively, are you interested in pursuing M&A to increase the green part of your business. If so, how do you address the multiple differential and implications that could have?

Chris Ashton: So there's three pathways to growth that we consider, obviously organic, partnering, and M&A. From an M&A point-of-view, if there's an opportunity that makes sense and helps drive the delivery of our strategy, we'll consider it. We always have. In terms of the multiple look, we will address that if it makes sense from a strategic delivery perspective and economic perspective. Partnering, we're going to continue to partner. You saw yesterday we announced the global cooperation agreement with IBM and ABB in the hydrogen space where we bring the design build capability, ABB, bring the energy efficiency expertise, and IBM bring the data platform. Great cooperation, so we will see ourselves building in that space. And then organically, and look, one of the reasons that we are reporting, the way we're reporting now, is we believe that the sustainability related revenues, are worthy over a different multiple on earnings compared to how we're being currently valued. And so we are deliberately structuring and being far more transparent in the revenue and the performance of sustainability-related work in way of demonstrating that this is an increasingly important part of our business. It's an increasing area of growth and it's not something which is a short life cycle. We know that the UPS report and other reports over $100 trillion between now and 2050 are going to be invested, so by shifting the business into the area of decarbonization, resource stewardship, asset sustainability, environments, and society. We believe that we're positioning ourselves to get access to long-term growth opportunity as the markets and our customers and governments invest in sustainability in the energy transition. So we believe that, as we demonstrate increasing proportion of our work in the sustainability space, that is worthy of the multiples being reconsidered because obvious long-term upside. And of course that will help the economics side of any strategic M&A that we believe will help drive the strategy as well. But three areas of growth, organic, partnering, and M&A.

Tiernan O'Rourke: I think I'll add -- I'll just add one supplementary point that any inorganic growth or M&A growth needs to be done on an accretive basis. I know this is given, but I just wanted to say it anyway, it needs to have a sufficient risk-reward balance, and it needs to be accretive. So that is a discipline that we will make sure we overlay on anything in that side of those three growth pathways.

Saul Kavonic: Thanks. As the quick follow-up --

Chris Ashton: Go on Saul. You go.

Saul Kavonic: Just a quick follow-up. I appreciate the way you're splitting the reporting here and the argument that the market should stop to recognize the premium for the greener -- that sustainable part of the business. My question would be, if the market continues to not essentially re-rate that multiple and not take -- provide that higher valuation for the sustainable part of the business because it remains locked together still with this legacy business, similar to what we're seeing in legacy energy companies across the globe, would you then move down a path to consider actually splitting these businesses up so you can realize that high multiple for the green business if the market refuses to do it as an integrated whole?

Chris Ashton: We considered all options further downstream. But what I would say Saul, the difference between us and say a Shell or a company that splits it off, our resource's fungible. Where you compared us to the wood group, that was actually a specific division that came with the Amec Foster Wheeler acquisition. So it's very easily carved off because it's always has been historically a specific area of the business. We have 50,000 people and they are fungible across what we do. So the splitting of the business isn't necessarily as easy as it would be with an asset-based company or a company that has a division that is clearly and more easily curved out from the body of the mother ship as it were.

Saul Kavonic: Thank you. Appreciate it. That's all for me.

Chris Ashton: Can I just -- I do want to -- you mentioned words and I do want to mention one thing and that is the -- they clearly the announcement by word of delaying its results because of $100 million write-down on one of its lump-sum turnkey projects -- lump-sum projects. I think it's really important to emphasize, and we've shared this before. This is not a space Worley works, and we don't do competitively bid lump-sum EPC work. From a risk profile point of view, that's not a space we play in. We have some lump-sum engineering work, but we don't play in that lump sum turnkey space, but not just raised up so because you mentioned what will could be doing.

Operator: Thank you. This concludes the question and answer session. Unfortunately, we were not able to get through all questions, [Operator Instructions]. That does conclude our conference for today. We do thank you for participating. You may now disconnect your lines.