Interim results presentation and script - Ultra …...Interim results presentation and script 6 August 2018 Amitabh Sharma, Group Finance Director, presented the details of Ultra’s

Douglas Caster, ChairmanSimon Pryce, Chief Executive OfficerAmitabh Sharma, Group Finance Director6 August 2018

Interim results presentation and scriptfor the six months ended 30 June 2018

Ultra Electronics Holdings plc

Cautionary statementThis document contains forward-looking statements which are subject to risk factors associated with, amongst other things, the economic and business circumstancesoccurring from time to time in the countries and sectors in which the Group operates. It is believed that the expectations reflected in these statements are reasonable,but they may be affected by a wide range of variables which could cause actual results to differ materially from those currently anticipated.

The Ultra Electronics Group manages a wide range ofspecialist capabilities, generating highly-differentiatedsolutions and products in the Defence & Aerospace, Security & Cyber, Transport and Energy markets.

We meet customer needs by applying electronic and software technologies in demanding environmentsand meeting critical requirements.

DEFENCE & AEROSPACE

SECURITY & CYBER

TRANSPORT ENERGY

Ultra Electronics Holdings plc.

Interim results presentation and script 6 August 2018

Douglas Caster, Ultra’s Chairman providedan overview of the interim results.

Good morning and welcome to the 2018 InterimResults Presentation.

Last November when I stepped in as ExecutiveChairman I had a number of priorities. The firstone was to deliver the revised forecast for the2017 year-end. The second was to set a budgetfor 2018 that I believed would be achievable atthe time and I concluded that modest progresscould be achieved in 2018. Thirdly, I conducted astrategic review during January, meeting with allof the Group’s businesses to understand the keydrivers, opportunities and issues they faced and Ishared this with our City audiences in March.

What I concluded from this review was that despitethe “reset” in performance expectations that wemade last November, there was nothingfundamentally wrong with the Group’s businessesand that there was no reason why the Groupwould not be able to make good progress into thefuture from there but under the right leadership.However this is not to say that I discovered severalareas where improvements could be made andthese are being pursued by our new ChiefExecutive Officer whom you’ll hear more from later.

Turning now to, the first point on the slide,overall we are experiencing improved marketconditions. This is particularly so in the USDefence market where Defence InvestmentOutlays in 2017 were up 5.6% on the previousyear and are expected to be up by about thesame amount in 2018. In the UK Defence markethowever, in common with other companies, we

have continued to experience fiscal tightness asthe UK MoD focuses on what I would call bigticket items where expenditure is alreadycommitted. In the civil aerospace market thiscontinues to be buoyant for us, driven by aircraftproduction programmes.

As a result of the currently prevailing marketconditions we have achieved a very strong orderintake across the Group with the order book up18% on the same period last year and 6% higherthan at the 2017 year-end. Ami will be givingmore detail but this level of order winningprovides good order cover for the second half.

For the first time in a while we are reportingunderlying organic growth. Unfortunately, this ismasked by currency exchange headwinds but it isa welcome indicator that Group performance isturning around. Specific engineering problems atHerley, however, have impacted profitperformance so that we are unable to report thematching organic growth in profits which wouldhave occurred without these charges. I’d like toassure you that much management attention hasbeen given to the Herley issues, including fullengagement with the customer, to ensure thatthey are contained and that a satisfactoryoutcome will eventually be arrived at.

One of my other priorities last November was tofind and appoint a new Chief Executive Officer.I’m glad to report that on 18 June we appointedSimon Pryce who is here before you and later hewill give you his initial impressions of the Group.

With that brief introduction I’ll hand over to Amito take you through the detail of the results.


01Interim results presentation and script 6 August 2018


Amitabh Sharma, Group Finance Director,presented the details of Ultra’s first halffinancial performance.

Thank you Douglas and good morning.

I am pleased to present our interim results for theperiod ended 30 June 2018.

We are reporting for the first time under IFRS 15and in this presentation all the percentagemovements quoted will be against IFRS 15adjusted comparatives.

The Group closed June with a strong order bookreflecting improved order intake over the period.At constant currencies, the order book grew 4.9%organically compared to December 2017 and19% organically compared to June 17. This isencouraging and reflects our improving major endmarket. Looking at order intake, this improved6.6% organically compared to H1 2017.

As expected, FX movements provided a headwindto our key indicators. Sterling strengthened 9.5%against the US Dollar, with the average ratemoving to 1.38 in the first half of 2018 from 1.26in the comparable period last year.

For the first time since December 2011, the Groupachieved organic revenue growth, with a constantcurrency increase of 1.3%. Operating profit reducedorganically by 9.4%, which includes £6.1mdevelopment cost overruns at Herley. Operatingprofit grew organically when excluding this.

Margins as a result were lower at 13.7%.Excluding the cost overruns, margins were in thecustomary range at 15.4%. Earnings per sharedeclined by 20.9% due to foreign exchange,lower profits and the 2017 equity raise. The share buyback commenced over the period, with3.5m shares re-purchased for just under £50m.

Reflecting these factors, the interim dividend of 14.6p per share is unchanged compared withH1 2017.

before the S3 programme, amortisation of intangibles arising on acquisitions, impairment charges, acquisition and disposal related costs net of contingent consideration adjustments, and significant legal charges and expenses. before the S3 programme, amortisation of intangibles arising on acquisitions, impairment charges, acquisition and disposal related costs net of contingent consideration adjustments, significant legal charges and expenses, fair

value movements on derivatives, unwinding of discount on provisions, defined benefit pension finance charges, and for EPS before related taxation.the annual rate of increase or decrease in revenue or profit that was achieved at constant currencies and when compared to the prior period results prepared on an IFRS 15 basis. Adjustment is also made for any acquisitions or

disposals to reflect the comparable period of ownership.


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Moving to the revenue bridge.

This is self-explanatory and highlights the organicgrowth and currency impact on the half year.

Similarly the profit bridge shows the impact ofcurrency and development contract overruns onthe half year.

* before the S3 programme, amortisation of intangibles arising on acquisitions, impairment charges, acquisition and disposal related costs net of contingent consideration adjustments, and significant legal charges and expenses.


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Turning to cash.

Operating cash flow of £6.5m represented cashconversion of 14%, compared to 54% last year. I will take you through the key elements of this.

Capital expenditure increased to £8.1m. Thisincluded spend on equipment required for ourLondon Heathrow Terminal 5 contract. OurMontreal military radio production site requiredinvestment to help execute the order book. Asyou may remember, we are undertaking a numberof ERP implementations. Six are in progress. Thesewill go live over H2 2018 and H1 2019.

Working capital increased by £33m over the firsthalf of the year. A breakdown is included in thebox on the right hand side of the slide. This islarger than the working capital outflow last halfyear so let me give you some detail.

Inventories represented £13m of the increase inworking capital, with a number of businessesincreasing stock levels. The largest increase was atour Ocean Systems business where inventoriesgrew by £7m for deliveries across a number ofunderwater warfare projects in H2. Most of therest is due to smaller inventory increases ahead ofH2 deliveries as a result of the larger order book.

Creditors decreased by £23m overall due to areduction in trade creditors from year end. £12mof this was due to supply chain constraintsrequiring us to make faster payments to suppliersand this is included in the 70-75% full year cashconversion guidance. In order to normaliseworking capital flows and improve business andfinancial performance, the Group intends toreview its working capital levels for future years.

Moving onto net debt. Significant movementsinclude the share buyback which resulted in acash outflow of nearly £50m over H1 and, aspreviously advised, the closure of the Spartonforward foreign exchange contract resulted in an£11m outflow. The net debt to EBITDA ratioreduced from 1.79x at the end of H1 2017, whichwas before the Sparton related equity raise, to1.39x at the end of June. A slide with more detailis included in the Appendices.

* before the S3 programme, amortisation of intangibles arising on acquisitions, impairment charges, acquisition and disposal related costs net of contingent consideration adjustments, and significant legal charges and expenses. 2017 has been re-presented as if under IFRS 15.


Moving on to how the three divisions performed,we start with Aerospace and Infrastructure.

Revenues grew organically at constant currenciesas activity increased on our aerospace contracts,notably the Joint Strike Fighter programme. Thiswas partially offset by reduced contractmanufacturing revenues. Profit margins increasedto 16.1% due to lower research anddevelopment costs at our aerospace business.

The Communications and Security division alsosaw organic revenue growth at constantcurrencies. Increased military radio, air defencesystems and electronic warfare deliveriescontributed, but this was offset by slower cryptorevenues and a strong comparative period forforensic equipment sales.

The cost overruns at Herley caused margins toreduce to 7.2%, but when excluding the £6.1mcharge, margins were 12.7% compared to12.0% in 2017.

Looking at the Maritime and Land division,revenues declined organically over the first half.Demand for legacy sonobouys remains healthy,but there have been some maritime systemprogramme delays leading to revenues movinginto the second half. Margins reduced to 17%principally due to additional costs of redesign oncertain programmes.

All three divisions saw significant increases intheir order books compared to June last year. The largest increase was experienced by theCommunications & Security division, whose 20%order book growth was driven by military radios,security equipment wins and strong order intakeat Herley. Joint Strike Fighter related ordersboosted the Aerospace & Infrastructure divisionorder book, which grew by 18%.

The Maritime & Land order book grew 16%,following a significant Indian Navy contract winand a maritime propulsion order.

* before the S3 programme, amortisation of intangibles arising on acquisitions, impairment charges, acquisition and disposal related costs net of contingent consideration adjustments, and significant legal charges and expenses. 2017 has been re-presented as if under IFRS 15.

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The S3 programme is now reaching its final sixmonths. The S3 initiative was launched in late2015 with an aim to reduce complexities withinour group so that management can focus ongrowing their businesses rather than managingthe back office processes.

From left to right, column 1 shows theprogramme has cost just under £0.5 million in2018 and column 2 shows that cumulatively wehave spent £19.7 million.

The costs to date comprise project costs, togetherwith onerous lease provisions, consolidation costsand the costs of some headcount reductionsowing to property closures. S3 costs areanticipated to be around £25 million in total asthe project concludes at the end of 2018.

Column 3 shows that S3 has generated savingsof £8.6 million in 2018 so far, and we expect thesavings will be £20 million from 2019.

Notable successes so far in 2018 include furtherprogress on the ERP rollout, a further reduction inour property footprint and the consolidation ofUK payroll services.

While the S3 project will end this year, thereremain opportunities for further operationalimprovements in the future.


06



Let me provide you with some technical guidancefor 2018. The strengthening of Sterling willprovide a FX headwind. At present, each onecent movement in the US dollar represents amovement of £3.2 million in revenues and £0.75 million in profits.

In respect of our investment plans our currentguidance is for capital expenditure to be around£20 million, the largest element being the ITsystem rollouts.

The Group’s effective tax rate is currentlyexpected to be broadly flat.

As previously guided, full year cash conversion isexpected to be in the 70-75% range.

In terms of the total dividend for the year, we willlook at this in the context of the full yearperformance.

The balance sheet remains strong and we willcontinue the share buyback, particularly when wesee good value in the shares.

Thank you. I will now hand over to Simon.

07



08

Simon Pryce, Ultra’s Chief Executive Officer,continued covering future performance andthe market outlook.

Good morning everybody, thank you Ami, thankyou Douglas. What I’m going to go through inthe next couple of slides is what I’ve been doingfor the last six weeks. I have spent most of mytime familiarising myself with the Ultrabusinesses, the Ultra leadership and the workingprocesses and practices that go on within theorganisation. My initial impressions very muchsupport the due diligence I did before I joinedand what Douglas’ has highlighted at thebeginning of this presentation.

In common with a number of other companieswith significant defence exposure, constraineddefence spending both in the UK and particularlyin the US created a challenging environment forUltra, which has particularly impacted the Groupover the last two or three years.

But, it shouldn’t detract from the underlyingstrengths of Ultra: What I’ve found here is an IP richgroup of businesses with a very solid technologybase and wide range of specialist capabilities.

As the US moves into a period of increaseddefence spend, Ultra’s world leading technologyin areas such as anti-submarine warfare andsecure communications is particularly relevant inhelping to address the perceived threats that ourmajor customers are trying to prioritise.

And these technologies and capabilities aresupported by good people who are wellconnected with their customers and a particularlystrong and flexible engineering capability.

We support a wide range of platforms, programmesand customers with generally, although notalways, relatively small shipset values, andimportantly from a risk management perspective,has no major platform or customer dependency.

Our federated structure allows both agility andflexibility in providing solutions that customersneed in the most technologically effective andcost efficient way.

And finally, we do all this with a pretty leancentral overhead.

But, it does feel, even after six weeks, like there islots more we can do:

As our performance over the last few years hasdemonstrated, there are significant strengthsassociated with being a federation ofautonomous businesses. However, I’m not surethat we have sufficiently robust underlyingprocesses particularly around risk assessment andmanagement and resource allocation, nornecessarily all of the right capabilities, toconsistently deliver the best possible outcome forall of our stakeholders.

continued on next page


continued from previous page

I am not sure that we have an optimised structureand set of management processes that supportsthe delivery and maximisation of long term andsustainable value creation across the wide rangeof technologies, capabilities and business modelswithin the Group.

Whether it is to do with the market, or forinternal reasons, it feels like Ultra at the momentis rather tactical, and that there are greateropportunities in a long-term business like this,from taking a more strategic approach to the waywe make decisions.

And the challenges the Group has faced in recentyears and the pressure to achieve profits growth,despite a challenging market, has led to a focuson cost cutting and a tendency to hold back oninvestment together with greater central controlover expenditure, perhaps at the expense of amore pragmatic approach to risk, contracting andeffective oversight.

And finally, as a number of you will be aware,one or two of the acquisitions we made recentlyare not delivering against the strategic investmentcases that were made at the time the investmentwas entered into.

But importantly, all of these issues feel likeopportunities rather than problems. They arefixable and build on Ultra’s traditional strengths,with its extensive specialist capabilities anddifferentiated technologies, its talented people andstrong balance sheet. In short, it feels like there islots of medium and long term opportunity at Ultra.


09


So what we are going to think about over thenext six to 12 months moving forward, it’s allabout securing the foundations for the nextphase of Ultra’s development:

We will be looking at things that continue to putthe customer first, focusing not just on meetingour commitments to them, but exceeding theirexpectations; delivering effective solutions tothem, on time, to cost and at a price they areprepared to pay;

We’ll be looking at ways of maintaining thatagility and flexibility in finding effective solutionsto meet our customer’s needs, not just throughdirect strategic and tactical relationships, but alsothrough mutually beneficial teaming andpartnering arrangements.

We’ll be working to ensure we have the rightempowerment framework that allows decisionmaking to take place at the right level and thatpeople are empowered and have the resources todeliver their plans in the context of aligned longerterm strategic goals.

Whilst the S3 programme was a start, as Amiflagged, we will continue to look at opportunitiesfor process improvement, commonisation andstandardisation that supports us being moreeffective in the way we do business whilstmaintaining our independent customer focus.

We will apply the same execution discipline I seefor some of our businesses more broadly acrossthe whole Group, and also on our cross businessand cross functional projects.

We will focus on the more effective andstructured development of our already talented,and our most precious resource, our people.

And we will be working on clarifying our strategicobjectives and ensuring that in our resourceallocation and in our investment process, we arealigning them and are disciplined in deliveringagainst those aligned objectives.

Our investment process is going to be verydisciplined, and will always support the longerterm Group strategic goals.

Ami and I will provide you with preliminarythoughts on these areas and where we have gotto at the time of the prelims in March. These feellike the areas we are going to focus on as weenter into Ultra’s next phase of development aswe focus on returning to long term andsustainable value creation from this Group.


10


So in summary, six weeks into the role, andadmittedly with much still to learn and see, I verymuch concur with Douglas’ view, despite adifficult few years and in no small part due to hisrecent efforts, Ultra is well positioned as we enterthe second half.

The order book is strong, indeed as strong as ithas been for a number of years.

We have got good, positive momentum as weexit the first half, and with good order cover forthe remainder of the year, and it certainly feelslike risks to H2 are mainly around execution andeffective delivery.

In parallel we will be looking at securing andstrengthening Ultra’s foundations, and I’mextremely excited to be part of Ultra and I thankDouglas for giving me the opportunity as we takeUltra into the next phase of its developmentwhere it feels that there is a lot of potential forthis Group in the medium to long term.

That is the end of the formal presentation and I’dnow like to open the session up for questions. Itwould be helpful, certainly to me as I amrelatively new to this audience, if you could raiseyour hand and state your name and theinstitution or firm you are representing followedby your questions. If we do not manage to get toyour questions during the course of thispresentation, please feel free to get hold of Amior me outside this session and we will do all wecan to answer any concerns or questions that youhave got. So with that, I will open the floor.


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Registered Office:

Ultra Electronics Holdings plc417 Bridport Road

Greenford

Middlesex UB6 8UA

England

Tel: +44 (0) 20 8813 4321

Fax: +44 (0) 20 8813 4322

www.ultra-electronics.com

[email protected] Design: HAT Associates+44 (0)1242 253112

Documents

Interim results presentation and script - Ultra …...Interim results presentation and script 6 August 2018 Amitabh Sharma, Group Finance Director, presented the details of Ultra’s