25 January 2011
Download the Report
Babcock International Group PLC
Interim Management Statement
Babcock International Group PLC (Babcock or the Group), the UK's
leading engineering support services company, issues the following
Interim Management Statement for the period from 1 October
2010.
Overview
The trading environment for the Group remains broadly as
outlined in our half year results issued on 9 November 2010. The
performance of the Group is consistent with our expectations at
that time, with our markets continuing to provide significant
opportunities for growth. The Group's order book remains stable at
around £12 billion reflecting the constant flow of new contracts,
rebids and contract extensions from the pipeline into the order
book. As anticipated, the pipeline of bids at PQQ or ITT stage has
increased and now stands at £6 billion. The Board therefore remains
confident in the outlook for this financial year and
thereafter.
As part of the Government's ongoing discussions with its key
suppliers, we continue to be involved in positive dialogue with our
key customers at the Ministry of Defence and with the Cabinet
Office. We expect discussions with the Cabinet Office to be
concluded by the end of the financial year.
We anticipate the outcome of the Comprehensive Spending Review
(CSR) and Strategic Defence and Security Review (SDSR) will lead to
significant new outsourcing opportunities. We believe our scale,
expertise and track record of delivering financial and operational
efficiencies will place us in a strong position The VT integration
is progressing speedily and efficiently and the business units
remain focused on maximising the significant benefits of bringing
the two complementary businesses together. The delivery of merger
benefits is on track and we are confident of achieving £50 million
(pre-tax) in total and as scheduled, achieving a run rate of £11
million by 31 March 2011, with annualised financial efficiencies of
£8 million already generated. The strategic review of the business
portfolio is continuing. As previously announced, we do not
consider the Waste operation to be a strategic growth opportunity
for Babcock and we are in discussions with Wakefield Metropolitan
District Council and interested parties regarding exit options.
Financial Review
As reported in our half year results, cash generation during the
first half was particularly strong and subsequently this momentum
has been sustained. Cash has been used to pay down debt and we
expect the net debt to ebitda ratio at the year end to be
substantially better than our acquisition planning assumptions. The
programme to refinance the Group's £400 million Bridge Facility is
progressing well and this will be followed by the refinancing of
the £600 million Revolving Credit Facility early in the next
financial year.
Divisional Review
To reflect the growing importance of technology as a key driver
of the business, the Marine division has been renamed Marine and
Technology. The division has continued to perform strongly across
all its business streams, with margins maintained at similar levels
to those achieved in the first half of the year.
As a key support partner to the Royal Navy, we continue to work
together to evaluate the implications of the SDSR and discuss how,
under the Terms of Business Agreement (ToBA), we can deliver
additional savings whilst maintaining the high levels of
availability and operational efficiency required.
In Canada we continue to make good progress on HMCS Chicoutimi's
Extended Docking Work Period (EDWP) and are providing additional
support at the Canadian Fleet Maintenance Facility on EDWPs for
HMCS Victoria and Windsor as they prepare to return to sea during
2011. We have recently been down selected as one of three bidders
for a contract with the Canadian Government to provide refit and
upkeep support to their fleet of 30 minor warships and naval
auxiliary vessels. We expect tenders to be submitted during the
next few months and contract award announced during the second half
of the next financial year.
We have expanded our resources in Australia and New Zealand.
With a number of experienced UK managers now based in Australia,
the business is well placed to build on the strength and experience
in the UK to develop the significant opportunities available in the
naval support market in the region. We have recently been down
selected to bid for refit and upkeep support contracts for the
Australian surface ship fleet, the first of these is for their
eight Anzac frigates. We expect announcement of this contract award
within the next financial year. A further package is expected to
come to market in mid 2011.
The Defence and Security division's financial performance has
been in line with our expectations and the division is continuing
to deliver high standards of training, technical support and
operational availability for the UK's armed forces.
The division has continued to progress its integration plans and
the delivery of targeted acquisition synergy savings is on track.
Following on from the SDSR, we have identified a comprehensive list
of cost saving initiatives for our customer where our experience of
working with all three armed services will enable us to provide
them with more cost-efficient, long-term solutions.
All the division's major contracts continue to perform as
expected. We have benefitted from the cancellation of DTR Package 1
through a short extension to our training contract at Bordon and
Arborfield. As the largest provider of military training in the UK,
we are pursuing a number of opportunities where we can assist the
MoD with the efficient delivery of its long-term military training
ambitions.
There has been little change since the half year results to the
market conditions for the Support Services business units, where
customers' budgets remain constrained by the current economic
climate. The financial performance of the division's key contracts
remains in line with our expectations.
Integration and restructuring across the division is proceeding
well and individual business units are focussed on further
rationalisation of overheads and facilities. As a result, in line
with our expectations, divisional margins should show some progress
in the second half and into the next financial year.
The division has continued to focus on a number of rebids and
new opportunities and since the time of the half year results has
been successful in re-bids for the £120 million six year baggage
handling contract for BAA at Heathrow and the 12 year, £86 million,
contract to provide Radiometrics and Calibration services at
Sellafield. Opportunities for Education and Training to deliver
education improvement services to new education authorities and
apprentice training to major new customers are progressing well, as
are negotiations to take our fleet management capabilities to new
customers in the civil market
In the International division the South African equipment business
has experienced ongoing recovery in demand. The power generation
support business has seen a continuing strong requirement for
outage support for Eskom.
In the US, the defence business has performed in line with our
expectations. Evergreen Unmanned Systems, the Unmanned Aerial
Systems (UAS) support business we acquired in September is
performing well and will help to support growth in higher margin
technical services operations. We have been selected as one of four
contractors to install Command, Control, Communications, Computers,
Intelligence, Surveillance and Reconnaissance (C4ISR) systems for
the US navy and expect to share in contracts worth in the order of
$840 million over the next three years.
We remain confident that there are a number of opportunities in the
Middle East where we can exploit our UK expertise to create a
strong business. Business development teams in the area are
actively pursuing a number of prospects.
Outlook
As stated at the time of our half year results, we believe the
key markets in which the Group operates remain attractive with
significant long-term growth opportunities in both the UK and
overseas. In addition, the breadth of our capabilities and track
record of delivering both operational and financial efficiencies
will place us in a strong position as new outsourcing opportunities
are created. In the short-term, earnings will benefit from both
synergy savings and improving contract margins in the Support
Services and International divisions.
The strength of our order book and bid pipeline along with our
involvement in longterm programmes gives us excellent visibility of
future revenue streams. We are confident of achieving our
expectations for this financial year and expect to make further
good progress thereafter.
Enquiries
BabInternational Group
PLC 020 7355
5300
Peter Rogers
Bill Tame
Terri Wright
FD
020 7269 7291
Andrew Lorenz
Nick Hasell