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Babcock International Group PLC
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Hello and welcome to the Babcock International February Trading Update Call. My name is Courtney, and I'll be your coordinator for today's event. Please note that this conference is being recorded. [Operator Instructions] And I will now hand you over to your host, Archie Bethel, Chief Executive Officer, to begin today's conference. Thank you.
Good morning, and thank you for joining the call this morning. You have seen our trading update statement we issued earlier this morning and for the first 9 months of the year. And Franco and I will take questions on the statement. But before doing that, I'd like to highlight a few things. It's been a frustrating third quarter. On one hand, we've seen across Marine, Nuclear, Land and most of Aviation trading performance pretty much in line with or slightly ahead of expectations. Whilst on the other hand, we have seen our oil and gas market trend downwards again. In the trading statement, we've updated detailed guidance to reflect trading so far this year. We expect revenue to be around GBP 4.9 billion, with underlying operating profit of around GBP 540 million. Free cash flow should be above GBP 250 million, and we expect to reduce net debt year-on-year and deliver earnings per share in line with current consensus expectations. So overall, we remain on track to deliver our short- and medium-term targets. Disappointingly, in our Aviation business, oil and gas has deteriorated further since we last updated the market, and we are now flagging an GBP 85 million exceptional charge relating to this. So what is causing the pressure on oil and gas? Well, competition has gotten tougher, and we have lost several major bids in the last few months. There are 3 large providers of helicopter services who operate worldwide in oil and gas. All 3 have emerged from Chapter 11 bankruptcy protection with reduced debts and written-down assets. This has effectively reset global market pricing levels, forcing us to respond quickly to remain competitive. This accounts for around 3/4 of the exceptional charge, and we are also restructuring our Aviation sector to address the cost base as the oil and gas revenues reduce and contract delays in Southern Europe push revenues out into future periods, and we are also exiting our oil and gas businesses in Ghana and Congo. So let me now say a bit more about the rest of the group. Overall, underlying trading has progressed in line with what we talked about at the half year. Marine continues to have a -- to be -- have a strong year, ahead of our expectations as activity levels are high across the business, including high demand for the liquid gas and marine transportation systems. Land is also having a good year, with continued progress across defense programs and strong trading in South Africa. Then our Nuclear sector is trading in line with our expectations. And in [indiscernible] Aviation sector, it's not all been bad news. U.K. and international defense continues to perform well, and aerial emergency services in the U.K., France, Scandinavia and Canada continues to perform in line with our expectations, but they have been unable to offset the issues in oil and gas and delays in Southern Europe. Looking ahead, we will present our full year results on the 27th of May, and we look forward to talking in more detail then. So I'm now going to hand over to you, and Franco and I will take your questions.
[Operator Instructions] So our first question comes in from the line of Joe Brent calling from Liberum.
Three questions, if I may. Firstly, could you give us an indication of the probability of in-sourcing Dounreay? Secondly, Dominic Cummings has made some fairly sort of negative comments about the industry. I'd be interested in your perspective about that. Does anyone care? And thirdly, on the order book and pipeline, I mean, clearly, it looks robust. But I don't think there's been much winning recently. Could you give us an indication of whether you think that will change? And why, perhaps, order intake has been a bit weak in the last quarter?
Okay, Joe. I'll take these. I'll take them in the order you've given them. Okay, in-sourcing of Dounreay. Yes, I mean the article in the press over the weekend -- I think our view or answer to that, and I think it was the exact same as the NDA's. One, we don't comment on speculation. I -- there is no discussions going on between Babcock and Dounreay -- and NDA about significant changes to the Dounreay contract. So I'm not going to comment any further on that.And Dominic Cummings, I -- there's clearly an SDSR who'll be coming along. I think that's where we're on and that is going to happen, and I think it will be a pretty all-encompassing one. I mean Babcock, as 1 of the key suppliers, will be involved and I know [indiscernible] to that, so we'll be involved in that process as we always are. And what I would highlight is that Babcock's main role with the Ministry of Defense is a -- as a support partner, it's a lot about reducing costs, improving efficiencies, improving availability of assets and taking down the term life cost of these assets. So I think what we do as our core business will be pretty much in chain with what some of the elements that -- of the strategic defense review. So I think in -- we expect to play [ also ] a part in that. And I think that's something that's coming and we'll hear lots more about over the next few months. I think in terms of the order book, I mean, the order book stayed the same. So the -- we've had no big exceptional orders to announce in the last 3 months. So with the steady input of orders, so we maintained the order book, which means we must've booked, at the best buy, probably a couple of billion. We don't have 1 or 2 kind of ones that we didn't issue on size. On Aviation, we had [indiscernible] France, we won the helicopter, the search and rescue support contract for the royal -- for the French Navy alongside Airbus and Safran. So there were a few kind of notable ones. But I think the order book, the GBP 18 billion and the pipeline staying at GBP 16 billion, kind of demonstrates that we continue to kind of regenerate the order book as we go.
I mean, the 2 [ like the ] account, Joe, is the H160, the Ministry in France, we had to highlight that there were a couple of those, and there's still some more to bid, so we're pleased with that. And we did sign an increase into the U.K. flight train. So as Archie said earlier, the Ministry area is going well.
Yes, and we did book or become -- prepared [ better for ] about GBP 600 million of the [indiscernible] south -- in Southern Europe, although it's pushed to the right. These were -- this was new order intake.
The next question comes in from the line of Robert Plant calling from Panmure Gordon.
I think you said that 3 quarters of the restructuring charge relates to oil and gas. Is there a quarter that isn't oil and gas-related?
No. I think I said 3 quarters was related to primarily -- yes, to -- oil and gas. So the Aviation sector restructuring is fundamentally being driven by oil and gas, but that will involve more of the Aviation sector as we right-size that for the impact of oil and gas.
And that extra quarter, is that mainly Southern Europe? And if that's the case, I felt it -- like it was a timing issue in Southern Europe. Or would you think some of that revenue won't come through?
I mean what I'd say is that, that is not specifically related to Southern Europe. Southern Europe revenue does come through. The restructuring will be -- I mean, as we go down in the oil and gas, the businesses change in size. I'm always continually working to see opportunities for making all of the businesses more efficient and more effective. And it seems to me, as we address this oil and gas issue, it's also good -- it's also the right time for us to look at the overall total structure of that sector. So there won't be any -- [ not any ] specific ones that's related just to Southern Europe or to any kind of specific part. But we are looking at how we can address the reduction in top line by -- to protect the bottom line, and that's by taking out some costs.
The next question comes in from the line of Charlotte Keyworth, calling from Barclays.
I have 3 questions. So first one, just on aerial emergency services. I wondered if you could give us just a little bit more color on what's actually driving the deferrals in Italy and Spain, and why you've got confidence, just a follow-on from the last question, as to why they're going to come back, that revenue? Secondly, more broadly on Aviation services, you -- I mean, you've talked about this reset in pricing for oil and gas. Even following this restructure, is there a possibility we are looking at any kind of divisional margin reset beyond 2020? And then just finally, on cash. I mean the impact of the restructure is GBP 30 million this year, and given free cash guidance is unchanged, I'm assuming that's taken as an exceptional. I guess on the exceptional point, you are in the middle of the trustee negotiation with Rolls-Royce at the moment, might we expect a one-off payment in H2 as an exceptional as well?
Yes, I'll come back and let Franco talk to these cash flows. On the emergency services, I mean, I think -- I guess what we've said is that at the half year, we were sitting, waiting on a bunch of -- I think we had about GBP 800 million at that point in time that was still waiting on the results [ on them ]. So a lot progress has been made. So I think, as we've said, GBP 600 million of that has been placed or we are the preferred bidder on. So we've done pretty well out of that set of outstanding orders. So I expect that the ones that have orders are others, and the ones that are preferred [ but as ] expected from the orders over the next 2 months so that they will be filling in the order book by next year. So that's a pretty high level of confidence I can have in that business being there for next year. Because of the delays, well, it's difficult with the customers who were [ really looking at ] kind of many things, and I think as we said at the half year, there had been some discussions and -- particularly [indiscernible] with regulators in terms of various things. So the delays were frustrating, but pretty pleasing that they've come through and that we've retained a kind of a high market share and actually on spend. The second one was about the Aviation's [indiscernible]...
[indiscernible] No. Charlotte, I don't think we've reset. I think, as Archie said, we're looking to protect our margin and that's why we're taking the actions that we are to reset. So we're not looking to reset. I think we just need to -- and that's why we're taking some actions. In terms of the exceptional cash, yes, you're right, it's GBP 13 million in cash terms. I think just to clarify, under the new accounting standard, it's only GBP 10 million per net debt because some of that cash is leases, which are already in net debt. So that's true. So that's the answer to that question. And the final one is the pension. And so we're still comfortable that we will be over GBP 250 million of free cash flow. And then finally, the H2 pension exception, I don't expect that to happen now at this -- we haven't quite agreed the deal. It'll -- it's nearly agreed, as I said before. But it's not quite there. Pensions always moves slower than you think. And so the additional payment will be on -- in next year, which we still think will happen.
The next question comes in from the line of Sam Bland calling from JPMorgan.
A couple for me, please. The first one is on the GBP 250 million free cash flow target for the year. I guess you've retained that, albeit there's a fair bit of work during the second half. Just have an update on is that progress on cash flow coming through in the second half as expected? And the second one related to that is, could I have an update on the total size of exceptional cash flows sort of after the free cash flow line expected, let's say, for this year and next?
Yes. I'll do both of those. Well, the good news is, as the end of December, we're ahead of where we expected to be in terms of free cash flow. So that does help us in terms of working capital and CapEx, which are the main drivers. So we are ahead at the end of December. And -- but the final quarter is very important, as we've said repeatedly, so it will depend on that final quarter. So -- but we are ahead of where we expected to be at the end of December. So that improves our confidence at this point. In terms of exceptional items, yes, previously, we had guided for about GBP 40-odd million for this year. That's -- in terms of IFRS 16, that's only going to go up by about GBP 10 million, as we said previously. And in terms of cash, we'll be doing it in cash by GBP 30 million. So that's the answer to previously. As for next year, it was pretty flat. I think it's probably going to be on a -- because we had some disposals of the EC225s, which we expect now that we've marked them down a bit further, that we can proceed with that. So for next year, it will be a small outflow, okay? Because of what we just said.
The next question comes in from the line of Allen Wells calling from Exane.
Just a very quick follow-up for me. Just to understand the Italy and Spain issues, obviously, you talked a little bit about the delays and the potential revenue moving on to following periods, but you haven't obviously changed your top line guidance. How do I reconcile that? And then you also, in the comments, make a point of the GBP 600 million of additional wins that you've won since then. Well obviously, it's difficult for us to quantify what does that actually mean? Is that enough to offset some of the headwinds that you had or were expecting? Is that more than you -- like I don't know how to quantify what GBP 600 million means in that context as well.
Okay. I mean, and that -- sorry, [ a little insane ]. Yes, the GBP 600 million has [ slipped I think ] for the whole year. So there's probably -- this year, the impact of that [indiscernible] Aviation is probably about GBP 100 million?
Just about GBP 100 million.
Just under GBP 100 million. So the GBP 600 million, these contracts run over 4 or 5 years. I think that even just in -- I think that will be offset simply in Marine. So if it's just a sample -- simple numbers there [ in the end ], I think we're going to be ahead in a couple of areas, but mainly in Marine. So we are sticking to that top line guidance in terms of what the top line should be. And I think the GBP 600 million in Aviation services, it pushes into next year, gives us a next year in that Aviation area -- it amounts in some business a good -- kind of good start in terms of [indiscernible] in the book.
And then a very quick follow-up question, just on -- just general oil and gas. Obviously, you [ flagged ] it's getting worse again. How do you think about sort of the options in the plan for that business? I mean obviously, you're trying to manage costs to manage a difficult period, but if this continues to get worse, it feels like it's a very tough business to be operating. What options do you think you have there? And how do you view the outlook from here?
Yes. I mean it's been a tough business for a few years, and I think it gets -- it's getting smaller. The problems are getting less. We've already -- last year, we -- the EC225 issue and the -- when we've -- we get rid of them, we'll get rid of them. We'll get rid of 5 of them. Think that we're making progress this year. I think that there's a competitive market. I think [indiscernible] Ghana and Congo, we're really, really kind of retention back to, as we've been doing for the last year, back to Aberdeen. It's now a relatively small business. We even, up in Aberdeen, we've significantly kind of downsized it. And by taking this further write-downs of these assets, we're almost at the stage where those -- where there's very little value in that part of the business. We clearly have an obligation to complete the contracts that we have out there. And we're [ delivering on ] them very well, but we have no intentions to [ enjoin ] the chase to the bottom with the other 2. And we're trying to manage that as well as we can, painful as it is. But we -- and protect the rest of the Aviation sector and the business from certain major problems. And I think, again, we've done that reasonably well. So yes, I mean, I think we don't see -- it's a difficult business to see long term what's going to happen when there's so much disruption going on around about this business, and we are still seeing the companies that have come out of Chapter 11 and we've still seen them in a price war with each other, which, as I say, we don't really want to join. I think we're in control of it. I think it's tough. I think we're taking the right decisions and doing our best on what's a pretty difficult situation.
[Operator Instructions] And the next question comes in from the line of Sash Tusa, calling from Agency Partners.
A couple of questions, I'm afraid, again on Aviation. But then one on Marine. You said just now that post the write-downs, there's very little value left or very little asset value left in the oil and gas cost for Aviation. I think I'd rather foolishly assumed after GBP 81 million of charges in the last financial year that you've pretty much written it down. So I found another GBP 80 million a bit of a surprise this morning. Are you -- I just wondered if you could quantify what assets you have left there? And what the exposure is? Have you written the -- all the Super Pumas now down to 0? And do you have other helicopters that you couldn't redeploy into other parts of the business? I'll -- perhaps I could follow-on after that.
Okay, that's -- do you want, Franco [indiscernible]
[ Yes. So -- ] I mean, yes, we've written down the assets pretty -- to a pretty low value now. There isn't, as you quite rightly say, very much. The real big part of it is the writing down of the leases on the S-92s. We have reduced on EC225 in leased assets from 6 down to 1. And we have reduced our S-92 fleet on leases from 15 down to 7. So we've done a lot of reduction, but we have still got leases for those helicopters. And the market has moved as the guys have gone into liquidation in recent release rates, which we hadn't foreseen. So it's not really assets in the classic meaning of the word, it's more the mark-to-market of the leases, just to explain where we've gotten to.
[indiscernible] So I would stress, I mean, last year [indiscernible] last year was all about the 225s and the -- because the 225 issue was driven by technical problems that had grounded the 225, so the estimate to -- so -- and I think we've done pretty well there. We've only got 1 left on lease out of the -- we had 13 last year. We've dealt with them all, we're down to 1 on lease. The S-92s, this time last year, we had 15 of them. We're down to 7. So we have pretty much been on track, and it really was frustrating that we don't see the impact of these other companies coming out so quickly in terms of how Chapter 11 allows them to reset the values. And the 3 of them are dominant in the market around the world, not just in Aberdeen. So they have effectively reset the value of the S-92, which is way, way below what we are actually paying in terms of lease cost. So we just had to take action on that.
Okay. Great. That's very useful. Just a detailed question on Aviation. There's a report from the Norwegian government that they have had to keep helicopter availability up in the north of Norway because you had, had problems standing up the air ambulance service there. I just wondered whether you could provide a bit of color on whether that was just a ramp-up glitch or whether that's something that has affected the wider ramp-up of the air ambulance service there.
[indiscernible] I mean, in Norway, there was an issue. We have been in the ramp-up, and it's gone pretty smooth. And we did have an issue where we had a technical fault with one of the new aircraft. We -- [ including ] safety first, as we always do, we grounded the fleet of 12 aircraft -- new aircraft until -- for such times as we ascertain what the issue was and how serious it was. It turned out to be a pretty minor problem, but we [ did up ] the aircraft. We ground it for about a week. And during that time period, we also brought in some aircraft from Sweden and other parts, and the customer provided some stuff. So we had a week where we did have an issue related to -- a technical issue, but it turned it be pretty minor and we were back in action pretty quickly. So I think the customer was pretty impressed with how fast we responded to and took the right decisions. And we demonstrated, based on the resilience of -- we have not need to interrupt -- not even such a big ground in not interrupting the service.
Great. And then just a final question. I just wondered whether you had any update on the Type 31 program? Are you still happy with the time scales for delivery that you last announced?
Yes, absolutely. I mean, it's still early days, but yes, we're making progress along all of our milestones. So we're still pretty much in the finalization and design phase, the supply chain procurement phase and we're well under the construction phase in Rosyth. So yes, I'd say we're pretty much in line with where we said we would be.
The next question comes in from the line of Robin Speakman, calling from Shore Capital Market.
Just to clarify, it sounds very much like from the statement this morning that you are actually pulling out entirely of Aviation in the oil and gas market. Is that correct? And further to that, obviously the assets that are utilized in oil and gas, I mean, you've kind of [ partnered ] out of this. But I mean, can you move some of those assets into other areas in Aviation? Does that have an impact on next year's CapEx in Aviation? And indeed, on asset sales as well?
I think -- I mean, I think the long-run route of oil and gas Aviation for us is that we don't intend to kind of invest further out to stay in that market. And I think we've been steadily, over the last 4 years now, kind of decreasing the size of that business. So -- and I think as we -- can I emphasize that last year on our Capital Markets Day, as just part of our adjacent markets -- adjacent businesses, we are always looking at what's the long-term future of that. In terms of the assets, we don't -- I mean, one of the [ saving ] -- one of the positive things is we don't have any -- at the moment, we don't have a big issue with the excess assets. So we've done pretty well at getting rid of these as we've needed to. I think on the 225s, we've only got the one. So we have reset -- we have redeployed some of these, and we'll continue to look at that as a possibility. The S-92 is a bit [ different, they're ] huge machines, mainly suited for search and rescue -- oil and gas and in search and rescue. We will look at other options to deploy these, and actually, the writing down of asset -- of the lease values helps that process. So we'll continue to look at [indiscernible] whenever we can. But I'd say at the moment, we don't -- I mean, we expect them to be in contract. The written down values, we expect them to be on contracts in Aberdeen.
We have no further questions coming through. So I shall hand you back over to your host for any closing remarks.
Okay. But once again, I thank you for joining the call this morning. I think overall, the business is in good shape. I think the numbers that we have confirmed in guidance today are pretty much in line with what we said they would be. We're being pretty upfront about the continuing issues in oil and gas, and I think we have acted very quickly to address that. So they should not have an impact -- any long-term impact on the business, and that's the most important thing. And we'll update you on all of this at the year-end in May. So thank you again for joining us this morning.
Thank you for joining today's call. You may now disconnect your handsets. Host, please stay on the line and await further instruction.