Few if any companies can and have managed to avoid negative impacts of COVID-19 and Babcock International is certainly no exception. Reporting a decline in revenue and profits in the attest trading update, Babcock International management also confirmed that, due to exceptional conditions being faced and the corresponding understandable uncertainty around outturn for the current financial year, would not being paying a final dividend for previous financial year ended 31st March 2020.
This is not the strong trading statement that Archie Bethel who hands over the mantle of CEO of Babcock International to David Lockwood on September 14th would have wished to present as his last report as CEO but COVID-19 and the impact that this has had across so many companies is a situation that has to all extents and purposes been outside of anyone’s control. Babcock have in my view managed a very bad situation well and Archie Bethel is deserving of significant praise for what he has achieved since joining the group in January 2004 and having replaced Peter Rogers to become CEO in August 2016. I wish him well and in doing so, welcome David Lockwood who I have had the pleasure of knowing for several years and who I know will accept the challenge of reshaping Babcock International operations and steering the group through the remaining period of COVID-19 impact.
But despite Q1 revenue and profits being down there was also good news that included order intake in the period of £0.7 billion and that in July the company had secured around £500 million of new contracts in our Aviation business – this helped by the delays in bid decisions beginning to clear. The Group’s order book at 30 June 2020 was £17.3 billion and the bid pipeline is put at around £17 billion.
Ruth Cairnie who took up her appointment as Chair of Babcock International a year ago said in the statement that “Our experience of the pandemic so far has demonstrated that the foundations of our business – long term programmes in critical and non-discretionary areas – provide a solid platform for delivery in the medium term”. She also confirmed that Group Finance Director Franco Martinelli has announced his intention to retire and that a search for his replacement will be initiated.
Babcock also made progress on cash performance – receivables outstanding at 31 March 2020 having now been collected and the Group’s working capital position at 30 June 2020 improved on the equivalent period to 30 June 2019. Importantly, the company has a substantial long-term order book and it said that its “strong liquidity position underpins confidence in navigating the short-term financial impacts of COVID-19 whilst safeguarding our key capabilities for the future”.
Underlying operating at Babcock International for the first quarter period to 30th June was around 40% lower than last year on revenue down 11%. The company said that around half of the profit reduction was due to lower levels of productivity in the core business and that the Magnox contract, which was terminated in 2017 together with South Africa and Land adjacent market businesses accounted for the other half.
The company said it would expect to ‘see a gradual improvement in group performance from the 40% reduction in operating profit in the first quarter’ and that, as with previous years, performance for the year to end 31st March 2021 is expected to be weighted to the second half period.
In respect of divisional performance, the company said that in Marine revenue grew in the first quarter led by increasing work on the Type 31 Frigate programme and continued strong growth in our technology businesses and it confirmed that Type 31 had now completed its preliminary design review and that the majority of Tier 1 suppliers were now under contract. After initial lockdown measures Babcock confirmed that warship support work was now moving towards more normal levels and that it had also been awarded a further batch of missile launch tube assemblies for the UK’s Dreadnought and for the Columbia nuclear submarine programmes in the USA.
Revenue in Nuclear sector was as expected lower than last year although revenue in the naval nuclear business grew during the period – this led by submarine support activity and nuclear infrastructure investment programmes. Revenue in the civil nuclear business was lower due to COVID-19 restrictions on nuclear site access together with lower levels of work in support of nuclear power generation and absence of revenue from the Magnox decommissioning contract that ended in August 2019.
Sector operating profit was also lower, mainly due to the impact of COVID-19 on revenue in civil nuclear and a lower margin earned in naval nuclear, as a result of restrictions in the number of people allowed on site and the practical application of safe distancing and PPE guidelines.
In July, the Nuclear Decommissioning Authority (NDA), in support of the roll out of its “One NDA” strategy, announced that the Dounreay decommissioning contract, currently being delivered by a joint venture including Babcock, will be taken back into the NDA in March 2021. In respect of this Babcock confirmed that it is continuing with the sector restructuring programme announced in June – this including planned integration of the civil and naval nuclear businesses into a single operating structure.
In the Land sector, the company maintained critical support activity across defence and emergency services throughout the period. However, this sector has clearly been the hardest hit by COVID-19 due to its large exposure to adjacent market short-cycle businesses. Revenue, margins and profits were lower in the first quarter compared to the same period last year with COVID-19 impacting performance in civil training, airports, rail, and power businesses. Trading in South Africa remained tough with the business broadly breaking even in the quarter.
Aviation sector, defence revenues were as planned as work continued across a variety of defence programmes. In Continental Europe, Scandinavia and Australia the Aerial Emergency Service bases have remained fully operational although sector revenue was lower in the Q1 period due to the impact of COVID-19 on flying hours and the ongoing weakness in oil and gas businesses. Thus, operating profits were lower than last year due to lower volume related revenue and additional COVID-19 related costs.
The civil aviation market continues to provide good long-term growth opportunities and in July the company was awarded around £500 million of new civil aviation contracts across both oil and gas and aerial emergency services as delays in bid decisions showed signs of beginning to clear.
Babcock confirmed that they are progressing with a sector restructuring programme and accelerating fleet rationalisation programme.
CHW (London – 4th August 2020)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785