TIDMBAB
RNS Number : 9999U
Babcock International Group PLC
04 August 2020
4 August 2020
Babcock International Group PLC (Babcock or the Group)
Trading update
Babcock, the aerospace and defence company, issues the following
update on trading for the first quarter of the financial year
ending 31 March 2021 ("the period").
Group trading
Coronavirus (COVID-19) had a significant impact on our financial
results in the period but work has continued on key customer
programmes and demand for our work in critical areas remains
resilient.
Underlying revenue for the first quarter was 11% lower than last
year. This reflects the absence of Magnox revenue and weakness in
our Land adjacent market short cycle businesses including South
Africa. Group revenue from the core business grew slightly,
demonstrating the high level of continuing work across the majority
of our business.
The necessary safety constraints on close proximity working have
had a significant impact on costs and efficiency, directly
impacting Group margins and profitability. These include restricted
access to customer sites, complex safety measures, reduced numbers
of staff on site, changed shift patterns and additional costs.
These have led to slower progress on some work streams which has
impacted margins on some of our long term contracts in the
quarter.
Underlying operating profit for the first quarter was around 40%
lower than last year. Around half of this profit reduction was due
to lower levels of productivity in the core business while Magnox,
South Africa and Land adjacent market businesses account for the
other half.
Order intake in the quarter was GBP0.7 billion and in July we
secured around GBP500 million of new contracts in our Aviation
business, helped by the delays in bid decisions beginning to
clear.
We made progress on our cash performance, with the receivables
outstanding at 31 March 2020 now collected and the Group's working
capital position at 30 June 2020 better than at 30 June 2019.
Our substantial long term order book and strong liquidity
position underpins our confidence in navigating the short term
financial impacts of COVID-19 whilst safeguarding our key
capabilities for the future.
Expectations for this financial year
Although we remain confident about the long term, there is
uncertainty around the duration and extent of the impact of
COVID-19 on productivity, margins and pipeline development. As a
result we are not giving detailed financial guidance today and will
provide an update at our half year results in November.
We are working closely with our customers to return productivity
to prior levels and have made steady progress in bringing our staff
safely back into their workplaces. As we adapt to the new working
environment, we continue to identify new and more efficient ways of
working and this is supporting a gradual improvement in
productivity.
As we progress through the year, assuming we are able to make
steady progress without further major setbacks from COVID-19, we
would expect to see a gradual improvement in Group performance from
the 40% reduction in operating profit in the first quarter. As with
previous years, performance for the year is expected to be weighted
to the second half.
Dividend
After careful consideration the Board has made an exceptional
decision not to pay a final dividend for the financial year ended
31 March 2020, given the continued uncertainty around the outturn
for this financial year. This supports our strategy of continuing
to reduce net debt and is appropriate given the Group's limited use
of the UK Government's Coronavirus Job Retention Scheme.
The Board recognises the importance of dividends to our
shareholders and will resume dividend payments at the earliest
opportunity.
Balance sheet and liquidity
During the period, we repaid our revolving credit facility and
extended its term by a year. This facility of up to GBP775 million
now expires in August 2025. In total, the Group has access to
around GBP2.4 billion of borrowings and facilities of mostly
long-term maturities.
Assuming a gradual improvement in Group performance, as well as
cash mitigation measures including reducing capex and accelerating
aircraft fleet rationalisation, we aim to end the financial year
with a net debt to EBITDA ratio(1) of around 2 times, well within
our covenant levels of 3.5 times.
Sector performance
Our Marine sector revenue grew in the first quarter led by
increasing work on the Type 31 Frigate programme and continued
strong growth in our technology businesses. Operating profit for
the sector was down year on year due to the impact of COVID-19
restrictions on operational performance.
Despite the challenging environment, the sector made good
operational progress. The Type 31 Frigate programme has completed
its preliminary design review and the majority of tier 1 suppliers
are now under contract. UK warship support slowed due to the
initial lockdown measures but work is now moving towards more
normal levels. We were also awarded a further batch of missile
launch tube assemblies for the UK's Dreadnought and the USA's
Columbia nuclear submarine programmes.
Revenue in our Nuclear sector was lower than last year. Revenue
in the naval nuclear business grew in the period led by submarine
support activity and nuclear infrastructure investment programmes.
Revenue in the civil nuclear business was lower due to COVID-19
restrictions on nuclear site access, lower levels of work in
support of nuclear power generation and the absence of revenue from
the Magnox decommissioning contract that ended in August 2019.
Sector operating profit was also lower, mainly due to the impact
of COVID-19 on revenue in civil nuclear and a lower margin earned
in naval nuclear, as a result of restrictions in the number of
people allowed on site and the practical application of safe
distancing and PPE guidelines.
In July, the Nuclear Decommissioning Authority (NDA), in support
of the roll out of its "One NDA" strategy, announced that the
Dounreay decommissioning contract, currently being delivered by a
joint venture including Babcock, will be taken back into the NDA in
March 2021. We are continuing our restructuring programme for the
sector announced in June, including integrating our civil and naval
nuclear businesses into a single operating structure.
In our Land sector, we maintained critical support activity
across defence and emergency services throughout the period.
However, this sector has been hardest hit by COVID-19 due to its
large exposure to adjacent market short cycle businesses. Revenue,
margins and profits were lower in the first quarter compared to the
same period last year with COVID-19 impacting performance in our
civil training, airports, rail, and power businesses. Trading in
South Africa was tough with our business there broadly breaking
even in the quarter.
In June, we announced the sale of our stake in the Holdfast
joint venture for GBP85 million. We are continuing to deliver the
long term RSME military training contract associated with
Holdfast.
In our Aviation sector, defence revenues were as planned as work
continued across our defence programmes. In Europe, Scandinavia and
Australia our Aerial Emergency Service bases have remained fully
operational. However, sector revenue in the first quarter was lower
given the impact of COVID-19 on flying hours and the ongoing
weakness in our oil and gas business. The sector's operating profit
was lower than last year due to lower volume related revenue and
additional COVID-19 related costs.
The civil aviation market continues to provide good long term
growth opportunities. In July, we won around GBP500 million of new
civil aviation contracts across both oil and gas and aerial
emergency services, helped by the delays in bid decisions beginning
to clear.
We are progressing with our sector restructuring programme and
accelerating our fleet rationalisation programme.
Order book and pipeline
The Group's order book at 30 June 2020 was GBP17.3 billion and
our bid pipeline was around GBP17 billion.
Ruth Cairnie, Chair said:
"We continue to deliver critical programmes for our customers
but our financial performance is being impacted by the challenges
created by COVID-19. Given the continued uncertainty over the
impacts of the pandemic, we are not giving detailed financial
guidance for the year at this stage.
"The Board has decided not to pay the final dividend for the
2020 financial year in order to prioritise strengthening our
balance sheet and reducing net debt. We recognise the importance of
dividends to our shareholders and we will resume dividend payments
at the earliest opportunity.
"Our experience of the pandemic so far has demonstrated that the
foundations of our business - long term programmes in critical and
non-discretionary areas - provide a solid platform for delivery in
the medium term.
"David Lockwood will join the Board on 17 August as CEO
Designate and replace Archie Bethel as CEO on 14 September. Franco
Martinelli has informed the Board of his intention to retire and a
search will be initiated for a new Group Finance Director. I thank
Archie and Franco for their contributions to Babcock over many
years and look forward to welcoming David as we continue to reshape
our operations and adapt to the COVID-19 business environment."
For further information please contact:
Babcock International Group PLC
Simon McGough Kate Hill
Director of Investor Relations Group Director of
Communications
Tel: +44 (0)7850 978 741 Tel: +44 (0)20 7355 5312
FTI Consulting
John Waples / Nick Hasell / Alex Le May
Tel: +44 (0)20 3727 1340
Notes
1. 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 to EBITDA
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END
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