Cobham INTERIM MANAGEMENT STATEMENT
Trading Environment
In August the Group presented the outlook for 2012 but gave no guidance beyond that, given the US defence/security market uncertainty at that time. There remains a high degree of uncertainty in the near term but there is adequate clarity to reasonably assess the potential impact the environment is likely to have. Cobham is today outlining the strategic actions it will take to adapt to these conditions.
The Group is planning for the current cyclical decline in the US defence/security market, which accounts for 40% of Cobham's revenue, to be consistent with previous US defence/security down cycles, recognising that these conditions can change rapidly with global events. Therefore the Group expects a period of declining, then flat, US defence/security budgets. Cobham continues to have strong technology positions on key strategic programmes in the US and is committed to taking the actions required to remain competitive in this important and very large market.
The Group enjoys a broad geographical spread with access to growing defence/security markets in the rest of the world, accounting for 28% of revenue. Although European markets are expected to be flat to declining, certain markets including the Middle East, Asia and South America are expected to grow.
Commercial markets, representing 32% of revenue, offer strong growth prospects driven by the need for technological innovation, rising demand for commercial aircraft and communications solutions for aviation and marine platforms.
The growth characteristics of these latter two markets remain particularly attractive for the Group.
2012
Cobham's organic revenue growth in the ten months to October has been broadly flat in line with the Board's expectations and this trend is expected to continue for the full year.
The initial phases to integrate the Thrane & Thrane (T&T) business acquired in June, have been completed on schedule and T&T is trading slightly ahead of expectations, with the remaining integration activities also being on schedule. The Group's Excellence in Delivery (EiD) programme is progressing well with the overall benefits being delivered in line with the plan. Cobham is on track to deliver a good set of results despite some difficult market conditions and the need to accelerate programme investment, particularly in Cobham Defence Systems.
The Board continues to expect full year 2012 EPS to be similar to the prior year.
Net debt was reduced to £446m at the end of September (30 June 2012: £536m), driven by strong cash conversion and the proceeds from the divestment of the US emergency locator beacon business, which completed in July 2012.
2013
The US defence/security market remains challenging with the market continuing through the down cycle, driven by the overall fiscal pressure the US faces but with a lack of political consensus on US Government budgets. Given these economic difficulties, regardless of whether sequestration occurs, Cobham anticipates that its US defence/security revenue will decline in 2013 by mid-to-high single digits.
Overall, Cobham is therefore planning for total Group revenue to decline organically by low-to-mid single digits in 2013, as the decline in defence/security revenue is partially offset by growth in commercial markets.
The Group expects that the continued success of the EiD programme and the contribution made by the acquisition of T&T will largely offset the marked operational impact of the decline in defence/security revenue, the change in sales mix, as well as substantial new investments to enable the return to organic growth. This will result in slightly lower operating margins than are expected in 2012.
Cobham will also continue to significantly streamline its operations and reduce its fixed cost base to enable it to remain competitive through the defence/security down cycle by integrating, downsizing or closing further facilities. This additional streamlining will be achieved by extending the integration aspects of the EiD programme for a further two years to the end of 2015, for an additional investment of £60m, with benefits each year rising steadily to £30m per annum on completion.
Outlook
As with the successful EiD re-engineering programme, the further restructuring of the Group's cost base to remove fixed costs will allow Cobham to transition through a difficult period and subsequently return to growth. The majority of the additional savings will be reinvested to enable Cobham to generate incremental organic revenue and gain market share, while slightly increasing operating margins. Accordingly, and on the basis of current market trends, the Group anticipates a return to modest organic revenue growth from 2014, rising above mid single digit growth thereafter.
Cobham will continue to use its knowledge of chosen technology markets and adjacent areas to reinforce its capabilities, expand its market positions and support the Group's return to organic growth by making carefully selected acquisitions consistent with its disciplined financial criteria. The Group's focus is on prioritising investment that will bring more balance between its defence/security and commercial end markets.
The Board believes that taking these robust actions swiftly together with the Group's cash generative business model will underpin the Group's long standing policy of paying a 10% progressive annual dividend increase
