John Wood Group PLC (OTCPK:WDGJF) Q2 2023 Results Conference Call August 23, 2023 3:00 AM ET
Ken Gilmartin – Chief Executive Officer
David Kemp – Chief Financial Officer
Conference Call Participants
Rachel Fletcher – Morgan Stanley
Nikhil Gupta – Citi
Mick Pickup – Barclays
Alex Paterson – Peel Hunt
Jamie Franklin – Jefferies
Good morning, and welcome to our Half Year Results Presentation. We’re here in London this morning for this virtual event. I’m Ken Gilmartin, CEO of Wood, and I’m really pleased to host you today as we share our latest results. I’m joined today by David Kemp, our CFO.
So, the agenda for this morning will be a summary of the highlights from the first half for me. David will then present the financials, and I will then talk about how we’re delivering on our strategy and the positive momentum that is creating. We will then take your questions at the end.
So, our standard disclaimer here for the record. So starting with a quick overview of the key highlights from the first half of 2023. So following a transformative 12 months for Wood, we entered 2023 with a clear strategy and a laser focus on performance excellence and predictable delivery. Six months in, that remains, and we’re seeing good trading and momentum. So let me talk to a few themes that illustrate my point.
So firstly, we’ve seen good trading across our business in the first half of the year. As David will walk you through, both revenue and EBITDA were up and we saw much improvement in our operating cash flow. We have increased our full year guidance today, underpinned by the delivery of our strategy. We shared this strategy at our Capital Markets Day last year.
I will come back to our progress here in more detail, but highlights include double-digit growth in revenue and pipeline across key focused markets, significant contract wins and a major improvement in employee engagement. And finally, we’ll continue to build momentum.
Our order book was up. Our sustainable revenues grew by 20%, and we have increased our employee headcount as a key marker of growth. Now you will have seen this morning that we announced that David Kemp, our CFO, has advised the Board of his intention to retire as CFO after 10 years with Wood.
I’ve really valued his support and leadership since I joined Wood and he has been instrumental in the challenges and the changes that we have made to transform the Company. So let me put on record my thanks to David. He’ll remain imposed until his successor is in place and will continue to support myself and the Board in our strategic delivery.
So with that, I will now pass you on to David to cover our financial results.
Thank you, Ken, and good morning, everyone. I will now talk you through our financial performance in the half and I’ll cover the strong trading we saw across revenue and EBITDA in the first half, the progress in our order book and our improving cash performance. I’ll also cover the increase to our full year guidance.
Overall, we saw good trading in the half. Both our revenue and EBITDA performance were ahead of the estimate we provided at the July trading update. And that reflected a strong close to the half.
We saw strong revenue growth, up 20% at constant currency, and this was helped by a significant increase in low-margin pass-through revenue, and that was about 1/3 of the growth. We delivered EBITDA of $202 million, and that was up 12% at constant currency. The EBITDA margin was lower at 6.8%, but this partly reflects the increased pass-through activity plus the OpEx investments we’re making to deliver future growth.
The adjusted diluted EPS of $0.011 reflects the sale of the Built Environment, which contributed significantly a year ago, plus a relatively high adjusted tax charge on our results. The net debt was in line with our expectations, and our cash turnaround story remains on track. The improved operating cash performance and consistency of exceptionals reflects this, and I’ll come back to this in a few slides.
Looking at revenue, we saw strong revenue growth in the half, up 20% at constant currency. And you can see in this chart that our revenue grew across all of our business units with particularly strong growth in projects. And that reflects the effectiveness of our strategy and the delivery of the strong backlog build last year.
The growth in projects also reflects a weak comparator to last year. The revenue growth was also helped by the increase in low-margin pass-through, which was approximately 1/3 of the growth. Especially pleasing was the growth of our sustainable revenue, which was up 20% to $600 million and that was despite our pullback from lump sum renewables projects.
Now onto adjusted EBITDA. An FX impact of around $6 million in the half, so growth at constant currency was 12%, and this was led by strong performance of projects, along with lower central costs. I’ll cover the performance by the business units shortly.
Our order book at June ’23 was around $6 billion and that’s up 5% since December after adjusting for FX and the sale of our Gulf of Mexico labor operations business. As Ken will pick up shortly, we continue to win significant contracts across our business units and our focus markets reflect our strategy delivering.
Growth was most pronounced in consulting, driven by the strength of our energy offering, but we’re pleased to have our order book has developed across all of our business units. The strength of our order book gives us in excess of 90% coverage of our revenue expectation.
So, looking at the business units in a bit more detail, starting first with consulting. We had strong revenue growth of 17% at constant currency, with good growth across energy and across digital. Adjusted EBITDA was $38 million, with the margin lower at 10.6%, and that reflects the exit of higher margin work in Russia last year. OpEx investments we’re making in SMEs and high-growth markets and the weighting of our energy asset development business performance to the second half.
Our energy asset development business develops renewables projects from concept to shovel ready. And as such, this is a low volume, high-margin business with a lumpy profit stream. The order book was up 8% at constant currency, with good growth right across the business. Looking ahead to the second half, we expect continued revenue growth and a stronger margin, partly reflecting the performance of the energy asset development business.
Moving next on to projects. Here, we had strong headline revenue growth of 30% at constant currency. And the growth represents good performance across oil, gas and chemicals, and that’s more than offsetting the impact of running down LSTK activities, which were principally in U.S. renewables projects. Around half of this growth relates to increased low-margin pass-through activity, and we are comparing to a weak comparator for the first half of ’22.
Adjusted EBITDA increased from $81 million to $92 million, with a lower margin reflecting that pass-through increase. The order book was up 2% at constant currency with lower year-on-year growth following a very strong recovery last year. Looking ahead, we expect slower growth in the second half of this year and a broadly similar margin.
Finally, moving on to operations. In a very solid performance in the half, revenue was up 9% at constant currency with growth from higher activity levels and some benefit from pass-through activity. The slightly lower margin reflects this, and so adjusted EBITDA was slightly higher at $77 million.
The order book was down 10% at constant currency and down 7% when adjusting for the Gulf of Mexico sale. This reduction reflects the multiyear phasing of large contracts in our operations business. And due to expected award timing, we expect a stronger second half. Looking ahead, we expect continued growth in the second half and an improved margin and that’s driven by lower pass-through and improving delivery margins.
Running through our cash flow now. There was a free cash outflow of $219 million and you can see all the moving parts in this table in detail. Operating cash flow improved by $120 million, and that was despite a $64 million contribution from Built Environment in ’22. The improved position was driven by lower provision outflows and a lower working capital outflow.
Working capital was an outflow of $94 million, and that was a significant improvement on last year. And we typically have an outflow in the first half, and some of this will unwind in the second half. CapEx and intangibles was higher at $76 million, and much of this was a phasing between the halves.
We expect a total of around $130 million for the year, and that’s higher than previously guided, primarily due to additional engineering software licenses. Exceptionals were also weighted to H1, and I’ll cover these in detail shortly.
Moving on to net debt. Net debt was in line with our expectations. We had net M&A flows of $20 million with inflows from the sale of our Gulf of Mexico business and Built Environment completion, and that was offset by the $62 million of tax paid on the Built Environment sale. FX was $20 million. So net debt, excluding leases, was $654 million, and that represents 2x net debt to EBITDA. And as a reminder, our covenants are set at 3.5x.
Our expectations around legacy liabilities are unchanged from the Capital Market Day last year. As we have said previously, we expect our legacy liability costs to come down significantly in ’23 and again in ’24 and further in ’25.
So now looking at our cash turnaround story as a whole. This is an update to the slide we presented at the Capital Markets Day last November. The blue shows our operating cash flow, which we expect to grow above EBITDA, given our focus on working capital and improvements to come in our projects business. We saw a significantly improved performance already in the half.
The bars below the line show CapEx, which we expect to come down as we complete our ERP implementation. And then we have legacy liabilities, which, as I just walked through, will reduce significantly in ’24 to $65 million and will come down to just $30 million in 2025. Adding that all together, you get the inflection in free cash flow in 2024 albeit at a modest level, and then we get significant growth beyond this.
Our capital allocation policy remains unchanged. It’s relatively straightforward and starts with having a strong balance sheet. We articulate this in our medium-term target leverage range of 0.5 to 1.5x net debt, excluding leases to adjusted EBITDA pre-IFRS 16.
Beyond this, we always consider how best to create value for our shareholders from dividends, share buybacks or attractive acquisition. We have made good progress in the first half, and we look forward to updating our shareholders on our thinking on capital allocation, including how to deliver value through dividends or buybacks alongside our full year results in March.
So bringing all of this together, I’d like to take you through the outlook for the group. We anticipate ongoing revenue growth in the second half, albeit at a lower level than the first half, with revenue for the full year expected to be around $6 billion.
Adjusted EBITDA is expected to be ahead of our original expectations, but within our medium-term target of mid- to high single-digit growth. We expect adjusted EBITDA margins to be flat in the near term at around 7%, partly as we reinvest in the business to secure growth and reflecting a level of low-margin pass-through revenue activity.
On cash, we expect positive free cash flow in the second half of this year with no change to our expectations for net debt at year-end.
So with that, I’ll now hand back to Ken.
All right. Thanks, David. So underpinned by our consistent financial performance, I’d like to now turn your attention to Wood strategy and the progress we’re making in delivering on it. So as a reminder, let me recap the key elements of Wood’s strategy to 2025, which we outlined at our Capital Markets Day last November.
The pillars of our strategy center on a commitment to delivering profitable growth and unrelenting focus on performance excellence, both in the work we do for our clients and in how we manage the business. Passion for building an inspired culture that helps us retain and attract the industry’s best skills and talent.
We’re focused on growing in two end markets: energy and materials. With digitalization and decarbonation being the core [Technical Difficulty] competitive advantage in everything we do. First, in Energy, we’re driven by the need for energy security and a commitment to energy transition.
And we are well positioned for growth opportunities in oil and gas, hydrogen and carbon capture markets. Our second core market is materials, where we’re focused on metals and minerals, chemicals and life sciences, driven by the demand for sustainable raw materials to enable the energy transition and growth in life sciences post pandemic.
Our strategy is ultimately about focus and prioritization, delivering for all of our stakeholders by concentrating on where Wood can bring the greatest value and achieve the highest growth. We’re nine months into our three-year strategy, and I’m pleased to say we are continuing to make good strategic progress. We’re measuring our performance against the three pillars of our strategy. Let me share some of what we’re achieving against our targets.
First, in profitable growth terms, we grew our EBITDA by 12% and saw a significant improvement in operating cash flow. Aligned to our commitment to derisk the business, lump-sum turnkey contracts now account for only 1% of our order book.
Looking ahead, we will further drive profitable growth by being highly selective in the markets we work in, and continue to improve our pricing. We will also optimize our portfolio like any good business continued to review our portfolio to ensure it fits our strategic goals.
Finally and importantly, we will continue to improve our cash generation. In terms of delivering performance excellence, we have grown our order book by 5%, we’re expanding our global execution centers to deliver global engineering support with more than 3,000 people now in our GECs and we’ve seen a 20% increase in revenues from sustainable solutions.
Our focus would be to maintain the critical discipline we have established in what work we bid, on further growing our global execution center work share model to deliver more for our clients and of course, in growing our sustainable solutions to support decarbonization, digitalization and sustainable energy and materials growth.
When it comes to inspire culture, I am really pleased with the tremendous progress we’re making in ensuring what is a great place to work. As a people business, this is critical to retention and attraction. We measure our employee engagement via an all-employee survey. And we’ve seen a 23-point increase on our employee Net Promoter Score compared to this time last year. This is fantastic and a real sign of employee loyalty and engagement.
Linked to this, we’re now seeing lower voluntary employee turnover and continue to make important progress on our gender diversity. Indeed, 35% of our leaders are female, which is up three percentage points, and we are on track to meet our target of more than 40% of female leaders in Wood by 2030.
Let me reiterate. We’re nine months into a three-year strategy. We’re making good strides with lots more to do. Clarity of priorities, coupled with a strong sense of accountability and high energy levels across our business lead me to believe we’re continuing to build the momentum necessary to meet our longer-term goals.
Turning now to the markets that offer the greatest growth opportunities for Wood. So our total addressable opportunity in six primary markets in 2025 has increased slightly to $235 billion. The combined market CAGR remains unchanged at around 5%, which we expect to consistently outperform.
We categorized our markets into three areas: large markets where we already hold a strong market share and provide solid growth potential, namely oil and gas and chemicals. Small markets like carbon capture and hydrogen, which are growing substantially and the large markets where we are smaller today, but focused on significantly growing our market share and for Wood that’s minerals and life sciences.
So moving on to our growing pipeline. We’ve made some great progress here since our Capital Markets Day. Firstly, we cleaned up our pipeline in late 2022 to align with our strategy, removing lump-sum turnkey and large-scale EPC opportunities.
So from this position, we’ve seen double-digit growth in our factored pipeline, reflecting both market growth and increasing demand for what we do, advising, designing and delivering complex projects. The pie chart here shows the market split of our pipeline across our two end markets. This shows you improved diversification, greater balance and that we are growing across both markets.
Sustainable solutions now make up 1/3 of our pipeline, and we expect this proportion to continue to grow. And finally, we’re seeing some signs of improved pricing. The gross margin bid as a percentage of revenue is increasing. There’s a lot of work to convert this to bookings and then deliver, but this is a great early sign that our strategy to prioritize and be selective is working.
So a reminder here that we now have a lower risk business model. Revenue’s shown on the left and our order book on the right. So you can see that we’re running down the lump sum turnkey exposure, now only 3% of revenue and around 1% of our order book. Most of the work we do is either cost reimbursable or fixed price services work. And this fixed price work is across contracts that average less than $10 million.
So let me now bring to life what we do by sharing a few examples of recent work we have won. And these projects showcase the incredible work our teams to deliver to ensure success for our clients. If you’ll recall, I just talked about Life Sciences being a large market where we’re focused on significantly growing our market share.
So a recent project win with GSK in the U.S. marks progress in our Life Sciences growth and evidences our capabilities. We’re working with GSK to upgrade a specialty facility for the production of global medicines, under $50 million contract to deliver engineering, procurement, construction management and validation, Wood won this work because of the strength of our subject matter experts.
We have some of the industry’s leading authorities in advanced manufacturing for life science facilities and of course, significant experience in capital project delivery, bringing digital tools and solutions to accelerate the construction of this critical project. And if there’s one thing that drives pharmaceutical projects, its pace, to ensure critical health products come to the market.
Turning to oil and gas. So in July, we renewed a major contract in Brunei to rejuvenate 20 critical offshore installations, ensuring energy security and efficiency for the region. Bringing our expertise in brownfield engineering and procurement through construction and commissioning, Wood employs around 1,500 skilled employees under this contract.
And as with almost every oil and gas contract we have, we are also bringing decarbonization solutions to our clients to optimize their assets. The demand for sustainable minerals is increasing and Wood won a major contract this year by Euro Manganese to deliver a unique mineral project critical to the energy transition.
In the Czech Republic, Wood is delivering feed and EPCM solutions for Europe’s largest proposed high-purity manganese processing facility. As a mineral used in most lithium-ion batteries, it’s deemed a critical mineral, and this is the only significant source of manganese in the European Union today.
With mineral reserves of 27 million tonnes, this project could provide up to 20% of projected European demand for high-purity manganese. This innovative project holds real significance for Wood as we continue to lead the development of critical mineral projects with specialist expertise in hydrometallurgy and a passion for designing sustainable energy and materials infrastructure.
I’m also keen to highlight some of the fantastic capabilities we have in delivering hydrogen and carbon capture projects as two of our focused growth markets. So Wood has performed over 175 carbon capture studies. We’re helping deliver the world’s largest CCUS hub in the Middle East and designing 400 kilometers of CCUS pipeline in Canada today, all of which leads us to play a role in setting industry standards in this space.
Looking at what we’re doing in the hydrogen markets. Our experience in hydrogen goes back over 40 years, and we have designed and delivered more than 130 global hydrogen plants. We have blue hydrogen technology that can capture up to 95% of CO2, which is in demand amongst our clients.
Wood is involved in three industrial cluster projects in the U.K., and we’re working in the U.S. Gulf Coast on FEED studies to eliminate 95% of CO2 emissions from some onshore complexes. I am really pleased with the progress we’re making in delivering across all of our key markets.
Now moving to the sustainable solutions we offer across Wood. So carbon capture and hydrogen are a significant part of this, but as you can see here, we do lots more. Sustainability is core to what we do as engineers and consultants, and we’re passionate about delivering the net zero solutions important to both our energy and materials clients the world over.
Wood’s skills and expertise are critical to the world meeting its net zero goals. And it’s important to remember that we deliberately set a really high sustainability bar for the work we include in our sustainable revenue metrics based on the principal set out in the EU taxonomy guidelines.
All that said, even against a high measurement bar, over $600 million of our revenue in the first half was from sustainable solutions. That’s a run rate of $1.2 billion alone this year and growing at 20%. This is progress and we will continue to focus on increasing our sustainable solutions.
We’ve covered how we’re delivering in our markets, growing our pipeline and performing. I now want to talk for a minute about Wood’s greatest pride, our people. We run 36,000 remarkable people, delivering some of the most complex and all inspiring projects for clients every day and we continue to grow and attract new people to meet the demand for our expertise. Already, we have increased our head count by 5%.
Culture is so important to us strategically. To be able to retain and attract the best in the industry, we need to create a great place to work where people are energized and see opportunities. And that’s why it’s really encouraging to see our employee engagement score increased so significantly compared to this time last year, up 23 points. And I’m always proud of the recognition our experts receive in the market.
And this year, we have seen Wood SMEs recognized globally across many areas, with Susie Ferguson and Valentina Dipitry recognized as two of the top 50 women in hydrogen as an example. And that industry recognition continues with the recent E&R rankings which showed Wood remains in the top 10 international design firms with top five positions across North America and globally across petroleum, industrial and manufacturing markets.
All of these steps help us to create and inspire culture for our people and bring significant competitive differentiation to Wood.
So to conclude, I’ll go back to where I started and reiterate what I believe are the important takeaways from our results. We saw good trading across our business in the first half and have raised our full year guidance. We’re delivering on our strategy as evidenced by the work we’re winning and improved employee satisfaction. And we continue to build momentum with a clear focus on sustainable solutions and increasing order book and growth in critical expertise.
So with that, I’ll close and move on to your questions. And we’ll now hand over to the operator.
[Operator Instructions] We will now take the first question, which is coming from the line of Rachel Fletcher from Morgan Stanley. Please go ahead.
Good morning gentlemen and sad to hear that you’re leaving David. Thank you for all of your help. My question is on the sustainable solutions revenue. So this is up 20% to $600 million. It’s now 20% of revenue. I think you said 33% of the pipeline. Firstly, I was wondering what drove the sharp increase in this revenue year-on-year. And then on this topic, is a 1/3 of revenues the target level for sustainable revenues forward? Or are you aiming for a higher proportion of revenue?
Yes, great question, and thanks for that. I think as you outlined, moving from $500 million to $600 million, right? So that 20% increase compared to where we were last year is a significant improvement for us and something that we’re really proud of. I think we also need to underscore that on the movement that we had away from our lump sum turnkey renewable pieces of work that we were doing. So what we’re seeing, Rachel, is growth in our sustainable solutions across all of our end markets. What we’re seeing, however, is particularly strong growth in energy transition.
And I think you’re right. As we move through our strategic cycle, as we’re seeing increased investment in various parts of the world in the areas of energy transition that we’re really strong at, carbon capture, hydrogen, that pipeline, the two-year pipeline jumping to 33% is a great indicator. Will we move towards that as we’re going through the strategic cycle? Let’s see how we go because our platform is a diversified one. But we’re very confident that we’re going to see continued momentum and a better trajectory as we’re moving forward on that. So short answer is yes, we’re going to see it continue to grow.
I think the only thing I would add, Rachel, is just to remind you we have a fairly strict definition of sustainable revenue. So, it’s really closely aligned to the EU taxonomy. So as Ken said, we’re really proud of the growth we’ve had. It doesn’t fully capture everything we’re doing in an energy transition space. There’s lots of decarbonization activities that don’t meet the definition that are right the way across our business as well.
Thank you. We will now take the next question from the line of Nikhil Gupta from Citi. Please go ahead.
Firstly, I would like to thank David for all the help. My question is, overall, the medium-term guidance is unchanged. But as I understand, the activity and the fact that the pipeline has increased the gross margins or the pricing is looking to increase. So just wanted to understand, is the guidance like being conservative? Or why do you see it unchanged like over the midrange?
Yes. Look, again, great question. So, probably a couple of things that I’d point you to here. So first of all, again, we would have always said that we’re on a three-year strategic cycle. And this company is about gaining momentum, discipline intensity and focus on where we want to play. And we’re going to continue to do that. And we’ve always said that as we go through this strategic cycle, we want to see that momentum increasing and that’s what’s reflected in our midrange guidance.
I think, particularly as it pertains to pricing, what we are seeing is in our bidding pipeline. And as we’re bidding, we’re seeing that selectivity and focus and discipline in the areas where we’re really good starting to parlay into us being able to bid at a higher margins where we are as a company. However, a lot of those are in large multiyear framework agreements.
So from bidding into award, from awards, turning into purchase order and purchase order turning into engagement takes a period of time for that to really reflect in the performance that we have. So while we’re seeing good signs now, really, we are building and we’re building the platform for what we hope will be increased and improved in performance as we’re moving into 2024.
[Operator Instructions] And the next question comes from the line of Mick Pickup from Barclays. Please go ahead.
A quick question on cost in your business, clearly, you’re talking about tightening market, bid margins, gross margins going up. Can you just talk about the inflation you’re seeing and how tough it is to get the new headcount growth that you’ve got in the business?
Yes. Thanks, Mick. First of all, let’s say, from an inflation standpoint, the one thing that we do point everybody to is, how we’ve derisked our portfolio and how we’ve continued to move away from lump sum turnkey work and really doubling down on both reimbursable work as well as fixed price services.
And why that’s important, Mick, from an inflationary standpoint, it means that we’re not exposed, because it’s a reimbursable — predominantly reimbursable services model that we have, we’re able to pass on those inflationary pressures, particularly as it pertains to kind of wages from our staff, to our clients, and our clients are willing to accept that.
So, I think what we’ve seen last year and what we’ve seen this is minimal or no kind of inflationary pressures kind of pushing through. You got to remind me the second part of the question?
That was it. It was people pricing and hiring people. Obviously, you’ve had a 5% headcount increase.
Yes, I think 5% head count increased lower kind of voluntary turnover, Net Promoter Score and engagement kind of moving up the 23 basis points jumped significantly from where it was last year. Just all underpins that we’ve got a good strategy. The strategy is resonating with our people. It’s resonating with clients. Our pipeline is continuing to build. We’ve got exciting opportunity.
And I think I’ve always been impressed by Wood’s ability to attract new talent. That’s been consistent and that continues to be consistent in all of the geographies that we serve, Mick. So that’s as a result of just that fantastic brand recognition through the years, the complexity of the projects that we work on. And we continue to see that been demonstrated all across the sectors that we work in as well as all of the geographies that we play in.
We’re also seeing our voluntary turnover in white collar coming down slightly as well, Mick, which is another great indicator for us and aligned with all the other people metrics that we’re seeing.
Thank you. We will now take the next question from the line of Alex Paterson from Peel Hunt. Please go ahead. Alex Paterson from Peel Hunt, please go ahead.
I’ve got three questions, please. Just on your CapEx, you highlighted that you were — your CapEx has gone up because of additional software licenses. Could you just talk a bit about where these are coming from? Is this a function of more activity, more employees, therefore, needing more licenses? Or are you buying licenses in different areas?
Secondly, could you talk a bit about the effect of higher interest rates on your interest costs? And also what that means? Well, I suppose, thirdly, your tax rate seemed to be quite high in the first half. Could you talk about what you’d expect for the full year?
And then finally, just on the free cash flow chart that you have put up, it seems to be slightly different from the previous one because you’ve explicitly identified CapEx. Was the CapEx previously in interest tax and other? Or is that a change on — is there any change to your expectation for free cash flow?
Yes, Alex. Maybe I’ll take the first one on the license piece, and maybe then I’ll hand over to David for the next two. So, specifically around the licenses, there’s probably a couple of things that are happening there, Alex. So one is around obviously, as we’re growing, headcount is growing. We need more licenses, right?
So in order to — for the engineering software and for the — in order to be able to do the designs that we need to do for our clients. So that’s one portion of kind of why the licenses are increasing. It’s a reflection of where we’re growing. Also renegotiating with some of our key vendors and key people as well is also a portion of that. So overarching from a license standpoint, the main piece is, yes, uptick in demand, which we think is a positive piece.
I’ll pick up the other elements. I counted four questions there, Alex, actually. So I’m not sure whether my counting is getting worse with age, maybe just as well, I’m retiring. I guess in terms of interest rates, most of our — most of our debt does vary with changes in the base rate. We have USPP debt, which is about $350 million, which is fixed. Our rate just now is about 6.7%. You saw the rate in the first half being slightly higher because we had increased margins related to the higher covenant levels that we had in the second half of ’22. And so that fed through until we had submitted our full year accounts for ’22. So going forward, just now, we’re at about 6.7%.
In terms of the tax rate, our expectation is that it will be broadly similar for the full year. And so that guidance was 36% you’ll see in the accounts just maybe building that out as a thematic. Our tax rate is relatively high just now. And that reflects we’re at almost a minimum level of tax just now. And so within the U.K., we’re not able to recover all of our withholding tax and our interest just now. So as we look forward, the opportunity is really around as growth delivers in the U.K., in particular, and the U.S., our tax rate will start to come down. So the minimum tax rate will stay constant but our actual rate will reduce.
Your next question, I think, was on — what was your final one, Alex?
It was just on the slide on sustainable free cash flow. You’ve now explicitly put CapEx in, that didn’t seem to be on the previous chart. Is that an additional or was it previously in the interest tax and other?
Yes. No, you’re right. It was previously in the — with the other. So we’ve just split out to give a bit more clarity. It’s maybe worthwhile just building out just where we are and what we’re trying to see in terms of that cash flow slide. Firstly, when we look at the first half of ’23, there’s been some really significant progress we’ve seen a big improvement in our operating cash flow. If you stripped out the built environment there, our operating cash flow has improved by over $180 million, driven by lower provisions and lower working capital. So that’s been a significant improvement. And you see that coming through as we go through ’24 and ’25.
The exceptionals have remained consistent. There’s no change to our guidance around that we still have to deliver that, but we’ve got that consistency. So the legacy items are coming in as we expected. The overall picture, we made some good progress in H1. In the second half of ’24, we expect to have positive free cash flow, but we also recognize there’s still more work to do. We need to play out the legacy items. They’ll reduce significantly in ’23, ’24 and 25, and there’s further improvement around our project’s cash conversion.
As we’ve had in almost every year, really excellent cash conversion in operations and consulting projects, we’re seeing the improvement, there’s still a bit more work to do there. And we also have some pressure from growth, and you picked up the CapEx element of that, but we also have a pressure on our working capital as well as we continue to grow. And all of that comes to the overall headline message. We expect to be free cash flow positive in the second half of ’23. We have a modest free cash flow for ’24 and a significantly more free cash flow in ’25.
There are no further questions at this time. I would like to hand back over to Ken Gilmartin for closing remarks.
Yes. Well, listen, thanks, everybody, for joining today. Thanks for the questions. Look, we announced our growth strategy in November of last year. We set it a plan kind of to deliver on that potential. I think what we’re seeing here is good results. Sorry, we’ve got one more question. Okay. Well, right at the death one more.
Thank you. Just one moment, please. The next question comes from the line of Jamie Franklin from Jefferies. Please go ahead.
I just wanted to go back on that free cash flow guidance again. So you mentioned potentially some working capital unwind in the second half. Just wanted to clarify whether your guidance for positive free cash flow in is on the basis that there will be some positive working capital inflow? And if so, perhaps what’s the magnitude of that? Or should it be the case that operating cash flow will be positive even if working capital is flat? And then second part of that is if you could just remind us how the working capital profile should change from 2024 onwards as you move away from lump sum work?
Yes. Let me pick that up, Jamie. So we do expect an unwind of part unwind of that working capital build in the first half. And that’s included in our guidance for ’23 in second half and the positive free cash flow. It’s probably worthwhile just stepping back and understanding our business. So typically, what we expect in our business is that we build working capital into the summer. So summer is typically our peak revenue months and then we release working capital as we come into November, December. And December is typically a lower revenue month.
And so that will be the shape of our working capital going forward. The derisking element around lump sum turnkey is largely achieved now. And so, if you look in we pulled out the last unwind of the lump sum turnkey into our exceptional cash flow. And so our guidance for ’23 is $25 million there. And we don’t see any further in ’24. So in ’24, our working capital becomes much more straightforward. It’s largely driven by DSO and our DSO varies typically between 65, 70 days or that order of magnitude. And so from a modeling perspective, it should be much more straightforward as we go forward.
I would like to hand back over to Ken for final remarks.
Take two. Well, listen, thanks, everybody, again, for joining us today. I’ll go to the abridged version, which is, look, we’ve had a very a very strong first half. We’re very pleased that we’re in a position to raise our guidance for the year. Confidence is growing. There’s more to come. Thank you all.