H1 2017 Trading Update
10 July 2017
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017
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Disclaimer
This presentation has been prepared by Carillion plc (the “Company”) contains certain
forward-looking statements with respect to certain of the Company’s current expectations
and projections about future performance, anticipated events or trends and other matters
that are not historical facts. These forward-looking statements, which sometimes use words
such as "aim", "anticipate", "believe", "intend", "plan", "estimate", "expect" and words of
similar 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 that
could cause actual results and performance to differ materially from any expected future
results or performance expressed or implied by the forward-looking statements. These
statements are subject to unknown risks, uncertainties and other factors that could cause
actual results to differ materially from those expressed or implied by such forward-looking
statements. Statements contained in this presentation regarding past trends or activities
should not be taken as a representation that such trends or activities will continue in the
future.
The Company obtained certain industry and market data used in this presentation from
publications and studies conducted by third parties and estimates prepared by the Company
based on certain assumptions. While the Company believes that the industry and market
data from external sources is accurate and correct, the Company has not independently
verified such data or sought to verify that the information remains accurate as of the date of
this presentation and the Company does not make any representation as to the accuracy of
such information. Similarly, the Company believes that its internal estimates are reliable, but
these estimates have not been verified by any independent sources.
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017
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Agenda
Philip Green,
Non-Executive Chairman
Introduction
Keith Cochrane,
Interim Group Chief Executive
Overview
and Strategy
Zafar Khan,
Group Finance Director
Financial
Review
Keith Cochrane,
Interim Group Chief Executive
Conclusions
Q&A
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017
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Overview & strategy
Keith Cochrane
Interim Group Chief Executive
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
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Strategic and operational review
Strategic and
operational review:
A thorough review of the
business and its capital
structure with all options
being given appropriate
consideration
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
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017
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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
(1)
– Non-core disposals targeting proceeds of £125m 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
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Enhanced balance sheet and contracts review
Since March 2017
UK:
•
£375m
Majority 3 PPP construction contracts
Overseas:
•
Impairment
£470m
Majority related to exits (Canada & Middle East)
TOTAL EXPECTED H1 PROVISION
£845m
• 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
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017
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Lessons learned and actions
Key Issues
Key Actions
• Acceptance of a high degree
of uncertainty around key
assumptions
• 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
• Success contingent on
performance of others not
under our control
• Design changes agreed
without agreeing incremental
cost and value
• Geographic risk
Two clear root causes are international construction and
PPP construction which we have addressed
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017
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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
Key differentiators
• Our People and Culture
• No significant renewals until end 2019
• Use of Technology
• Selected on frameworks worth £23bn in total
• Health & Safety Excellence
• Approach to Sustainability
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017
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Leading positions in growth markets
INFRASTRUCTURE
SERVICES
Market
Growth
PROPERTY
SERVICES
Rail
Defence
No. 2 in UK
No. 1 in UK
Highways
Central Gov
No. 2 in Framework
CCS Framework
Transmission
Communities
No. 3 in Canada
LA Partnerships
Telecoms
Corporate
Market
Growth
No.1 in Broadband
Oil & Gas
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017
Health
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A lower risk Construction business
Construction Positioning
• Change in approach to Construction
Only Lower Risk
Procurement Routes
• 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
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017
Cost
reimbursable
Early Contractor
Involvement
– Target Cost
Two Stage
- Design & Build
Frameworks
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Short-term priorities
2017 actions
2018 actions
• Leadership and management
changes
• Non-core disposals substantially
(1)
completed (£125m)
• Non-core disposals - 50% of
Oman sold, three more in process
• Qatar/KSA/Egypt construction
exits completed
• Enhanced contract review
completed and lessons learnt
• Challenging contracts completed
• Canada construction exited
• Strategic review - progress update
with interims in September
• 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
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Financial review
Zafar Khan
Group Finance Director
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
(1)
– planning to raise approximately £125m 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
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Enhanced contracts review
- selection and scope
Review covered all completed and ongoing services and construction contracts
Selection process
Scope of review
• Contracts in the UK where there has been
notable deterioration during 2017 that
would indicate potential risk of impairment
• 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)
• 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
• 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
• Agreed scope with KPMG contracts
specialists
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017
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Enhanced contracts review
- outcomes and financial impacts
Outcomes
£845m
• Review identified a number of contracts with
potential issues, relating to construction
contracts (continuing and completed)
TOTAL EXPECTED PROVISION
• 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
£m
Expected
provision
UK
375
Canada
145
Middle East
325
845
• 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
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017
£m
Receivables
Payables
Remaining cash flow
Impairment
provision
Revised
position
(net)
927
(599)
328
(197)
(246)
(443)
730
(845)
(115)*
Current
position
* Range of £100-£150m
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Contracts portfolio
SUPPORT SERVICES
CONSTRUCTION
PPP
£12.8bn
£2.5bn
£0.7bn
80%
• Average contract period
nine years
• No major contract
renewals until end 2019
• Approximately 90% for
public and regulated
sectors
16%
• New work focused on
lower risk procurement
routes
4%
• PPP investment
portfolio performing well
• 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
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017
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Actions to reduce average net borrowing
Disposal of
non-core businesses
• Approximately £125m over next 12 months
Further cost
efficiencies
• Significant additional cost savings to be quantified as part of
the operational review
Increased focus
on managing
working capital
• Cash collection remains key focus including for problem
contracts
• Aim to reduce monthly swings in working capital
Recoveries
• Provision supported by dedicated team to facilitate cash
settlements on key contracts
Suspension of 2017
dividends
• The Board will review the dividend policy in 2018
Pension deficit
payments
• c£50m deficit recovery payment in 2017
(1)
(1) Includes £12.8m upfront consideration from sale of Carillion Alawi but not the deferred consideration
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017
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H1 Summary financials
Group
H1 2017
H1 2016
Change (%)
£2.6bn
£2.5bn
+4%
£16.0bn
£16.0bn(2)
-
• Healthy work winning and order
book
New & probable orders(1)
• Net debt increase due to working
capital outflows, mainly on
onerous construction contracts
Total revenue(1)
£2.5bn
£2.5bn
Average net debt(1)
£695m
£587m(2)
-18%
Adjusted spot net debt(1) (3)
£536m
£183m(2)
-193%
Average EPF utilisation
£412m
£400m(2)
-3%
Pension deficit (net of tax)(1)
£587m
£663m(2)
+11%
Carried forward tax losses(1)
£810m
£186m(2)
+335%
£39m
£36m(2)
+8%
• Expected exceptional provision of
£845m related to Middle East,
exiting construction market in
Canada and certain construction
contracts in the UK
Order book plus probable orders(1)
Net derivative asset(1)
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
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017
(1) Estimated
(2) Vs. 31 December 2016
(3) Adjusted for net derivative asset
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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
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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
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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
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Conclusions
Keith Cochrane
Interim Group Chief Executive
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
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Appendix
Additional Financial Information
Pensions
£m
Assets
Liabilities
Deficit
Deferred tax
Net pension deficit
H1 2017
Dec 2016
2,618
2,573
(3,329)
(3,378)
(711)
(805)
124
142
(587)
(663)
• 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
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017
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c.£1.5bn of available funding
UK borrowing facilities maturity profile (£m)
844
249
34
49
2017
2018
227
51
2019
2020
2021
2022
0
27
2023
2024
Year of maturity
CARILLION PLC H1 2017 TRADING UPDATE - JULY 2017
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