TIDMBAB
RNS Number : 2664V
Babcock International Group PLC
13 April 2021
Business update
13 April 2021 This announcement contains inside information
Babcock International Group PLC ("Babcock" or "the Group")
issues the following update for the financial year ending 31 March
2021 (FY21) including an update on reviews currently taking place
and our headline unaudited results. This announcement is being made
ahead of the Group's Preliminary Results announcement to provide
some early transparency on key issues.
Key points
Note: these are subject to the finalisation of our reviews and
the year end audit
-- Babcock will focus on being an international aerospace,
defence and security company with a leading naval business and
providing value add services across the UK, France, Canada,
Australia and South Africa
-- The contract profitability and balance sheet review ("CPBS")
has identified impairments and charges totalling approximately
GBP1.7 billion
-- The vast majority of the impact of the CPBS is one-off in nature and non-cash affecting
-- The CPBS is expected to result in an ongoing reduction in
Group underlying operating profit of approximately GBP30 million
each year
-- We are changing our operating model to simplify the business
and reduce layers. The consequential restructuring will have a one
off cash cost of approximately GBP40 million and is expected to
deliver realisable annualised savings of approximately GBP40
million. The benefit in FY22 will be roughly half this due to
timing
-- We will rationalise the Group's portfolio by divesting
certain businesses. We anticipate this will generate proceeds of at
least GBP400 million over the next twelve months
-- Draft unaudited management results show FY21 underlying
revenue of GBP4,690 million (FY20: GBP4,872 million) with
underlying operating profit of GBP307 million (FY20: GBP524
million) before CPBS impacts. These results include our share of
joint ventures and associates (note 1)
-- Net debt (excluding lease obligations) at 31 March 2021 was
GBP750 million, with an estimated net debt to EBITDA ratio of 2.5
times
-- We have confidence that the markets we address and our
capabilities to address those markets will be favourable in the
medium term. However, we will be revising our forecasts for
profitability for future periods as we continue to assess the
business. We are cautious about progress in FY22 profitability as
it will be a year of transition
-- We aim to return Babcock to strength without the need for an equity issue
We will set out further details of the above at our Preliminary
Results, the publication of which is likely to be delayed as a
result of COVID-19 working constraints and the large number of
potential adjustments under consideration in our CPBS. We will
prioritise quality of reporting over speed.
David Lockwood, CEO said:
"We announced a series of reviews in January and promised to
report back on our strategic direction, a new operating model and a
new financial baseline at our full year results. Today we give you
an update on all of these areas. The early results from our reviews
show significant write offs and a smaller ongoing reduction in the
profitability of the Group.
Through self-help actions, we aim to return Babcock to strength
without the need for an equity issue. We are creating a more
effective and efficient company through our new operating model
and, in line with our new strategic direction, will rationalise the
Group's portfolio to help strengthen our balance sheet.
Through our new operating model, the future Babcock will be a
better place to work, a better partner to our customers and will be
well placed to capture the many opportunities ahead of us".
Conference call
A conference call will be held today at 8:00am with David
Lockwood (CEO) and David Mellors (CFO):
Number: +44 (0) 33 0551 0200
UK Toll Free: 0808 109 0700
Password: Babcock International
This call will also be webcast live at
www.babcockinternational.com and will be available on demand after
the event.
For further information:
Simon McGough, Director of Investor Relations +44 (0)7850 978 741
Kate Hill, Group Director of Communications +44 (0)20 7355 5312
Tulchan Communications +44 (0)20 7353 4200
The person responsible for arranging the release of this
announcement on behalf of the company is Jack Borrett as Company
Secretary.
Introduction
As previously communicated, we are currently undertaking a
series of reviews of the Group, including refreshing our strategy
and reviewing our contract profitability and balance sheet. We are
also taking actions to improve the efficiency and financial
strength of the Group including a programme of disposals and
changes to our operating model. While this work is ongoing and not
yet finalised, the initial headlines are being shared today to give
early transparency.
1) Strategy review
The strategy review we announced in November 2020 is now well
advanced and so, while work continues, we can share the highlights
today:
-- Our UK defence businesses operate in an attractive market and
have strong competitive advantages
-- Our Marine business has a range of platforms, systems and
products that are highly competitive in international markets
-- We expect to play a crucial role as a strategic partner to
the UK Government across key defence programmes including the
Government's 2030 vision for UK shipbuilding
-- Our international defence businesses have strong niche
positions that will be further developed. We will focus on France,
Canada and Australia
-- The other markets we operate in vary in their attractiveness,
ranging from the long term opportunities of the civil nuclear
market and a strong business in South Africa through to areas
outside the core of what Babcock offers, for example civil
training
-- The Avincis acquisition in 2014 has not delivered shareholder
value with low returns on high amounts of invested capital. We are
selling our oil and gas aviation business and we are reviewing our
options for the each of the aerial emergency services
businesses
-- A number of key enablers will be needed to execute our
strategy including a new operating model, a new culture and people
strategy, an innovation strategy and a stronger balance sheet
supported by our disposal programme
We will give more details of our new strategy alongside our
Preliminary Results.
2) Results for the 2021 financial year (before adjustments from
CPBS)
We set out the headline financial performance for the year
ending 31 March 2021 based on our draft management accounts. This
information is subject to detailed reviews by management and
external audit and is before the impacts of our contract
profitability and balance sheet review.
In summary, based on our previous format of underlying reporting
(see note 1):
-- Underlying revenue was GBP4,690 million (FY20: GBP4,872
million), down 2% on last year excluding disposals and FX
-- Underlying operating profit was GBP307 million (FY20: GBP524
million), down 36% excluding disposals and FX
-- Net debt (excluding lease obligations) at 31 March 2021 was
GBP750 million. This position benefited from a VAT timing benefit
of GBP56 million, corporation tax repayments of GBP67 million and
around GBP20 million of FX translation benefit
-- Average net debt (excluding lease obligations) over the year was around GBP1.2 billion
Balance sheet
Based on draft management accounts and the early view of the
recurring impact of the CPBS, the Group's net debt to EBITDA ratio
at 31 March 2021 was 2.5 times. This is the measure used in the
covenant in our revolving credit facility (RCF) and makes a number
of adjustments from reported net debt and EBITDA.
Our net debt now includes balances related to the use of supply
chain financing in the Group with extended credit terms. Such
amounts were previously reported in trade payables. At 31 March
2021 the amount included was GBP25 million, lower than the level
last year. We are phasing out the use of supply chain financing
across our Group.
In addition to supply chain financing, the Group factors certain
receivables in Southern Europe. These are non-recourse to the Group
and so are not included in net debt. For reference, the level of
receivables factoring at 31 March 2021 was GBP102 million (31 March
2020: GBP98 million).
At 31 March 2021, the Group's cash balance was GBP533 million.
This combined with the undrawn element of our RCF gave us liquidity
headroom of around GBP1.2 billion. We repaid the US Private
Placement of $500 million, which was hedged at GBP307 million, in
March 2021. This was funded from existing Group cash resources.
We are commencing discussions with our banks to secure
protection to the potential downside risks in our scenario
planning.
Capital structure
We believe that a strong balance sheet provides resilience to
the Group as well as operational and strategic advantages. After
the completion of our various reviews, we will determine the
appropriate capital structure for the Group which we believe we can
achieve within the next 24 - 36 months.
Our plans outlined in this update, including the changes to our
operating model and our disposal programme, are part of our aim to
return Babcock to strength without the need for an equity
issue.
Dividend
As part of our focus on building a strong balance sheet, the
Board will not be recommending a dividend for FY21 or FY22.
Outlook
We have confidence that the markets we address and our
capabilities to address those markets will be favourable in the
medium term. However, we will be revising our forecasts for
profitability for future periods as we continue to assess the
business. We are cautious about progress in FY22 profitability as
it will be a year of transition and also given the ongoing
uncertainty of when COVID-19 restrictions will be lifted in our
markets.
3) Contract profitability and balance sheet review ("CPBS")
As announced in January, we have been performing a detailed
review of our contract profitability and balance sheet. This review
is looking at a sample of approximately 100 contracts, representing
around GBP2.6 billion of revenue each year across all four sectors.
The selected contracts received differing levels of review
depending on their perceived risk. We have also performed a review
of the balance sheet covering all of the balance sheet captions.
Again, these reviews were performed on a risk basis across all four
sectors.
While the work is not yet complete and is subject to further
review by our Audit Committee, our Board and our auditors prior to
the publication of audited results for the year, the early
conclusions indicate a material impact on the Group's financial
statements. This update is accordingly being provided to provide
early transparency on key areas with the caveat that the
finalisation of the exercise well may change the results set out
below.
The impacts of the CPBS on our financial results may be
categorised into two types:
1. One-off write offs and provisions - the large majority of
adjustments totalling c.GBP1.7 billion are one-off in nature. The
technical accounting analysis has not been finalised and therefore
the allocation of the adjustments between exceptional items,
underlying profit and prior year adjustments is not yet decided
2. Recurring income statement impacts - these items will reduce
underlying operating profit in both FY21 and future years. The
early estimate of this impact is approximately GBP30 million per
annum for future periods and approximately GBP20 million for
FY21
There are over 100 potential adjustments identified within the
review. A summary of these by balance sheet caption is as
follows:
Impairment of goodwill and acquired intangibles of approximately
GBP1 billion. Despite the fact that we have not finalised our
ongoing budgets and forecasts, our current analysis indicates an
impairment of the goodwill for the Land and Aviation sectors
relating to a decrease in our forecasts for future cash generation
and changes in our impairment test methodology.
Impairment of property, plant and equipment (PPE) and right of
use assets of approximately GBP300 million. These adjustments
primarily relate to fleet valuation - where certain aircraft
carrying values are no longer expected to be recovered through use
or sale - and the standardisation of our accounting policies
covering aircraft maintenance and airframe parts and rotables.
Other non-current assets will be impacted by approximately
GBP100 million relating to lower deferred tax assets, the
impairment and amortisation of some intangible assets (e.g.
software) and the revision of investment balances in joint ventures
and associates.
Adjustments to current assets of approximately GBP250 million
following the assessment of certain contract profitability margins,
the recoverability of trade and other receivables, an increase in
obsolescence provisions for inventory, and a reassessment of
certain contract mobilisation costs.
Current liabilities will increase by approximately GBP50 million
including the reassessment of aircraft maintenance accruals,
contract liabilities and environmental provisions.
4) Operating model
We are changing our operating model to create a business that is
more efficient and effective. We are reducing layers of management
within the business to form a simpler, flatter structure that will
simplify how we operate, improve line of sight, shorten
communication lines and therefore increase business flexibility and
our responsiveness to market conditions. This will reinforce a one
company culture and remove the duplication and lower quality
delivery that a siloed approach delivered. This, unfortunately,
will result in headcount reductions. We are also reducing the
Group's property portfolio, especially in the UK.
The changes will result in approximately 1,000 employees leaving
the Group within the next twelve months with an approximate
restructuring cost of GBP40 million, most of which are cash
costs.
This will reduce our overall operating cost base. Some of the
savings will be recognised across long term projects, for example
where they form part of existing contract efficiency assumptions,
and some savings will benefit our customers via the contract
structure.
As such, the expected realisable annualised savings are
approximately GBP40 million. The benefit in FY22 will be roughly
half this due to timing.
5) Portfolio rationalisation
One of the strands of our strategic review is to consider which
businesses Babcock is the best owner of and on which we could earn
a sufficient return on capital. We will be looking to rationalise
the portfolio to reduce complexity, increase focus and increase the
effective use of the Group's capital by disposing of the businesses
that are nearer the perimeter of our strategy.
We are targeting net proceeds of at least GBP400 million over
the next twelve months from these disposals. Several businesses are
currently being reviewed as disposal candidates and three processes
are currently underway to test the market.
Additionally, as announced on 11 March 2021, we have agreed the
conditional sale of our oil and gas aviation business. This deal is
expected to complete in the second calendar quarter of 2021 subject
to the satisfaction of the relevant third party conditions.
Notes
Note 1: presentation of financial results
We will change the way we report our results for FY21 onwards.
The Preliminary Results will show this new approach along with
restatements for the prior year and a full reconciliation from the
old to the new approach.
We will be updating the definition and presentation of
underlying results to align more closely to statutory measures.
This will include changing how we show the results of joint
ventures in our underlying numbers, moving to including one line in
the income statement relating to Babcock's share of joint ventures'
and associates' profit after tax. This will align our underlying
revenue with the statutory IFRS measure. Our underlying operating
profit will be consistent with the IFRS measure except for the
exclusion of certain defined specific adjusting items.
We will also be simplifying the method of presenting our cash
flow.
The numbers cited in this release are under the previous
reporting format.
Forward-looking statements
Certain statements in this announcement are forward-looking
statements. Such statements may relate to Babcock's business,
strategy and plans. Statements that are not historical facts,
including statements about Babcock's or its management's beliefs
and expectations, are forward-looking statements. Words such as
'believe', 'anticipate', 'estimates', 'expects', 'intends', 'aims',
'potential', 'will', 'would', 'could', 'considered', 'likely', and
variations of these words and similar future or conditional
expressions are intended to identify forward-looking statements but
are not the exclusive means of doing so. By their nature,
forward-looking statements involve a number of risks, uncertainties
or assumptions, some known and some unknown, many of which are
beyond Babcock's control that could cause actual results or events
to differ materially from those expressed or implied by the
forward-looking statements. These risks, uncertainties or
assumptions could adversely affect the outcome and financial
effects of the plans and events described herein. Forward-looking
statements contained in this announcement regarding past trends or
activities should not be taken as a representation that such trends
or activities will continue in the future. Nor are they indicative
of future performance and Babcock's actual results of operations
and financial condition and the development of the industry and
markets in which Babcock operates may differ materially from those
made in or suggested by the forward-looking statements. You should
not place undue reliance on forward-looking statements because such
statements relate to events and depend on circumstances that may or
may not occur in the future. Except as required by law, Babcock is
under no obligation to update (and will not) or keep current the
forward-looking statements contained herein or to correct any
inaccuracies which may become apparent in such forward-looking
statements.
Forward-looking statements reflect Babcock's judgement at the
time of preparation of this announcement and are not intended to
give any assurance as to future results.
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END
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