The future of defence outsourcing

Transcription

1 The future of defence outsourcing Kevin Thomas Group Business Development Director 1 Babcock International Group FTSE 250 engineering support services company revenue~ 2 billion market capitalisation ~ 1.1 billion Our customers are government departments, public bodies or private companies operating in highly regulated environments operate strategically important assets which require long-term maintenance and upgrade where spend is non-discretionary seek innovative, cost effective engineering solutions Our key strengths highly technical engineering skill base (17,000 people) complex project management capability long-term relationships with our customers 2

2 Our business model Integrating engineering skills In challenging regulated environments Delivering value for money outcomes Babcock for complex technical programmes and vital services + + reliably cost effectively on time safely = trusted to deliver 3 A secure financial position 2008/09 year end net debt 351.5m reduced from 373.9m at Sept 08 Facilities (ex-overdrafts - 24m) 600.0m 5 year term from June 2007 Net debt to ebitda (annualised) ratio 2.0 x Interest cover 6.5 x Cash from operations 153.6m operating cash conversion rate 115% Free cash flow less dividends 74.8m 2007/ m 4

3 Delivering value for shareholders p p Dividend increased in line with earnings Policy to maintain dividend cover of between 2.5 and 3 x 25% increase in full year dividend for 2008/09 reflects Board s confidence in future prospects of the Group full year dividend underlying eps 5 Sustained track record of growth 2000 Revenue 140 Operating profit m 1000 m / / / / / / / / / /09 half year full year half year full year By establishing leading positions in markets with strong growth potential: defence, public services and critical infrastructure 6

4 UK defence market 7 Current MoD strategy MoD s current annual spend is 38 billion* Top priority remains equipment and support for Afghanistan Whilst ensuring Armed Forces are fit for the challenges of tomorrow New Strategic Defence Review to begin post election Government Defence Green paper to be published early 2010 covering experience of working in partnership defence as a force for avoiding armed conflict technology more effective processes, including acquisition (Bernard Gray) future requirements and aspirations of Service personnel *includes ~ 11bn on personnel, ~ 4bn equipment support, ~ 4bn property management, ~ 5.4 bn major procurement programmes 8

5 Defence industrial perspective Securing Britain s Future and Prosperity, Defence Industries Council, September 2009 Over the past decades the UK MoD has transferred many of the functions and activities which used to be carried out by service personnel to industry. This has been a successful and cost-effective process and has released military resources to carry out the job for which they are best suited 9 The budget challenge facing the MoD The MoD have some difficult challenges ahead cost savings in both revenue and capital budgets the release of resources for the front line They will be keen to ensure that cost reductions do not reduce levels of service, equipment, facilities. In short, their desire is the same for less An area for close scrutiny is likely to be the capital equipment programme, which will result in more life extensions of current platforms more off the shelf solutions more focus on through-life cost 10

6 Babcock and the MoD: highlights Babcock is currently one of the top 6 providers to MoD Sole provider of support for the Royal Navy s submarine fleet 75% of surface ship refit work Integrator for 2 new aircraft carriers (CVFs) Managing 2 of the Royal Navy s 3 naval bases includes fleet time maintenance and engineering support Managing 2 of Defence Estates 5 Regional Prime Contracts Training and training support for the Royal School of Military Engineering Equipment support and base support to the Royal Air Force s Hawk fleet 11 Babcock and the MoD Naval bases 13% Infrastructure 19% Logistics 9% Submarines and surface ships 40% Aircraft support 2% Design and technology 17% 60% 2008/09 Group revenue from MoD support through Marine and Defence divisions 12

7 Babcock s approach to outsourcing: the same for less Outsourcing produces cost savings target cost incentive contracts drive efficiencies not afraid to take the difficult decisions flexibility of resource levels Outsourcing releases military resource for the front line many support tasks do not need to be done by military personnel Outsourcing needs trusted partners understanding their systems and processes knowing what s important to the customer 13 Training 14

8 Why outsource defence training? MoD seeking to increase outsourcing in training market financial benefits cost savings a key driver Manpower release of personnel for operational duties MoD recognise that training transformation will not happen without industry involvement partnering approach transfer of training risk increasingly required outsourcing linked infrastructure upgrades consolidation across cap badges and trades increasing requirement to use technology and distributed training agility and relevance key to support current and future operations 15 Defence training market - UK Annual value of market Army 700m Royal Navy 470m Royal Air Force 440m Current Opportunities Royal Navy Training current Flagship contract split into training, facilities management and administration training 15 year contract, total value 200m Defence Training Review Package 2 (revised procurement) opportunities for separate tri-service training packages driver training 20m pa, logistics training 15m pa Military Flying Training System tier 2 contracts for aircraft procurement and through-life support for all elements of MOD flying training, a number of contracts total value 1bn for 25 years starting /24/

9 Royal School of Military Engineering Achieved financial close September 2008, commenced January 2009 contract value 1.5bn for 30 years First PPP to deliver training support for the Army skill and craft training from NVQ to foundation degree Significant investment programme of refurbishment and construction upgrade of accommodation at Chatham and Minley new training facilities to be built at both sites Focus on delivering greater efficiency through improved levels of service training programme matching of training to Army requirements Releases over 310 military personnel for front line duties equivalent of a new regiment of Engineers 17 Infrastructure 18

10 Defence Estates Prime contracts Current market size 1.5bn (out of DE budget of 4bn) Babcock current market share 30% Trends significant budget issues estate size reducing further outsourcing opportunities due to budget constraints 19 Regional Prime Contracting Prime Contracting aims to achieve long-term value for money through improved supply chain management incentivised payment mechanisms continuous improvement economies of scale partnering Previous process lacked a single point of responsibility was hampered by number of client-customer interfaces 200 contractors imprecise allocation of risk vulnerability to malpractice and fraud 20

11 Regional Prime East and South West South West Regional Prime sites with over 9,000 assets awarded in m over 7 years East Regional Prime - 46 sites with over 4,000 assets awarded in m over 7 years Both contracts grown since award through scope enhancements addition of new sites as individual contracts finish 21 Naval base support Faslane dedicated home for submarine fleet, including future deterrent includes fleet time engineering works Devonport 560 million contract to 2013 dedicated home for amphibious fleet majority of surface ship refit work transferred from Rosyth centre of excellence for deep refit work for submarine fleet Portsmouth operated by BVT/BAE Type 45 destroyer base port some refit work Rosyth owned by Babcock assembly yard for Queen Elizabeth class aircraft carriers 22

12 HMNB Clyde - Faslane By 2017 Clyde will be base port for all UK submarine fleet First WSMI contract awarded m extended to m target cost incentive fee arrangement We manage 1,400 employees, 200 seconded Royal Navy staff and 50 seconded MoD staff We provide submarine and surface ship maintenance facilities management, accommodation and logistics support First partnership agreement of its kind with the MoD objective to deliver cost savings whilst maintaining or improving services provide to Royal Navy every performance objective has been beaten ~ 100m of cost savings delivered to the MoD 23 Other defence infrastructure opportunities Market scale Army 50m Navy 90m RAF 90m Central 8m DE&S 4m Market currently fragmented PFI and individual contract basis Other opportunities Next Generation Estates Germany Residual UK Estate ATE DHE Clyde Future Nuclear Facilities 9/24/

13 Equipment 25 Equipment key factors Capital for new equipment likely to be rationed in the short term Afghanistan will be key priority Postponement or cancellation of new platforms will lead to existing platforms being life extended Two key issues dominating MoD programme for next five years life extension through-life support 26

14 Submarine programmes Terms of Business Agreement (ToBA) with MoD will emphasise working in partnership performance based on shared goals through-life support rather than task based projects Submarine Engineering Support Contract (SESC) 155 m over 10 years Babcock leads industry team Submarine Support Management Group performance based contract emphasis on though-life support builds on relationships established during previous 11 years Refits and refuelling existing Trafalgar, Vanguard boats and new Astute class Future Nuclear Facilities already underway at Devonport total 1bn Babcock likely to play key role in Submarine Dismantling Programme 27 Surface ship support programmes Member of CVF Alliance (alongside Thales, BVT, BAE Systems and MoD) Member of the transforming Surface Ship Support (SSS) alliance (alongside BVT) agreed in March 2009 Devonport to become centre of excellence for warship refit Well positioned to further extend lives of current surface ship fleet Another key element in the ToBA negotiation with MoD 28

15 Other equipment programmes Babcock also provides production, support and spares management to a range of programmes in land, sea and air including Royal Navy s Phalanx and 4.5 guns Jackals and Coyote all-terrain vehicles for Afghanistan Integrated Operational Support (IOS) for Hawk fast jets at RAF Valley and Hercules transport at RAF Lyneham Outlook potential further life extensions for almost any MoD hardware as capital rationed new procurement will require greater emphasis on contracting for availability and through-life capability management (TLCM) 29 Outlook for defence outsourcing 30

16 Opportunities We believe budget pressures will result in further outsourcing by MoD There are still significant opportunities for Babcock to benefit from this trend Defence Infrastructure Training Equipment technical support life extension Decommissioning 31 Summary same for less! We have already delivered much of what the MoD is seeking to achieve cost savings by delivering services more efficiently by Improving availability of assets and troops to the front improved availability of equipment through-life platform support life extensions fewer banana skins for MoD through risk transfer and outcome style contracts We have a proven track record and are a trusted partner The necessity for further outsourcing in the Defence market will create even more growth opportunities for Babcock 32

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