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CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 2
Disclaimer
This presentation has been prepared by Carillion plc (the “Company”) contains certainforward-looking statements with respect to certain of the Company’s current expectationsand projections about future performance, anticipated events or trends and other mattersthat are not historical facts. These forward-looking statements, which sometimes use wordssuch as "aim", "anticipate", "believe", "intend", "plan", "estimate", "expect" and words ofsimilar meaning, include all matters that are not historical facts and reflect the directors'beliefs and expectations and involve a number of risks, uncertainties and assumptions thatcould cause actual results and performance to differ materially from any expected futureresults or performance expressed or implied by the forward-looking statements. Thesestatements are subject to unknown risks, uncertainties and other factors that could causeactual results to differ materially from those expressed or implied by such forward-lookingstatements. Statements contained in this presentation regarding past trends or activitiesshould not be taken as a representation that such trends or activities will continue in thefuture.
The Company obtained certain industry and market data used in this presentation frompublications and studies conducted by third parties and estimates prepared by the Companybased on certain assumptions. While the Company believes that the industry and marketdata from external sources is accurate and correct, the Company has not independentlyverified such data or sought to verify that the information remains accurate as of the date ofthis presentation and the Company does not make any representation as to the accuracy ofsuch information. Similarly, the Company believes that its internal estimates are reliable, butthese estimates have not been verified by any independent sources.
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 3
Agenda
Introduction Philip Green,
Non-Executive Chairman
Keith Cochrane,
Interim Group Chief Executive
Zafar Khan,
Group Finance Director
Keith Cochrane,
Interim Group Chief Executive
Q&A
Overview
and Strategy
Financial
Review
Conclusions
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 5
H1 trading and management actions
H1 trading:
• Strong work winning performance - £2.6bn of work won
• Support Services - £2.1bn of new wins in H1, £555m for MoD
• Construction trading difficult in the UK and Middle East
• Lower full year guidance - expect FY17 Group revenue between £4.8bn and £5.0bn
Progressing with March 2017 actions to reduce net borrowing:
• Cost reduction programme well underway
• Disposals - sale of 50% of our economic interest in Oman announced today, three more in process
• Significant deterioration in cashflows on a small number of construction contracts
• Impact of a number of UK construction contracts reaching completion not replaced by material new starts
• H1 average net debt £695m, higher than expected
Expected H1 provision:
• Enhanced review of balance sheet and material contracts (supported by KPMG contracts specialists)
• £375m provision expected at 30 June 2017 relating to the UK (majority 3 PPP construction projects)
• £470m provision expected for overseas markets, majority relating to exits
• Expected £100-£150m net cash costs mainly in 2017 and 2018
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 6
Strategic and operational review
Decisions already taken
• Exit PPP construction
• Exit Egypt, Saudi Arabia and Qatar construction
• Sale of 50% of Oman business for up to £42m (£12m upfront)
• Bid only lower risk procurement routes on construction contracts
Leadership and management changes
Strategic and operational review:
A thorough review of the
business and its capital
structure with all options
being given appropriate
consideration
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 7
Actions to reduce net debt
• Substantial programme of action to reduce net debt also underway:
– Scope for significant further cost efficiencies – to be quantified as part of the strategic and operational review
– Non-core disposals targeting proceeds of £125m(1)
within 12 months
– Targeting significant receivable recoveries
– Improved contract execution
• 2017 dividends suspended (saving c£80m pa), Board to review dividend policy in 2018
(1) Includes £12.8m upfront consideration from sale of Carillion Alawi but not the deferred consideration
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 8
Enhanced balance sheet and contracts review
• Anticipated total net cash outflow £100-150m mainly in 2017 and 2018
• Four large contracts (3 in UK, 1 in Middle East) account for around half the provision
• All four complete within the next 18 months
Since March 2017 Impairment
UK: • Majority 3 PPP construction contracts
£375m
Overseas:• Majority related to exits (Canada & Middle East)
£470m
TOTAL EXPECTED H1 PROVISION £845m
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 9
Lessons learned and actions
• Acceptance of a high degree of uncertainty around key assumptions
• Success contingent on performance of others not under our control
• Design changes agreed without agreeing incremental cost and value
• Geographic risk
• Exit non-core countries and markets
• Strengthen governance
• Leadership & management changes:
– New CEO
– UK Building MD exited
– Construction Services team strengthened and refreshed
– Changed 3 BU FDs
– Incentives to be linked to de-leveraging
Two clear root causes are international construction and
PPP construction which we have addressed
Key Issues Key Actions
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 10
Why we believe in this business
We are a market leading Support
Services business
• Focused on infrastructure and property
services
• A strong reputation for service excellence
• Outlook underpinned by more than 90% of
work won in H1 for repeat customers with
long-term contracts
• High revenue visibility in Support Services –
94% for 2017, 58% for 2018 and 44% for 2019
• No significant renewals until end 2019
• Selected on frameworks worth £23bn in total
Key differentiators
• Our People and Culture
• Use of Technology
• Health & Safety Excellence
• Approach to Sustainability
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 11
Leading positions in growth markets
INFRASTRUCTURESERVICES
Rail
Highways
Transmission
Telecoms
Oil & Gas
No. 2 in UK
No. 2 in Framework
No. 3 in Canada
No.1 in Broadband
MarketGrowth
PROPERTYSERVICES
Defence
Communities
Corporate
Central Gov
Health
No. 1 in UK
LA Partnerships
CCS Framework
MarketGrowth
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 12
Only Lower Risk
Procurement Routes
A lower risk Construction business
Construction Positioning
• Change in approach to Construction
• Exit PPP construction
• Reduced Middle East exposure
• Only bidding under lower risk forms of procurement
• Going forward:
– Highly selective approach
– Small number of customers
– Targeted at Support Services customers
– Focusing on the UK
• In H1 c70% of construction work won in the UK was for repeat customers and all is under lower risk procurement routes
Cost
reimbursable
Early Contractor
Involvement
– Target Cost
Two Stage
- Design & Build
Frameworks
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 13
Short-term priorities
2017 actions
• Leadership and management changes
• Non-core disposals - 50% of Oman sold, three more in process
• Enhanced contract review completed and lessons learnt
• Canada construction exited
• Strategic review - progress update with interims in September
2018 actions
• Non-core disposals substantially completed (£125m)
(1)
• Qatar/KSA/Egypt construction exits completed
• Challenging contracts completed
• Cost out programme
• Receivables recoveries well progressed
(1) Includes £12.8m upfront consideration from sale of Carillion Alawi but not the deferred consideration
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 15
Background
• Took over in January 2017 with key priorities of:
– reducing net debt
– increasing financial reporting transparency
• Subsequent adverse developments in H1 have increased net debt despite progress against actions outlined in March
• H1 average net debt £695m
– actions to reduce net debt already underway
− 50% of Oman business sold, raising up to £42m (£13m upfront)
− cost savings programme stepped up
− 2017 dividends suspended
– planning to raise approximately £125m(1)
from disposals in next twelve months – three more businesses currently in a sale process
• Enhanced contracts review:
– as part of wider balance sheet review
– supported by KPMG contracts specialists
(1) Includes £12.8m upfront consideration from sale of Carillion Alawi but not the deferred consideration
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 16
Enhanced contracts review - selection and scope
• Contracts in the UK where there has been notable deterioration during 2017 that would indicate potential risk of impairment
• Contracts impacted by decision to exit construction in Canada and certain territories in the Middle East
• Any contracts with material contentious receivables
• All continuing contracts with revenues greater than £20m in the period to 31 May 2017
• All contracts with receivable balances in excess of £20m as at 31 May 2017
• Agreed scope with KPMG contracts specialists
Selection process
• Selection process identified 58 contracts for enhanced review:
– 20 completed contracts
– 38 continuing contracts comprising:
– 13 Support Services contracts
– 25 construction contracts (of a total of 83 continuing construction contracts)
• 38 continuing contracts account for 46%of total Group revenue at 31 May 2017
• 58 reviewed contracts accounted for £1.58bn or 73% of total receivables on the balance sheet as at 31 May 2017
Scope of review
Review covered all completed and ongoing services and construction contracts
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 17
Enhanced contracts review - outcomes and financial impacts
Outcomes
• Review identified a number of contracts with potential issues, relating to construction contracts (continuing and completed)
• Expected provision of £845m to be taken as an exceptional at 30 June 2017
• Net cash outflow of £100-£150m expected in relation to underperforming contracts, mainly in 2017 and 2018
• No prior year adjustment
• The four most challenging contracts represent around half the total provision
– All four expected to complete in the next 18 months
– All other contracts identified will complete within 12 months
• Additional cash benefit of £110m relating to further tax losses
£845mTOTAL EXPECTED PROVISION
UK
Canada
Middle East
375
145
325
845
Expected provision£m
Receivables
Payables
Remaining cash flow
328
(443)
(115)*
Revisedposition
(net)£m
(599)
(246)
(845)
927
(197)
730
Currentposition
Impairmentprovision
* Range of £100-£150m
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 18
Contracts portfolio
• Average contract period nine years
• No major contract renewals until end 2019
• Approximately 90% for public and regulated sectors
• New work focused on lower risk procurement routes
• Reducing exposure to PPP construction –15% of construction revenue and tracking towards zero by 2018
• Overseas exposure reducing as focused only on contracts supported by UK Export Finance
• PPP investment portfolio performing well
80%
£12.8bn
SUPPORT SERVICES
16%
£2.5bn
CONSTRUCTION
4%
£0.7bnPPP
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 19
Actions to reduce average net borrowing
Disposal of non-core businesses
• Approximately £125m(1)
over next 12 months
Increased focus on managing working capital
• Cash collection remains key focus including for problem contracts
• Aim to reduce monthly swings in working capital
Further cost efficiencies
• Significant additional cost savings to be quantified as part of the operational review
Suspension of 2017 dividends
• The Board will review the dividend policy in 2018
Pension deficit payments
• c£50m deficit recovery payment in 2017
Recoveries• Provision supported by dedicated team to facilitate cash
settlements on key contracts
(1) Includes £12.8m upfront consideration from sale of Carillion Alawi but not the deferred consideration
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 20
H1 Summary financials
Group
• Healthy work winning and order book
• Net debt increase due to working capital outflows, mainly on onerous construction contracts
• Expected exceptional provision of £845m related to Middle East, exiting construction market in Canada and certain construction contracts in the UK
Support Services
• Good H1 work winning
Construction
• Difficult H1 trading in construction, particularly in the UK with a deferral of a number of contract starts
New & probable orders(1)
Order book plus probable orders(1)
Total revenue(1)
Average net debt(1)
Adjusted spot net debt(1) (3)
Average EPF utilisation
Pension deficit (net of tax)(1)
Carried forward tax losses(1)
Net derivative asset(1)
£2.6bn
£16.0bn
£2.5bn
£695m
£536m
£412m
£587m
£810m
£39m
H1 2017
£2.5bn
£16.0bn(2)
£2.5bn
£587m(2)
£183m(2)
£400m(2)
£663m(2)
£186m(2)
£36m(2)
H1 2016
+4%
-
-
-18%
-193%
-3%
+11%
+335%
+8%
Change (%)
(1) Estimated
(2) Vs. 31 December 2016
(3) Adjusted for net derivative asset
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 21
Revised guidance
Reduced performance against management expectations for 2017
• Group revenue (including joint ventures) between £4.8bn and £5.0bn
• Support Services revenue of £2.6bn to £2.8bn
• PPP revenue of £225m to £275m with underlying operating profit around 15-20% lower vs. previous year
• Middle East construction services revenue between £520m and £570m and maintained operating margin at around 4 per cent
• Construction services (ex Middle East) revenue of £1.2bn to £1.4bn and margins lower vs. 2016
• Net debt (excluding disposal proceeds)
– YE slightly below 30 June level
– FY average between £775m and £800m
• IFRS 15 review underway – expect to provide an update with our H1 results
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 22
My philosophy
• Transparency a priority
• New key performance indicators
– Redefine cash conversion to exclude cash from PPP equity sales
– Analysis and commentary on total Days Sales Outstanding
– ROCE to be included in Group KPIs
• Focus on underlying cash generation and profitability
– Increased disclosure on movements in working capital and net debt
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 23
Summary
• Poor first-half cash performance reflects outflows on challenging contracts and phasing of new contract starts
• Enhanced contracts review addressed issues associated with ongoing and legacy contracts
• The actions we are taking should improve future cash generation and reduce contract risks
• Substantial liquidity with no short-term loan maturities
• No covenant issues
– Well within our 3.5x net debt to EBITDA covenant at the half year
• Ongoing de-leveraging supported by:
– Disposals
– Cost reduction
– Collection of legacy receivables and
– A greater focus on underlying working capital
• Increased financial reporting transparency
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 25
A leading Support Services business
• Very difficult H1
• Strengths in underlying business:
– Good positions in growth Support Services markets
– Excellent people, great capabilities
• Key priorities:
– Look afresh at how we operate
– Learn the lessons of recent challenges
– Simplify the business
• Ensure we deliver value to our shareholders
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017 27
Pensions
• Deficit very sensitive to movements in AA bond yield – 10bps movement changes deficit by £60m
• Current contributions plus asset returns of 3% to 5% would be sufficient to cover liabilities
• Main schemes closed to future accrual and c.40% of mortality risk hedged by a longevity swap
• Triennial valuation date 31 December 2016
• c£50m deficit recovery payment in 2017
H1 2017 Dec 2016
Assets
Liabilities
Deficit
Deferred tax
Net pension deficit
2,618
(3,329)
(711)
124
(587)
£m
2,573
(3,378)
(805)
142
(663)