Qinetiq Group Plc · LSE:QQ.
Qinetiq — FY2010 Earnings Presentation
48 slides from Qinetiq's earnings presentation, May 27, 2010
Slide 1: Restoring QinetiQ to Strength
Restoring QinetiQ to Strength QinetiQ Annual Results 2010 Thursday 27 May 2010 1
Slide 2: Leo Quinn, Chief Executive Officer
Leo Quinn Chief Executive Officer 2
Slide 3: Agenda
Agenda 1. Headlines 2. Financial overview 3. Review of operations 4. Q&A 3
Slide 4: Headlines
Headlines • Difficult year – sales disappointing, margins weakened • Markets remain challenging • Review of operations complete – priorities agreed • Programme underway to restore QinetiQ to strength over next two years • Immediate drive on debt reduction to reduce net debt : EBITDA from 2.5x+ to a
Slide 5: David Mellors, Chief Financial Officer
David Mellors Chief Financial Officer 5
Slide 6: Financial overview
Financial overview 6
Slide 7: Summary financial headlines
Summary financial headlines Revenue £m Organic change at FY10 FY09 constant £m £m Change currency Revenue 1,625.4 1,617.3 +1% (3)% Operating profit*^ 120.3 151.6 (21)% Operating margin*^ 7.4% 9.4% Earnings per share* (pence) 11.1 15.9 (30)% Net cash from operations* (post capex) 174.3 169.8 +3% Cash
Slide 8: Group revenue bridge
Group revenue bridge £m 43.2 9.3 1,669.8 (44.4) 1,617.3 1,625.4 FY09 FX Acquisition/disposal FY09 Organic FY10 adjustments Pro-forma decline 8
Slide 9: Organic revenue bridge
Organic revenue bridge 500 £m 450 1,669.8 400 1,625.4 350 300 QNA (4%) 250 200 150 EMEA 100 (1%) 50 0 FY09 Mission Systems Technology Managed Consulting Technology FY10 Solutions Engineering Solutions Services Solutions QNA EMEA 8% 6% (31)% 6% (3)% (7)% (3)% Organic growth rate at constant currency
Slide 10: Segmental analysis of profit
Segmental analysis of profit Operating profit* Operating profit margin* FY10 FY09^ £m £m FY10 FY09^ QNA 67.7 83.0 8.5% 10.8% EMEA 61.1 84.2 7.5% 10.0% Ventures (8.5) (15.6) Group 120.3 151.6 7.4% 9.4% ^ Operating profit for FY09 has been restated to show the finance elements of the IAS19 pension cos
Slide 11: Non recurring items
Non recurring items* FY10 FY09 £m £m Non cash items: Impairments: Goodwill and intangibles (53.4) – Fixed asset investments (11.3) (5.7) Property, plant and equipment (24.0) – (88.7) (5.7) Amortisation of acquisition intangibles (26.1) (23.5) (114.8) (29.2) Items with cash impact: EMEA reorganisatio
Slide 12: Cash conversion
Cash conversion Strong cash generation FY10 FY09^ £m £m Underlying operating profit 120.3 151.6 Share of JVs/associates (0.2) 7.2 Operating profit before JVs/assoc 120.1 158.8 Cash flow from operations* 204.6 202.2 Purchase of PPE and intangible assets (30.3) (32.4) Net cash flow from operations pos
Slide 13: Movements in net debt
Movements in net debt FY10 FY09 £m £m Free cash flow 139.4 147.0 EMEA reorganisation costs (35.4) (27.0) Acquisitions and investments* (46.7) (95.0) Divestments 21.1 16.7 Dividends (31.6) (28.9) Other 7.5 (6.9) Change in net debt before FX 54.3 5.9 FX translation impact 26.2 (163.9) Change in net de
Slide 14: Borrowings and debt facilities
Borrowings and debt facilities FY10 FY09 £m £m Net debt (£m) 457.4 537.9 Committed facilities* (£m) 876.7 893.0 Net debt: EBITDA** 2.5 2.2 Covenant limit** 3.5 3.5 * US$ denominated facilities translated at 31 March 2010 rate of $1.52:£1 and 31 March 2009 rate of $1.44:£1 ** Annualised and calculate
Slide 15: Defined benefit pension scheme
Defined benefit pension scheme IAS19 balance sheet position 31 March 2010 30 Sept 2009 31 March 2009 £m £m £m Market value of assets 915.9 795.8 647.4 Present value of scheme liabilities (1,063.2) (952.9) (752.6) Net pension liability before deferred tax (147.3) (157.1) (105.2) Deferred tax 41.2 44.
Slide 16: Leo Quinn, Chief Executive Officer
Leo Quinn Chief Executive Officer 16
Slide 17: Review of operations
Review of operations 17
Slide 18: Value has been lost
Value has been lost Indexed Share Price Performance since IPO Actual Share Price Performance since IPO 300 4,000 280 3,800 260 3,600 240 3,400 220 FTSE Aerospace & Defence QinetiQ share price (p) 3,200 200 180 3,000 15-Feb-06 23-Sep-06 02-May-07 09-Dec-07 16-Jul-08 22-Feb-09 01-Oct-09 10-May-10 Qine
Slide 19: Symptoms of forced growth
Symptoms of forced growth • Loss of clear direction • High organisational complexity • Lack of transparency • Innovation not managed– too many loss makers • Costs too high • Fragmented culture – leaders, processes, execution • Siloed organisation • Over-stretched balance sheet “Rising tide” has mask
Slide 20: A difficult environment
A difficult environment • New UK Government; Strategic Defence and Security Review • US Government policy • Insourcing US Federal Spending for Professional Services / Aftermarket By Top Agenices (1988 - 2015) - $bn • Delays and curtailments 400 DOD DOE NASA DHS Other • Large market 350 300 • Players
Slide 21: Summary of issues
Summary of issues • QinetiQ has failed to deliver its potential • Symptoms of forced growth • Rising tide has masked weaknesses • Markets will remain challenging 21
Slide 22: QinetiQ has a number of strengths
QinetiQ has a number of strengths Strong customer relationships in two world leading defence markets • Multiple contracting vehicles – barrier to entry • Excellent reference base – under exploited global potential Potentially well-balanced portfolio • Service models in more resilient sectors • Diffe
Slide 23: Priorities to restore value
Priorities to restore value Focus 1. Clarify direction 2. Simplify and align structure Cultural transformation 3. Increase transparency and control 4. Upgrade leaders 5. Drive performance 6. Reset cost base 7. Create single QinetiQ mindset Strengthen balance sheet 8. Pay down debt Strong foundation
Slide 24: 1. Clarify direction
1. Clarify direction Of the original QinetiQ strategy • What has delivered Focus on existing customers Expert technical services Enter US defence market • What has not delivered – unproven or under-exploited ? Applications in adjacent markets ? Penetration of defence beyond UK/US ? IP exploitatio
Slide 25: Where we win is where we play to our strengths
Where we win is where we play to our strengths Unique domain knowledge - aerospace, defence, security Trusted partner to governments • UK (MOD - Defence Equipment & Support; Dstl; Home Office; Highways Agency) • US (DoD and DHS) Proven expertise delivering outsourced technology services at low
Slide 26: 2. Simplify and align structure
2. Simplify and align structure QinetiQ Group plc US Services UK Services Global Products Systems Engineering Managed Services Group • Test and Evaluation Technology • Aerospace Solutions (UK) + + Advice Technology Mission Solutions Solutions Group Training Delivery Group (US) Australia 80% >Service
Slide 27: Service businesses model
Service businesses model • Clear customer benefit • Outsourcing expert technical services • Domain knowledge • Delivered nationally • People-based • Security clearance • Relationship-driven • Contract ‘vehicles’ • Utilisation level – key metric • More predictable income and cash flow Stable earnings
Slide 28: Product businesses model
Product businesses model • Technology based – IP exploitation • Global marketplace, driven by US • Existing channel • Scalable • Complementary skills – improve output • Research/IP in UK • Productisation and business development in US • Reduce structural cost base • Higher margins, but uneven revenu
Slide 29: 3. Increase transparency and control
3. Increase transparency and control Standard operational processes Single financial reporting pack • Line of sight, baseline • Common KPIs Rolling quarterly reviews of • Businesses • Talent • Innovation • Cost takeout (Fit 4 Growth) • Productivity (My Contribution) • Portfolio – stop loss-makers *
Slide 30: 4. Upgrade leaders
4. Upgrade leaders • Rigorously upgrade top 100 • Senior team changes – business leaders; energised • Results and behaviours – candour, edge, example • Remove layers • Leadership charters • Customer focus – executive account sponsorship • Align incentives Leadership makes the difference 30
Slide 31: 5. Drive performance
5. Drive performance • Empower = Accountability with measurement • Manage = Individual performance • Enrol = ‘Brains on the case’ • Engage = Communicate, communicate, communicate Proven methodology – tangible benefits 31
Slide 32: 6. Reset cost base
6. Reset cost base • Fit 4 Growth = commercial process overhaul • Win business • Value-based selling • Negotiating • Project delivery • Eliminate inefficiencies • Address onerous legacy UK Terms and Conditions Future growth depends on competitive cost base 32
Slide 33: 7. Create single QinetiQ mindset
7. Create single QinetiQ mindset • Decide investments on global basis • Leverage domain and technical expertise • Ex US/UK, international markets largely untapped • Share IP – best route to market • Build on QinetiQ’s reputation • One leadership team Extract full potential 33
Slide 34: 8. Strengthen balance sheet – pay down debt
8. Strengthen balance sheet – pay down debt • Net debt : EBITDA too high – target is below 2x • Address by self-help • Focus on working capital • Improve cash generation • Eliminate loss-makers • Resolve structural cost in UK businesses • Enables investment in future • Suspend dividend for 12 months
Slide 35: Summary: restore QinetiQ to strength
Summary: restore QinetiQ to strength • Right leaders • Right investments and priorities • Right cost base • Right focus – extract full value from assets • Right balance sheet Build path to sustainable growth 35
Slide 36: Outlook
Outlook • Defence markets remain challenging • Strategic Defence and Security Review • The Board has concluded its review of the operations and reset the priorities of the Group • Priorities over the next 24 months; • reduce costs • improve productivity • drive cash generation • Reduce net debt rapi
Slide 37: Q&A
Q&A QinetiQ 37
Slide 38: Appendix
Appendix 38
Slide 39: Definitions
Definitions Underlying performance is stated before: • Major reorganisation costs • Business divestments and unrealised impairment of investments • Amortisation of acquisition related intangible assets • Impairment of intangible assets and property plant and equipment • Tax effect of the above Organ
Slide 40: Financial reconciliation to new structure
Financial reconciliation to new structure £628.0m £693.9m £303.5m £167.0m £124.9m Mission Systems Managed Technology Technology Consulting Solutions Solutions Ventures Solutions Engineering Services £142.6m EMEA QNA £6.5m £354.7m £273.3m £384.3m £291.9m £172.1m 40
Slide 41: Pro-forma segmental analysis for new structure
Pro-forma segmental analysis for new structure Year ended 31 March 2010 Revenue Operating Profit* Operating Margin* £m £m % US Services Business 628.0 52.6 8.4 UK Services Business 693.9 59.1 8.5 Global Products 303.5 8.6 2.8 Total 1,625.4 120.3 7.4 * Underlying performance as defined on slide 39 41
Slide 42: Detailed income statement
Detailed income statement FY10 FY09^ £m £m Revenue 1,625.4 1,617.3 Underlying operating profit^ 120.3 151.6 Net finance expense^ (34.6) (21.4) Underlying profit before tax 85.7 130.2 Business disposals and asset impairments (83.6) 7.3 Amortisation of acquisition related intangibles (26.1) (23.5) EME
Slide 43: Revenue analysis
Revenue analysis FY10 FY09 £m £m Mission Solutions 354.7 289.5 Systems Engineering 273.3 244.5 Technology Solutions QNA 172.1 231.6 QinetiQ North America 800.1 765.6 Managed Services 384.3 370.7 Consulting 142.6 145.1 Technology Solutions EMEA 291.9 326.5 EMEA 818.8 842.3 Ventures 6.5 9.4 Group reve
Slide 44: Revenue by sector and customer
Revenue by sector and customer 5 8 23 FY10 FY10 51 49 £1,625.4m 28 £1,625.4m 36 6 7 20 FY09 47 FY09 £1,617.3m 30 £1,617.3m 53 37 Revenue by sector (%) Revenue by customer (%) QNA EMEA Ventures (<0.5%) Civil/Other Government Agencies MOD DoD DHS Commercial Defence 44
Slide 45: Taxation
Taxation FY10 FY09 Headline tax credit (charge) 2.8 (20.4) Tax on non-recurring items (15.7) (6.3) Underlying tax charge* (12.9) (26.7) Underlying tax rate* % 15.0% 20.5% Underlying tax rate not expected to rise significantly in the medium term* * Underlying performance as defined on slide 39 45
Slide 46: Balance sheet
Balance sheet FY10 FY09 £m £m Goodwill 579.7 638.5 Intangible assets 141.7 164.2 Property, plant and equipment 285.5 332.4 Working capital 107.2 154.0 Retirement benefit obligation (net of tax) (106.1) (75.8) Other assets and liabilities (76.9) (72.7) Net debt (457.4) (537.9) Net assets 473.7 602.7
Slide 47: Capital investment
Capital investment FY10 FY09 £m £m LTPA Expenditure on tangible assets 9.1 12.3 Non LTPA Expenditure on tangible assets 15.0 16.8 Expenditure on tangible assets 24.1 29.1 Investment in intangible assets* • Development costs 0.6 0.2 • Purchased software and other intangibles 5.6 3.1 6.2 3.3 Depreciat
Slide 48: Disclaimer
Disclaimer Cautionary statement regarding forward-looking statements This document contains certain forward-looking statements relating to the business, financial performance and results of the Company and/or the industry in which it operates. Actual results, levels of activity, performance, achieve