Babcock International Group PLC

LSE:BAB

Earnings Call Transcript 2020-Q4

[Operator]

Hello, and welcome to the Babcock International 2020 Full Year Results Call. My name is Judy, and I'll be the coordinator for today's event. Please note that this call is being recorded. [Operator Instructions]I will now hand you over to your host, Archie Bethel, to begin today's conference. Thank you.

[Archibald Bethel, CEO & Executive Director]

Yes. Good morning, and thank you for joining us for the presentation of our results for financial year ending 31st of March 2020. Unfortunately, for obvious reasons, we couldn't adopt our usual practice of a live presentation, questions and answers, so we will try though in this format to update you as best we can and leave plenty of time to answer your questions. We also posted the presentation on the website at 7 a.m. this morning, along with our results and hopefully, you have found that to be useful. Assisting me with the presentation will be our Finance Director, Franco Martinelli; and our 4 sector chief executives, John Howie; John Davies; Simon Bowen; and Neal Misell; and our Managing Director of Technology, Jon Hall, who are all available on the call to answer your detailed questions. In the final quarter of the financial year, we have had to address a number of unexpected issues, of course, with many of them, but not all of them related to COVID-19 and I will be updating you on these in the presentation. But before I do, I want to stress that the fundamental long-term underlying operational and financial characteristics of this business remain extremely strong. These fundamental strengths and long-term deep customer relationships and largely nondiscretionary nature of the services we provide, will at least in part, protect us during this period of volatility and uncertainty. There are lots of moving parts in the results. So let me start with some key messages. FY '20 results are in line with expectations, apart from the impact of COVID-19 during the final 2 months of the financial year. Our Defence business, and particularly, Marine, had a really good year. We have tackled the weakness in the Aviation business, including writing down a substantial amount of noncash assets, including goodwill, reflecting our updated view of the oil and gas market. In total, we have taken exceptionals of GBP 503 million, but the net cash cost of this is only GBP 27 million. We are not providing financial guidance for FY '21 or beyond at this point, given the uncertainty of COVID-19, but we have included as much detail as we can to try and be helpful. And for the same reasons, we have deferred the decision on our final dividend. I'm really proud of how our people responded to the challenge of the pandemic. Most of us were designated key workers and we worked alongside our customers through the crisis, making sure that critical services and programs continued. Our focus has remained on keeping our people safe and on maintaining our capability and capacity. We've shown our business is resilient. We remain confident in the medium term given our strong liquidity position, robust business model, record order book and pipeline and focus on critical nondiscretionary services. The COVID-19 pandemic has had some limited impact on the FY '20 results, as business activity in some areas was abruptly disrupted in February and March. Undoubtedly, it will have a greater impact on our F '21 -- our FY '21 numbers. At this stage, we are unable to assess the scale of these impacts. Therefore, we will not be giving financial guidance for FY '21 today, but we will keep the market informed as the situation develops. In terms of trading, our Defence businesses, both in the U.K. and internationally, had a strong year, but we have also experienced a degree of weakness in our Civil Aviation and Civil Nuclear markets, and I will say more about that later on. We are, of course, taking positive actions to mitigate the impact of COVID-19, and I will say more about this in the next few slides. We took the difficult step of deferring the decision on payment of the final dividend as a prudent measure, minimizing cash outflows in the short term until we have a clearer view on the likely longer-term impact of COVID-19. This decision was not taken lightly and in the circumstances, we felt that it would be appropriate in both Board and senior executive level to temporarily reduce pay and defer bonuses and LTIPs until final decisions are made. The price of oil fell to new lows during the final quarter, leading to further unexpected deterioration in our oil and gas market, with COVID-19 as also having an immediate impact with reductions in the number of crew change flights being down. The medium-term market forecast for the price of oil coupled with the likely negative ongoing impact of COVID-19 has changed our view of the attractiveness of this market. We are now taking exceptional measures to protect the wider Aviation business, quickly reducing operating costs, writing down the value of assets and impairing balance [ sheet ] goodwill. And I will say more about this shortly. On a much smaller scale, we also experienced slowdown in the U.K. Civil Nuclear market, with less activity on nuclear decommissioning and slower-than-projected spend on new build. And we are now accelerating the integration of our naval and civil nuclear businesses. But again, I just want to stress that despite the COVID-19 and oil and gas market volatility, the fundamental strength of this business remain intact. Our services remain critical, and we continue to deliver for our customers. Let me now say a few words about how we have responded to the developing coronavirus crisis over the last few months. Keeping our people safe and continuing to deliver to our customers is the best way to protect our shareholders' investment, and I'm extremely proud of the way our people around the world have responded, recognizing the key critical roles we play in supporting our customers. The health and safety of our employees, customers and supply chain partners have been our primary focus, always ensuring we are complying with government guidelines in countries we operate. Our operations in Italy, Spain and France began to feel the impact in early February, with the U.K., Scandinavia and Australia kicking in, in March. Across the group and around the world, we quickly enabled homeworking for thousands of our employees, closing most of our offices within a few days. In the U.K., we work closely with our customers on a state-by-state, location-by-location basis, identifying safe ways of keeping critical defence and nuclear sites operating and receiving exceptionally positive feedback from the MOD, SDA and Cabinet Office around the fast and positive way we had responded.Across Europe, in particular, our aerial medical emergency services teams worked courageously alongside National Health Services in the transport of critically ill patients to hospital. We pioneered the use of innovative technical safety solutions, including the introduction of biocontainment isolation structures and helicopter cockpit separation barriers; and in the U.K., we responded to the UK Ventilator Challenge, developing the new Zephyr Plus ventilator. On the next slide, I look at the early impacts of COVID-19 on our business. It's a busy slide, capturing a range of operational and financial impacts. So I will pick out a few key points. Defence programs have continued across all 4 of our sectors. Critical defense and nuclear sites have remained open. We are seeing a negative impact on productivity as we apply government guidance on social distancing and homeworking. There has been some limited financial impact on the first 2 months of the year, and Franco -- in final 2 months of the year, sorry, and Franco will say more about this in his presentation. However, we are not yet able to assess the likely impact on FY '21 and beyond. On the next slide, I'm going to look at mitigation actions that we are taking. We acted quickly and within a few days, we had thousands of our staff working effectively from home. Most of our people were designated as key workers, and we quickly worked with our customers to create safe and compliant working conditions. This allowed us to continue work on all of our key defense programs, including nuclear submarine programs, Type 31 design and infrastructure and the manufacturing of Missile Tube Assemblies of Dreadnought and Columbia class submarines. And of course, we immediately reviewed our spending, eliminating or delaying nonessential spend and making short-term cost reductions wherever possible. In a limited way, we are also taking advantage of the government's furlough program where appropriate, mainly in our airports and civil training businesses. As I explained earlier, we also made the decision to defer a final decision on payment of the final dividend until there is greater certainty for the current year. Let me move on from COVID, now talk about our trading performance. Overall, we had a good year with good financial performance and growth across most of our businesses, particularly in defence, that we had an excellent year. In our Civil Nuclear market, we experienced lower volumes than anticipated, and we have taken actions to adjust the cost base and improve efficiency through closer integration with Naval Nuclear. And we also had a relatively small exceptional cost in Rail as we completed our transition to the new long-term contract based on delivering services and projects in Scotland. But it was in the civil aviation areas of the Aviation sector, where we saw a significant shortfall in work and profitability, and we have taken decisive action to address the issues. The major problem area continues to be our offshore oil and gas business. And on the next slide, I show a summary of the market deterioration over the last few years. In the final quarter of the year, we saw a major drop in oil prices, resulting in further delays to new order placement and even lower competitive pricing levels. And of course, in the last 6 weeks of the financial year, the COVID impact dramatically reduced the number of flights. We exited Ghana and in the process of exiting Congo. In the North Sea, we retired leases on 7 of our 16 S-92 heavy helicopters, and we retired the leases on 5 of our 6 EC225s, achieving significant reduction in our ongoing operating costs in the North Sea. The offshore market has declined dramatically in the second half of the year. Oil prices have fallen sharply, even going negative at one point. And our main competitors are continuing to bid at low pricing levels. When you combine this with the likely impact of COVID-19, we no longer believe this to be an attractive long-term market for Babcock. And this leads me on to the goodwill write-down. Babcock acquired Avincis back in 2014. The acquisition offered 3 potential drivers for new growth: expansion of our international footprint in our Defence and other sectors; growth in our aerial emergency services through entry to new territories; and growth in the oil and gas market. We have made good progress in 2 of these areas since the acquisition of international business now accounts for 31% of revenues compared to under 20% in 2014. And the international opportunities now account for 48% of our bidding pipeline. We have also grown our aerial emergency services businesses across Europe and entered several new territories, including Canada, Australia, Norway, Sweden and Finland. However, oil and gas has been frustrating and disappointing. And as I said earlier, we no longer believe it to be an attractive growth opportunity. We will continue to operate the reduced business for value and continue to deliver for our customers, but we are not predicting significant growth over the next few years, and we are now writing down the value of goodwill in our Aviation sector to reflect our updated views of the future. In the next part of the presentation, I'd like to move on from the negative impacts of oil and gas and COVID-19 and concentrate on the strength of our underlying performance across most of the group. In June last year, we presented our medium-term strategy at our Capital Markets Day, and we set out performance measures that we expect to achieve. On the left-hand side of this slide, I repeat our strategic priorities. And on the right-hand side, I highlight examples of the progress being made. Progress has been made both in the U.K. and internationally, establishing operations in Norway and Canada and achieving high growth in our technology businesses. We also continue to review our business portfolio with the successful sale of Context, and as announced today, the realization of our investment in the Holdfast JV. And we begin this financial year with a record order book and opportunities pipeline. So as I stressed earlier, the fundamentals of this business remains strong. And over the next few years, we will continue to grow and further strengthen our business as we deliver on our strategy. On this slide, we summarized our record order book and pipeline and highlight the split between U.K. and international. I have already talked about most of this, but I think it is useful to draw out some of the progress that has been made in growing our international business, which is a key strand of the group's growth strategy. So for example, in France, we won our second significant defense contract. And in Australia and New Zealand, we continue to grow our position in naval marine and we commenced new operations in Norway and Canada, further expanding our international footprint. In the year, our new order intake was GBP 5.3 billion against sales of GBP 4.9 billion, moving our opening order book for FY '21 up to a healthy GBP 17.6 billion. The order book is split pretty evenly across our 4 sectors. And overall, U.K. and International Defence accounts for around 68% of our orders. As the slide shows, we had a number of notable contract wins, including contract to design and build 5 new Type 31 frigates for the Royal Navy. And our pipeline of near-term opportunities has never been stronger. As expected, U.K. and International Defence continues to make up the lion's share of the pipeline, underlying our strong position in this market. This combined order book and pipeline of GBP 35 billion is a key strength of this business, providing us with good visibility into the medium term, and it creates a solid base for [ delivering ] on our medium-term targets, which we can now look at on the next slide. The inset box restates the medium-term targets established a year ago, and even in this coronavirus world, they're still relevant and important. The strong fundamentals of our business remain unchanged. We benefit from stable customers, stable countries and we have a long-term order book and pipeline. These medium-term targets remain our aiming point as we address the impacts of the pandemic. But given the uncertain impact of COVID-19, our medium targets will not be achieved in this current FY '21 year. However, we have shown this business to be resilient in the past. And before handing over to Franco, I make no apologies for repeating the key strengths of the business. Like most every other business, we face new unexpected challenges in the year ahead as we emerge from the lockdowns and restrictions that have come with COVID-19. Unlike many businesses, the very nature of our business model and the work we do provide some protection through this period of uncertainty. We are up for the challenges, our people have demonstrated great courage and resilience, and this will be an increasingly important factor in the quality of the recovery. We are performing strongly across our Defence businesses. And as you have seen, we have a large order book and pipeline of opportunities. Most of our work is critical and nondiscretionary, and importantly, we have a comfortable liquidity position. And on that final note, I will now pass over to Franco to take you through the summary of our financial results.

[Franco Martinelli, Group Finance Director & Executive Director]

Thank you, Archie, and good morning. I'm now going to talk through our full year results in detail. I'll start with a summary of our results. As you can see, we delivered revenue in line with our full year guidance of around GBP 4.9 billion and delivered underlying operating profit of GBP 524 million. This reflects the updated profit guidance we gave in February and the trading update we gave in April, with a small impact from COVID-19 in the final 2 months of the year of between GBP 10 million and GBP 15 million of operating profit. We have incurred exceptional costs this year, most of which relate to our Aviation sector. Total exceptional items were GBP 503 million, with GBP 395 million of this related to the goodwill impairment that Archie talked you through. I will cover the other items in detail shortly. The total net cash impact before the proceeds from the Context sale of these charges is expected to be GBP 129 million, but this is reduced to GBP 27 million when we include the Context proceeds. Underlying free cash flow for the year was GBP 192 million, below our guidance of over GBP 250 million due to the impact of COVID-19. I will talk you through cash in detail later in the presentation. Net debt, excluding lease obligations, was GBP 922 million, being 1.7x EBITDA so we are in a strong financial position. You will have seen, we have sold our interest in the Holdfast joint venture for GBP 85 million, further strengthening our position, producing a pro forma 1.5x net debt-to-EBITDA. Underlying basic earnings per share was 69.1p, and we have deferred our decision on the final dividend due to the current level of uncertainty around COVID-19. We will keep this under review during the financial year as the impact of COVID-19 becomes clearer. So moving on to some of the detail of the income statement. The revenue and operating profit reflects the impact of the step-downs we identified at the start of the year and foreign exchange. We include all the details of these in the appendix. Overall, the impact from this was GBP 428 million on revenue and GBP 60 million on operating profit. There's also the impact of the adoption of IFRS 16 to consider. And again, we have included all the detail in the appendix. In short, it helps operating profit, but given the associated higher interest charge, had a small negative impact on EPS. Like many companies, we have adopted this standard on the modified retrospective transition approach. This means only this financial year is changed. So the year-on-year comparison to financial year '19 [ reported ] numbers is more difficult. Looking at performance over year then. We saw strong performances across our Marine, Land and Nuclear sectors, but weakness in Aviation. And I will now talk you through the bridges to bring out the story in more detail. So our revenue bridge. After rebasing for step-downs, you can see revenue grew by 3% in the year, led by the double-digit growth we saw in the Marine sector. Aviation was the only sector that did not grow revenues on this basis, reflecting the pressures we have seen and the comparison to last year, which included FOMEDEC equipment revenue. Looking now at operating profit, you can see here the impact of both the step-downs and IFRS 16. Excluding these, we have seen a fall of GBP 28 million in the year, with the weakness in our Aviation sector offsetting growth in the other 3 sectors. Now looking at the exceptional items in detail. We have booked GBP 503 million of exceptional items this year, with the majority of the charges related to our Aviation sector. We show here the 3 main buckets of exceptional. The first and largest item here is the goodwill impairment that Archie has talked you through. The second item is the other charges in Aviation of GBP 143 million. These relate to the charges we identified in February around writing down assets and leases in our oil and gas business and exiting Ghana and Congo, plus the restructuring of the Aviation sector, as Archie has talked about. In addition to this, we have also recognized the provision for the Italian antitrust decision. This had been a contingent liability in our accounts since last year, where we had to provide for this since losing the first instance court decision. We are appealing this decision. The third area is the other charges we have. These include the capacity restructuring we did in Nuclear, as Archie talked to and in Rail, where we completed the restructuring for the CP6 contract. This was offset by the profit made on the disposal of Context. Now on cash, the total of cash outflows from these charges are GBP 129 million, which reduces to GBP 27 million after the Context proceeds. We include detail on exceptional cash flows in the appendix. I'll now take you through each sector. Marine has had a strong year, with double-digit revenue growth led by U.K. warship support and technology business, LHD in Australia and the start of Type 31 design work. Operating profit was up slightly, with a margin lower as we expected, given contract outperformances last year and lower profit takes in the early stages of some of our contracts that we have started this year. Now in terms of outlook, we are not giving financial guidance at this point in time given the uncertainty of COVID-19. We do, however, want to provide some useful points by sector. Defense work across Marine continues and indeed work on Type 31 program will ramp up this year. There is some impact on the short-cycle Energy and marine [Audio Gap]And there will be an impact of sector margins from lower demand and lower productivity. Moving on to Nuclear. Revenue and operating profit here reflect the step-down in Magnox. Excluding this, revenue grew by 6% and operating profit by 7%. This growth was driven by the Defence business with higher levels of submarine support and growth in infrastructure work. The Civil market, however, remains challenging, and we saw lower levels of customer spend in the year as well as a small impact on activity levels from COVID-19 at the end of the year. As outlined, we are taking action to address the cost base in our civil business. Defense work continues, but the outlook for the civil business is tougher. There will also be an impact on sector margins from lower demand and productivity level. Performance in Land was ahead of our expectations, with small revenue growth, excluding excess and disposals and operating profit growth after adjusting for step-downs. Revenue growth came from the higher Defence procurement revenues and stronger trading in our South Africa business, which had a very strong year. We did however see a small impact from COVID-19 in the final month of the year in our short-cycle work. Operating profit was helped by South Africa's performance and better-than-expected performance in Holdfast and ALC joint ventures. Of course, looking ahead, we have now sold our interest in the Holdfast joint venture and the ALC joint venture ends in May 2021. So these contributions will not repeat in full again. Now to Aviation. Last year benefited from FOMEDEC equipment revenues. If we exclude these and the impact of our disposal of Helidax, revenue was broadly flat year-on-year. This represents new operations in Norway and Canada being offset by weakness in oil and gas, and the impact of COVID-19, the final month of the year, particularly in Italy and Spain. The fall in operating profit is due to various factors, including the pressures in our oil and gas business, delays in emergency services in comparison to contract outperformance last year. The pressures we have faced this year have highlighted our cost base for this sector was too large. So we have taken action to rebase this and to create a more agile business for the medium term. Our military business continues well, but there is lower flying activity in oil and gas and aero emergency services. Moving now to cash. Our cash performance was on track pre-COVID-19 to deliver our GBP 250 million free cash flow. This year was lower than expected due to around GBP 60 million COVID-19 impact, split across working capital and capital expenditure. On working capital, we had a good performance overall, with the outflow being in line with our guidance for the year. We had, however, expected to be able to outperform this but COVID's impact on customer receipts and invoicing in the final months of the year stopped this. On capital expenditure, we had expected net CapEx to reduce around 1x depreciation, while gross CapEx was where we expected. We saw lower levels of asset disposal as COVID-19 stopped some asset sales completing in March. This was due to both contract and financing delay. Now moving into some details of the cash flow. This table shows the moving parts down to operating cash flow. On a technical point, the PPE depreciation charge excludes GBP 10 million related to leases previously identified as finance leases. This is now included in the depreciation of right-of-use assets. The main movement here year-on-year is the expected swing in working capital, given the benefits of the large inflow from FOMEDEC last year. The COVID impacts I discussed in the previous slide resulted in a cash conversion of 83%, below our target of 90%. Taking this detail down to free cash flow then. Cash tax was lower this year due to lower profit and the unusually high level last year. JV dividends and pension contributions were as guided, and this all led to a free cash flow of GBP 192 million. As I said, this was below the GBP 250 million, which we had guided, given the impact that COVID-19 had on working capital and net CapEx. I want to talk about working capital and capital expenditure in some more detail, and also 2 other areas that impact our free cash flow conversion, joint ventures and the additional pension contributions that we made. As guided, there was a working capital outflow of GBP 27 million in the year. This was primarily driven by GBP 23 million outflow in receivables. The outflow is a result of increased capitalized contract costs in Norway, Canada and the Type 31 contract, some VAT timing differences in Europe and delays to customer invoicing and receipts due to COVID-19. These COVID-19 delays were 1 of the 2 drivers for our free cash flow below our expectations. And since March, we have collected these receipts due. Looking at payables, lower March activity has meant only a small inflow in year. The inventories outflow of GBP 11 million is due to increased stock in South Africa and the stock for new contract start-ups in the year. Looking ahead to 2021 financial year, we expect to see our normal phasing of working capital. Working capital for the group are typically weighted to the second half as contract receivables are reduced and payables are seasonally higher at the end of the year. While we will see some benefit of the timing differences at the end of the last financial year unwinding, as we see things coming back to normal, we still expect working capital to be phased into the second half. So moving on to the second area of CapEx. I am looking here at the pre-IFRS 16 CapEx. As you may know, we had gross and net CapEx that varies depending on activity levels in our Aviation business. We've created a slide for this at the half year, and we include it again in the appendix this time. It shows that we continue to invest in our fleet. Gross CapEx was down on last year. However, as discussed, the level of proceeds from disposals was lower than we expected as COVID-19 delayed some sale and leaseback transactions in the final 2 months of the year. As a result, the net CapEx was at 1.5x depreciation, where we had expected 1x depreciation, as I have explained. In addition to completing these -- those sale and leasebacks, we expect to accelerate our fleet rationalization project this year. Okay. Now turning to JVs. We have shown these a bit differently this time to help understanding of the group. In the year, they contributed GBP 106 million of underlying operating profit, and you can see the main contributors to this. AirTanker and Ascent had strong years with improved contract performances. Holdfast saw a step-down compared to last year, but we are still able to realize more lifetime cost savings. We would expect the profit contribution -- we would have expected the profit contribution for 2021 to be around GBP 7 million. But of course, we have now exited this JV. ALC saw an improved performance in Land as we get close to the end of this contract. And at the smaller end, we have our Nuclear JVs, Dounreay and up until August 2019, Magnox. The dividend strength from this joint venture is significant, with our share of distributable reserves coming to around GBP 150 million. We received GBP 52 million of dividends in the year and expect to receive around GBP 30 million in financial year '21. Our share of JV net debt has fallen to GBP 260 million as JVs continue to pay down debt. Roughly 85% of this figure is in AirTanker, where guaranteed minimum payments cover the financing. We included a slide on AirTanker at the half year and included it again in the appendix this time. Moving on to pensions. On an IAS19 basis, the small deficit last year has become a surplus due to the forward inflation assumptions and the discount rates staying broadly flat. Conversely, the actuarial position has increased an estimated GBP 500 million deficit, primarily due to the falling guild rate -- [ gilt yield rate. ] Our hedging policy has limited this deterioration. We expect to make a slightly higher contribution for payments around GBP 75 million in financial year '21, which will continue to be included in free cash flow. We are close to signing an agreement on the Rosyth scheme, which we'll make payments of around GBP 90 million over the next 2 -- this year and next. As signaled in November, this will be treated as exceptional cash flow. We set out here the 2 debt measures we have with and without these obligations. Net debt of GBP 922 million, excluding lease obligations, amounted to a net-debt-to-EBITDA of 1.7x on a basis similar to that used in our debt covenants. If you add in the proceeds of Holdfast sale, it would be actually 1.5x. Including this, you get to GBP 1.6 billion of net debt. As a reminder, our net debt does not include pensions or JV net debt for very good reasons. Pensions funding deficit is expected to be paid over the next 6 years and is included in our free cash flow each year. Changing net debt is nonrecourse to the group, and about 85% of it relates to 1 JV, AirTanker. Moving on to the impact of COVID-19 on the year ahead. We are not giving group financial guidance, but we do want to provide as much detail as is useful. Looking at the group level, I would point out 3 main points. One, our short-cycle business, which makes up around 20% of revenue are the most impacted as they have some lower levels of demand. Two, our long-term critical, nondiscretionary work provided over long-term contracts is around 80% of group revenue has, by and large, continued. Across the sectors as a whole, our margins will be impacted by the slow demand and lower productivity levels. We have performed various impact assessments, and we are confident that we are in a strong position, and we'll give you more details on our trading statement in August. Now in this slide, we are providing some detail by sector. You have heard a lot of this already, so I won't dwell on it too much. We show the different working streams that have been impacted and the various mitigations we are taking. As I said, we can't provide financial guidance at this time. We have a strong liquidity position. As you can see on the left here, our debt maturities -- this is after refinancing we did in September last year, raising the 2027 Euro bond and extending our revolving credit facility.Our primary financial focus is on ensuring strength of the group, cash flow and balance sheet. And while we work through the uncertainty and negative impacts of COVID-19 as such, we drew down our RCF a few months ago. This led to a significant cash balance of GBP 1.3 billion on our balance sheet as of March 2020. We had previously repaid GBP 100 million of term loan and GBP 40 million loan notes in the year, and we'll repay the USPP in March 2021 using the refinancing we have already done. We include here the covenants that exist on our RCF and USPP. You can see we have plenty of headroom, and there are no covenants on our bonds. Finally, in this slide, you can see our capital allocation policy is consistent with what we had set out in the half year, with the added focus on ensuring liquidity during these times. We have deferred the decision on the final dividend for the year and we view this at our Cap -- as we progress through the pandemic. The sales both of Context and Holdfast have added GBP 180 million to the group and have helped reduce the hit from the exceptional costs we have incurred. So we feel very comfortable here. And with that, I will now pass you back to Archie.

[Archibald Bethel, CEO & Executive Director]

Thank you, Franco. Let me sum up returning to my previous final slide. We were running close to achieving our plan for FY '20 when the world was hit by the coronavirus pandemic and almost simultaneously, we experienced a further severe slump in world oil prices. We had to respond quickly and decisively to limit the damage of these events. And as we've demonstrated this morning, that is exactly what we did. We have protected the core business, and we are in a strong position to deal with whatever is ahead as the whole world economies recover from the financial impact of COVID-19. And finally, I'd like to repeat some important points. We have a strong and growing U.K. and International Defence presence that underpins our business, and we have a significant long-term order book and bidding pipeline. Most of our work is critical and nondiscretionary, and we have a strong financial position. So on that, I'd now like to pass over to you. And along with my colleagues, we will now take your questions. Thank you.

[Operator]

[Operator Instructions] The first question is coming from the line of Sam Bland from JPMorgan.

[Samuel James Bland, Research Analyst]

I've got 2 questions, please. The first one is on the COVID-19 impact you saw in FY '20 both -- could you just talk about how much that was, both on revenue and on profitability? Just to get a sense of what the sort of drop-through margin was in FY '20 and whether that drop-through margin you -- might be similar in FY '21? And then the second question is, you provide the kind of fully underlying changes in revenue and profitability. I think revenue was up about 2.7% and profit down about 4.7%. Is there anything specific to call out about why on that kind of basis, revenue is up and profitability was down? Any big items to call out on what causes that divergence?

[Franco Martinelli, Group Finance Director & Executive Director]

I'll take that, Sam. Okay. So our estimate is that the revenue was down about GBP 80 million in the final sort of 1.5, 2 months of the final year. It's very difficult on COVID, obviously, because each country is in a different place. And the U.K. that really went from March, but Italy and Spain were in February. And so there -- it's a mix and everything changes in each country. It was about 80, and the profit was around 10 to 15. I think that sort of measure is a reasonable measure just to look at if you're trying to look forward. In terms of the revenue growth versus the profit growth, I mean profit fall, the 2.7% revenue growth, as we said, is across the 3 sectors. And with good growth. A lot of those are at the beginning of new contracts, particularly in Marine, would start off at a low margin. So it wouldn't necessarily contribute higher-margin early phase of contract because as you know, we're pretty prudent with our accounting. We try to recognize margin lower at the beginning of contracts. On the profit side, it's really the Aviation story. The Aviation story is oil and gas weakness, is the COVID weakness, it's the fact that we -- as we've identified we had some delays in aerial emergency services. And our cost base is too high. So we have taken action to remedy that and in nuclear as well. So that's where the weakness was. So I think that's why we've had revenue go up and profits go down. So it's all about the Aviation story, which we talked about a lot.

[Operator]

The next question is coming from the line of Suhasini Varanasi from Goldman Sachs.

[Suhasini Varanasi, Equity Analyst]

This is Suhasini from Goldman Sachs. I have 2 questions, please. You mentioned that you expect the short cycle work to be impacted by COVID-19 and that is 20% of the mix. Can you give us an idea of how much were revenues down in short cycle work in April? And has it recovered from the trough in May as the economies came out of lockdowns? And the second one is on the decision on dividend, when does the final decision on the dividend will be taking place?

[Franco Martinelli, Group Finance Director & Executive Director]

On the short cycle in April, well, it's -- we don't really want to give -- we will give a trading update in June on where it is because everything is moving and there's lots of moving parts, and it's a little bit too difficult to give that detail. I mean, the areas that were really affected were -- obviously, training was quite difficult in that time, but it hasn't yet picked up. So I think it's -- as I said, the exit is 20%, which is the short cycle, which will be most effective. And as I said, we'll update when we get to June as to what that is. And on dividend, Archie will answer that.

[Archibald Bethel, CEO & Executive Director]

Yes. I mean, on dividend, the dividend is linked to our ability to give guidance. So we will get to a point -- at some point when we will want to give guidance for this year in medium term. And we're reviewing that every month. By the time we get to the end of the first quarter, we're going to do a major review. On that basis, we'll have 1 quarter behind us of actuals. And also very importantly, by that time, we are hoping that we'll maybe get to start to hear from our customers because the main factor in the guidance really is we've yet to understand the impact that COVID-19 has had on our customer base. And until we really get more comfortable with exactly how they've been impacted, it's difficult for us to really know what the impact on us will be. So the first chance we'll get to really look at, I think, will be when you look at the first quarter forecast and our annual general meetings in August, the beginning of August, we will do a major trading update for that. And that's really the first time that the Board will really be considering do we know enough to have the confidence to do 2 things. One, give guidance of how we think the year will pan out and then what the impact is longer term. And then second, whether we've got enough confidence to make a decision on the dividend.

[Suhasini Varanasi, Equity Analyst]

Sorry, just one question, please, on the cost base. You [indiscernible] you will be seeing additional costs linked to social distancing, linked to maybe providing PPE equipment for your employees. Would you give us some idea of what kind of impact you expect on the cost base for '21 as a result of that, please?

[Franco Martinelli, Group Finance Director & Executive Director]

Yes. Again, this is -- I think it depends on how it works out. I'm not sure if I would give any particular guidance. You're right, there is additional costs, particularly if you look into there's additional cleaning, et cetera, on aircraft -- there has been less utilization. But there is -- there are costs across the PPE, but it's also productivity on things like social distancing 2 meters in a submarine is a little bit more difficult to do.

[Archibald Bethel, CEO & Executive Director]

Yes. And yes, I would say that these costs -- investments in PPE will be a major factor on us being able to return to the higher levels of productivity that we need to get to. So it's not simply across the PPE and different ways of working will be key factors in taking productivity back up to higher levels, which again, will have a bigger impact on the results than the cost of the PPE will.

[Operator]

The next question is coming from the line of Robert Plant from Panmure Gordon.

[Robert John Plant, Analyst]

Archie and Franco, in Civil Nuclear, is the lower customer spend a timing issue? Or is it structural?

[Archibald Bethel, CEO & Executive Director]

I think that's something we are trying to make decisions about at the moment. I think we have definitely seen a major slowdown over the last 12 months. And also, we haven't seen any new opportunities come out of Magnox since we handed that contract back. So that's an assessment we're trying to do with that customer, is that a temporary reduction or is it more structural. So I don't really know that. What we're doing is, again, we're taking some costs out of the business. We're preparing the business for what we think might be the different kind of scenarios going forward. Will Nuclear decommissioning spend, for instance, still have a priority in the post COVID government finances, don't know about that yet. On the other aspects, it's not government. So EDF and power generation, they do have issues related to performance of the AGR reactors, which are slowing some things down. And again, we are close with that customer trying to assess the impact that might have on us. And then in new build, that just continues to be slow. So there's -- the main areas of supporting generation, decommissioning and new build have all kind of slowed down.

[Operator]

[Operator Instructions] The next question is coming from the line of Joe Brent from Liberum.

[Joe Brent, Head of Research and Equity Analyst]

Two questions, if I may, maybe one at a time. Firstly, on MOD budgets. Historically, they've been pegged at 2% of GDP. GDP can fall more than 10% this year. How do you think the government will respond to that?

[Archibald Bethel, CEO & Executive Director]

Look, I mean, I think these are the main questions that we need to answer. So as you know, the CSR and integrated reviews have all been suspended for the moment. And this, as you said, the GDP measures forecast for the next year or so are pretty unclear. And it's actually -- that's probably the main situation that's stopping us from being able to make a solid confident prediction for what this year's results will be. So I'm not going to speculate on that, but I can tell you like all companies in the sector, that's the kind of information we are desperate to try and get a better view on.

[Joe Brent, Head of Research and Equity Analyst]

And the second question, if I may. On working capital, I think you implied it will be weak first half, which is, I expect quite a seasonal issue. But isn't that quite a big unwind from the full year, maybe of something like GBP 30 million from 2020?

[Franco Martinelli, Group Finance Director & Executive Director]

Yes. Thanks, Joe. The answer to that is, yes, if everything is back to normal, right? So when I say that I've had the receipts of the March in post year-end, yes, I had them in April, and that's absolutely right. In fact, 2 transactions alone was GBP 25 million. So I think that's very much there. So it's pretty clear and pretty evident that we saw that fall off of what we expected. But as I say, 2 transactions alone was GBP 25 million. But the question really is, is the world a better place by September? And that's a prediction for you to make as opposed to me. So I didn't get everything I wanted in April, paid in April, but I've got everything -- so everything is sort of a little bit delayed. So is it everything is going to take longer? Or is it that everything will get back to normal? And that's the question to answer yours.

[Joe Brent, Head of Research and Equity Analyst]

The world will be a better place in September, I'd like to make a guess.

[Franco Martinelli, Group Finance Director & Executive Director]

Then we will see an unwind. That's the answer to your question.

[Joe Brent, Head of Research and Equity Analyst]

Excellent. And lastly for me. The cash exceptionals, the GBP 127 million, could you just talk through the phasing of that? And also, what other exceptional costs relate to prior year provisions? Really just help us with the cash flow forecast of that single line item.

[Franco Martinelli, Group Finance Director & Executive Director]

Yes. There's a very useful slide in Slide 49, which everyone can see, in which we set out last year's exceptional items and how they flow out by cash, this year's exceptional items and how they flow out by cash. And we put on the sale of Holdfast and we put the Rosyth additional payment. It's pretty clear by year what you can see and what you can expect. And basically, most of the cash that hasn't gone this year will go into next year. It doesn't really go very much further than that is the real answer. But it's set out on slide 49.

[Operator]

And the next question is coming from the line of Sash Tusa from Agency Partners London.

[Sash Tusa, Research Analyst]

I got a question for the [indiscernible] follow on from the -- [indiscernible] dividend. I think now, aware of that conditions, which you...

[Franco Martinelli, Group Finance Director & Executive Director]

Sorry, Sash. Sash, we're really struggling to hear you. I don't know if that's us or you, but we're struggling -- it was a question about dividends but we couldn't get much more than that, sorry. Could you maybe just try again?

[Sash Tusa, Research Analyst]

The issue is under what conditions you would restore the dividend? And specifically, whether you would restore it from the previous level or whether the Board considers the dividend to be a tabula rasa and you could restore it at whatever level you want or consider to be appropriate?

[Archibald Bethel, CEO & Executive Director]

I think -- I mean what you're doing there is rehearsing the decision that the Board has to make. I think in terms of that timing, the Board attention is still -- we've deferred the dividend. So we're not saying we're not paying a dividend. That's definite. The timing of that decision will be, as I mentioned earlier, dependent on how -- when we can get enough clarity and the confidence that the -- we've got a robust position for this year and beyond. And so the first point we will get to really review that seriously will be June, July as we do the first quarter forecast. And might be optimistic that by then, we will have some clarity. And if that's the case, then the Board will consider the issues exactly as you've said, as we get back to dividend payment. And I think all these issues you've just talked about in terms of dividend policy will be reviewed when we make that -- as we make that decision.

[Sash Tusa, Research Analyst]

Given this is so clear now, if I could just ask you an additional follow-up? Could you just [indiscernible] idea of the key issues on [indiscernible] Type 31 this year, particularly construction of [indiscernible] and then what the key milestones we should expect for Vanguard [indiscernible] this year and progress on that.

[Archibald Bethel, CEO & Executive Director]

Okay. I think I got that. So your question was about progress in Type 31 and then second on Vanguard. On Type 31, yes, I mean, we've been quite fortunate there at the timing of that because it's still very much in the design phase and even with the COVID restrictions, we were able to continue home working the whole design phase. And we've maintained a high level of productivity there. So we are still on schedule there. Also, the fact that we are designated as a key worker site at Rosyth, and we're able to continue with the construction of the new build facilities, which, again, is the main piece of work that goes through this year with production not scheduled until July of next year, 2021. So on Type 31, I think we're in a pretty good position. We haven't lost -- our assessment is we haven't lost much time in terms of the restrictions yet. So I think that's positive. In terms of Vanguard, I'm not -- I can never comment on individual submarines. I think you probably kind of know that. So Vanguard is part of the CASD deterrence. The deterrence is still maintained. We're still cycling boats, there's still always a boat out at sea. The Vanguard is in its refuel and second life extension phase, that's progressing. And really, that's probably all I can say on it.

[Franco Martinelli, Group Finance Director & Executive Director]

Sorry, Sash, we don't think it's going to be scrapped, by the way.

[Operator]

And the next question is coming from the line of Charlotte Keyworth from Barclays.

[Charlotte Anne Keyworth, Analyst]

I've just got 3 questions. A couple of them [indiscernible]. Just on working capital, you've done -- and particularly receivables. We've obviously had the outflow, and you've spelled out kind of the timing issues and et cetera. I think I'd just like to understand, given the shape of your portfolio and the fact that the MOD is your, by far and away, your largest customer, and they've been accelerating advanced payments in this period for the sort of supply chain health. What's the offsetting factor from that? Because I would have assumed within that GBP 23 million outflows, you'd have obviously had some fast payments or has a lot of that been passed through to suppliers? Second question is on kind of gross CapEx and proceeds on sale and leaseback. Just broadly, what's your expectations into 2021 of actually completing on the sales that you'd expect that have been delayed? And then finally, on Aviation services, you've laid out the oil and gas headwind. But when we consider that emergency services were half of that division in revenue terms and [indiscernible] [ different costs and pricing. ] Is that essentially a 1 year phenomenon or would you say that's actually a reset now in [indiscernible] that we're seeing going forward?

[Franco Martinelli, Group Finance Director & Executive Director]

Okay. Well, I'm going to take the working capital receivables and in fact most of them [ relate to me. ] Working capital receivables. Yes, the MOD has always paid on time, and there's not really been a problem with that. March is a very, very significant month for us. It's the most significant month of the year and in that we need to get our invoices out and the variations agreed. And that requires us to meet the customer, and it's quite difficult to go through and et cetera. But MOD is just one part of the equation. This is across the business as a whole, where we've had things that we would expect to have been paid in March being paid in April. And it's across the aviation, it's across the U.K. It's across everywhere. So I think it's not -- MOD has not -- have continued to pay on time. There's no real problem with that. That isn't the issue -- about agreeing variations. So that's that. On gross CapEx and sales, yes, look, as I said earlier, there was a complete lack of opportunity to do any financing on any aviation related matters in March. Anything that had the word Aviation, it was very difficult. That has now calmed down, and we've been able to explain our position. So going from there, what we have done is we have now got the deals lined up, and we would expect to do some of those before the half year. And that's what we would expect to do. It's about GBP 30-odd million. Okay. And on the Aviation sector as a whole, as Archie said, oil and gas was a factor. There are some pressures in aerial emergency services, but we're taking action to restructure the cost base of that business. And so we expect to -- for that to improve from here.

[Operator]

[Operator Instructions] The next question is coming from the line of Kean Marden from Jefferies.

[Kean Marden, Head of Business Services Equity Research]

I have 3 as well. Can you provide a bit of background on what the GBP 40 million finance leases, which shifted to operating leases, what that relates to? And secondly, on Ascent, a nice uptick in profitability in fiscal '20. Do you have a view on what happens this year and further out? And then thirdly, on the pipeline, is the main reason for the increase -- inclusion of the defence training estates bids? And just what your latest view is on that process, whether that's been delayed. Maybe you can give a bit of insight into how much of your bid pipeline is accounted for by defence training estate? And then I think you're bidding in partnership. I don't know whether it's a JV or whether it's a more informal relationship or whether you've got some other factors, but the shape of that would be helpful, please.

[Franco Martinelli, Group Finance Director & Executive Director]

Okay. Well, I'm going to take the -- some of those. The GBP 40 million of finance lease, okay. Financial leases no longer exist, right? Finance leases no longer exist. And so you can't show them that. There is only one type of lease now, so that comes out, it's GBP 40 million, and relate to some helicopters, an old finance lease. So the finance leases on helicopters, which now, as I say, no longer exist -- finance leases -- and you have to treat them all as leases. And the auditors will not let you show them anything other than just leases because that's all there is. So that's what it is. So it's GBP 40 million. On Ascent, yes, actually, very, very pleased with the aviation and joint venture performance on both of them. And yes, I think there's areas to continue that progress. So we're very pleased with those. In terms of the industrial -- the training estate...

[Archibald Bethel, CEO & Executive Director]

Yes. I mean that -- it's about GBP 900 million in value, Kean. That's quite a number. I mean, the bid book, I mean, we will be looking very closely at some of these larger potential -- the other big training contract, Selborne, in defence as well. We've got a couple of defence communications, the largest contracts, contract called [ Music ]. Yes, these are the ones we will be really looking at to see if there's any impact in terms of the timing of these but we've no indication yet that there is any timing of this shifting to the right. But again, these are exactly the type of things that we're looking at signals to see how the customer is going to respond.

[Franco Martinelli, Group Finance Director & Executive Director]

The other thing I'd say to you on that is that 48% of our pipeline is international now, right? So a big uptick is the increase in presence of overseas, and that's in France, Australia, Canada. That's where we are. So it's U.K., yes, it's an opportunity in U.K., but it's lots of overseas as well.

[Operator]

The next question is coming from the line of Allen Wells from Exane.

[Allen David Wells, Research Analyst]

A couple from me, please. Maybe you could just provide some comments on the rationale behind the Holdfast JV sale and timing, et cetera? And maybe if there's any sort of comment, if there's any potential for more of these types of exits coming up. I would have argued that this maybe wasn't necessarily in that sort of broad basket of assets I might have thought you might have sold. So any comments there would be really appreciated. Secondly, I just want to make sure I understood. You talked about on the cash flow side. You said CapEx was a bit higher than you planned partly as a result of COVID. And if that's correct, what exactly is the CapEx impact from COVID on this year's numbers? And then very final question. Maybe if you could just provide some comments on CEO succession, Archie, obviously, on [indiscernible] if COVID has delayed that and you still plan to maybe step down in -- under the current time line? Any update there would be much appreciated.

[Archibald Bethel, CEO & Executive Director]

Okay. I'll leave you the CapEx. So if I start, with Holdfast, yes, I mean, Holdfast is 2 things. It's the joint venture company that we sold our interest in, we set up to basically build and manage the properties that -- of the RSME training estate. That's all been completed. It was a PFI type each arrangement over 30 years. As you know, over the last couple of years, we've been rebaselining it. We've had some decent returns from it. We felt that part of the -- was at this peak. And we decided to sell our stake to a partner who is basically a property fund and mostly to their portfolio. But the main interest to us is still is the [ delivery ] of the training program that -- for RSME, which we haven't touched. So we still -- up until I think it's 2033. We still provide that training contract for RSME, which is where our revenue comes from, through that area. So to me, it was a really good opportunity to sell an investment position, where we really didn't do -- we really didn't have any major operational role. I think the answer on that is we have other things. Well, again, like any business, we're -- we can't come out -- we don't ever come out and say everything that's -- we might sell. I mean, it just doesn't happen that way. But we've got -- we sold Context earlier in the year, again because we got a really good value for it. We did this deal because we get really good value for it. So what we're looking for is deals that are in areas that are not strategic to us, but you can get good value from. And yes, we will continue to do that when the opportunities arise. On my succession. Yes, the Board -- Ruth and the committee of the Board are advancing that process. It's likely to have been slower than maybe if we hadn't had COVID because it's been -- we've been restricted in kind of meeting people type things, but the process is underway. I mean, we will get there. But the key thing is we're going to try and get the right person. And as I said back in February, I'm committed to staying in this role however long it takes to get the right person and get them on board. But the process is progressing. And I'm sure by the time we get to the AGM, our Chairman, will be -- we'll give an update on that.

[Franco Martinelli, Group Finance Director & Executive Director]

On cash flow, Allen, I mean, it's net CapEx -- it's the sale and leasebacks which were delayed as I said for 2 reasons. One, because the stages of the contracts were a bit slower than we'd hoped. And secondly, because financing for anything, as I said earlier, with the word aviation was impossible in the end of March, right? It's much -- it's easier already now. We can talk to the banks about our particular proposal. So that's why it was delayed because financing just was unachievable at a rate that we required.

[Operator]

And the next question comes from the line of Christopher Bamberry from Peel Hunt.

[Christopher Bamberry, Analyst]

Just a couple of questions on the exceptional cash costs on Slide 49. Just trying to reconcile the GBP 70 million or so you talked about back in February. It looks like there is GBP 129 million now, post [indiscernible] inflow from Context. So I guess kind of -- the difference probably is the Italian fine. Is there anything else on top of that? Secondly, there's a GBP 12 million inflow in March '22 year, just what that relates to?

[Franco Martinelli, Group Finance Director & Executive Director]

Okay. Yes, you're right. Chris, it's Franco. Obviously, the -- yes, the Italian fine is by far, the biggest part of that. You're absolutely right. There is also the restructuring costs that we're going to have in Nuclear and Rail. So that's the main differences. The GBP 12 million is the tax effects going into financial year '22 -- is the main reason for that.

[Operator]

I'll now hand it back over to Archie.

[Archibald Bethel, CEO & Executive Director]

Okay. Well, yes. So I'll just finish probably by thanking you for this morning, tuning in. And hopefully, the information, the extended pack of information we gave you kind of helped the process. I appreciated the questions, and I hope we've answered them fully for you. Our next update is likely to be in August. But again, I hope at that time, we can say a bit more about how we think our guidance is going to be shaping up for the year. So thank you for joining us, and speak to you again, soon. Thank you.

[Franco Martinelli, Group Finance Director & Executive Director]

Thank you, everyone.

[Operator]

Thanks, everyone, for joining us on today's conference. You may now disconnect your handsets.