2019 Interim Results 25 th July 2019
01 Introduction David Lockwood
Overview • Recommended cash offer for Cobham from Advent International at 165p * per share. Offer details are in the Rule 2.7 firm offer announcement released this morning • Actions feeding improving set of financial results with variation in Sector performances, as expected; confidence improving • Actions to improve execution and reduce overheads in Advance Electronic Solutions in place • Risk significantly reduced by KC-46 tanker settlement and resolution of UK tax dispute, although some risk remains • Strategic review of Aviation Services in Australia commenced • Strong Balance Sheet maintained after H1 2019 settlements • Resumption of dividend, as previously announced; declared interim payment of 0.4p * • Full year expectations unchanged *Interim dividend included in 165p offer price 3
02 Financial Results David Mellors
Summary Financial Headlines £m H1 2019 H1 2018 (1) Revenue 1,028.9 924.5 Underlying operating profit 107.1 95.5 Underlying operating margin 10.4% 10.3% Underlying earnings per share (pence) 3.2 2.0 Operating cash flow 64.2 37.7 Operating cash conversion 60% 40% Free cash flow (15.7) 9.2 Net debt (148.3) (195.3) Net debt/EBITDA (2) 0.2x - Interim dividend per share 0.4p - (1) Restated for IFRS 16, Leases (2) Consistent with bank covenants on a frozen adjusted IFRS basis which excludes the impact of IFRS 16, Leases 5
Revenue Bridge H1 2018 to H1 2019 £m 1,200 1,028.9 27.2 5.7 67.3 1,000 27.8 4.9 924.5 28.5 800 2% 31% 9% 4% 600 Organic revenue increase 11% 400 200 0 H1 2018 Currency & i/c Divestments CCC CMS CAES CAVS H1 2019 elims 6
Underlying Operating Profit Bridge H1 2018 to H1 2019 £m 140 Margin 10.4% 14.0 Margin 120 10.6 10.3% 107.1 6.6 1.1 2.8 10.3 100 5.1 95.5 90.4 80 60 40 20 0 Impact of H1 2018 H1 2018 FX Divestments CCC CMS CAES CAVS H1 2019 IFRS 16 Restated 7
Movements in Net Debt 122% operating cash conversion (pre-exceptionals) £m 164.5 40 Free cash flow £15.7m (outflow) (14.9) (148.3) (128.1) 0 (19.0) Includes £48.7m KC-46 Boeing settlement (40) (69.5) (66.4) (80) (120) (6.5) (3.9) (4.5) 60% operating cash conversion Net working Closing net (160) Restated opening Other operating Net Tax Other net Other net Cash impact of FX and net debt capital capex (1) settlement debt cash flow interest taxation other exceptional items (1) Net capex is stated after proceeds on disposal of property, plant and equipment of £13.3m (2) Full details on cash conversion can be found in the Appendix (page 38) 8
2016 Exceptional Charges Update Opening Cash flow Income statement Closing £m FX (charged/released) (2) balance (3) balance utilised (191) (1) 2017 67 9 3 (112) 2018 (112) 103 (198) 1 (206) 2019 (206) 66 - - (140) Cumulative totals @ 30 June 2019 (191) 236 (189) 4 (140) (1) Opening balance comprises 2016 non-underlying charges of £237m which included £56m of asset write offs and IFRS 15 restatement (2) Non-underlying in the income statement. Net charge in 2018 included £200.0m charge on KC-46 less £1.7m provision release (3) Closing balance comprises net liabilities held in working capital £26m (31 December 2018: £73m) and provisions £114m (31 December 2018: £133m) 9
Communications and Connectivity H1 2018 (1) £m FX Divested Organic H1 2019 Order intake 336.2 3.0 (32.3) (52.3) 254.6 4.9 (2) Revenue 279.9 2.8 (28.5) 259.1 Underlying operating profit 23.6 (0.6) 1.1 10.6 34.7 Underlying operating margin 8.4% (0.3%) 1.4% 3.9% 13.4% Order book 284.1 268.8 Organic revenue increase driven by: Profit increase due to: Growth from FliteLine radio on USAF T-38 trainer, Radio Increased sales volumes, operational improvements and • • Management System on USAF T-6 trainer 2018 restructuring benefits Increased avionics revenue including NH-90 and slip-ring sales Lower PV expense (£3.3m), including Aviator S entering • • flight testing phase Partially offset by lower maritime SATCOM shipments • Prior year higher inventory and receivables provisions • (£4.3m) (1) Restated following adoption of IFRS 16 (2) Organic revenue growth 2% Note: Revenue by currency; USD 33%, EUR/DKK 58% 10
Mission Systems H1 2018 (1) £m FX Organic H1 2019 Order intake 237.1 11.2 73.5 321.8 67.3 (2) Revenue 209.0 10.2 286.5 Underlying operating profit 28.9 1.8 14.0 44.7 Underlying operating margin 13.8% 0.2% 1.6% 15.6% Order book 762.0 785.8 Organic revenue primarily driven by: Profit increase due to: Programme timing with increased throughput on existing • Increased production volumes • programmes (c19% growth) - improved execution, supply Improvement in quality and manufacturing, and cost • chain management and arrears reduction efficiencies; more than offset increased PV and SG&A Increased demand (c12% growth), including releases and • expense to deliver growth restraints, fuel tank inerting and weapons carriage and release Small amount of non-recurring high margin product • Actuation volumes expected to moderate following growth • supply and licence income (1) Restated following adoption of IFRS 16 (2) Organic revenue growth 31% Note: Revenue by currency; USD 76% 11
Advanced Electronic Solutions H1 2018 (1) £m FX Organic H1 2019 Order intake 379.6 23.8 (56.8) 346.6 27.2 (2) Revenue 279.4 17.6 324.2 Underlying operating profit 31.3 1.8 (6.6) 26.5 Underlying operating margin 11.2% (0.1%) (2.9%) 8.2% Order book 606.4 679.5 Profit impacted by: Organic revenue increase driven by: Reduced margins on certain programmes; adverse space product mix Growth in electronic warfare and missile guidance • • programmes Programme charge of £9.3m, largely offset by £5.2m property • Demand for semiconductor, rotary joint and space disposal profit and small net benefit from the overhead cost reduction • announced at the 2018 year end; waveguide products Prior year £4.2m net credit from reassessment of legal, property and Lower revenue from completed Mars 2020 programme • • inventory provisions (1) Restated following adoption of IFRS 16 (2) Organic revenue growth 9% Note: Revenue by currency; USD 99% 12
Aviation Services H1 2018 (1) £m FX Organic H1 2019 Order intake 74.8 (1.5) (25.4) 47.9 5.7 (2) Revenue 157.0 (2.7) 160.0 Underlying operating profit 11.7 (0.2) (10.3) 1.2 Underlying operating margin 7.5% - (6.7%) 0.8% Order book 1,004.4 877.5 Organic revenue increase driven by: Profit impacted by: Increased Australia commercial revenue, including growth in Lost profit contribution from DHFS; additional £3.2m • • fly-in, fly-out for natural resources customers charge on helicopter disposal and write down Partially offset by completed UK DHFS contract - £11.2m Prior year £4.4m credit related to release of lease service • • revenue in Q1 2018 and make good provisions On conversion to IFRS 16, prior year one-off gain on • aircraft lease surrender of £2.1m (1) Restated following adoption of IFRS 16 (2) Organic revenue growth 4% Note: Revenue by currency; AUS$ 69% 13
03 Business Review David Lockwood
Good progress against all objectives Improve Onerous Fix the Capital Operational Focus the Contracts & Allocation & Balance Performance & Portfolio Other Legacy Dividend Sheet Culture Items Change • Maintain strong • Allocation of capital for • Focus on defence, • Full rate production on • On-time customer delivery balance sheet with capability and organic growth aerospace and space onerous legacy (OTTP) >90% TARGET gearing <1.5x net markets contracts • Progressive dividend with • Underlying operating margin debt/EBITDA appropriate earnings and free • Other contingent 12-14% cash flow cover liabilities resolved or • Sustainable cash conversion risks mitigated • Bolt-on M&A with strong fit around 90% and effective integration • ‘Every Mission Matters’ • Strong balance sheet • PV investment £44.1m • Increased focus following • KC-46 update - see • Positive trend in operational H1 PROGRESS at 30 June 2019; 2018 divestments following slide metrics, notably quality • Investment effectiveness significant de-risking e.g. Cobham Delivery • Regular Board level • Tax settlement with UK • Underlying operating margin • Net debt/EBITDA - nil Framework portfolio review tax authorities driven by CMS & CCC • Net debt includes • Organic revenue and • Commenced strategic • EC State Aid tax decision • 122% operating cash IFRS 16 - lease debt underlying operating profit review of CAVS on UK CFC legislation in conversion before on balance sheet improvement operations in Australia April 2019 exceptionals • Reinstated dividend, • Culture change traction interim payment of 0.4p * *Interim dividend included in 165p offer price 15
KC-46 US Tanker Programme – Hose and Drogue Financial • Net settlement of US$63m (£49m) paid Programme status • Centerline Drogue System (CDS) – full rate production now commenced • Progress on Wing Aerial Refuelling Pod (WARP) qualification consistent with previous guidance (completion around middle of 2020) • WARP flight testing commenced June 2019 – test duration of eight to ten weeks 16
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