xchanging cost for profit · financial review. 3 ... 2. 2007 eps based on weighted average number...
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Xchanging Cost for Profit
2009 Interim Results3 August 2009
1
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
H1 2009 performance…
…growth and resilience
• Continued profitable growth with:
• Revenues: ↑ 38%
• XEBIT: ↑ 42%
• Strong incremental customer demand despite difficult economic conditions
• Over £900m of new contract wins and renewals
• Increased opportunities in the pipeline
• Consolidation of German investment account administration market with FondsServiceBank acquisition
• Integration of Cambridge progressing successfully
• US integration largely complete
• Added over 500 new customers mainly in the US and Asia
• XEBIT margin : ↑ 15 basis points
• Earnings per share: ↑ 14%
Richard HoughtonChief Financial Officer
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Financial review
3
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Revenue
188222
267
367350
254
394
468
558
2004 2005 2006 2007 2008 2009
£m
Half Year Full Year
Revenue up 38%(9% organic)
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XEBIT
8.310.4
14.3
20.319.3
8.8
21.7
31.1
38.5
2004 2005 2006 2007 2008 2009
£m
Half Year Full YearNote1. Pre exceptional items and amortisation of acquired intangible
assets
XEBIT up 42%1
(18% organic)
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EBIT and XEBIT margins
4.4%4.7%
5.4% 5.5%
6.9% 6.9%
6.1% 6.2%
H1 2006 H1 2007 H1 2008 H1 2009
XEBIT Margin EBIT Margin (including minorities)
Note1. Pre exceptional items and amortisation of acquired intangible assets
XEBIT margin up 15 bps1
(Xchanging up 43 bps)
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Underlying Basic EPS1
84
4.65.4
6.2
11.5
14.4
2007 2008 2009
Half Year Full YearNotes 1. Pre exceptional items, amortisation of acquired intangible assets and other add backs2. 2007 EPS based on weighted average number of shares issued between IPO and 30 June 2007 to the actual number of shares in issue
at IPO
Underlying Basic EPS
up 14%
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Xchanging and Cambridge
84
Notes1. Revenues include £4.3m between Xchanging Group companies and Cambridge Group companies
2. XEBIT is pre exceptional items of £12.1m (2008: £Nil) and amortisation of acquired intangible assets
18%
43 bps
9%
Increase
£2.4m
3.1%
£77.3m
H1 2008
£3.4m
4.2%
£81.1m
H1 2009H1 2008 H1 2009 Increase
Revenue £266.8m £290.3m 5%
XEBIT margin 5.4% 5.8% 110 bps
XEBIT £14.3m £16.8m 42%
Xchanging Cambridge
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527492
394468
558
446394
340
445
667
2006 2007 2008 2009
£m
Visible revenue - beginning of year Visible revenue - half year
Revenue achieved
Revenue visibility
84
Visible revenue Build up of visible revenue
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
86% 84% 95% 80% 88%
Xchanging (stand-alone) Consolidated Group1
Note1. Half year visible revenues for 2009 consolidates
Cambridge. Prior visible revenues are based on Xchanging stand-alone numbers
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Financing costs
84
Financing costs
H1 2008 H1 2009
Net bank interest 2,639 (930)
Net interest on pensions (57) (891)
Other interest 235 311
Adjusted interest 2,817 (1,510)
Imputed interest on put options (313) (632)
Other imputed interest 193 -
Reported interest 2,697 (2,142)
Xchanging's share of adjusted interest 2,430 (1,087)
• Lower cash balances and interest on cash
• Interest cost on Cambridge debt
• Higher pension interest due to lower discount rate
Financing cost drivers
• Loan facility increased from £90m to £110m to maintain headroom post refinancing of Cambridge debt and FSB acquisition
• Loan facility expires in October 2012
Update on debt funding
10
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Investment
84
H1 2009 Full year Guidance£m £m $m
Exceptional costsCash 7 8 12Non-cash 5 7 10Total P&L 12 15 22
Capex 2 8 13
Total 14 23 34
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Capital expenditure
4.6%
3.0%
4.8%4.4%
3.0%
7.0%
4.0%
2006 2007 2008 2009
Half year Full year
Expected long-term rate of 4%
12
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Free cash flow
3.1
26.0
33.0
0.6
16.5
5.8
7.0
Cash generatedfrom operationspre-exceptionals
Cash exceptionalcosts
Cash generatedfrom operations
after exceptionals
Tax Capex / investment Net interest paid Free cash flow
£m
Note 1. Cash exceptional costs relate to the restructuring of Cambridge
1
13
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Balance sheet
90
Cash/ debt£m FY
2008H1
2009
Assets
Non-current assets 231.3 386.6
Trade and other receivables 112.5 137.5
Cash and cash equivalents 117.8 63.4
Liabilities
Current liabilities (129.9) (191.1)
Net current assets 100.3 9.8
Total assets less current liabilities 331.7 396.4
Non-current liabilities (73.3) (137.0)
Net assets 258.4 259.4
• Cash of £63.4m at H1 2009 (FY 2008: £117.8m)
• Centrally available cash balances of £21.6m (FY 2008: £75.3m1)
• Net cash of £17.2m (FY 2008: £117.5m)
Pension
• Pension deficit of £22.3m at H1 2009 (FY 2008: £18.2m)
Note 1. Included £25.5m held in escrow in relation to the Cambridge
acquisition
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Segmental reporting
H1 2009 Revenue
47%
14%
8%
19%
12%
UK Global Procurement Americas
Continental Europe Asia Pacific
H1 2009 underlying XEBIT
30%
23%20%
21%
6%
UK Global Procurement Americas
Continental Europe Asia Pacific
Note 1. Segmental financials split before central costs and eliminations
15
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Financial overview of Cambridge
H1 2009 Revenue: £81.1m
73%
27%
BPO
ITO
H1 2009 EBIT: £4.5m (6% margin)
Note1. Revenues include £4.3m between Xchanging Group companies and Cambridge Group companies
52%
10%
14%
24% BPO USA
BPO India
BPOAustraliaITO
1
EBITRevenues
David AndrewsChief Executive Officer
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Strategy and outlook
17
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First half highlightsGrowth
• £825m, five-year procurement contract with Alexander Mann Solutions
• Acquired FondsService Bank (FSB) business unit, with revenues of over €40m in 2008, for €21.4m
• Seven-year contract with AonBenfield to provide insurance broking services in the UK
• Enterprise licence agreement with QBE and associated implementation services
Renewals
• 100% renewal rate in the US including Walmart and American Express
• Extended contracts with DHL, Singapore Government and Swift
• Concluded discussions on the future shape for claims processing with the London Insurance Market
Re-alignment
• Employee integration well underway globally
• Completed restructuring of US BPO – 45 sites reduced to 16 principal offices
• Regional organisation structure in place and strengthened senior management team
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Global BPO market…
70 74 80 8796
105
26 28 31 34
111119
130142
157172
2422 332927242219
2008 2009 2010 2011 2012 2013
US
$ b
illio
ns
Americas EMEA Asia/Pacific Worldwide
2009 – 2013 CAGR: 10%
2009 growth: 7%
Source: IDC May 2009
… continues to be attractive
19
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A large customer base…
Notes 1. Annual revenues based on 2008 financials2. Aon included in >£1m column a customer for both Cambridge and Xchanging
53
6 415
74
18
31
51
>£0.5m >£1.0m >£5.0m >£10.0m >£20.0mAnnual revenues
Num
ber o
f cus
tom
ers
Xchanging Cambridge
723
83
125
4
2
… an exciting base to build on
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A global customer base…
48
9
44
517
2
US UK Continental Europe Asia Pacific
Num
ber o
f cus
tom
ers
Xchanging Cambridge
61
50
95
… to drive sustainable growth
21
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A strong pipeline …
20
Opportunities, each with annual value > £20m
Interest Shaping Validation Conclusion
18
8
2 2
… for sustainable high growth
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Key aims …
Continental Europe
UK
Americas
• Continue electronification of London insurance market• Grow broking and hosting• Reap consolidation synergies
Asia Pacific
Global Procurement
• Turnaround as a result of restructuring• Leverage Cambridge and Xchanging’s insurance customers• Gain market share in US claims market
• Participate in consolidation of the investment account administration market
• Extend strong relationships into insurance, HR and procurement for new profitable revenues
• Develop Tier 3/4 locations and special economic zones in India• Promote additional offshoring of onshore processing• Transform ‘white label’ workers compensation processing in Australia
• Use our global footprint to exploit our position in a high growth market
• Leverage our global procurement expertise locally
… in our segments
23
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Outlook …
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Confident of continued delivery of profitable growth
• Focus on growing our relationships with a broader customer base
• Deliver on opportunities in our pipeline
• Consistent focus on margin enhancement
• Well placed to take advantage of next growth wave in the global BPO market
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•Strong competitive position
•High revenue visibility
•Sustainable high growth
•Established profitability with margin upside
•Proven management
•Clear strategy
Our shareholder promise…
… that we continue to deliver on
Q&A25
Xchanging Cost for Profit
Appendix26
Xchanging Cost for Profit
27
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Re-enforcing our IPO message …
• Structural market growth• Track record of market outperformance• High barriers to entry
Sustainable High Growth
• Long term contracts• High customer “stickiness”• Systematic sales targeting
High Revenue Visibility
• Global footprint• Flexible go-to-market approach with full suite of BPO offerings• Lean processing
Strong Competitive Position
• Productivity improvement and economies of scale• Significant arbitrage opportunities from offshore capability• US BPO restructuring benefits
Established Profitabilitywith Margin Upside
• Significant experience • Seasoned team• Significant investment in senior management recruitment
Proven Management
• Grow existing platforms • Add new platforms• Lean processor
Clear Strategy
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Segmental reporting
29
© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.
99.9
9.5
112.4
14.3
Revenue XEBIT
£m
H1 2008 H1 2009
UK
• Revenues up 13% driven by new contract wins and incremental volumes from IMR investment
• Profits driven by productivity improvements, benefits from regional restructuring and HR business performance
• Trends and opportunities
• Continuing electronification London market
• Growth in broking and hosting businesses
• Strategic alliance with AMS in HR market
Review / trends
Note 1. Segmental financials before central costs and eliminations
30
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Continental Europe
6.1
72.2
5.9
81.9
Revenue XEBIT
£m
H1 2008 H1 2009
• Revenue driven by launch of new German withholding tax offset by weaker processing volumes and business support
• Net revenue growth primarily reflects movement in foreign exchange
• Profit maintained through productivity improvements
• Trends and opportunities
• Consolidation of the funds administration market
• Recovery in retail securities volumes
• Leverage strong relationships into insurance, HR and procurement
Review / trends
Note 1. Segmental financials before central costs and eliminations
31
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Americas
1.7
15.0
2.3
76.7
Revenue XEBIT
£m
H1 2008 H1 2009
FY
Review / trends
• Revenues include £61m from Cambridge US BPO and ITO businesses
• Profits increased by higher margins in Insurance software offset by loss-making US BPO
• Trends and opportunities
• Turnaround in US business as a result of restructuring
• Recovery in US consumer spending
• Leverage Cambridge and Xchanging’s insurance customers to sell large deals
• Gain market share in US claims marketNote 1. Segmental financials before central costs and eliminations
32
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Asia Pacific
2.90.4
23.2
3.7
Revenue XEBIT
£m
H1 2008 H1 2009
Review / trends
• Revenues include £20m contribution from India and Australia BPO businesses
• Profits increased through addition of profitable India and Australia BPO businesses
• Trends and opportunities
• Multinationals looking to exit Indian captives
• Leverage Tier 3/4 locations and special economic zones in India
• Additional offshoring of onshore processing
• ‘White label’ workers compensation processing in Australia Note
1. Segmental financials before central costs and eliminations
33
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Global Procurement
5.7
85.1
4.2
88.0
Revenue XEBIT
£m
H1 2008 H1 2009
Review / trends
• Revenues driven by strong volumes from BAE Systems offsetting weaker trading elsewhere as customers reduce indirect spend
• Profits impacted by investment in global expansion and revenue mix
• Trends and opportunities
• High growth market (IDC forecast 16% growth)
• Large scale cross-border deals
• Leverage Cambridge and Xchanging relationships to expand globally
Note 1. Segmental financials before central costs and eliminations
34
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Reconciliation of segmental reporting…
Old business line reporting Old business line reporting
£'000Business
Lines InsuranceFinancial Markets
BPS & Central H1 2008
Business Lines Insurance
Financial Markets
BPS & Central
H1 2009 excluding
Cambridge Cambridge
H1 2009 including
Cambridge
Continental Europe 72,222 72,222 81,859 81,859 - 81,859
UKInsurance 67,042 67,042 74,649 74,649 - 74,649Human Resource 20,348 20,348 21,762 21,762 - 21,762Hosting 8,538 8,538 11,668 11,668 - 11,668
AmericasCambridge - - 61,059 61,090Insurance Software 13,442 13,442 13,078 13,078 - 13,078
Global Procurement 84,888 84,888 87,132 87,132 - 87,132
Asia PacificCambridge - - 15,693 15,693BPS - - (11) (11) - (11)
Central 342 342 146 146 - 146
GROUP TOTAL 113,774 80,484 72,222 342 266,822 120,562 87,727 81,859 135 290,283 76,752 367,065
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Our consistent strategy…
… to become THE global business processor
5 key offerings for: – customer choice
Acquisitions for:– adding volume
Partnering for:– customer trust and ambition
Acquisitions for: – international customer reach
Acquisition for:– adding scale and capability
Processing Centres for:– customer competitiveness
and uniform quality
Grow existingplatforms
Lean Processor
Add new platforms
36
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Strategic rationale for Cambridge acquisition…
IT capability underpins electronic automation
Broadens international reach
Accelerates Lean Processor strategy
US and Asia market presence to increase Xchanging’s global appeal to blue chip companies
Indian BPO scale and US aggregation opportunity for "best-shoring"
Indian IT development capability strengthens Xchanging’s ability to build out electronic platforms
Customer baseDiverse customer list (over 500 new customers) with low penetration of major accounts
Margin upsideMargin upside from US BPO restructuring, synergies and arbitrage opportunities in Asia Pacific
37
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Our go-to-market strategy…
Policy / Strategy
Core Business
Industry Specific
HR Procurem
entAccountingTechnology
Share the profit and capital upside from productivity improvement, scale advantage and entrepreneurship 50/50. Xchanging bears the implementation investment and deploys reusable assets. Our joint aim is valuable processing platform asset and a sustainable 100% improvement in the Day 1 cost base over 10 years
Deliver better, cheaper processing and procurement category spend. Xchanging provides services to an agreed specification and usage charge or cost baseline and savings profile (gain-share). We offer customers an upside for additional revenue or superior savings on a case by case basis.
Supply better solutions for business processes and information requirements than can be achieved internally or by other suppliers. Xchanging provides the solutions in accordance with a price book, based on licence free, maintenance, usage, installation fee, etc. We listen to customers needs and prioritise enhancements through user groups.
Extend the scope of the services provided by Xchanging in Partnering of Outsourcing to gain additional processing and spend efficiencies for the customer and Xchanging.The price of Straight Through Processing is cost plus an agreed mark up that then becomes the agreed service price in the normal way.
Deploy experts and re-usable assets for supporting specific improvement activities in the business processing value chain, on a project or interim assignment bases.Xchanging charges based on the level of expertise involved and the achievement of agreed deliverables and results. Xchanging published a rate card
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Lean processing…
4,770 employees
(c. 54% of Group employees)
890 employees
(c. 10% of Group employees)
3,150 employees
(c. 36% of Group employees)
Global Balancing
… for competitiveness and profitability