# Babcock International Group resilient business model ready for the year ahead

- Link: https://www.directorstalkinterviews.com/babcock-international-group-resilient-business-model-ready-for-the-year-ahead/412831340
- Published: 2020-06-11T07:42:49+01:00
- Author: Giles Arbor

**Babcock International Group plc** (LON:BAB) have delivered full year results for
the year ended 31 March 2020.

> **Archie Bethel, Babcock Chief Executive, said:**
> “We end a busy year in a strong position to deal with the current Coronavirus (
> COVID-19) uncertainty. We saw strong performances across our Marine, Nuclear and
> Land sectors and have taken action to address weaknesses in Aviation, including
> writing down goodwill to reflect our updated expectations of the oil and gas market.
> The early impact of the global COVID-19 pandemic had a limited impact on the Group
> in the last financial year but is creating uncertainty as we head into this new
> financial year.
> “I am immensely proud of the way our people have responded in these challenging
> times. At Babcock we pride ourselves on the fact that we support customers responsible
> for providing critical services: our work in defence and aerial emergency services
> saves lives, supports national defence and protects communities. As always, my
> priority, and the priority of the Group, is to keep our people safe whilst making
> sure that those vital services can continue.
> “I am also extremely grateful to HM Government and in particular the Cabinet Office
> and Ministry of Defence who acted quickly and decisively to ensure that contracts
> continue to be funded and that cash flowed effectively through the main suppliers
> and down into the supply chain. Also, working with us and other major suppliers,
> we have together quickly developed safe working solutions at site level supported
> by our employees, trades unions and regulators. These solutions are being widely
> shared to ensure that the entire sector is benefiting from the experiences of 
> individual companies.
> “The majority of our work has been declared to be critical and our people designated
> as key workers. All of our major sites have remained open, and we have worked 
> closely with our customers to understand and support their changing requirements
> and operational priorities. Whether working on site or at home, we have continued
> to work on major defence programmes, to design new systems, to provide emergency
> services and to keep nuclear power sites operational. Across Europe our emergency
> medical services teams have worked courageously alongside national health services
> in the transport by air of critically ill patients to hospital.
> “We have also contributed to the fight against the pandemic with new innovative
> technical solutions. We pioneered the introduction of biocontainment isolation
> stretcher units which allow virus positive patients to be transported safely, 
> and new in-helicopter barrier systems that provide added protection to flight 
> crews and medical staff. We have shared the experiences gained in Italy, Spain
> and France with our teams elsewhere, including Sweden where we refitted one of
> our aircraft to create a dedicated COVID-19 air ambulance.
> “By establishing strong safety protocols, many of our contracts have continued
> to operate throughout the crisis. The business impact of the virus will be felt
> most significantly in our short-cycle work and adjacent market businesses. We 
> have put mitigation measures into place, including reducing and deferring non-
> essential operating and capital expenditure to protect the business in the short
> term. We continue to model a number of scenarios around the ongoing impact of 
> the virus. We have also developed detailed plans to return to productive operating
> capacity in response to government guidance and customer need as the countries
> in which we operate begin to emerge from varied restrictions.
> “Looking back over last year, we made solid progress in driving our strategy forward.
> We achieved good revenue growth across our defence businesses and won significant
> opportunities, including building the next generation of UK warships, securing
> long term positions on major submarine projects for the USA and Australia, and
> expanding our aviation defence operations in France. Our expanding technology 
> capabilities were crucial in these wins, and I am really pleased with the high
> level of growth seen across our technology businesses this year.
> “Our area of weakness was in the Oil and Gas aviation business. The global oil
> and gas market has become even more competitive and we have written down the value
> of assets in that business to reflect this and impaired Aviation goodwill to reflect
> how the market has changed and that we do not expect any recovery any time soon.
> We have also addressed the cost base of our civil aviation and civil nuclear businesses
> to right size them for the future given the weaker oil and gas market, price and
> cost pressures in our emergency services business and the smaller civil nuclear
> business following the end of the Magnox contract and a slowing UK civil nuclear
> market, exacerbated by COVID-19.
> “We enter the new financial year facing uncertain times but the long term characteristics
> of our business remain strong. We provide some commentary on the year ahead across
> our sectors but are unable to provide detailed financial guidance at this time.
> Given this uncertainty, the Board has deferred the decision on our final dividend
> until there is greater certainty on the impact COVID-19 will have on our business
> and stakeholders.
> “Despite this uncertainty, the Group’s strong liquidity position, robust business
> model, record order book and pipeline and focus on critical services gives us 
> confidence that we will deliver for all our stakeholders in the current year.”

| **Financial results** |   |   | 
|   | 31 March
 2020IFRS 16 basis | 31 March 2019Pre-IFRS 16 basis |   | 
| Statutory revenue | £4,449.5m | £4,474.8m |   | 
| Underlying revenue^(1) | £4,871.7m | £5,160.6m |   | 
| Statutory operating (loss) / profit | £(164.9)m | £196.5m |   | 
| Underlying operating profit^(2) | £524.2m | £588.4m |   | 
| Exceptional items | £(502.9)m | £(160.8)m |   | 
| Statutory (loss) / profit before tax | £(178.2)m | £235.2m |   | 
| Underlying profit before tax^(3) | £428.4m | £517.9m |   | 
| Statutory basic earnings per share | (38.6)p | 39.5p |   | 
| Underlying basic earnings per share^(4) | 69.1p | 84.0p |   | 
| Underlying operating cash flow (post net capex) | £344.4m | £469.3m |   | 
| Underlying free cash flow (post pension payments)^(5) | £192.2m | £323.7m |   | 
| Net debt^(6) | £(922.1)m | £(957.7)m |   | 
| Net debt/EBITDA^(7) | 1.7x | 1.6x |   | 
| Full year dividend for the year (reflecting interim dividend already paid) | 7.2p | 30.0p |   |

Results for this year are reported under IFRS 16 without prior year restatement.
The adoption of IFRS 16 increased operating profit by £23.6 million.

Results for this year include the impact of step downs (detailed on page 19). The
revenue impact (including FX) was £428 million and the operating profit impact (
including FX) was £60 million.

#### Financial highlights

·      **Underlying revenue** of £4.9 billion in line with our FY20 guidance, statutory
revenue of £4.4 billion

·      **Underlying operating profit** of £524 million after a small impact of COVID-
19

·      **Statutory operating loss** of £165 million after exceptional items

·      **Exceptional items **of £503 million include Aviation goodwill impairment
of £395 million, other Aviation charges of £143 million (including Oil and Gas write
downs, an Italy anti-trust fine and a sector restructure). Other exceptionals include
a restructure of Nuclear and a profit on the sale of Context

·      **Total cash outflows** from these charges expected to be £129 million, reduced
to £27 million after proceeds from sale of Context

·      **Exceptional net cash inflow in FY20 **of £23 million, including Context
proceeds

·      **Underlying basic EPS** of 69.1p

·      **Underlying free cash flow** of £192 million compared to FY20 guidance of
over £250 million, with the shortfall reflecting the impact of COVID-19

·      **Statutory net cash flows from operating activities **of £330 million (2019:
£386 million)

·      **Net debt^(6)** of £922 million with net debt / EBITDA at 1.7 times. Net
debt including lease obligations was £1,595 million

·      **Final dividend** decision deferred until COVID-19 situation becomes clearer

#### Operational highlights

·      **Record combined order book and pipeline** of around £35 billion (March 
2019: around £31 billion) with an order book of £17.6 billion and a pipeline of 
£17 billion

·      **Contract wins in the year** included Type 31 frigate programme, Met Police
training, Australia and USA submarine programmes

·      **Win rates continue** at over 40% for new business and over 90% for rebids
in our focus markets

·      **Increasing international presence:** Aviation operations started in Norway
and Canada, second defence contract in France

·      **Completed sale of Context **for over £100 million in March 2020

·      Announced today, **we completed the sale of our share of the Holdfast joint
venture** for £85 million, taking pro forma net debt / EBITDA to 1.5 times

###  

#### Financial strength and liquidity

·      Group comfortable with liquidity under stress-tests performed

·      Group has access to around a total of £2.4 billion of borrowings and facilities
of mostly long-term maturities

·      Significant cash balance at 31 March 2020 of £1.35 billion

·      Net debt to EBITDA ratio of 1.7 times well within our covenant levels of 
3.5 times

#### Outlook for the year ending 31 March 2021

·      Given the current level of uncertainty we are not providing financial guidance
for the year ahead

·      Work on critical, non-discretionary long term contracts (around 80% of Group
revenue) continues

·      Work across our short-cycle businesses (around 20% of Group revenue) will
be more heavily impacted due to lower demand levels

·      Sector margins will be impacted by lower demand and productivity levels

·      Performance is expected to be weighted to the second half, reflecting normal
business phasing and the expected impact of COVID-19

·      We will provide a further update at our trading statement on 4 August 2020,
the date of our AGM

Notes
The adjustments described below, collectively, are made to derive the underlying
results of the Group. The underlying figures provide a consistent measure of business
performance year-to-year, thereby enabling comparison and understanding of Group
financial performance. A reconciliation from statutory to underlying is provided
within the financial review on page 17.

 1. Underlying revenue includes the Group’s share of joint ventures and associates 
    revenues.
 2. Underlying operating profit includes IFRIC 12 investment income and joint ventures’
    and associates’ operating profit but is before amortisation of acquired intangibles
    and exceptional items. Underlying operating profit excludes exceptional items of
    £502.9 million.
 3. Underlying profit before tax is inclusive of pre-tax joint ventures and associates
    income but before amortisation of acquired intangibles and exceptional items.
 4. Underlying basic earnings per share is before amortisation of acquired intangibles,
    and exceptional items, before the related tax effects and before the effect of 
    corporate tax rate changes.
 5. Includes pension payments in excess of income statement of £70.2 million.
 6. Excludes lease obligations. This measure now excludes £40 million of lease obligations
    which were previously treated as finance leases.
 7. Group net debt (excluding non-recourse JV debt and all lease obligations) divided
    by underlying Group EBITDA (pre-IFRS 16) and JV dividends received. This is comparable
    to our covenant measure of net debt / EBITDA which includes finance leases but 
    also makes some adjustments to EBITDA.

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