Babcock International Group PLC
LSE:BAB
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Babcock International Group PLC
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Ladies and gentlemen, welcome to the Babcock International Trading Update Call. My name is [ Hailey ], and I will be the operator for your call this morning. [Operator Instructions]I will now hand you over to the CEO of Babcock International, Archie Bethel.
Good morning. And first of all, thank you for joining the call this morning following the issue of updated trading statement. I'm joined this morning with Franco Martinelli, our Group Financial Director. And after I make a few opening remarks, we'll be happy to take your questions. It's only 2 months since our last update, so it shouldn't be a surprise that in some way, we are confirming that we are trading in line with our expectations and that we are confirming our outlook for the year. All of our sectors continue to make good progress in the period, including our international businesses. Our order book and pipeline remain strong with a combined value of GBP 32 billion. And we have around 80% of our revenue of this year in place and 50% for next year. As I mentioned in July, as part of our focus on our 3 core markets of defense, emergency services and nuclear, we are exiting a number of nonstrategic, small low-margin businesses. And we have agreed the sale of our Media Services business, and we have exited our North American mining and construction business. And this follows on from the exit of our renewables and civil infrastructure business in the U.K. last year.This process will continue in the second half of the year, where we expect to exit our powerlines business in South Africa and to reshape our oil and gas crew change business, while ensuring we still meet our customers' needs in that sector. And of course, we will provide a full update on these activities with the announcement of our half year results in November.So in summary, we continue to perform well. Our pipeline and order book remain strong, and we look forward to updating you again at our half year results on November 21.So with that, I'm going to hand over to questions, which Franco and I will answer. Thank you.
[Operator Instructions] Your first telephone question today is from the line of Jonathan (sic) [ Joe ] Brent of Liberum.
Three questions, if I may. Firstly, on the disposal program, could you give us an indication of what the impact on revenues and profits would be? Secondly, in respect to those -- of the portfolio rationalization, could you give some indication of what the exceptional costs may be? And finally, on modernization defense program, could you give us a sense of the progress there and whether orders are starting to flow in the Land business?
Okay. On the first -- on your first question, again, as we stressed in July, these businesses that we're exiting are all really small in terms of the group. When we emphasize the 3 core sectors of defense, emergency services and civil nuclear, which accounts for around 76% of our business. In the other 24%, we have clearly been looking at the future shape of these businesses. There are 3 large businesses within there that make up about 22%, 23% of that 24%. So the businesses that we are talking about here are pretty small. So in total, probably in the region of 100 -- between GBP 100 million up to maybe GBP 140 million in total of our turnover. And the margin content on the -- the main reason we're exiting them is because they make very, very low, if any, margin. So by exiting these businesses, we are improving the performance of the business. But again, I'd stress they are very small, each of them, in their own right, probably not worth really mentioning, but we are doing this as part of this tighter focus around our 3 core markets. And in terms of MDP, well, I think before the kind of holiday period, a statement was made on the progress that was made -- was being made on it. And everyone, I should have said, have probably seen that. It's still a work in process. It's been a fairly positive experience for us, and this engagement has been quite deep and constant. And we are beginning -- moving at the process and have been looking forward about how the relationship between industry and defense can be developed in a way that suits both of us, i.e., we deliver more efficiencies and more capability to the armed forces for, one, for less money; but two, in a more efficient way. So I think MDP has still got -- I think we -- in this year, you'll hear more about that process, but it's now an ongoing process.
So in terms of the...
Yes. I'm sorry, Joe, just on the middle question, the second one you were talking about. I mean, overall, the exit costs will be offset by the disposal profits and stuff. So overall, it won't be material in significance and will not significantly change our cash guidance we've got this year.
The next question is from the line of Edward Stanley of Morgan Stanley.
Just a sort of high-level question. Can you give us an idea of why your net debt isn't going down given that H2 implied like-for-like is somewhere between 4% and 5%? And given your visibility, are you comfortable that run rate can continue into next year?
Okay. I mean, the consensus net debt is going down. And we're expecting our net debt-to-EBITDA to go down to about 1.4x, around, for this year and followed by -- and that's progressing from this year into next year. So we steadily have been geared over time, and we expect to continue to do that. The like-for-like revenue growth I think is -- our guidance is low single digit in terms of organic. So the 4% to 5% is once you add back the exit of QEC, which are one-off type items, so you do get to that sort of number. But we are continuing to pay down debt and we are continuing to de-gear, and that is part of our investment story and has always been.
The next question is from the line of Allen Wells of Exane.
A couple from me. Maybe firstly, just sort of following up on some of the comments around LGE and DSG when you're talking. And obviously, Marine and Land were flagged as part of the reasons for the slightly weaker growth expected when you flagged in July. Is it right to sort of think that the comments you're making now on ecoSMRT and some of the revenues coming in on DSG, at least you're suggesting that those delays aren't getting any worse? That's my first question. And then secondly, on the crew change MCS business and the restructuring there, how should we think about the potential for any sort of write-downs or sort of changes in that part of the business? And then finally, just a quick third one on FOMEDEC. I know, obviously, there was a little bit of uncertainty on the timing of the cash back from the leases on that one, a bit further along now, any update? Will we expect to see all that coming back in by the half year or still not sure?
Okay. I'll take probably the first 2, and I'll let Franco think about FOMEDEC while I'm doing that. I mean, the LGE and DSG, we highlight these for a couple of reasons. One, at the end of last year, actually, in the final quarter of last year, we did flag up that we have had some big delays in LGE, liquid gas business, and that some contracts hadn't come through. I think we're now emphasizing, I'll just point out that, actually, all of the contracts that we had anticipated have now come through. So again, I can just confirm that, that had, in fact, been the payment issue that we thought it was going to be. So that has come through and that business is performing well this year. On the DSG, actually, nothing has really changed in that. So the kind of flow-through of equipment still remains as we kind of guided it would be. But I think what we'll point out there is that we have been awarded, in the last 6 weeks, GBP 120 million worth of new contracts that expand the DSG contract. So this is new scope, new work and at decent -- at normal defense margins. And it's a positive sign that as we kind of open that DSG contract that, over time, it will continue to grow. Second one was...
MCS, yes.
The crew change business, so yes. Yes, I mean, I think it's quite early days. I mean, we signaled -- we clearly signaled at the year-end, when we put the focus -- when we clearly set up our focus on defense, emergency services and nuclear. The crew change, the offshore oil and gas business was not seen by us as a kind of a critical part of the business. So again, that, I guess, kicked off an exercise that says, well, what is the -- what happens with that business? Do we -- how do we operate it? It's a reasonable-sized business. It's still profitable. And I think all the segment here is we're going to look at what we can do with it in terms of making it the best we possibly can, whilst, of course, still maintaining a top priority in safety and in meeting our customers' kind of needs. But we do feel that the business is -- the oil and gas business, overall, in that sector has stabilized, though it's still not great. But I think we want -- we -- the business will be there. Questions of what we do with it in the long term, again, the exercises that we'll do in the moment might lead us toward some kind of conclusions there. Then the first instance is all about us taking actions around about making sure that we're making the best out of that business that we possibly can at the moment. And the FOMEDEC?
And I'll change subject. Yes, the -- really no change to guidance. We set out pretty clearly that what we intend to reverse in FOMEDEC is on track to reverse. So -- and we would expect it to reverse in the first half.
[Operator Instructions] Our next question is from the line of Sam Bland of JPMorgan.
It's Sam Bland here. I've got 2 really, just both of them on the sort of H1-H2 split that might be expected. If we start with organic revenue growth, I think also we're expecting low single digits for the full year. Is there any commentary around what that might look like in the first half, possibly slightly weaker than that as you -- just because some of the phasing that's in the business with different contracts and then a little bit stronger in the second half? And the second one is just on the cash flow. What kind of phasing H1, H2 might be expected? I think you said at the full year last year, the operating cash flow was a 30-70 split and you're expecting similar for this year. Is that still the case? And if so, what causes that kind of 30-70 split in the operating cash flow?
Okay. I'm going to let Franco give some detail on that. But again, I'd just emphasize that this is the normal pattern for this business. So it's not -- this is -- if you went back, we have typically been -- there's typically been a bigger second half to the year to first half of the year. And that's due to a number of factors within our trading cycles that Franco I'll let go into some of the detail on that. But we've signaled -- or I think last year, we felt a bit -- clearly, the markets hadn't noticed that, and we probably hadn't signaled it. Now this year, we've been very clear that this year, like many years before, will be pretty much the same with H2 being bigger than H1. But Franco?
Yes. Sam, yes, I think you put the revenue split pretty well as well it's sort of single-digit OpEx for the full year. And as we signposted in July, we started off a little bit slower than we'd hoped, which is some of the throughput, and all those orders have now -- all coming through. So I think it's -- you're actually right, I think you put it pretty well, slightly lower in the first half than that and better in the second half. In terms of cash flow, yes, we're not changing our guidance at all on the cash flow. And the reason why it happened is twofold. A large proportion of our customer base is government, and they settle their cash positions towards the year-end. And it's not about invoice payments, it's just settling of transactions. And the additional one is the firefighting season, which -- in Southern Europe, which is based over the summer. So those 2 factors tend to keep cash in the second half. And of course, obviously, as you know, in terms of net debt generation, the dividend is first-half weighted. So those 3 things are the things to bear in mind when we're looking at our net debt and our operating cash flow.
The next question is from the line of Ed Steele of Citi.
A question about 2020. Obviously, this is a trading update related to the first half of '19. But kind of looking at consensus 2020, it seems to be for a few percent organic growth. You've obviously got 3 big step-downs in contract revenue for FOMEDEC, QE Carrier and Magnox now. At what stage do you think you'll be turning your attention to sort of guidance for 2020, please?
Ed, yes, I think we've given sort of mid-term guidance. We think that our business is a sort of mid-single-digit type growth business. We've given that guidance. We did identify these -- those things that you said. And on the opposite side of that, we have got the Norway contract starting, which is significant, in next year. And as we said, we do expect to get a significant part of the Magnox stuff back. So yes, we have -- we didn't -- we're happy with where the market is at the moment, but we need to go through our proper reviews. And of course, we'll update you in November. So I think that's where we are. I think we're not uncomfortable where it is, but we'll update in November.
This concludes our question-and-answer session. I would now like to turn the conference back over to Archie Bethel for any closing remarks.
Okay. Well, thank you again for joining the call this morning. And as I said at the beginning, it's only 2 months since the last trading statement. So not surprisingly, there's not huge amounts. But I think, overall, we believe that -- we feel that we are pretty much on track on where we thought we were and particularly in terms of new order flow. So again, thank you for joining us, and we will speak to you at the next call. So thank you very much.
Thank you.
Ladies and gentlemen, this conference -- this concludes today's conference. Thank you for joining. You may now disconnect. Goodbye.