1 March 2023

 

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 ("MAR"), and is disclosed in accordance with the Company's obligations under Article 17 of MAR.

 

Ricardo plc

Interim Report for the six months ended 31 December 2022 (HY 2022/23)

 

A good set of results, whilst also transforming our business.

 

HIGHLIGHTS

·    A good set of underlying results for the Group in line with the Board's expectation

·    Record high order book in excess of £410m

o   Continued strong growth across our Environmental and Energy-Transition portfolio, in line with strategic focus

o   Defense and Performance Products providing long-term visibility and financial resilience in our Established Mobility portfolio

·    Improvement in underlying financial metrics overall

o   Strong order intake from continuing operations of £292.8m, a 42% increase on prior period

o   Revenue up 17%, underlying operating profit up 28%

o   Net debt reduced to £31.4m, with continued strong underlying cash conversion of 97%

·    Market dynamics impacting the overall A&I business

o   Prioritising capital allocation towards Emerging to position the business for long-term growth

o   Accelerating restructuring in Established to optimise performance, with £18.7m of impairment and restructuring charges booked in the period (cash cost: £2.7m)

·    Meaningful strategic progress accelerating our portfolio transformation

o   Disposal of Ricardo Software (£12m cash inflow after fees)

o   Acquisition of E3-Modelling after period end

·    Increased interim dividend of 3.35p declared

·    On track to deliver our full year expectations

 

References are defined in the glossary of terms below.

Commenting on the results, Graham Ritchie, Chief Executive Officer, said:

"We have made good progress in the first half of the year delivering in line with the Board's expectations whilst also accelerating our portfolio transformation.  As a result, our Group expectations for the full year remain unchanged. Our very strong order intake demonstrates the meaningful progress we are making against our sharpened strategy. The good revenue and profit growth is centred on our environmental and energy-transition services and our established US Department of Defense (DoD) programme, along with our continued focus on driving operational excellence.

 

There is still some economic uncertainty, with ongoing market dynamics impacting the performance of our A&I business, and particularly within our established portfolio.  As a result we have taken decisive action to accelerate our restructuring programme in A&I to ensure that we are well positioned to improve ongoing cyclical resilience and deliver long-term sustainable growth.

 

We have also continued our progress in transitioning our portfolio to high growth, high margin, low capital solutions, demonstrated by our recent acquisition.

 

We are confident that the actions we are taking in delivering our short-term performance are aligned with our global long-term growth drivers, supporting Ricardo's ambition - to become a world-leading strategic and engineering consultancy in environmental and energy-transition solutions.

 

At our Capital Markets event in 2022, we set out Ricardo's sharpened strategy, and we are looking forward to hosting a follow-up event in May 2023 to provide further details on the progress we have made one year on."

 

About Ricardo plc

Ricardo plc is a global strategic, environmental, and engineering consulting company, listed on the London Stock Exchange. With over 100 years of engineering excellence and close to 3,000 employees in more than 20 countries, we provide exceptional levels of expertise in delivering innovative cross-sector sustainable outcomes to support energy transition and scarce resources, environmental services together with safe and smart mobility. Our global team of consultants, environmental specialists, engineers and scientists support our customers to solve the most complex and dynamic challenges to help achieve a safe and sustainable world.

Visit www.ricardo.com  

 

Analyst and investor presentation

There will be a presentation for analysts relating to the Group's interim results for the six months ended 31 December 2022 at 9:30am on Wednesday 1 March 2023. A recording of the presentation will be available online to all investors from Wednesday 1 March 2023 at https://ricardo.com/investors/financial-reporting/results-presentations.

Further enquiries:

Ricardo plc
Ian Gibson	Tel:	01273 455611
Natasha Perfect	Website:	www.ricardo.com
SEC Newgate
Elisabeth Cowell	Tel:	020 7680 6882
Ian Silvera	E-mail:	ricardo@secnewgate.co.uk

 

Cautionary Statement

Note: Certain statements in this press release are forward-looking. Although these forward-looking statements are made in good faith based on the information available to the Directors at the time of their approval of the press release, we can give no assurance that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. We undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Glossary of terms

Cross-referenced to superscript in the financial tables and commentary

(1)   Underlying measures exclude the impact on statutory measures of specific adjusting items as set out in Note 9. Underlying measures are considered to provide a more useful indication of underlying performance and trends over time.

(2)   Underlying earnings from continuing operations also exclude a tax credit to statutory earnings of £0.5m (HY 2021/22: £0.9m) for the specific adjusting items described in Note 9.

(3)   Cash conversion is a key measure of the Group's cash generation and measures the conversion of profit into cash. This is the reported cash generated from operations (defined as operating cash flow, less movements in net working capital and defined benefit pension deficit contributions) divided by earnings before interest, tax, depreciation and amortisation (EBITDA), expressed as a percentage.

(4)   Net debt, as set out in Note 14, is defined as current and non-current borrowings less cash and cash equivalents, including hire purchase agreements, but excluding any impact of IFRS 16 lease liabilities. Management believes this definition is the most appropriate for monitoring the indebtedness of the Group and is consistent with the treatment in the Group's banking agreements.

(5)   Headcount is calculated as the number of employees on the payroll at the reporting date and includes subcontractors on a full-time equivalent basis.

(6)   Constant-currency growth/decline is calculated by translating the result for the prior period using foreign currency exchange rates applicable to the current period. This provides an indication of the growth/decline of the business, excluding the impact of foreign exchange. See also Note 4.

 

Overall, Ricardo has performed in line with the Board's expectations in HY 2022/23. Revenue from continuing operations, excluding Ricardo Software, which was sold in August 2022, was £212.7m, an increase of 17% on the prior period (HY 2021/22) (12% on a constant-currency basis). Underlying operating profit from continuing operations was £12.5m and underlying profit before tax from continuing operations was £9.9m, representing growth of 28% and 24% on the prior period respectively (20% and 16% on a constant-currency basis). The underlying results are reflective of strong order intake in the period. The Group won £292.8m of new orders from continuing operations, up 42% on the prior period and 34% on the six months to 30 June 2022.

Reported operating loss from continuing operations, after taking specific adjusting items into consideration, was £9.9m (HY 2021/22: profit £6.4m) and reported loss before tax from continuing operations was £12.5m (HY 2021/22: profit £4.6m). HY 2022/23 reported operating profit and profit before tax included £18.3m of largely non-cash charges for the impairment of goodwill and other assets, including decommissioning costs, in the Automotive and Industrial Established Mobility (A&I Established) operating segment, stemming from a downturn in performance in this segment. Restructuring charges totalling £0.7m were booked in A&I Established and Rail. In addition, £2.0m of amortisation on acquired intangibles and £1.4m of acquisition related expenditure were booked in the period. This was partially offset by a £7.5m gain on the disposal of Ricardo Software.

Net debt at 31 December 2022 was £31.4m, a reduction of £4.0m on the 30 June 2022 position of £35.4m. The Group received £13.1m of proceeds (net of cash disposed) for the sale of Ricardo Software and paid £0.8m of fees in relation to the completion of the transaction in the period. Underlying working capital was broadly neutral with underlying cash conversion of 97%. Reported cash conversion was 60%, after taking into account the cash impact of specific adjusting items.

Headline trading performance

References in superscript are defined in the glossary of terms.

 

(a)   Growth from continuing operations excludes the results of the Software operating segment which was sold on 1 August 2022 (see Note 6).

(b)   Organic growth excludes the performance of current year acquisitions from results of FY 2022/23.

 

HY 2022/23 includes the results of Inside Infrastructure Pty Ltd (Inside Infrastructure), which was acquired in March 2022. Inside Infrastructure contributed £2.0m of revenue and £0.5m of underlying operating profit and £0.5m of underlying profit before tax.

Ricardo Software contributed £0.8m of revenue and £0.5m of underlying operating profit and profit before tax in the current period (HY 2021/22: revenue of £3.5m, and £0.7m of underlying operating profit and underlying profit before tax. The current period includes the benefit of not charging £0.3m of amortisation, as the business was classified as held for sale during July 2022. The reported operating profit and profit before tax from the discontinued operation of £8.0m in the current period includes the £7.5m gain recognised on its sale. £0.6m of external fees in relation to the sale process were recognised in the prior period within reported operating profit and profit before tax.

Operating segments summary: Order intake and revenue

References in superscript are defined in the glossary of terms.

 

Operating segments summary: Operating profit

References in superscript are defined in the glossary of terms.

*Prior period results have been restated to reflect the fact that a share of central plc costs are no longer included in the operating profit measure for operating segments. This has increased the operating segment underlying operating profit shown above by £4.5m for HY 2021/22. There is no impact on the Group's operating profit.

In addition the discontinued operation was previously reported within the PP operating segment. The A&I Established and A&I Emerging operating segments were previously reported as the A&I operating segment. Comparative numbers have been restated. See also Note 7.

Environmental and Energy-Transition portfolio

·      Order intake: up 18% (constant-currency: up 13%)

·      Revenue: up 27% (constant-currency: up 17%)

·      Underlying operating profit: up 98% (constant-currency: up 93%)

·      Underlying operating profit margin: 14.0% (HY 2021/22: 8.5% at constant-currency)

Energy & Environment (EE) performed strongly, with order intake, revenue and underlying operating profit all increasing compared to the prior period. Growth has been driven by energy and carbon regulation, waste resource management and air quality services.

There was good growth in the Automotive and Industrial Emerging Mobility (A&I Emerging) business. Order intake was similar to the prior period. Revenue and underlying operating profit both increased, driven by demand for electronic and battery applications.

Rail revenue and underlying operating profit both declined period-on-period, as expected, due to the timing of large projects ending and new project wins and extensions commencing. Order intake was similar to the prior year and Rail enters the second half of the year with a strong order book. £0.3m of restructuring costs were recognised in Rail in the period relation to the ongoing restructuring of its operating structure, aimed at creating a more streamlined and customer-focused business. These costs were recognised as specific adjusting items.  

Established Mobility portfolio

·      Order intake: up 83% (constant-currency: up 75%)

·      Revenue: up 7% (constant-currency: up 6%)

·      Underlying operating profit: down 47% (constant-currency: down 49%)

·      Underlying operating profit margin: 4.8% (HY 2021/22: 10.0% at constant-currency)

Defense performed very strongly in the period, with significant growth in order intake, revenue and underlying operating profit. Defense received £28.0m (USD35.9m) of orders for the Anti-lock braking systems/electronic stability control (ABS/ESC) retrofit programme in the period. Together with new vehicle kits, Defense delivered 3,956 kits in HY 2022/23 (HY 2021/22: 1,786 kits). In addition, there was good growth in the Technical Solutions consultancy business, including Field Support Services (the sustainment of ABS/ESC kits in the field).

Performance Products (PP), excluding the results of Ricardo Software, won £77.0m of orders in HY 2022/23, more than double the order intake achieved in the prior period. This reflects a number of new long-term contract wins in the period. Revenue was in line with the prior period and profit reduced, driven by a combination of supply chain challenges, which led to some inefficiency, and higher energy and operating costs.

Orders and revenue significantly declined in the A&I Established business, driven by increased economic uncertainty and the continuing shift in the technological landscape in the automotive sector. The business made an underlying operating loss of £4.8m in the period, compared to a £0.9m profit in HY 2021/22, on a constant-currency basis. Given the performance of the business and the accelerating technological changes facing the segment, a non-cash impairment charge of £17.7m was recognised in the period in respect of goodwill, intangible assets, and property, plant and equipment (see discussion of Specific Adjusting Items below). In addition, £1.0m of costs relating to restructuring and asset disposals were recognised during the period. Restructuring actions, including further headcount reductions are being accelerated. These actions are focused on returning the business to profitability, with further costs to come in the second half of the financial year (see Note 17). On a reported basis, after including the impairment charge and restructuring costs, the operating loss in A&I Established was £23.5m.

Cash performance

·      Net debt: down 11% to £31.4m (HY 2021/22: £35.4m)

The Group had a net cash inflow for the period of £4.0m. The Group received £12.3m of cash proceeds, net of fees and cash disposed, for the sale of Ricardo Software (£0.4m of fees in relation to the sale incurred in FY 2021/22 were also paid during the current period). In addition, £0.9m was paid to external advisors on other M&A and strategic projects. £2.7m was paid out in relation to the ongoing restructuring actions in A&I Established and £0.6m was paid in relation to the ongoing management restructuring in Rail. £0.2m was paid as the final element of the exit settlement for the Group's former CEO. Excluding these specific adjusting items, the Group had a cash outflow of £3.5m. Underlying working capital was broadly neutral. The composition of net debt is defined in Note 14.

Specific adjusting items

As set out in more detail in Note 9, the Group's total underlying profit before tax excludes £14.9m of costs incurred during the period that have been charged to the income statement as specific adjusting items (HY 2021/22: £4.0m). In line with the Group's policy, these items have been recognised as specific adjusting items, due to their nature or significance of their amount, so as to provide further clarity over the financial performance.

 

	HY 2022/23	HY 2021/22
		Restated*
	£m	£m
Underlying(1) profit before tax from continuing operations	9.9	8.0
Amortisation of acquired intangibles	(2.0)	(2.2)
Acquisition-related expenditure	(1.4)	(0.5)
Restructuring costs
- A&I: change in fair value of contingent consideration	-	(0.3)
- A&I: restructuring costs	(0.4)	0.1
- A&I: asset impairment and decommissioning	(18.3)	-
- Rail: restructuring costs	(0.3)	-
ERP implementation costs	-	(0.5)
Total specific adjusting items from continuing operations	(22.4)	(3.4)
Reported (loss)/profit before tax from continuing operations	(12.5)	4.6
Specific adjusting items from discontinued operation
Gain on disposal and external fees relating to the disposal	7.5	(0.6)

*Acquisition-related expenditure of £0.6m in the prior period has been re-presented as part of the result of the discontinued operation.

References in superscript are defined in the glossary of terms

Amortisation of acquired intangibles was £2.0m in the period, compared to £2.2m in HY 2021/22. The current period charge includes £0.2m in relation to the amortisation of customer relationships acquired as part of the Inside Infrastructure acquisition.

Acquisition-related costs of £1.4m were incurred in the period (HY 2021/22: £0.5m). These included an accrual of £0.2m for deferred consideration in relation to the acquisition of Inside Infrastructure (acquired in March 2022), together with £0.2m of post-deal integration costs, £0.1m of external fees paid in respect of the acquisition of E3 Modelling S.A. (E3M) and £0.9m of external fees in relation to other M&A and strategic projects. Costs in the prior period reflected £0.3m of M&A fees and integration costs for Inside Infrastructure and £0.2m of fees in relation to other strategic projects.

Restructuring costs

A&I: Change in fair value of contingent consideration: In the prior period charge a of £0.3m was recognised in relation to a reduction in the fair value of deferred consideration in respect of the sale of Ricardo's Detroit engine test business in June 2020. The reduction in the fair value reflects lower levels of traditional engine testing work than originally forecast at the time the business was sold.

A&I: Restructuring costs: £0.4m of restructuring costs were booked in A&I Established in the period, which included £0.1m of redundancy and onerous contract costs in relation to the actions taken at the end of the prior year-end and £0.2m of external consultancy fees. These major restructuring activities will continue into the second half of FY 2022/23 with further costs and headcount reductions expected. The total cash cost of these actions, including redundancy and associated external incremental change management costs, is expected to be in the region of £5m.

On 21 February 2023, following the period-end, it was announced that certain staff are to leave the business as part of these restructuring activities. The announcement creates a constructive obligation that satisfies the IFRS criteria for recognising a provision as at the date of the announcement. This represents a non-adjusting event after the reporting date. The costs relating to this element of the restructuring, which form part of the £5m total cost, are in the region of £1.5m.

A&I: Asset impairment and decommissioning: Goodwill and asset impairment charges of £17.7m were recognised in the period within the A&I Established operating segment. As a result of the performance of this segment in HY 2022/23, the impact of economic uncertainty and the continuing technological change in the automotive sector, the future projections and discounted cash flows for the operating segment were reassessed. The resulting value in use did not support the carrying value of the associated assets, resulting in an impairment of all of the goodwill associated with A&I Established segment (£5.2m), together with £1.8m of intangible assets and £10.7m of property, plant and equipment. In addition, £0.6m of loss on disposal was recognised during the period for under-utilised engine testing assets in the UK associated with the restructuring actions above.

A review for indicators of impairment in the Group's other cash-generating units (CGUs) was performed. No indicators of impairment were found to exist for the other CGUs.

Rail: Restructuring costs: A charge of £0.3m was recognised in Rail in respect of the restructuring of the senior management structure, which commenced in the second half of FY 2021/22. This process will continue into the second half of FY 2022/23, with further costs expected.

ERP system implementation costs: In the prior period, due to the result of guidance being issued following a recent IFRS Interpretations Committee (IFRIC) decision, £0.5m of external costs incurred in FY 2020/21 in relation to the implementation of a new cloud-based ERP system within the PP operating segment were expensed in the period. These costs were previously capitalised in line with prevailing practice at the time the costs were incurred. They were classified as a specific adjusting item as they are not reflective of the underlying performance of the business in the period.

Gain on sale of Ricardo Software (recognised within the discontinued operation): A net gain of £7.5m was recognised in the current period in relation to the disposal of Ricardo Software, completed on 1 August 2022. Total consideration for the sale was £14.9m (USD 17.5m), of which £14.8m was satisfied in cash in the current period. £7.5m of net assets were disposed of, and £0.9m of cumulative currency gains were reclassified to the income statement. £0.8m of costs directly attributable to the disposal were incurred in the current period. Per the terms of the sale, up to a further £2.4m (USD 3.0m) is receivable based on Ricardo Software achieving certain revenue targets in the twelve-month period post-sale. The fair value of this contingent consideration has been assessed to be nil as it is unlikely that these revenue targets will be achieved.

Research and Development (R&D) and capital investment

The Group continues to invest in R&D and spent £5.9m (HY 2021/22: £6.2m) before government grant income of £2.2m (HY 2021/22: £1.2m). Development costs capitalised in this period were £1.9m (HY 2021/22: £3.5m, including development costs capitalised in Ricardo Software of £1.5m), reflecting continued investment in electrification and alternative fuels technology within the A&I Emerging segment, together with technology, tools and processes in the EE segment.

Capital expenditure on property, plant and equipment, excluding right-of-use assets, was £2.4m (HY 2021/22: £2.6m), reflecting targeted investment in our business operations, including hydrogen and electrical test capability in the A&I Emerging segment.

Net finance costs

Finance income was £0.5m (HY 2021/22: £0.3m) and finance costs were £3.1m (HY 2021/22: £2.1m) for the period, giving net finance costs of £2.6m (HY 2020/21: £1.8m). The increase in costs reflects an increase in the SONIA interest rate during the current period.

Taxation

The underlying effective tax rate was 26.0% for the period (HY 2021/22: 24.4%). The reported effective tax rate was negative 80%% (HY 2021/22: 25.9%). The current period rate is impacted by the impairment charge recognised during the period, which does not attract tax relief. Excluding this impairment, the effective tax rate is 27.5%.

Earnings per share

Basic loss per share was (13.2)p (HY 2021/22: 5.6p). The Directors consider that underlying earnings per share provides a more useful indication of underlying performance and trends over time. Underlying basic earnings per share for the period was 12.2p (HY 2021/22: 10.6p). The calculation of basic earnings per share, with a reconciliation to an underlying basic earnings per share, which excludes the impact (net of tax) of specific adjusting items, is disclosed in Note 10.

Dividend

As set out in more detail in Note 11, the Board has declared an interim dividend of 3.35p per share (HY 2021/22: 2.91p). The dividend will be paid gross on 11 April 2023 to holders of ordinary shares on the Company's register of members on 10 March 2023.

Banking facilities

Net debt at 31 December 2022 comprised cash and cash equivalents of £52.1m, and borrowing and overdrafts, including hire purchase liabilities and net of capitalised debt issuance costs, of £83.5m.

The Group funds its operations via a Revolving Credit Facility (RCF) of £150m, with a £50m accordion, which provides committed funding through to August 2026, alongside the Group's uncommitted overdraft facilities of £16m. At 31 December 2022, the amount undrawn on the RCF was £75.0m. This, together with the cash held of £52.1m, and £6.8m of unutilised overdraft facilities, provided the Group with total cash and liquidity of £133.9m.

The Group's Adjusted Leverage ratio (defined as net debt over EBITDA for the last twelve months, excluding the impact of specific adjusting items and IFRS 16 Leases) was 0.8x as at 31 December 2022. The Adjusted Leverage covenant is a maximum of 3.0x.

The Interest Cover ratio (defined as EBITDA for the last twelve months, excluding the impact of specific adjusting items and IFRS 16, over net finance costs), was 9.5x at 31 December 2022. The Interest Cover covenant limit is a minimum of 4.0x.

Further details are provided in Note 14.

Foreign exchange

On consolidation, revenue and costs are translated at the average exchange rates for the period. The Group is exposed to movements in the Pound Sterling exchange rate, principally from work carried out with customers that transact in Euros, US Dollars, Australian Dollars and Chinese Renminbi. Compared to the prior period, the average value of the Pound Sterling weakened by 14% against the US Dollar, 1% against the Euro, 6% against the Australian Dollar and 7% the Chinese Renminbi. Had the prior period results been translated at current period exchange rates, revenue from continuing operations would have been £8.3m (5%) higher, underlying operating profit would have been £0.6m (6%) higher and underlying profit before tax would have been £0.5m (6%) higher.

Pensions

The Group's defined benefit pension scheme operates within the UK. The fair value of the scheme's assets at the end of the period was £109.2m (FY 2021/22: £127.1m) and the present value of the scheme's obligations was £96.3m (FY 2021/22: £111.9m). The value of the scheme's assets reduced over the period due to movements in the stock market. However, this was partially offset by a reduction in the scheme's liabilities, due to increases in the discount rate. The pre-tax surplus, measured in accordance with IAS 19, at 31 December 2022 was £12.9m (FY 2021/22: £15.2m). Ricardo paid £0.9m of cash contributions into the scheme during the period (HY 2021/22: £2.1m).

Appointment of new Chair of the Board

Mark Clare joined the Group as Chair of the Board in November 2022. Mark succeeds Sir Terry Morgan CBE, who gave notice of his intention to retire in February 2022 and resigned at the Annual General Meeting on 17 November 2022. Mark joined the Board on 1 November as a non-executive director and Deputy Chair of Ricardo. At the conclusion of the Annual General Meeting on 17 November 2022, Mark became the Chair of the Board. The Board would like to welcome Mark and thank Sir Terry for his service over the past 9 years.   

Acquisition of E3-Modelling

Following the period end, on 24 January 2023, the Group acquired a 93% shareholding in E3 Modelling S.A. (E3M), a consulting company, based in Greece, that provides advanced empirical modelling services. The maximum cash consideration is £24m, of which £19m was paid on completion. The deferred consideration of £5m is based on the business achieving certain performance targets for the twelve months ending 31 December 2023 and the retention of key management. There is a commitment to acquire the remaining 7% stake in January 2025. The value paid for the 7% stake will be determined based on the EBITDA achieved in the 12 months to 31 December 2025. The minimum cash consideration for the remaining 7% stake is £2m, and is reduced by 50% if the owners are not retained in the business. Ricardo has acquired full control and voting rights in E3M.

E3M provides digital modelling capabilities right across the markets that Ricardo serves, making the acquisition highly complementary to Ricardo's unique position at the intersection of the energy, environment and mobility agendas.

Group Outlook

Our half-year underlying results are in line with our expectations.

The remainder of the year looks positive with a record high order book driven by the strong demand for our Environmental and Energy-Transition portfolio and an excellent team in place. We continue to expect the A&I Established business to be challenging in the near term whilst we accelerate our restructuring plans to increase our focus on business improvements.

Macro-economic uncertainties remain and we continue to navigate our supply chain in order to ensure that we are able to meet demand. Nevertheless, we are confident in the delivery of our full year expectations.

 

By order of the Board:

 

 

 

 

Graham Ritchie                                                 Ian Gibson

Chief Executive Officer                                     Chief Financial Officer

 

28 February 2023

 

ENERGY & ENVIRONMENT (EE)

Energy and Environment (EE) works with clients across a wide variety of sectors and geographies to help provide solutions for their major energy and environmental challenges. We have a broad range of environmental skills, plus a strong energy and carbon capability to support the energy transition.

Financial and operational highlights

 

References in superscript are defined in the glossary of terms above.

*Prior period results have been restated to reflect the fact that a share of central plc costs are no longer included in the operating profit measure for operating segments. This has increased the segment underlying operating profit shown above by £0.8m for HY 2021/22.

 

Performance

The strength of EE's market position supported a strong first half, particularly in Air Quality, Energy & Carbon Regulation, Sustainable Transport and Waste & Resource Management. Order intake for the period was strong at £57.4m, growth of 48% on the prior period on a constant-currency basis. Revenue and underlying operating profit grew by 23% and 26%, respectively, on a constant-currency basis, as a result of strong demand across multiple services, segments and geographies. Underlying operating profit margin was 16.8%, a 0.4ppts improvement on the prior period, on a constant-currency basis.

The Middle East has been a major success. Our waste team has won new projects ranging from supporting the development of circular-economy strategies to practical engineering solutions that focus on the sustainable management of significant volumes of construction and demolition waste over the next 25 years. We have seen a significant scale of new orders in the Middle East - our growing reputation for managing air-quality monitoring networks and modelling complex data sets has bought recognition in the UAE, Qatar and Saudi Arabia.

The HY 2022/23 results include order intake of £1.7m, revenue of £2.0m and underlying operating profit of £0.5m from Inside Infrastructure, which was acquired in March 2022. HY 2022/23 was a very successful period for the business. Since its acquisition, the business has grown, particularly within the mining and water utility sectors in South Australia. The growth reflects the benefits of its complementary portfolio, with collaborative developments across our water and our environment and planning solutions. The team has also secured its first hydrogen agreement to support the development of a 250MW Green Hydrogen Project in South Australia.  

Our team in Europe goes from strength to strength, which is assisting our ongoing and growing portfolio of work for the European Commission while also leading to opportunities across Europe and in Latin America - for example, supporting the design of integrated public transport systems in Mexican cities.

Our Air Quality Inventories team has secured a major contract with the Department for Environment, Food and Rural Affairs (Defra) in the UK for further development of a Scenario Modelling Tool (SMT), a digital solution that will be adapted to reflect the range of available emissions interventions over the coming years.

RAIL

Rail provides expert independent assurance and engineering consultancy services to help clients navigate the industry's operational, commercial and regulatory demands.

Financial and operational highlights

               

References in superscript are defined in the glossary of terms above.

*Prior period results have been restated to reflect the fact that a share of central plc costs are no longer included in the operating profit measure for operating segments. This has increased the segment underlying operating profit shown above by £0.8m for HY 2021/22.

 

Performance

The Rail results reflect a mixed half for the business in HY 2022/23. Overall order intake was robust at £44.8m, 4% up on the prior period on a constant-currency basis. HY 2022/23 included large project extensions in the Middle East and Australia. As at 31 December 2022, the order book was £114.0m, an increase of £8.3m over the prior period, on a constant-currency basis. Revenue was £36.1m, a reduction of 8% compared to the prior period, on a constant-currency basis. Revenue reduced in Australia as some larger projects ended towards the end of FY 2021/22. New project extensions were secured towards the end of HY 2022/23, with the order intake reflecting a pivoting of the business to new customers and territories. 

The period-on-period reduction in underlying operating profit and underlying operating profit margin was linked to the reduction in revenue and investment in business development capability. In general, utilisation levels remained solid. The restructuring of the Rail management structure, which started in the second half of FY 2021/22, continued in HY 2022/23. The business is seeing benefit from the actions through a more streamlined and customer-focused structure, with clearer accountability on a geographic basis. These actions will continue into the second half of FY 2022/23. £0.3m of redundancy costs were recognised in the period as specific adjusting items. The cash cost of the actions in HY 2022/23 was £0.6m.

In Europe, our team was awarded Designated Body (DeBo) status in Ireland in November. DeBo recognition means we can now offer clients a broader accredited assurance service in line with the portfolio we offer in established markets: UK, Netherlands, Belgium, Denmark and Spain.

In North America, we were appointed to provide Systems Integration Verifier Services for the extension of Ottawa's O-Train system. This light-rail project will involve major civil engineering works, new vehicles and signalling technologies. We will be responsible for helping oversee the smooth integration of each system.

In South America, we were appointed to support a new monorail in Panama. 'Line 3' will connect Panama City to urban centres in Panama Oeste. We will provide specialist systems analysis for the Phase One construction.

AUTOMOTIVE AND INDUSTRIAL  - EMERGING MOBILITY (A&I EMERGING)

Automotive and Industrial Emerging is a trusted engineering partner for the next generation of mobility. A&I Emerging leverage their expertise in power electronic systems and propulsion systems, software and digital technologies for connected, autonomous vehicles and sustainable, light urban mobility.

Financial and operational highlights

             

References in superscript are defined in the glossary of terms above.

*Prior period results have been restated to reflect the fact that a share of central plc costs are no longer included in the operating profit measure for operating segments. This has increased the total A&I (including A&I Established) underlying operating profit by £1.8m for HY 2021/22. In addition, £0.3m of HY 2021/22 revenue has been reanalysed to discontinued operations, reducing revenue by that amount. See Note 7 to the condensed interim financial statements.

 

Performance

In HY 2022/23, A&I Emerging saw good growth in key financial metrics. Order intake was £50.7m, a decline of 5% on a constant-currency basis, with some change in the mix of work won period-on-period. In HY 2022/23, the business won several multi-million pound contracts in the fuel cell, power-electronics and battery applications for commercial trucking, battery systems for passenger vehicles and advanced propulsion systems for aerospace applications. The prior period order intake included large wins in motorcycles and vehicle integration. A&I Emerging accounted for 75% of total A&I order intake in HY 2022/23 (HY 2021/22: 65%, on a constant-currency basis).

Revenue grew by £13.2m (43%) on a constant-currency basis, with significant projects being worked in the electrification, aerospace and vehicle integration spaces.

Underlying operating profit grew by £8.0m, on a constant-currency basis (from a loss in the previous period). The increase in the profitability of the business was driven by the revenue growth, combined with better alignment of skillsets in the engineering workforce, and indirect cost benefits from the restructuring actions that were implemented at the end of FY 2021/22 (refer to the A&I Established operating segment review for further details). The underlying operating profit margin was 15.0% in HY 2022/23, compared to negative 4.6% in the prior period, on a constant-currency basis.

Attracting and retaining talent in key emerging technology fields remains a key focus for the A&I Emerging business. We have enhanced our talent development and retention programme, with positive impacts in both reducing the time to acquire talent and voluntary attrition.

DEFENSE

Defense has gained significant insights into the needs of armed forces and provides solutions to meet the challenges our clients face in the integration of logistics and field support for complex and diverse systems.

Financial and operational highlights

                           

References in superscript are defined in the glossary of terms above.

*Prior period results have been restated to reflect the fact that a share of central plc costs are no longer included in the operating profit measure for operating segments. This has increased underlying operating profit shown above by £0.3m for HY 2021/22.

 

Performance

Defense's order intake grew significantly by £28.1m (154%) on a constant-currency basis in HY 2022/23, driven by £28.0m (USD35.9m) of orders to retrofit Antilock Brake System/Electronic Stability Control (ABS/ESC) kits, which improve the safety of operation of the US Army's High Mobility Multi-purpose Wheeled Vehicle (HMMWV) fleet.  

Revenue increased by 65% period-on-period on a constant-currency basis. Revenue growth was driven by increased ABS/ESC volumes - in total, we delivered 3,956 ABS/ESC kits in HY 2022/23, a record six-months for this programme, compared to 1,786 in the previous period, which included both retrofit kits and kits for new production vehicles. In addition, revenue from our Technical Solutions consultancy services also increased. 

Underlying operating profit was £5.7m, an increase of 63% compared to HY 2021/22 on a constant-currency basis. Underlying operating-profit margin was broadly stable at 13.9% on a constant-currency basis. Our technical services continue to have high levels of direct utilisation, which has driven strong underlying profit. 

The Field Support Solutions offering continues to expand and we are working side by side with US soldiers to ensure that they are trained to safely operate and maintain their vehicles.

Alongside the continuing delivery of the Ricardo-produced ABS/ESC system - which integrates a complete set of solutions to the architecture of the vehicles, thereby ensuring the safety of both soldiers and operators during critical missions - Defense is also focusing on the development of software that improves energy usage and fuel management in near real time for the US Department of Defense's decarbonisation strategy. Additionally, we have applied our existing software IP to impact climate strategy and strategy integration across the digital engineering ecosystem.

PERFORMANCE PRODUCTS (PP)

Performance Products (PP) is responsible for the manufacture and assembly of niche high-quality products, including engines, transmissions, electric drive units and other performance-critical driveline and powertrain products.

Financial and operational highlights

                           

References in superscript are defined in the glossary of terms above.

*Prior period results have been restated to reflect the fact that a share of central plc costs are no longer included in the operating profit measure for operating segments. This has increased the segment underlying operating profit shown above by £0.7m for HY 2021/22.

 

Performance

PP delivered a good performance and has increased its order intake from continuing operations to £77.0m in HY 2022/23, more than double the order intake achieved in the prior period. HY 2022/23 includes multi-year contract awards from two customers (one existing customer contract extension and one new to the business) to manufacture high performance transmissions. 

Revenue from continuing operations in HY 2022/23 was £38.5m, in line with the prior period. McLaren engine volumes increased modestly year-on-year, with revenue also increasing due to the higher volume and mix of engines sold. Transmission volumes and revenue reduced in the period as a result of the timing of demand on one of the major transmission programmes. Industrial engineering revenue was maintained period-on-period. 

Underlying operating profit from continuing operations was £3.6m, a reduction of £0.9m compared to the prior period, driven by a mixture of increased operating costs (including energy and staff costs). Underlying operating profit margin was 9.4%, compared to 11.7% in the prior period. 

We are continuing to develop our portfolio of existing powertrain (engine) and drivetrain (transmission) products during the year as well as new projects in the zero-emission propulsion space, including electric drive units, industrial engineering services in Electric vehicle (EV) production and concept work around battery systems and electric machines.

Our motorsport engineering and manufacturing capabilities continued to operate at the highest tiers in motorsport, with a particular focus on next-generation technology. During the year, we worked with Hyundai (on its hybrid-powered Rally 1 car), DS (on its the all-electric Formula E race car), Porsche (in GT racing), and with our long-standing customer in Formula 1.

Furthermore, we have maintained our level of support to the UK Ministry of Defence, providing key spare components and precision machined components to the aerospace industry under our AS9100 certification. The strong outlook across all our key business areas of high-performance automotive, motorsport, defence and aerospace were reflected in the strong order intake for the period.

COVID-19, and subsequently the conflict in Ukraine continued to cause some disruption in the supply chain. However, our rigorous process management and tools ensured that client deliveries were not affected.

AUTOMOTIVE AND INDUSTRIAL - ESTABLISHED MOBILITY (A&I ESTABLISHED)

With over a century of propulsion design and development, A&I Established deploys innovative simulation, model and test-based approaches to increase product efficiency and robustness, whilst reducing development cost and time for our global clients.

Financial and operational highlights

                           

References in superscript are defined in the glossary of terms above.

*Prior period results have been restated to reflect the fact that a share of central plc costs are no longer included in the operating profit measure for operating segments. This has increased the total A&I (including A&I Emerging) underlying operating profit by £1.8m for HY 2021/22. In addition, £0.3m of HY 2021/22 revenue has been reanalysed to discontinued operations, reducing revenue by that amount. See Note 7 to the condensed interim financial statements.

 

Performance

Performance in Established Mobility has been challenging in HY 2022/23, reflecting economic uncertainty and the continuing shifting customer demand away from established technologies to electrification and alternative fuels, particularly in the passenger car market. The business continues to position itself to deliver high-efficiency internal combustion engine (ICE) and emissions-compliant capabilities to support the market through its global transition towards electrification and alternative fuels.

A&I Established order intake was £16.5m, a decline of £11.5m (41%) on the prior period, on a constant-currency basis. Revenue declined by 42% in HY 2022/23, on a constant-currency basis. The declines in order intake and revenue reflected lower demand in the period for traditional ICE and calibration work.

Underlying operating profit decreased from a £0.9m profit, on a constant-currency basis, in HY 2021/22 to a £4.8m loss in HY 2022/23. The underlying operating margin was negative 32.0% in HY 2022/23, compared to positive 3.5% in the prior period, on a constant-currency basis. The reduction in profitability reflected the decline in revenue and overcapacity in the engineering workforce.

During HY 2022/23, headcount reductions (announced at the end of FY 2021/22) were enacted (primarily within senior management and administrative roles), underutilised properties were downsized or exited and underutilised tangible assets relating to certain testing capability that is no longer core to the business' ongoing strategy were closed. £1.0m of restructuring costs and losses on disposal of assets were recorded as specific adjusting items in the period. The cash cost of the restructuring activities was £2.7m in the period (HY 2021/22: £1.3m).

Although these actions led to a reduction in the overall A&I Established cost base compared to the prior period, the savings could not compensate for the reduction in revenue, which was higher than anticipated. At the period end, following a reassessment of the value in use of the segment, goodwill, intangible assets and additional property, plant and equipment were impaired, resulting in a charge of £17.7m, also recognised within specific adjusting items. After taking the impairments and restructuring charges into consideration, the reported operating loss for the segment was £23.5m (HY 2021/22: £0.7m profit).

The restructuring process will continue into the second half of FY 2022/23 and will be primarily focused on better aligning the capabilities in our engineering function with anticipated customer needs (see Note 17).

 

Condensed consolidated income statement

for the six months ended 31 December (unaudited)

 

 

*     Previously certain costs, such as engineering software licenses and subscriptions and running costs related to testing and manufacturing facilities, have been allocated to administrative costs. These costs have been allocated to cost of sales in the current period as they are considered to directly relate to the delivery of revenue. Comparative amounts have been restated to allocate the costs on a consistent basis. As a result cost of sales have increased by £4.9m, and administrative expenses have reduced by the same amount. There is no impact on profit for the period or EPS. In addition comparative information has been re‑presented due to a discontinued operation. See Note 6.

**   Specific adjusting items are disclosed separately in the condensed interim financial statements where it is necessary to do so to provide further understanding of the financial performance of the Group. Further details are given in Note 4 and Note 9.

Condensed consolidated statement of comprehensive income

for the six months ended 31 December (unaudited)

 

 

The accompanying notes are an integral part of these condensed interim financial statements.