Babcock International Group PLC · LSE:BAB
Babcock International — HY20 Earnings Presentation
57 slides from Babcock International's earnings presentation, Nov 20, 2019
Slide 1: Half year results for the six months ended 30 September 2019
Half year results for the six months ended 30 September 2019 20 November 2019
Slide 2: Disclaimer
Disclaimer This document has been prepared by Babcock International Group PLC been correct. Forward looking statements in the Presentation regarding (the “Company”) solely for use at a presentation in connection with the past trends or activities should not be taken as a representation that such Com
Slide 3: Key messages
Key messages Half year Full year Operational in line with guidance momentum expectations confirmed increasing 3
Slide 4: Market update: UK Defence
Market update: UK Defence • 2.6% (£2.2bn) growth in MOD budget for next year • SDSR expected in 2020 • Higher activity levels supporting Royal Navy • Transition to Future Maritime Support Programme • Naval infrastructure programmes starting • Continued expansion of training programmes and use of ext
Slide 5: Market update: International Defence
Market update: International Defence • Defence spend increasing in our target markets • Strong equipment market for our defence technology businesses • Australia: growth in defence budget, development of Attack- class submarine and frigate programmes • Canada: investment in submarine support, new pi
Slide 6: Market update: Emergency Services
Market update: Emergency Services UK • Met Police training – c.£300m contract announced today • Continuing investment and expansion in air ambulance services Europe • Private provision continues to grow across Europe • New regulations causing temporary delays in Italy and Spain • Potential to expand
Slide 7: Market update: Civil Nuclear
Market update: Civil Nuclear UK decommissioning • Magnox sites handed back to NDA • New supply chain model being developed by Magnox Ltd • New opportunities emerging at Sellafield and AWE • Longer term opportunities developing to support decommissioning of EDF power stations UK nuclear services • Su
Slide 8: Financial review
Financial review Franco Martinelli Group Finance Director
Slide 9: On track for full year guidance
On track for full year guidance Revenue £2.46bn Free cash flow (post- Underlying basic EPS > Full year c.£4.9bn pension payments)3 £7m 32.5p > Full year > £250m Operating profit1 £251m Net debt (excl. IFRS 16 Interim dividend > Full year2 debt) of £1,138m 7.2p £540m to £560m > De-gearing in H2 9 1.
Slide 10: Underlying results in line with expectations
Underlying results in line with expectations HY19 (£m) HY20 (£m) Pre-IFRS 16 IFRS 16 basis* basis* • Revenue and operating profit reflects Revenue 2,458 2,577 previously communicated step downs Revenue excl. step downs2 2,458 2,458 • Margin broadly stable excluding step Operating profit* 251 280 dow
Slide 11: IFRS 16 adoption: minimal impact to EPS
IFRS 16 adoption: minimal impact to EPS HY20 IFRS 16 HY20 pre-IFRS 16 adjustment post-IFRS 16 • IFRS 16 impact as expected Underlying operating profit (£m) 237.9 12.7 250.6 • Adoption: modified retrospective Net interest (£m) (35.7) (12.4) (48.1) transition approach Underlying profit before tax (£m)
Slide 12: Revenue growth excl. Fomedec
Revenue growth excl. Fomedec (£m) Excluding Fomedec, revenue up 3.6% YoY 2,577 (6) + 0.2% (35) 6 (84) 2,452 2,458 HY19 FX Disposals Other step downs HY19 rebased Underlying HY20 excl. disposals 1 movement 12 1. Exits, QEC and Magnox
Slide 13: Operating profit reflects phasing of step downs
Operating profit reflects phasing of step downs (£m) - 280 (7) 13 (5) 251 (30) 243 HY19 FX Disposals Other step HY19 rebased IFRS 16 impact Underlying HY20 downs¹ growth 13 1. Exits, QEC, Magnox, Holdfast and Brexit-related costs
Slide 14: Margin movement in line with expectations
Margin movement in line with expectations (%) Phasing of step downs: revenue impact weighted to H2, profit impact weighted to H1. As such, -1.0ppt impact on group 0.5 margin in H1, +0.2ppt impact in H2 (-0.4ppt impact for full year) 0.2 10.9 0.2 (1.0) 10.4 (0.3) (0.3) 10.2 HY19 IFRS 16 Step down Reb
Slide 15: Marine: strong revenue growth, ahead of expectations
Marine: strong revenue growth, ahead of expectations HY20 HY19 Organic • Strong revenue growth led by: IFRS 16 basis* Pre-IFRS 16 basis* growth1 – Increased activity in UK warship support Revenue (£m) 564 526 – Strong orders across technology businesses Revenue excl. step downs2 564 517 8.6% • Opera
Slide 16: Nuclear: revenue growth excl. Magnox
Nuclear: revenue growth excl. Magnox HY20 HY19 Organic • Revenue and operating profit down due to IFRS 16 basis* Pre-IFRS 16 basis* growth1 Magnox step down2 Revenue (£m) 588 637 • Strong performance in UK defence Revenue excl. step downs2 588 581 1.1% • Small decline in civil nuclear Operating prof
Slide 17: Land: good first half performance
Land: good first half performance HY20 HY19 Organic • Revenue growth of 6.3% excluding exits IFRS 16 basis* Pre-IFRS 16 basis* growth1 and disposals: Revenue (£m) 790 798 – Higher defence procurement revenues – Stronger trading in South Africa Revenue excl. step downs2 790 748 6.3% • Operating profi
Slide 18: Aviation: first half headwinds
Aviation: first half headwinds HY20 HY19 Organic • Last year included around £90m from IFRS 16 basis* Pre-IFRS 16 basis* growth1 Fomedec asset sales • Revenue slightly down excl. Fomedec and Revenue (£m) 515 616 step downs, helped by new operations in Norway and Canada Revenue excl. step downs2 515
Slide 19: Cash conversion: second half weighted
Cash conversion: second half weighted HY20 (£m) HY19 (£m) Underlying operating profit excluding JVs1 209.0 219.7 • Working capital outflow as expected, last Amortisation and depreciation 51.4 52.9 year included Fomedec benefit Depreciation of right of use asset (IFRS 16) 59.4 - Other non-cash items
Slide 20: Working capital: always seasonal, H2 inflow expected
Working capital: always seasonal, H2 inflow expected (£m) Sep 18 Mar 19 Sep 19 YoY • Payables/receivables: in line with last September Inventory 167.6 211.4 (43.8) • H2 movement expected again 196.5 Inventory 13.3 • Further build up for Brexit Total 976.3 907.8 963.0 receivables • Mobilisation for N
Slide 21: Free cash flow reflects working capital phasing
Free cash flow reflects working capital phasing HY20 (£m) HY19 (£m) • Minimal IFRS 16 impact1 Operating cash flow after capex 77.8 180.2 • JV dividends higher year on year: Magnox – phasing Net interest paid (15.5) (14.0) Interest paid – IFRS 16 (12.4) - • Pension contributions evenly spread this ye
Slide 22: Net debt: our definition
Net debt: our definition Two measures: Net debt: Gearing: Group EBITDA1 (excl. IFRS 16 EBITDA impact) 1 £1.14bn Group net debt 1.9x + JV dividends “covenant basis” Group net debt Group EBITDA1 (incl. IFRS 16 EBITDA impact) 2 £1.75bn + IFRS 16 lease liability 2.3x + JV dividends Group net debt exclud
Slide 23: Pensions
Pensions IAS 19: (£m) HY20 HY19 • IAS 19 deficit £15m (HY19: £26m surplus): Assets 4,907 4,652 – Discount rate effect greater than inflation reduction Obligations 4,922 4,626 Net (deficit)/surplus (15) 26 • Technical provisions deficit still c.£400m – Contributions reduce deficit Underlying income s
Slide 24: Joint ventures: significant cash dividend stream
Joint ventures: significant cash dividend stream JV performance JV net debt (at Sept 2019) HY20 HY19 Babcock All £m Total Asset Operational Total Asset Operational All £m Cash Loans Net debt proportion Total underlying 59 37 22 AirTanker 421 (2,265) (1,843) (239) profit 41 28 13 Profit after tax 22
Slide 25: Joint ventures: AirTanker
Joint ventures: AirTanker Our holding: 13.3% Our JV partners: Airbus, Rolls-Royce, Thales, Cobham Our share of JV net debt: £239m (non-recourse) • Owns 14 aircraft • PFI structure: guaranteed minimum payments cover financing (assumption: only 9/14 aircraft flying) • JV holds significant cash balance
Slide 26: Refinanced: access to multiple liquidity sources
Refinanced: access to multiple liquidity sources Debt maturity profile (£m) Term loan Euro bond • Access to sufficient liquidity via a £775m Loan note RCF Revolving Credit Facility maturing in USPP GBP bond August 2024 Total facility amount: 775 • New 8 year Euro bond 2027 • Gross cash balance high
Slide 27: Capital allocation: we target 1.0x to 1.5x net debt / EBITDA
Capital allocation: we target 1.0x to 1.5x net debt / EBITDA Net debt / EBITDA1: Our capital allocation priorities: Organically invest in the business 2.0x 1.8x 1.6x Fund pension schemes / safeguard credit rating 1.0x – 1.5x Sustainable ordinary dividend to shareholders FY17 FY18 FY19 Highly selecti
Slide 28: FY20 guidance confirmed
FY20 guidance confirmed Revenue: expected to be around £4.9bn Margin1: as previously guided, plus IFRS 16 benefit Operating profit1: expected to be in the range £540m to £560m Free cash flow: expected to be over £250m Performance weighted to H2, especially for cash generation 28 1. Compares to previ
Slide 29: Progressing on our strategy
Progressing on our strategy Archie Bethel Chief Executive
Slide 30: Delivering medium term growth
Delivering medium term growth • Focus on three markets with strong leadership positions: • Significant wins in our three focus markets Defence, Emergency Services and Civil Nuclear including Type 31 • Grow revenue from these markets from around 75% of • Record order book and pipeline with group reve
Slide 31: Continue to grow international businesses
Continue to grow international businesses HY20 revenue Commenced operations in: • Norway aerial medical services £2.5bn 69% 31% • Canada (Manitoba) aerial firefighting • Canada nuclear waste management consultancy Existing market progress: Order book1 • Australia: commenced new defence support opera
Slide 32: Order book increased to over £18 billion
Order book increased to over £18 billion1 Marine Nuclear Land Aviation 25% 20% • £3.5bn order intake including Type 31 • Order book since increased to over £18bn following award of Type 31 £18bn1 • 88% contracts >£25 million 24% • 92% of FY20 revenue secured, 61% of FY21 31% 32 1. As at 20 November
Slide 33: Pipeline increased to £16 billion
Pipeline increased to £16 billion1 Defence UK Emergency Services • Shipbuilding 10% • Canada, Europe • Army C-vehicles 33% • Marine training 6% • Nuclear infrastructure Civil Nuclear • Submarine disposal • Decommissioning, services, new build • Army heavy-vehicle sustainment • Aviation support £16bn
Slide 34: Arrowhead 140: significant milestone for the Group
Arrowhead 140: significant milestone for the Group 34
Slide 35: Type 31: indicative timeline
Type 31: indicative timeline Design phase Manufacture phase Beyond Today 2021 2028 2030s Ship 1 Ship 2 Ship 3 Ship 4 Ship 5 • Capex c.£50m • c.£200m revenue per year • Sustainment programme • Export opportunities 35
Slide 36: On track to deliver medium term targets
On track to deliver medium term targets 1. Earnings growth of 3% to 4% CAGR 2. Sustain margins at around 11% 3. Increase cash flows each year in line with earnings 4. Generate around £1.4 billion of free cash flow over the next five years 5. Continue to reduce net debt and increase flexibility 6. Im
Slide 37: Key messages
Key messages Half year Full year Operational in line with guidance momentum expectations confirmed increasing 37
Slide 38: Appendix
Appendix
Slide 39: HY20 step downs
HY20 step downs Revenue (£m) Operating profit (£m) Margin HY19 2,577 280 10.9% Step downs: End of QEC contract (9) (1) End of Magnox contract (56) (10) Impact of exits and disposals (54) (8) Normalisation of Holdfast profit contribution (13) Brexit-related Aviation restructuring (5) (119) (37) Rebas
Slide 40: FY20 guidance: updated estimated step downs
FY20 guidance: updated estimated step downs Revenue (£m) Operating profit (£m) Margin FY19 5,161 588 11.4% Step downs: End of QEC contract (80) (2) End of Magnox contract (240) (25) Impact of exits and disposals (70) (9) Normalisation of Holdfast profit contribution (17) Brexit-related Aviation rest
Slide 41: Our aircraft fleet financing approach
Our aircraft fleet financing approach Gross book value of aircraft (£m) 700 Aims: 600 • New assets to be leased where appropriate 500 • Optimise lease pricing 400 300 Approach: 200 • Buy aircraft/slot deposits for a percentage of possible new 100 requirement (wins/rebids) 0 • Once contract won, sale
Slide 42: HY19: sector splits
HY19: sector splits Revenue Operating profit Order book1 Pipeline1 21% 20% 23% 26% 25% 28% 27% 44% £2.5bn £251m £18bn £16bn 24% 10% 24% 32% 23% 23% 31% 19% Marine Nuclear Land Aviation 42 1. As at 20 November 2019
Slide 43: HY19: market splits
HY19: market splits Revenue Order book1 Pipeline1 9% 18% 27% 10% 33% 44% 6% £2.5bn 15% £18bn £16bn 61% 10% 10% 5% 14% 5% 33% Defence UK Defence International Emergency services Civil nuclear Adjacent 43 1. As at 20 November 2019
Slide 44: HY19: international splits
HY19: international splits UK vs international International 11% Europe 31% 12% 37% South Africa UK Australasia International 15% 69% North America 25% Rest of world 44
Slide 45: Key contracts: Marine
Key contracts: Marine Contract Customer Start End Country Notes Type 31 UK MOD 2019 2028 UK Design, build and assembly of five general purpose frigates for the Royal Navy MSDF UK MOD 2014 2021 UK Warship support and surface fleet infrastructure elements of MSDF QEC UK MOD 2005 2019 UK Build and asse
Slide 46: Key contracts: Nuclear
Key contracts: Nuclear Contract Customer Start End Country Notes MSDF UK MOD 2014 2021 UK Nuclear submarine, infrastructure and license site elements of MSDF Dounreay NDA 2012 TBD UK JV with CH2M and Aecom, decommissioning, demolition and restoration of Dounreay Hinkley Point C – MEH Alliance EDF 20
Slide 47: Key contracts: Land defence
Key contracts: Land defence Contract Customer Start End Country Notes RSME - Royal School of Mechanical Provision of training and associated support services UK MOD 2008 2038 UK Engineers Joint venture DSG - Defence Support Group Maintenance, repair and overhaul to over 35,000 vehicles of the Britis
Slide 48: Key contracts: Land civil
Key contracts: Land civil Contract Customer Start End Country Notes Technical fleet management of the LFBs 430 vehicles and around 45,000 London Fire Brigade (LFB) fleet management LFB 2014 2035 UK pieces of firefighting equipment Delivering over 200 training programmes to c 5,000 firefighters from
Slide 49: Key contracts: Aviation
Key contracts: Aviation Contract Customer Start End Country Notes Fomedec French DOD 2017 2028 France Provision of aircraft, training and maintenance to French Air Force HADES UK MOD 2018 2023 UK Air station support. Provision of engineering services and technical aviation services to 17 air station
Slide 50: Underlying EPS reconciliation
Underlying EPS reconciliation HY20 (p) HY19 (p) Movement • Acquired intangibles amortisation: non-cash item Statutory EPS 25.6 11.5 14.1 JV treatment: Acquired intangibles amortisation1 6.9 8.4 (1.5) • No effect at EPS level Exceptional items1 - 20.0 (20.0) • Impacts operating profit, net finance ch
Slide 51: Statutory to underlying reconciliation
Statutory to underlying reconciliation Joint Ventures and Associates Amortisation of Exceptional All values in £m Statutory Revenue and Finance costs Tax IFRIC 12 income acquired items Underlying operating profit intangibles 30 Sept 2019 Revenue 2,194.8 263.0 2,457.8 Operating profit 168.7 27.9 13.7
Slide 52: Underlying organic growth
Underlying organic growth All values in £m Marine Nuclear Land Aviation Unallocated Total Underlying revenue 30 September 2018 525.9 637.1 798.1 615.8 2,576.9 Exchange adjustment 2.4 - (7.9) - (5.5) Disposals - - (30.9) (4.3) (35.2) Step downs excl. disposals (9.1) (56.0) (19.1) - (84.2) Organic gro
Slide 53: Underlying segmental analysis
Underlying segmental analysis Revenue (£m) Operating profit (£m) Operating margin HY19 HY19 HY20 HY19 HY20 HY20 (pre-IFRS 16) (pre-IFRS 16) Group 546.0 515.4 70.5 73.4 12.9% 14.2% Marine JV 18.4 10.5 2.0 2.7 10.9% 25.7% Total 564.4 525.9 72.5 76.1 12.8% 14.5% Group 419.8 405.8 50.2 44.1 12.0% 10.9%
Slide 54: Exchange rate movements
Exchange rate movements Impact of FX movement on revenue Impact of FX movement on underlying operating Impact of FX movement on profit (£m) profit (£m) before tax (£m) 1% 5% 10% 1% 5% 10% 1% 5% 10% EUR 2.2 11.0 22.0 0.3 1.3 2.6 0.1 0.6 1.2 ZAR 1.7 8.6 17.3 0.2 1.0 1.9 0.2 0.9 1.8 CAD 0.7 3.4 6.7 0.1
Slide 55: Provisions
Provisions Charge/(release) as % of underlying profit1 • Half year net charge2 £0.6m 8.0% • Average of last nine and a half years: 6.0% – 0.4% cumulative net charge as a % of underlying profit2 4.0% – 5% cash utilisation of underlying operating profit2 2.0% • Half year: £14m cash outflow2 – Utilised
Slide 56: Joint ventures
Joint ventures Babcock underlying JVs Share Country Sector Start End Holdfast (RSME) 74% UK Land 2008 2038 Asset JVs ALC 50% UK Land 2005 2021 • Typically assets and debt Asset JVs • Dividends follow after paying down JV debt Ascent 50% UK Aviation 2016 2033 • Typically long-term AirTanker 13% UK Av
Slide 57: Joint ventures: significant cash dividend stream
Joint ventures: significant cash dividend stream HY20 (£m) HY19 (£m) Total Assets Operational Total Assets Operational Operating Profit 27.8 14.7 13.1 45.1 23.2 21.9 IFRIC 12 13.2 13.2 - 14.1 14.1 - Total underlying profit 41.0 27.9 13.1 59.2 37.3 21.9 Finance costs (11.7) (11.7) - (11.8) (11.8) - P
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