analyst presentation 2 march 2009 - dxc technology · analyst presentation 2 march 2009. david...
TRANSCRIPT
Delivering on our strategy
Analyst presentation2 March 2009
David AndrewsChief Executive Officer
1
2
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Another strong year in 2008…
… creating value for our shareholders
2007 2008 Increase
Revenue £468.2m £557.8m 19%
XEBIT margin 6.8% 7.3% 50 bps
XEBIT £31.6m £40.8m 29%
Pro forma EPS 10.51p 14.67 40%
Dividend per share 2.0p 2.5p 25%
Free cash flow £27.7m £33.0m 19%
Group net cash £98.4m £117.8m
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© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Delivering on our strategy…
… for rapid international growth
Growing existing platforms
• Expanded our Broking Services platform through Cooper Gay contract
• Significant progress in moving from paper-based to electronic processing in the London insurance market
• Expanded our Hosting services including signing contract with Northgate Arinso and implementing a new technology trading infrastructure for the London Metal Exchange
• Completed acquisition of Mercuris SA, French Procurement outsourcing services provider
• Expanded the Central Price Services capabilities and automated the valuation process for our financial services customers
• Upgraded our securities processing platform to address new German withholding tax laws (Abgeltungssteuer)
Adding new platforms
• Successfully completed re-alignment phase of EP with Allianz Global Investors
• Grew 3rd party Open Architecture customer accounts for Fondsdepot Bank by c.40%
• Signed contracts to acquire Cambridge Solutions Ltd
Becoming the lean processor
• Implemented a set of standard production methods across our top 10 centres globally
• Commissioned a new technology to support complex processing
• Increased sharing to balance work loads across processing centres
Richard HoughtonChief Financial Officer
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© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Profit & Loss (1) …
£m 2007 2008 % increaseRevenue 468.2 557.8 19%
Cost of Sales (414.2) (491.4)
Gross profit 54.0 66.3
Administrative expenses (15.2) (16.7)
Adjusted operating profit 38.9 49.7 28%
Net finance income 2.3 4.7
Adjusted profit before tax 41.2 54.4 32%
Taxation (13.4) (15.0)
Adjusted profit for year 27.7 39.4 42%
Profit attributable to minority interests 4.9 6.4
Profit attributable to equity holders of the Group (XPAT) 22.8 33.0 44%
Pro forma EPS – basic 10.89p 15.22p 40%
Pro forma EPS – diluted 10.51p 14.67p 40%
(1) Pre exceptional items and post add backs which include share-based payments of £2.3m (2007: £0.5m)(2) Pro forma number of shares for the year ended 31 December 2007 has been calculated by adding weighted average number of
shares issued between IPO and 31 December 2007 to the actual number of shares in issue at IPO
(2)
(2)
6
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Revenues…
59 67 86147 176 216 262
58 66108
116136
165167
63
9796
103
150
1228
(14) (21)(15)(9)(3)(3)(3)(0)(50)
50
150
250
350
450
550
650
2001 2002 2003 2004 2005 2006 2007 2008
(£m
)
Business lines Insurance Financial markets Intercompany
40115
131
254
350
394
468
558
(1) Includes BPS and Corporate.
(1)
19%
7
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Revenue visibility…
84
… expected to remain at similar levels
340394
446
527
394
468
558
-
100
200
300
400
500
600
2006 2007 2008 2009
(£m
)
Visible revenue Revenue achieved
Basis of preparation
Visible revenue comprises the following:
• Annuity revenue from contracts which have a remaining contracted period greater than one year.
• Revenue at risk which is contracted revenue that is volume dependent after contingency.
• Renewals where there is an ongoing relationship and for which contracts renew within a year.
Visible revenue
86% 84% 80%
8
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Profits…
6.1
13.6
17.1
22.8
33.0
0
5
10
15
20
25
30
35
2004 2005 2006 2007 2008
(£m
)
9.0
19.722.2
31.6
40.8
0
5
10
15
20
25
30
35
40
45
2004 2005 2006 2007 2008
(£m
)
Xchanging share of profit after tax (XPAT)Xchanging share of EBIT (XEBIT)
Note: Pre exceptional items and after add backs including share-based payments of £2.3m (2007: £0.5m)
29%44
%
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© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Margin upside…
84
… strongly underpinned
Margin drivers
• Leveraging central costs
• Productivity improvement
• Offshoring
• Partly offset by dilutive impact of:
– addition of FDB
– additional discounts
– weakness of Business Support revenues
Xchanging EBIT margin
Note: Pre exceptional items and after add backs including share-based payments of £2.3m (2007: £0.5m)
7.3%6.8%
5.6%5.6%
3.6%
8.3%8.9%
0%
2%
4%
6%
8%
10%
2004 2005 2006 2007 2008
XEBIT Margin
EBIT Margin (including minorities)
10
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Segmental performance – Business Lines…
176.1215.8
261.8
0
50
100
150
200
250
300
2006 2007 2008
(£m
)
FY
9.8
19.721.4
0
5
10
15
20
25
2006 2007 2008
(£m
)
XEBIT
Revenue
• Strong organic growth in procurement
– Increased volumes from existing long-term customers
– Full-year effect of new contracts which were being implemented in 2007
• Mercuris SA acquisition
• Improvements in procurement margins
• Diluted by weak performance of the Business Support offerings which operate at higher margins
XEBIT margins 8.2%9.1%5.6%
21%
9%
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© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Segmental performance – Insurance…
135.7164.7 167.0
0
50
100
150
200
2006 2007 2008
(£m
)
FY XEBIT
Revenue
• Higher claims volumes
• Automation of insurance processes
• Offset by impact of discounts and loss of certain policy preparation services
• Cost savings in Xchanging Broking Services resulting from
– offshoring
– productivity improvements
• Offset by increased discounts and non-recurring implementation costs associated with offshoring and electronification of the London market
16.7
20.8 20.6
0
5
10
15
20
25
2006 2007 2008
(£m
)
XEBIT margins 12.3%12.6%12.3%
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© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Segmental performance – Financial Markets…
13.3
10.4
15.1
0
5
10
15
20
2006 2007 2008
(£m
)
96.2 102.9
150.3
0
50
100
150
200
2006 2007 2008
(£m
)
FY XEBIT
Revenue
• Contribution from FDB
• Strong transaction volumes in XTB
• Strengthening of the Euro against Sterling
• Productivity gains
• Arbitrage savings from offshoring in 2007
• Strengthening of the Euro against Sterling
• Partly offset by guaranteed discounts to Deutsche Bank and margin dilution due to FDB
XEBIT margins 10.0%10.1%13.8%
46%
45%
13
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Finance income and tax…
84
27.0%
31.8%
26.6%
10%
15%
20%
25%
30%
35%
2006 2007 2008
FY Adjusted tax (2)
Adjusted net interest (1)
2.02.3
4.7
0.0
1.0
2.0
3.0
4.0
5.0
2006 2007 2008
(£m
)• Higher cash balances held by the Group driven by
– strong cash conversion
– full year effect of the primary funding received from the IPO
• Utilisation of tax losses in the central services entity
• 2007 effective tax affected by
– decrease in corporation tax rates in Germany and the UK, resulting in a reduction in deferred tax assets
(1) Excludes imputed interest on put options and employee loans
(2) Effective tax rate on Xchanging’s share of adjusted profit before tax
14
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Operating cash flow…
91
Cash generated from operations and cash conversion (pre investment) (1)
(1) Cash conversion ratio, calculated as cash generated from operations divided by the Group’s adjusted operating profit
69.7
29.434.5
17.4
49.7
92%99%
91%
128%
139%
0
10
20
30
40
50
60
70
80
2004 2005 2006 2007 2008
(£m
)
60%
80%
100%
120%
140%
160%
Cash generated from operations Cash conversion (pre investment)
15
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
5.0%
6.1%
4.0%
7.0%
3.0%
3.1%3.1%2.6%
3.1% 2.9%
0%
1%
2%
3%
4%
5%
6%
7%
8%
2004 2005 2006 2007 2008
Capex as % of revenue Depreciation as % of revenue
Capital expenditure…
Expected long-term rate
… tangible and intangible
16
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Strong cash flow…
32.8
33.0
69.7
27.15.9
8.9
0
10
20
30
40
50
60
70
Cash generatedfrom operations
Tax Capex Net interestreceived
Free cash flow Minority dividend Xchanging freecash flow (post
minoritydividend)
(£m
)
5.0
17
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Strong balance sheet…
90
Cash/ debt
Net cash of £117.8m at 31 December 2008 includes £25.5m held in escrow in relation to the Cambridge acquisition. Of this net cash, £75.3m was centrally controlled cash.
Pensions
£m 2007 2008
Assets
Non-current assets 193.8 231.3
Trade and other receivables 100.9 112.5
Cash and cash equivalents 98.4 117.8
Liabilities
Current liabilities (109.6) (129.9)
Net current assets 89.6 100.3
Total assets less current liabilities 283.5 331.7
Non-current liabilities (61.5) (73.3)
Net assets 221.9 258.4
Pensions deficit of £18.2m (2007: £8.7m). Increase primarily due to falls in the value of the schemes’ investments during 2008.
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© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Update on Cambridge process…
• Open Offer closes on 16 March
• Open Offer completes on 31 March
• David Andrews and Richard Houghton appointed to the Board of Cambridge on 12 January
• Sale of shares under the two share purchase agreements expected to complete on 2 April 2009
… acquisition expected to complete in early 2009
• Letter of Offer dispatched to Cambridge Shareholders on 20 February
• Open Offer to the public opened on 25 February
January 2009 February 2009 March 2009 April 2009
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© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Financial overview of Cambridge business…
Financial overview (fiscal YE 31 March) Geographic segments
Revenue (2)
(2) Cambridge reported revenue by geography for fiscal year ended 31 March 2008.(3) As at 31 March 2008.
Employees (3)
Revenue (£m) (1)
Adjusted EBIT (£m) (1)
(1) Cambridge consolidated revenues and adjusted operating profit under Xchanging’s IFRS accounting policies excluding discontinued operations; GBP:Rs exchange rate of 1:79.6049.
2.0
4.0
… substantial revenue base with opportunity to increase margin
North America30%
India 61%
Australia 9%
Europe8%
RoW5%
North America70%
Australia17%
144.3
170.5159.0
0
50
100
150
200
2006 2007 2008
£m
16%
9.5
7.7 7.0
4.4%
6.6%
4.6%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2006 2007 2008
£m
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
EBIT EBIT Margin
12.0%
20
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Significant potential to create value…
27
… through access to enhanced global sales opportunities
• Acceleration of consolidation of US BPO business to reduce fixed costs
• Strategy to create ‘flagship’ processing centre to appeal to US buyer sentiment
• Existing and new customers have responded well to the acquisition and there is evidence of
increased interest in the USA and Australia
• Scale benefits in Indian BPO and IT as spare capacity is utilised
21
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Investment…
27
Guidance Current view£m $m £m $m
Exceptional costs 9 17 15 22
Capex 7 13 8 13
Total 16 30 23 34
(1) At original $/£ exchange rate of $1.8/£
• Total capex for the enlarged Xchanging Group in 2009 including implementation investment is expected to be 5% of revenue
(1)
22
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Strong cash position post Cambridge acquisition…
90
Pro forma controllable cash position
(1) Centrally controlled cash includes a £25.5 million cash balance in escrow account
Central cash as at 31 December 2008 of £75.3 million (including £25.5m in escrow account)
Lloyd’s facility extended to £90 million in October 2008
– €20m utilised under LOC
– £70.5m un-drawn facility remains
Post completion, pro forma group central cash of c.£22 million
Available central cash plus unused facility is c.£93 million
Cambridge net debt of £36 million to be refinanced using some combination of external debt and Xchanging facility
0
20
40
60
80
100
Centrally controlledCash (31/12/2008)
Cash consideration(incl. non-competeand fees not yet
paid)
Central cash afterconsideration
Unutilised Facility
(£m
)
75.3
53.0
22.3
70.5 (1)
Headroom = c.£93m
23
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Significant margin improvementSignificant margin improvement
High revenue visibilityHigh revenue visibility
Continued strong organic growthContinued strong organic growth
In summary …
Cambridge acquisition on trackCambridge acquisition on track
Confident in
the outlook for 2009
and beyond
Confident in
the outlook for 2009
and beyond
David AndrewsChief Executive Officer
24
25
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Xchanging’s vision is to be…
… THE global business processor
26
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Making change happen…
… in non-core processing
Policy / Strategy
Core Business
Industry Specific
Hum
an Resources
Procurement
AccountingIT & Hosting
27
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
THE global business processor vision…
… is there to go after
IDC – 2012 BPO market size
$68 billion
>$1.3 trillion
Fortune 500 non-core cost base
28
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
THE global business processor vision…
… is there FOR US to go after
c.1,300employees
c.3,400employees
c.3,900employees
Revenue 78%
Revenue 5%
Revenue 17% (1)
Operations in 9 countries(1) % of illustrative pro forma Enlarged Group revenues. Pro forma Enlarged Group revenues comprise: Xchanging revenues for year ended 31/12/2008 (£558m) and Cambridge
revenues for year ended 31/03/2008 (£159m)
29
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
THE global processor vision…
… is what the market expects
Customers in 38 countries
30
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Our 3-pronged strategy…
… to achieve the vision
Grow existingplatforms
Lean Processor
Add new platforms
31
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Our 1 + 4 “Go to Market” offerings…
… for sustaining rapid growth
Products
Straight Through Processing
Outsourcing
Business Support
Partnering
32
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
A good pipeline …
… of well-qualified opportunities
“1 + 4 Go to Market
Strategy”
20
Pipeline visibility Interest Shaping Validation Conclusion
Memorandum of Understanding
“MOU”ContractLetter of Intent
“LOI”Arrangement
Letter
Authority to Proceed Authority to Continue 1 Authority to Continue 2 Authority to Start
• Continue to see accelerated market demand with a high number of opportunities
– trend towards bigger and more complex opportunities with an international dimension
• 2008 emphasis on our outsourcing, products and additional services to existing and new customers
• Major partnering opportunities take longer to conclude in uncertain conditions
– aggressively pursuing several partnering opportunities
33
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Our lean processor strategy…
… a proven formula
Processing Centres
Standard Operating Model
Global Balancing Repeatable
Standard
Large Scale
34
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Becoming the lean processor …
Xchanging (excl.Cambridge)
Xchanging (incl.Cambridge)
Xchanging (excl.Cambridge)
Xchanging (incl.Cambridge)
… through processing precision and Global Balancing
Lloyd’s Building Farnborough
Deutsche Bank Branch
India (Gurgaon) India (Cambridge, Bangalore)
Preston
Sossenheim
Hof
Employeesc.18%
Employeesc. 67%
Xchanging (excl.Cambridge)
Xchanging (incl.Cambridge)
Employeesc. 15%
c. 39%
c. 51% c. 10%
Malaysia (Kuala Lumpur)
35
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
What will lean processor look like?
… large scale, standard and repeatable
36
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Global business processing…
… power, precision, performance
… making change happen
Sales
Service
Quality
Production
Relations
Technology
Implementation
Technology Definition Technology AgendaPlatform InnovationRisk BalancingEnterprise Map Technology BlueprintProcessing Components
Quality Definition Corporate Social Responsibility
Risk Register Contract RepositoryQuality System Control Universe Compliance Regime
Sales Definition Revenue ControlBusiness SupportProducts Partnering Straight Through Processing
Outsourcing
Improvement Definition
Business PlanProject ControlCapacity ScheduleComponent Library People PyramidBest Practice
Relations Definition Value ManagementStakeholder Management
Regional CooperationNetwork Management PioneeringRelationship Management
Production Definition Improvement PipelineGlobal BalancingWorkflow Control Process Flow Capacity ScheduleWork Package
Service Definition Improvement PipelineEntrepreneurial SpiritPerformance Control Service Academy Change Register Customer Experience
Baselining channels Increasing predictability
Maximising value together
Guaranteeing sustainable savings
Optimising the value chain
Applying know-how for results
Delivering the bestsolution
Baselining delivery Enhancing resultsInspiring serviceprofessionals
Optimising relations Anticipating newrequirements
Optimising thevalue chain
Meetingobligations
Baselining productivity Increasing productivityReducing friction Eliminating duplication Maximising resource usage
Driving costefficiency
Managing throughput effectively
Defining stakeholders Optimising relationships
Establishing contacts Building the network Targeting opportunities
Satisfying stakeholder requirements
Leveraging relationships
Baselining technology Targeting superior platforms
Linking technology with business
Driving standardisation
Enabling reusability Deploying best technology
Mitigating business risk
Progressing to the next level
Improving performance
Capitalising on reusable assets
Boosting effectiveness Enhancing career opportunities
Securing resultsMaximising resourceusage
Raising standards Making a differenceDeploying best practice
Ensuring adherenceDriving rigourControlling risk Honouring commitments
… strives for very satisfied customers
… attains precision processing
… finds new revenues
… builds high reputation
… builds long-term competitive advantage
… controls risk
… makes change happen
37
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Measuring performance…
… the Xchanging Way
Classes
Types
1
2
3
4
We Measure:
Empi
rical
Dis
cipl
ine
Perc
eptio
n
38
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
Our imperatives in 2009…
Capitalise on our German track recordCapitalise on our German track record
Position Xchanging in the USAPosition Xchanging in the USA
Seize the global business processing opportunitySeize the global business processing opportunity
Leverage our UK market positionLeverage our UK market position
Drive lean processingDrive lean processing
Consolidate our global reach in claims processing and procurementConsolidate our global reach in claims processing and procurement
… for building a global business processor of choice