Half year results for the six months ended 30 September 2018 21 November 2018
Marine Land Aviation Nuclear Disclaimer This document has been prepared by Babcock International Group PLC (the “Company”) solely for use at a presentation in connection with the Company's half year results announcement for the half year ended 30 September 2018. For the purposes of this notice, the presentation that follows (the “Presentation”) shall mean and include the slides that follow, the oral presentation of the slides by the Company, the question and answer session that follows that oral presentation, hard copies of this document and any materials distributed at, or in connection with, that presentation. The Presentation does not constitute or form part of and should not be construed as, an offer to sell or issue, or the solicitation of an offer to buy or acquire, securities of the Company in any jurisdiction or an inducement to enter into investment activity. No part of this Presentation, nor the fact of its distribution, should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever. Statements in this Presentation, including those regarding the possible or assumed future or other performance of the Company or its industry or other trend projections, as well as statements about Babcock’s or management’s beliefs or expectations, may constitute forward-looking statements. By their nature, forward-looking statements involve known and unknown risks, uncertainties and other factors, many of which are beyond Babcock’s control. These risks, uncertainties and factors may cause actual results, performance or developments to differ materially from those expressed or implied by such forward-looking statements. Accordingly, no assurance is given that such forward-looking statements will prove to have been correct. Forward looking statements in the Presentation regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. They speak only as at the date of this Presentation and the Company undertakes no obligation to update these forward-looking statements. The information and opinions contained in this Presentation do not purport to be comprehensive, are provided as at the date of the Presentation and are subject to change without notice. The Company is not under any obligation to update or keep current the information contained herein.
2 Marine Land Aviation Nuclear Introduction Archie Bethel, Chief Executive
Marine Land Aviation Nuclear Taking actions to further strengthen Babcock
Full year Underlying De-gearing Interim dividend guidance results in line on track up 3.6% confirmed
Exceptional costs (mostly non-cash) as we take action to further strengthen Babcock
4 Marine Land Aviation Nuclear Agreement for consistent and enduring relationship with UK Government
• UK Government Strategic Partner Programme • MOD Strategic Supplier Management Programme • Cabinet Office, MOD and Babcock signed ‘Joint Ways of Working’ Charter
5 Marine Land Aviation Nuclear Taking action: addressing Oil and Gas
Our Oil and Gas business Tough markets conditions • Two main geographies: UK North Sea and Australia • Platform crew shift patterns reduced • Around 50 helicopters (c.10% of total Aviation fleet) • Exploration and new platforms on hold • Includes 13 EC225s • EC225 taken out of North Sea operations
Oil price drops: EC225 EC225 $114 to $46 grounded cleared to fly
2014 2015 2016 2017 2018 2019
Business Oil price CHC into Bristow & Columbia acquired drops: $30 Chapter 11 merge + impair EC225s
6 Marine Land Aviation Nuclear Reshaping our Oil and Gas business
Focus on UK North Sea and Australia
Maintain revenue levels
Refocus cost base and rightsize the fleet
Sell surplus helicopters / repurpose some for firefighting
7 Marine Land Aviation Nuclear Magnox update
Magnox JV contract Future • Decommissioning 10 reactor sites and two test sites • NDA to repackage into smaller contracts • c.£3.8bn, 14-year contract now ending in Aug 2019 • Expect similar approach to Sellafield supply chain model Termination • More prudent scenario in revenue step down • Early termination a result of flawed procurement process assumptions • No reflection on performance (confirmed by NDA) • Cavendish Nuclear will compete for future packages • Committed to achieving a smooth transition back to NDA • Significant medium term opportunities remain
Bid Additional scope NDA decide NDA announce Holliday report Award Consolidation period starts required to terminate subsidiary model findings
2012 2014 2015 2016 2017 2018 2019
High court rule NDA under Our contract Energy Solutions claim begins Holliday report begins against NDA review terminates
8 Marine Land Aviation Nuclear Operational highlights for the half year
Marine Land Aviation Cavendish Nuclear
• Type 23 frigate life extension: • c.500 vehicles deployed to • HADES (17 RAF bases) fully • Dounreay fast reactor now HMS Northumberland, HMS Oman for British Army operational 20% defueled Kent • Progressing with DSG • FOMEDEC planes and • Wylfa reactors now • HMS Monmouth and HMS transformation simulators delivered 75% defueled Albion deployment support • Mobilised Hinkley • Mobilising air ambulance • Bradwell entered care and • First delivery of Dreadnought Point C training contracts in Sweden, Finland maintenance submarine missile launch tube contract for EDF and Norway to USA • Office opened in Japan • Mobilised new rail contract • Renewed search and rescue • Babcock-Schulte Kairos LNG Northern Ireland contract in Spain service vessel
9 Marine Land Aviation Nuclear Our strategy focuses on three markets
Emergency Defence Nuclear Services
Delivered across our four sectors:
Marine Land Aviation Nuclear
With international a key growth driver
10 Marine Land Aviation Nuclear Actions to sharpen our strategic focus
Exits and Restructure disposals and reshaping
• Media services • Oil and Gas business • Renewables • Appledore shipyard • North America mining and • Rosyth, QEC construction support • Magnox ahead of contract end • Powerlines (South Africa)
11 Marine Land Aviation Nuclear Strong order book and bid pipeline
Order book - £18bn Pipeline - £14bn
7% 13% 10% Defence Emergency Services1 18% 16% Nuclear 63% 67% Other 6%
• £2.6 billion order intake in period, • £1 billion increase since March 2018 £0.9 billion of which not through pipeline • £3.7 billion of opportunities added2 • 92% of FY19 revenue secured, • Group win rates maintained 60% of FY20 • 87% contracts > £25 million • 88% contracts > £25 million
1. Emergency Services contracts typically have shorter bid periods and as such are underrepresented in our pipeline 2. Includes: Marine training, UK defence fleet vehicles, Eskom boiler maintenance (South Africa) and aerial emergency services in Canada 12 Marine Land Aviation Nuclear Financial review Franco Martinelli, Group Finance Director
Marine Land Aviation Nuclear Maintaining underlying performance
Underlying Taking action Cash Returns performance
FCF2: increasing to £140m Revenue: £2,577m, £120m exceptional Underlying EPS: down 1.1%1 charges Cash conversion3: up 3.1% 120% pre capex Operating profit: Net cash costs 82% post capex Interim dividend: £280m, up 2.4%1 only c.£10m up 3.6% Net debt: £159m down year on year
1. Organic growth at constant rates 2. Before pension payments in excess of income statement 3. Defined as underlying operating cash flow over underlying operating profit 14 Marine Land Aviation Nuclear Underlying results in line
Organic • Organic revenue growth -1.1%1, HY19 (£m) HY18 (£m) Change 1 growth +0.5% adjusting for exits Total revenue 2,577 2,639 -2.3% -1.1% • Organic operating profit growth Operating profit 280 276 +1.4% +2.4% +2.4%1 Operating margin 10.9% 10.5% • Margin supported by exits from Profit before tax 246 240 +2.5% low margin businesses EPS 39.9p 38.7p +3.1% • Underlying results exclude Interim dividend 7.10p 6.85p +3.6% £120 million of exceptional charges
All results throughout this presentation are shown on an underlying basis unless otherwise stated and all percentages are calculated on non-rounded figures
1. At constant exchange rates
15 Marine Land Aviation Nuclear £2,700 £2,698£2,699£2,700 £2,695£2,696£2,697 £2,693£2,694£2,695 £2,690£2,691£2,692 £2,688£2,689£2,690 £2,685£2,686£2,687 £2,683£2,684£2,685 £2,680£2,681£2,682Revenue impacted by exits and disposals £2,678£2,679£2,680 £2,675£2,676£2,677 £2,673£2,674£2,675 £2,670£2,671£2,672 £2,668£2,669£2,670 £2,665£2,666£2,667 £2,663£2,664£2,665 £2,660£2,661£2,662 £2,658£2,659£2,660 £2,655£2,656£2,657 £2,653£2,654£2,655 £2,650£2,651£2,652 £2,648£2,649£2,650 £2,645£2,646£2,647 £2,643£2,644£2,645 Organic growth - 1.1% £2,640£2,641£2,642 £2,638£2,639£2,640 £2,636£2,637£2,635 £2,633£2,634£2,635 £2,639m - £17m £2,630£2,631£2,632 £2,628£2,629£2,630 £2,625£2,626£2,627 £2,623£2,624£2,625 £2,620£2,621£2,622 £2,618£2,619£2,620 £2,615£2,616£2,617 - £15m 1 £2,613£2,614£2,615 Excl. exits £2,610£2,611£2,612 + 0.5% £2,608£2,609£2,610 £2,605£2,606£2,607 £2,603£2,604£2,605 - £16.9m £2,600£2,601£2,602 £2,598£2,599£2,600 £2,607m - £42m £2,595£2,596£2,597 £2,593£2,594£2,595 £2,590£2,591£2,592 £2,588£2,589£2,590 £2,585£2,586£2,587 £2,583£2,584£2,585 £2,580£2,581£2,582 £2,578£2,579£2,580 £2,575£2,576£2,577 £2,573£2,574£2,575 £2,570£2,571£2,572 + £12m £2,568£2,569£2,570 £2,577m £2,565£2,566£2,567 £2,563£2,564£2,565 £2,560£2,561£2,562 £2,558£2,559£2,560 £2,565m £2,555£2,556£2,557 £2,553£2,554£2,555 £2,550£2,551£2,552 £2,548£2,549£2,550 £2,545£2,546£2,547 + £60m £2,543£2,544£2,545 £2,541£2,542£2,540 £2,538£2,539£2,540 £2,535£2,536£2,537 £2,533£2,534£2,535 £2,530£2,531£2,532 £2,528£2,529£2,530 £2,525£2,526£2,527 £2,523£2,524£2,525 £2,520£2,521£2,522 £2,518£2,519£2,520 £2,515£2,516£2,517 £2,513£2,514£2,515 £2,510£2,511£2,512 £2,508£2,509£2,510 £2,505£2,506£2,507 £2,503£2,504£2,505 £2,500£2,501£2,502 HY18 FX Disposals HY18 rebased Exits2 HY18 continuing Growth3 HY19
1. Growth rate adjusting for both years 2. Expected full year impact of exits c.£50m 3. Includes QEC stepdown of £47m
16 Marine Land Aviation Nuclear Operating profit growth £285.0 £284.5 £284.0 £283.5 £283.0 £282.5 Organic growth +2.4% £282.0 £281.5 £281.0 £280.5 £280.0 £279.5 £279.0 £278.5 + £6.6m £279.6m £278.0 £277.5 £277.0 £276.5 £276.0 £275.5 + £3.5m £275.0 - £1.4m £274.5 £275.8m £274.0 £273.5 - £1.4m £273.0 £272.5 £272.0 £273.0m £271.5 £271.0 £270.5 £270.0 £269.5 £269.0 £268.5 £268.0 £267.5 £267.0 £266.5 £266.0 £265.5 £265.0 HY18 FX Disposals HY18 rebased Growth HY19
17 Marine Land Aviation Nuclear Underlying results reconciliation
HY19 HY18
Underlying operating profit 280 276
Exceptional items (120) -
Joint ventures and associates (45) (39)
IFRIC 12 (16) (16)
Amortisation of acquired intangibles (50) (49)
Statutory operating profit 49 172
18 Marine Land Aviation Nuclear Net cash cost of exceptional items c.£10m
• Total net cash costs c.£10m P&L cost £m • £5m net cash costs in H11 Oil and Gas 80 • Expected asset sales reduce cash costs Capacity reduction & 40 • Reshaping Oil and Gas: restructuring • £38m asset write downs Exits 15 • £42m lease provision Business disposal (15) Total 120 • Capacity reduction and restructuring: mainly Appledore, Rosyth (QEC rundown) and Magnox Tax (19) Net 101 • Exits and disposals: Renewables, North American mining and construction support, media services, powerlines in South Africa
1. Expected H2 net cash costs of around £10m, expected small net cash inflow in future years
19 Marine Land Aviation Nuclear Marine: growth maintained excl. QEC
1 HY19 HY18 Organic • +2.1% organic revenue growth excl. Change (£m) (£m) growth1 renewables exit and QEC step down
Revenue 825 883 -6.6% -6.2% • QEC revenue step down of £47m • Mix of business led to stable margins Continuing revenue 819 854 -4.1% -3.5% Outlook: Operating profit 108 116 -6.3% -6.0% • FY19: Revenue broadly stable and stable margins Operating 13.1% 13.1% margin • FY20: QEC step down c. £75m to revenue, minimal impact to operating profit 1. at constant exchange rates
Business units: Naval Marine | Technology | International
20 Marine Land Aviation Nuclear Land: margins improved
• Revenue lower: business exits, lower HY19 HY18 Organic procurement in Defence and lower Rail Change (£m) (£m) growth1 electrification • Operating profit increase driven by: Revenue 798 934 -14.6% -11.9% • Contract performance Continuing • Cost reduction revenue 759 862 -12.0% -9.9% • South African equipment Operating profit 63 57 +12.0% +15.6% • Holdfast (RSME) savings
Operating Outlook: margin 7.9% 6.0% • FY19: c.10% lower reported revenue (c.£75m impact from exits and disposals), strengthening margin 1. at constant exchange rates Business units: Defence | Training & Emergency Services | Networks & Equipment Support | South Africa
21 Marine Land Aviation Nuclear Aviation: strong revenue growth
• Revenue growth led by FOMEDEC
HY19 HY18 Organic • Emergency Services and UK Military Air Change (£m) (£m) growth1 growth H2 weighted
• Operating profit: Revenue 616 498 +23.6% +24.2% • FOMEDEC initial contract phase • Lower margins in early phase of new Operating contracts profit 82 79 +3.9% +4.5%
Outlook: Operating 13.3% 15.8% margin • FY19: Strong revenue growth for full year (weaker in H2), softening margin year on year
1. at constant exchange rates Business units: Military Air | Aerial Emergency Services | Oil & Gas
22 Marine Land Aviation Nuclear Nuclear: good growth, Magnox impacts FY20
• Revenue growth across the business
• Margin reflects stable business mix HY19 HY18 Organic Change (£m) (£m) growth1 Outlook: • FY19: Revenue flat and stable margin Revenue 338 323 +4.8% +4.8% • Magnox step down assumed to be larger: Operating . FY20: c.£250m revenue, c.£20m 30 29 +3.1% +3.1% profit operating profit . FY21: c.£100m revenue, c.£7m Operating margin 8.8% 9.0% operating profit • Significant medium term opportunities remain
1. at constant exchange rates
Business units: Decommissioning JVs | Projects
23 Marine Land Aviation Nuclear Operating cash flow in line with expectations
Cash flow HY19 (£m) HY18 (£m) • FOMEDEC had a £50m working capital Underlying operating profit1 219.7 221.3 outflow in FY182 which unwinds in full in FY19 Amortisation and depreciation 52.9 50.7 • Slightly larger benefit in H1 helped offset Other non-cash items 2.0 6.6 expected phasing of other working capital Working capital (excl. pensions) 10.4 (115.1) Provisions (20.9) (10.4) • FOMEDEC contract now cash positive Operating cash flow 264.1 153.1 • Group cash generation H2 weighted Cash conversion before capex 120% 69% Net capital expenditure (capex) (83.9) (63.1) • Full year outlook unchanged 180.2 90.0 Operating cash flow after capex • Aircraft payments drove capex in H1, Cash conversion after capex 82% 41% reversing in H2 as converted to operating Capital expenditure/Depreciation 1.6x 1.2x leases
1. Excludes exceptional items and amortisation of acquired intangibles 2. FY18 included £109m of FOMEDEC debtors and £59m of FOMEDEC creditors, net outflow of £50m
24 Marine Land Aviation Nuclear Net cash flow weighted to H2
Cash flow HY19 (£m) HY18 (£m)
Operating cash flow after capex 180.2 90.0 Interest paid (net) (14.0) (17.2) Taxation (46.7) (43.6) Dividends from JVs 20.0 15.1 Free cash flow before pensions 139.5 44.3 Pensions contributions in excess of income statement (20.7) (11.3) Free cash flow after pensions 118.8 33.0 Dividends paid (115.5) (112.8) Acquisitions / other 1.2 (5.8) Net cash cost of exceptional items1 (5.3) - Net cash outflow (before FX)2 (0.8) (85.6)
1. Includes £26m net proceeds from disposal of media services business 2. Net debt increase due to FX in H1: £16.1m 25 Marine Land Aviation Nuclear De-gearing remains on track
• Net debt1: £1,132m – down £159m year on year Net debt / EBITDA • Includes £163m FOMEDEC lease debtor which 2.5 converts to cash in H2
2.0 • Net debt to EBITDA2 ratio 1.6x (HY18: 1.9x) • FY19 expected: c.1.4x 1.5 • FY20 expected: c.1.1x
1.0 • IFRS 163 expected impacts to FY20: • Net debt: + c.£550m 0.5 • EBITDA: + c.£150m • Net debt to EBITDA: + c.0.4 0.0 • EPS: negligible FY15 FY16 FY17 FY18 HY19 FY19 FY20 4 • Operating profit increase offset by interest 1. Net debt excludes £345m of non-recourse JV net debt, mainly held in AirTanker and Ascent 2. EBITDA of £695m (12 months to 30 September 2018). H1 EBITDA was £333m increase: c.£30m 3. IFRS 16 (Leases) effective for FY20. Based on lease profile of group as at 30 September 2018 4. Based on current accounting standards 26 Marine Land Aviation Nuclear Capital allocation priorities
Invest in the • Disciplined investment criteria to support ROIC Drive growth business • Bolt-on M&A if meets hurdles
• Well-positioned for any environment De-gear balance Flexibility • Safeguard credit rating sheet • Additional funding for pension schemes
• Growing ordinary dividend, well covered by free cash Return capital Sustainable flow to shareholders dividend • De-gearing on track and offers scope for additional returns
27 Marine Land Aviation Nuclear Pensions update
• IAS19 position now in surplus: HY19 HY18 • Discount rates, asset performance, deficit contribution Assets (£m) 4,652 4,593 • Trustee funding Obligations (£m) 4,626 4,709 • Devonport valuation signed off: no effect on deficit, Net surplus / (deficit) (£m) 26 (116) cash service cost increase of £5m • Rosyth under discussion – more challenging Income statement impact HY19 HY18 • FY19 impacts Operating profit impact (£m) (23) (25) • Cash service cost increasing above IAS 19 service cost Net interest costs (£m) - (1) • Contributions in excess of income statement – deficit recovery and cash service cost dependent Total impact (£m) (23) (26) • Continued actions Key assumptions HY19 HY18 • Increased employee cash contributions Discount rate 2.7% 2.7% • Restructuring reduces number of active members Inflation (RPI) 3.2% 3.2% • Interest rate/age/inflation hedging continues
28 Marine Land Aviation Nuclear Joint ventures: JV debt is non-recourse
Cash Loans Net debt Babcock • JV debt mostly in AirTanker £m £m £m share £m • Significant cash balances • JV performance AirTanker 350 (2,320) (1,970) (260) • Scheduled debt repayments Ascent 50 (180) (130) (65) • Babcock share of net debt of c.£345m Others 50 (100) (50) (20) • All non-recourse Total 450 (2,600) (2,150) (345)
29 Marine Land Aviation Nuclear Joint ventures: significant cash dividend stream
HY19 (£m) HY18 (£m)
TOTAL Asset Operational TOTAL Asset Operational • 12% of underlying Operating Profit 45.1 23.2 21.9 39.2 19.9 19.3 revenue (HY18: 12%)
IFRIC 12 14.1 14.1 - 14.3 14.3 - • 21% of underlying profit (HY18: 19%) Total underlying profit 59.2 37.3 21.9 53.5 34.2 19.3
Finance costs (11.8) (11.8) - (12.2) (12.2) - • Distributable reserves: c.£140m Profit before tax 47.4 25.5 21.9 41.3 22.0 19.3 • Dividends expected in: Tax (7.1) (2.4) (4.7) (5.6) (1.6) (4.0)
Profit after tax 40.3 23.1 17.2 35.7 20.4 15.3 . FY19: c.£50m
Dividends 20.0 5.4 14.6 15.1 3.8 11.3 . FY20: c.£45m
Cash Gap 20.3 17.7 2.6 20.6 16.6 4.0
See appendix for definitions of asset and operational JVs 30 Marine Land Aviation Nuclear Updated FY19 guidance: no overall change
FY19 (as per July) FY19 (updated) Revenue Margin Revenue Margin Reported basis by sector: Marine Flat Stable Broadly stable Stable Land Slight decline Strengthening c.10% decline Strengthening Aviation Strong growth Softening Strong growth Softening Cavendish Nuclear Flat Stable Flat Stable Group impact of FX and disposals1 c.£70m revenue, <£5m OP impact Group organic revenue growth2 Low single digit growth Low single digit growth Margins Broadly stable Stronger Tax rate c.18% c.18% Cash conversion: pre capex/post capex > 100% pre capex/ c.80% post capex > 100% pre capex/ c.80% post capex Capex to depreciation ratio c.1.2x c.1.2x Net debt to EBITDA ratio c.1.4x c.1.4x JV dividends c.£45m c.£50m Pension contributions in excess of income statement c.£50m c.£55m 1. Based on FX rates as of 30 Sept 2018 and assumptions on disposals. Expected full year FX impact c.£20m (HY18: £17m). Expected full year impact of disposals c.£50m (HY18: £15m) 2. At constant exchange rates. Excludes expected full year impact of exits of c.£50m, of which £42m impact in H1 31 Marine Land Aviation Nuclear FY20 modelling considerations
Exits and disposals • Revenue impact of c.£40m, operating profit impact small
QEC stepdown • Revenue impact of c.£75m at low margin
• Revenue impact of c.£250m (previously guided c.£100m) Magnox stepdown • Operating profit impact of c.£20m (previously guided c.£7m)
32 Marine Land Aviation Nuclear Our priorities: drive value for customers and shareholders
• On track this year Sustain margins • Continuing cost focus • Bidding control
• H1 performance in line overall Cash generation • On track for full year expectations • Zero based budgeting for working capital
• On track to reach 1.4x at March 2019, 1.1x at March 2020 De-gearing • Supports growing and sustainable dividend
Customer and shareholder • Deliver savings for customers value • Focus on cash returns on capital
33 Marine Land Aviation Nuclear Further strengthening Babcock Archie Bethel, Group Chief Executive
Marine Land Aviation Nuclear International growth a key part of our strategy
• International now around 30% of revenue Order book Pipeline • Focus on key markets: • Australia, Canada, South Africa £18bn £14bn • France, Spain, Italy, Scandinavia • South Korea, Japan, Oman, New Zealand UK International • Leveraging our strengths across all sectors and our experience in the UK
• Pipeline includes significant opportunities
35 Marine Land Aviation Nuclear Strong market positions, high barriers to entry
Sector specific technical expertise
Deep customer relationships
Unique infrastructure assets
Long-term contract visibility
36 Marine Land Aviation Nuclear Market trends: Defence
Global • Increasing air, sea, land and cyber threats • Budget pressures driving need for efficiencies • Increasing need for capability upgrades and life extension of key equipment and facilities • New equipment programmes and platform development continues UK • Recent Government announcements confirmed commitments to Defence • Continue to identify support needs across Marine, Land and Aviation • Modernising Defence Programme driving Strategic Partnering approach • Large programmes continuing: Dreadnought, Type 26, Type 31, ASDOT
37 Marine Land Aviation Nuclear Market trends: Emergency Services
Global trends • Population growth driving greater need • Budget pressures driving need for efficiencies and critical mass • Increasing levels of regulation around safety and operations • Innovative technology increasing effectiveness of service provision • Increasing use of unmanned equipment for monitoring and inspection Europe • Increasingly shared and pooled fire fighting efforts across countries • Scale of fleet increasingly important to achieve economies of scale • Investment in support infrastructure and development of skills critical to safety, performance and growth
38 Marine Land Aviation Nuclear Market trends: Nuclear
Decommissioning • Growing requirement as ageing power stations come offline • Less certainty on timing of Magnox work post August 2019 • Sellafield programme progressing and international opportunities emerging Nuclear New Build • Increased UK activity following continued Government support for Nuclear • Hinkley Point C progressing, MoU signed, promising progress at Wylfa Nuclear Services • Expert support for active UK Reactor Fleet is growing • Major project opportunities across the UK’s nuclear installations in areas of nuclear engineering, safety and health physics
39 Marine Land Aviation Nuclear Our priorities: drive value for customers and shareholders
Focus on core markets • Disposals and exits programme
Sustain margins • On track this year, exiting low margin businesses
• #2 supplier to MOD for over a decade Develop UK business • Significant opportunities in pipeline
International expansion • Ahead of schedule, key growth driver
Customer and shareholder • Growing and sustainable dividend value • Continuous performance improvement
40 Marine Land Aviation Nuclear Conclusion: further strengthening Babcock
Full year Underlying De-gearing Interim dividend up guidance results in line on track 3.6% confirmed
41 Marine Land Aviation Nuclear Additional slides
Marine Land Aviation Nuclear Single Source Regulations Office (SSRO)
Contract profit rate steps 2018/19 Rates Babcock Commentary
Baseline profit rate (BPR) 6.81% No cost reimbursable contracts Cost risk adjustment: +/-25% x BPR +/- 1.7% Expect close to +25% x BPR
SSRO funding adjustment -0.024%
Incentive adjustment Up to 2.0% Typically at the top end
Capital servicing adjustment Average 1.36%
Maximum CPR 11.85% Before shared cost savings
Source: www.gov.uk SSRO 2018 contract profit rate
43 Marine Land Aviation Nuclear We are the MOD’s second largest supplier Chart: MOD suppliers paid above £50m last year (to rough scale)
General Leonardo QinetiQ DXC Thales Airbus Dynamics
BAE Innisfree KBR Interserve Ferrovial Leidos
Rolls-Royce Terra Northup 3I Fujitsu Grumman Raytheon Firma
Galliford Tokenhouse AJG&Co Boeing BP Try Cobham
BT Nats Safran Vinci Infrared Capita Compass Lockheed Martin Macquarie Mears
Serco Groupe CGI Jacobs Marshall of Sodexo Cambridge Allianz Hocomm Hogg Robinson
Source: www.gov.uk MOD Trade, Industry & Contracts, Sept 2018
44 Marine Land Aviation Nuclear Half of our MOD work is competed
BAE Rolls -Royce Lockheed Martin Leonardo
5% 12%
68% 85%
50% QinetiQ General Dynamics Thales Airbus
10%
45%
Amount of revenue from competed contracts vs. non-competed 68% 74% contracts
Source: www.gov.uk MOD Trade, Industry & Contracts, Sept 2018
45 Marine Land Aviation Nuclear Summary of actions taken
Business Sector Exit date Rationale
Renewables Marine 2017/18 Non-strategic, low margin
Civil infrastructure Land 2017/18 Non-strategic, low margin
North American mining Land H1 2018/19 Non-strategic, low margin and construction support Media services Land H1 2018/19 Non-strategic, net proceeds of £26m
South Africa powerlines Land H1 2018/19 Non-strategic, low margin
Exit from Appledore Marine H1 2018/19 No pipeline of future work
46 Marine Land Aviation Nuclear Marine (FY18 figures)
Revenue split Bid pipeline
28% 32% 49% 58% Typical 14% 1 margin range 19% UK Naval 7%-11% International Naval 8%-12% Technology2 6%-15% Addressable market Geography
Intl 21% Intl 33%
£12bn UK 79% UK 67%
Revenue Pipeline 1. Excludes gain share 2. Includes customer procurement related revenue 47 Marine Land Aviation Nuclear Land (FY18 figures)
Revenue split Bid pipeline
22% 34% 31% 46%
Typical 32% margin range1 12% 23% Defence2 8%-10% Emergency Services 8%-12% & Training Addressable market Networks & 4%-6% Geography Equipment Intl 17% Support Intl 29% South Africa 5%-8%
UK £9bn UK 83% 71%
1. Excludes gain share Revenue Pipeline 2. Excludes pass-through customer procurement related revenue 48 Marine Land Aviation Nuclear Aviation (FY18 figures)
Revenue split Bid pipeline
4% 16% 33% 29%
Typical 67% 1 51% margin range Defence2 8%-12% Emergency Services 10%-18% Oil & Gas Low Addressable market Geography
Intl 60% Intl 69% £8bn UK UK 40% 31%
1. Excludes gain share Revenue Pipeline 2. Excludes JVs 49 Marine Land Aviation Nuclear Cavendish Nuclear (FY18 figures)
Revenue split Bid pipeline
Projects (incl. New Builds) 32% 34% Decommissioning JVs
62% 68% 4% New Build Operational Support Decommissioning Addressable market Geography Intl 1% Intl 2%
UK UK £8bn 99% 98%
Revenue Pipeline
50 Marine Land Aviation Nuclear Key defence contracts
Marine Land Queen Elizabeth Class (QEC) Aircraft Carriers UK Babcock Defence Support Group (DSG) UK HMS Vanguard refit and refuel UK Royal School of Military Engineering (RSME/Holdfast) UK Dreadnought missile launch tubes UK British Forces Germany UK Dreadnought & Astute Weapons Handling and Launch System (WHLS) UK Training, Maintenance & Support Services (TMASS) UK Dreadnought design phase services UK Phoenix (White Fleet) UK Submarine Dismantling Project UK ALC JV (provision and maintenance) UK Fleet Outsourced Activity Project (FOAP) naval training UK Defence College of Technical Training (DCTT) UK Astute Class Training Service (ACTS) submarine training UK Maritime composite training site UK MSDF Devonport, Clyde, Rosyth (incl. ships & subs fleet time support) UK Aviation T23 life-ex: HMS Portland, HMS Lancaster, HMS Richmond refits UK HADES, technical support services contract UK HMS Scott through-life support UK Light Aircraft Flying Task (LAFT2) UK Marine Systems Support Partner (T45 & QEC design authority) UK Tucano In Service Support (TISC) UK Maritime Training Systems through-life support availability UK Hawk integrated operational support UK Pumps repair and overhaul management UK Hawk advanced jet training T II UK Valves – equipment management service UK UK Military Flying Training System (UKMFTS) UK Engineering and support for WHLS & submerged signal ejectors UK Ascent JV (flight training) UK Design Support Alliance – naval ship design support UK Airtanker Ltd JV (Asset JV) UK 4.5" Gun through-life support UK Airtanker Services JV (Operational JV) UK Phalanx close in weapon system availability UK FOMEDEC training, maintenance, flying systems France Naval Design Partnership UK HELIDAX army helicopter training France ANZAC Class support Australia Collins Class submarine support Australia Australian submarine WHLS Australia Dockyard management & naval support New Zealand Victoria Class submarines In Service Support (VISSC) Canada Duqm JV, naval and commercial ship support Oman Jangbogo III submarine WHLS South Korea S80 submarine WHLS Spain US Coastguard Cutter design USA
51 Marine Land Aviation Nuclear Key civil contracts
Marine Aviation LNG/LPG transportation systems China Norway, Sweden, Finland, Gas Supply Vessel JV with Bernard Schulte Germany Emergency Medical Services (multiple) Australia, UK, Italy, Spain, Portugal, France Aerial Fire Fighting (multiple) Spain/Portugal/Italy Land SASEMAR Search and Rescue Spain Rail track renewal, electrification UK Offshore Oil and Gas helicopter services (multiple) UK, Europe, Australia Power Networks UK Metropolitan Police vehicle fleet management UK London Fire Brigade fleet management UK Cavendish Nuclear London Fire Brigade training UK Magnox decommissioning UK Technical apprentice training (BMW, EDF, Network Rail) UK Dounreay decommissioning UK Heathrow Airport baggage handling systems UK Sellafield gloveboxes UK Heathrow Airport ground support fleet UK Sellafield Silo Maintenance Facility project UK QANTAS ground support equipment Australia Atomic Weapons Establishment MENSA Doors UK Schiphol Airport baggage handling Netherlands EDF Hinkley Point C new build station UK Fiumicino Airport ground support Italy EDF fuel route management (all stations) UK ESKOM power station support South Africa Engineering, safety, design and mechanical UK Vehicle fleets (Volvo, DAF) South Africa construction
52 Marine Land Aviation Nuclear Joint ventures
Babcock underlying JVs Share Country Sector Start End Asset JVs Holdfast (RSME) 74% UK Land 2008 2038 • Typically assets and debt ALC 50% UK Land 2005 2021 • Dividends follow after Ascent 50% UK Aviation 2016 2033 paying down JV debt
Helidax 50% UK Aviation 2008 2029 • Typically long-term Asset JVsAsset AirTanker 13% UK Aviation 2008 2035 Operational JVs Helidax 50% France Aviation 2008 2029 • Capability partnerships Cavendish Fluor Partnership 65% UK Nuclear 2014 2019 • No debt Cavendish Dounreay Partnership 50% UK Nuclear 2012 2030s • Dividends follow profits, Naval Ship Management Australia 50% Aus Marine 2018 2024 subject to short-term ABC Electrification 33% UK Land 2014 2019 phasing
Operational JVs Operational AirTanker Services 22% UK Aviation 2008 2035
53 Marine Land Aviation Nuclear Revenue by sector
Organic growth at Organic growth at HY19 (£m) HY 18 (£m) Reported growth constant rates constant rates excluding exits
Marine 824.7 883.3 -6.6% -6.2% -3.5%
Land 798.1 934.4 -14.6% -11.9% -9.9%
Aviation 615.8 498.4 +23.6% +24.2% +24.2%
Cavendish Nuclear 338.3 322.8 +4.8% +4.8% +4.8%
Total 2,576.9 2,638.9 -2.3% -1.1% +0.5%
54 Marine Land Aviation Nuclear Underlying segmental analysis
Revenue (£m) Operating profit (£m) Operating margin HY 19 HY 18 HY 19 HY 18 HY 19 HY 18 Group 814.2 873.0 105.6 114.0 13.0% 13.1% Marine JV 10.5 10.3 2.7 1.6 25.7% 15.5% Total 824.7 883.3 108.3 115.6 13.1% 13.1% Group 782.6 892.3 46.8 42.4 6.0% 4.8% Land JV 15.5 42.1 16.5 14.1 106.5% 33.5% Total 798.1 934.4 63.3 56.5 7.9% 6.0% Group 551.0 453.2 59.6 57.5 10.8% 12.7% Aviation JV 64.8 45.2 22.0 21.0 34.0% 46.5% Total 615.8 498.4 81.6 78.5 13.3% 15.8% Group 107.0 98.2 11.9 12.2 11.1% 12.4% Cavendish Nuclear JV 231.3 224.6 18.0 16.8 7.8% 7.5% Total 338.3 322.8 29.9 29.0 8.8% 9.0% Unallocated (3.5) (3.8) Group 2,254.8 2,316.7 220.4 222.3 9.8% 9.6% Total JV 322.1 322.2 59.2 53.5 18.4% 16.6% Total 2,576.9 2,638.9 279.6 275.8 10.9% 10.5%
55 Marine Land Aviation Nuclear Statutory to underlying reconciliation
Joint Ventures and Associates Amortisation of Exceptional Change in tax All values in £m Statutory Revenue and IFRIC 12 income acquired Underlying Finance costs Tax items rate operating profit intangibles 30 Sept 2018 Revenue 2,254.8 322.1 2,576.9 Operating profit 49.3 45.1 14.8 50.0 120.4 279.6 Share of profit from JV 37.4 (45.1) 11.8 7.1 (14.1) 2.9 - Investment income 0.7 (0.7) - Net finance costs (22.3) (11.8) (34.1) Profit before tax 65.1 - - 7.1 - 52.9 120.4 - 245.5 Tax (6.9) (7.1) (11.4) (19.8) 1.0 (44.2) Profit after tax 58.2 - - - - 41.5 100.6 1.0 201.3 Return on revenue 2.2% 10.9% 30 Sept 2017 Revenue 2,316.7 322.2 2,638.9 Operating profit 172.2 39.2 - - 15.3 49.1 - 275.8
Share of profit from JV 32.8 (39.2) 12.2 5.6 (14.3) 2.9 - -
Investment income 1.0 - - - (1.0) - - - Net finance costs (24.1) - (12.2) - - - - (36.3) Profit before tax 181.9 - - 5.6 - 52.0 - - 239.5 Tax (26.6) (5.6) (11.1) 0.2 (43.1) Profit after tax 155.3 - - - - 40.9 - 0.2 196.4 Return on revenue 7.4% 10.5%
56 Marine Land Aviation Nuclear Underlying organic growth Cavendish All values in £m Marine Land Aviation Unallocated Total Nuclear UNDERLYING REVENUE At 30 September 2017 883.3 934.4 498.4 322.8 - 2,638.9 Exchange adjustment (3.5) (10.2) (3.2) - - (16.9) Disposals - (14.8) - - - (14.8) Exits (23.8) (18.6) - - - (42.4) Organic growth (31.3) (92.7) 120.6 15.5 - 12.1 30 September 2018 824.7 798.1 615.8 338.3 - 2,576.9
Underlying revenue growth -6.6% -14.6% +23.6% +4.8% -2.3%
Organic growth1 -6.2% -11.9% +24.2% +4.8% -1.1% Organic growth1 excluding exits -3.5% -9.9% +24.2% +4.8% +0.5%
UNDERLYING OPERATING PROFIT
As at 30 September 2017 115.6 56.5 78.5 29.0 (3.8) 275.8 Exchange adjustment (0.4) (0.6) (0.4) - - (1.4) Disposals - (1.4) - - - (1.4) Organic growth (6.9) 8.8 3.5 0.9 0.3 6.6 30 September 2018 108.3 63.3 81.6 29.9 (3.5) 279.6 Underlying operating profit growth -6.3% +12.0% +3.9% +3.1% +1.4%
1 Organic growth -6.0% +15.6% +4.5% +3.1% +2.4% 1. At constant exchange rates
57 Marine Land Aviation Nuclear Exchange rate movements
Average Average Impact of FX movement on Impact of FX movement on underlying Impact of FX movement on rates for rates for Change revenue (£m) operating profit (£m) profit before tax (£m) HY19 HY18 1% 5% 10% 1% 5% 10% 1% 5% 10%
EUR 1.1282 1.1374 -0.8% 3.4 16.9 33.9 0.4 2.0 4.0 0.3 1.3 2.7
ZAR 17.4540 17.0221 +2.5% 1.6 8.1 16.2 0.1 0.4 0.9 0.1 0.4 0.8
CAD 1.7259 1.6814 +2.6% 0.7 3.4 6.9 0.1 0.3 0.7 0.1 0.3 0.7
SEK 11.7282 10.9208 +6.9% 0.3 1.5 3.0 0.1 0.4 0.8 0.1 0.4 0.7
AUD 1.7841 1.6795 +5.9% 0.9 4.3 8.6 0.1 0.3 0.6 0.1 0.3 0.5
58 Marine Land Aviation Nuclear Cash flow reconciliation
HY19 (£m) HY18 (£m) Cash generated from operations 243.4 141.8 Retirement benefit contributions in excess of income statement 20.7 11.3 Operating cash flow 264.1 153.1
59 Marine Land Aviation Nuclear Underlying to statutory cash flow reconciliation
Underlying Exceptional items Statutory
Operating profit before amortisation of acquired intangibles 219.7 (120.4) 99.3 Amortisation and depreciation 52.9 28.0 80.9 Other non-cash items 2.0 (15.2) (13.2) Working capital (excl. excess retirement benefits) 10.4 19.5 29.9 Provisions (20.9) 56.7 35.8 Operating cash flow 264.1 (31.4) 232.7
Net proceeds from disposal of media services business: £26.1m
Net exceptional cash cost: £5.3m
60 Marine Land Aviation Nuclear Provisions
1 • Half year net release £2.7m Charge/(release) as % of • Average of last eight and a half years: underlying profit2 • 0.6% cumulative net charge as a % of underlying 8.0% profit 6.0% • 6% cash utilisation of underlying operating profit 4.0% 2.0% • Half year: £21m cash outflow 0.0% • Utilised: contracts (gain share and warranty), -2.0% personnel (taxation and reorganisation), property -4.0% and assets -6.0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 H1 Total • Provisions made as required by accounting FY19 standards • Contract costs, property, personnel, warranty, onerous leases, acquisitions and disposals
1. Excluding provisions in relation to exceptional items 2. Excluding JVs
61 Marine Land Aviation Nuclear Net capital expenditure
HY19 (£m) HY18 (£m)
Purchases of property, plant and equipment 84.0 66.8
Purchases of intangible assets 19.2 11.1
Proceeds on disposal of property, plant and equipment (19.3) (14.8)
Capital expenditure (net) 83.9 63.1
62 Marine Land Aviation Nuclear 63 Marine Land Aviation Nuclear