REG - Ricardo PLC - Business and Strategy Update

RicardoAnnouncement

22/04/2025 07:00

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RNS Number : 6017F  Ricardo PLC  22 April 2025

FOR IMMEDIATE RELEASE

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

22 April 2025

 

Ricardo plc ("Ricardo" or the "Company")

Business and strategy update

Further to its announcement on 28 March 2025, the Board of Ricardo (the
"Board") is pleased to provide an update on the financial performance of the
Company and the strategic initiatives being undertaken to create shareholder
value.

Highlights

Building on the good progress made with its strategy to transform the
portfolio, the Board believes that the Company remains well positioned to
deliver significant value creation for Ricardo's shareholders. Key highlights
include:

·      Ricardo expects to deliver trading within the range of analyst
expectations for FY24/25. Management's confidence is supported by the high
level of FY24/25 net revenue already secured and in the pipeline across each
of Ricardo's business units. In addition, whilst there has been a significant
level of market uncertainty in recent months, which has created short-term
order and currency volatility, Ricardo has identified additional cost actions
in the second half to largely offset the impact of this market turbulence;

·      Cash conversion in the second half of FY24/25 is expected to
materially exceed the Company's medium-term target. If the 2 years ending 30
June 2025 are taken together to lessen the impact of seasonality, cash
conversion for the Company's continuing operations is expected to be above
85%;

·      Net debt is expected to be towards the lower end of analyst
guidance for FY24/25, before the impact of restructuring costs required to
deliver the identified cost reductions. The Board is confident that the
Company will remain compliant with its leverage and interest cover covenants;

·      In addition to the cost savings and gross margin improvements
being delivered in FY24/25, management expects to achieve at least an
incremental £10m of cost savings in FY25/26;

·      Enhanced collaboration is being achieved between the A&I and
PP business units, which leverages their unique end-to-end service
capabilities and supports continued diversification into broader industrial
sectors; and

·      Good progress delivered on portfolio transformation towards
environmental and energy transition solutions, creating a simpler, more
focused and efficient business.

Graham Ritchie, Chief Executive Officer, commented:

"Despite the increased global and market uncertainty in the last few months,
Ricardo expects to deliver trading within the range of analyst estimates for
FY24/25. This reflects the continued focus on prioritising growth in resilient
end markets, delivering an efficient cost base and focused cash management.
Ricardo continues to transform its portfolio leading to a simpler, more
efficient business with higher growth and higher margins which will create
significant value for all shareholders. We have a clear strategy, underpinned
by targeted cost savings in the short term, and a focus on resilient services
and markets for value creation in the medium term."

A separate presentation has been released on Ricardo's website, which provides
additional information and should be read in conjunction with this
announcement. The presentation is available for all investors at
www.ricardo.com/en/investors/results-centre
(http://www.ricardo.com/en/investors/results-centre) .

 

Current trading and outlook

Certain end markets have seen increased uncertainty in recent months along
with increased currency volatility, but the Board remains confident in the
delivery of the Company's full year FY24/25 results within the range of
analyst estimates. FY24/25 performance is underpinned by the high percentage
of revenue already secured and in the pipeline across each of Ricardo's
segments and additional cost actions taken in the second half:

·      Energy & Environment (EE): Over 100% of FY24/25 net revenue
is either secured or in the pipeline, an improvement to the level at this time
in FY23/24 (96%). Of this 94% is secured compared to 85% at this time in
FY23/24. In March, the business unit won several notable contracts including
an air quality project in the Middle East as well as various energy and water
infrastructure related projects in the UK. The outlook is supported by a
number of short-cycle high probability prospects identified for the rest of
the fiscal year;

·      Rail & Mass Transit (Rail): Over 100% of FY24/25 net revenue
is either secured or in the pipeline, of which 93% is secured revenue,
materially exceeding 87% at this time in FY23/24. The Rail business continues
to successfully win contracts across its global footprint with major projects
in the Netherlands, US and Australia won during March. In addition, a number
of significant contracts with clients, principally in Europe and the Middle
East, are expected to be secured in April and May;

·      Performance Products (PP): All net revenue is either secured or
in the pipeline for FY24/25, including 95% secured compared to 91% at this
time in FY23/24. Looking ahead, the new multi-year marine framework programme
remains on track. In addition, Ricardo has recently won a major contract
extension with a major European OEM and has a high probability prospect for
further extension with a high-performance automotive customer supporting the
business unit's outlook; and

·      Automotive & Industrial (A&I): All net revenue is either
secured or in the pipeline for FY24/25, with 86% secured, compared to 89% at
this time in FY23/24. The business unit has also been confirmed as sole source
on three major projects in the defence and automotive sectors with final
orders expected in April and May. In addition, there is a pipeline of high
probability prospects across a broad range of end markets, including marine
and stationary power, which are expected over the coming months.

Overall, Ricardo has 91% of its consultancy net revenue secured for FY24/25,
compared with 87% at this time in FY23/24, and is expected to deliver good
order intake in the second half. This momentum supports the Board's confidence
both in Ricardo's short-term financial performance and delivery of its
medium-term targets.

Cost savings and efficiency

The Company has continued to take action to reduce costs and improve the
efficiency of its overall business, which remains a key component of its
strategy. By way of example, Ricardo's indirect costs as a proportion of
revenue have fallen in its continuing operations from 27% in FY21/22 to the
current level of 23%. This reflects a significant absolute reduction despite
the high levels of inflation seen during this period. Additional actions
underway are expected to reduce this level to 22% in FY25/26, representing
significant progress towards the Company's publicly stated objective of 20%
over the medium term.

In summary, £3m of year-on-year cost savings have been delivered in the first
half of FY24/25 through a reduction in indirect costs as a result of actions
to centralise enabling functions and improve operational efficiency. Continued
cost actions in the second half of FY24/25 are expected to deliver an
incremental £2m of indirect cost savings from property consolidation and
continued focus on reducing discretionary spend.

Furthermore, in its latest interim results for the 6-month period ended 31
December 2024, Ricardo reported an improvement in gross margin of 200 bps over
the prior period as a result of improvements in utilisation across all
business units.

As announced in its latest interim results, Ricardo is also targeting further
improvements in the cost base in FY25/26 following the recent reshaping of the
Group's portfolio, which includes the sale of the Defense business unit.
Ricardo's cost reduction plan is expected to achieve at least an additional
£10m per year of cost savings across both its direct and indirect cost bases.
These savings are expected to underpin the delivery of profit in FY25/26
despite the increased market uncertainty and order volatility in the short
term.

The Company has identified three main areas in which these cost savings will
be delivered:

·      Gross margin improvement (c.60% of total): Key initiatives
include the right-sizing of direct resource in identified markets, improving
efficiency, increased use of variable resources and low-cost delivery centres,
and increasing billable time to reduce recruitment requirements.

These initiatives are a continuation of actions Ricardo has been implementing
to drive productivity and increase utilisation rates across the Company, as
seen recently in the ongoing turnaround of the A&I business. These
initiatives have already led to significant improvements in underlying
business performance. Key highlights include:

o  EE: Utilisation of 72% for FY24/25 (up 3ppts on FY23/24). Improvement in
FY23/24 from bid process enhancements and driving operational efficiency.
Further improvement expected of 5ppts in FY25/26 with increased use of
variable resourcing and cost reduction from focus on resilient services;

o  Rail: Utilisation of 81% for FY24/25 (up 1ppts on FY23/24). Reflects an
uptick in FY24/25 driven by operating model improvement, particularly in
growth markets of Asia and North America and mature markets of the UK and
Europe. However, this recent improvement was partially offset by a short-term
reduction in Australia where certain projects reached completion. A further
small improvement in utilisation is expected in FY25/26; and

o  A&I: Utilisation of 70% for FY24/25 (up 6ppts on FY23/24). Material
improvement in FY24/25 as a result of operating model changes and focus on
variable resourcing. Further improvement of 2ppts is expected in FY25/26 with
cost reduction focused in lower growth areas.

·      Business unit overheads (c.10% of total): Key cost reduction
initiatives include prioritisation of business development and operational
costs to more resilient growth markets, and more targeted digital investment;
and

·      Enabling functions (c.30% of total): Key initiatives include
continued consolidation and efficiency in enabling function structures as the
Company continues to scale and mature its operations globally and reduced
discretionary spend.

The Board has high confidence in the deliverability of its cost reduction plan
which underpins the operating profit outlook for FY25/26 and has been working
with an external third party to validate these savings and to identify further
areas for additional incremental efficiencies over the medium term.

Cash management

As a result of the Company's focus on cash generation and working capital
management, cash conversion in the second half of FY24/25 is expected to
materially exceed Ricardo's medium-term cash conversion target of 90%. This
strong performance follows a challenging first half of FY24/25 in which cash
conversion was temporarily depressed following delays in the receipt of
R&D tax credits, a build-up in inventory in the Defense business unit,
delayed customer payments and changes to the profile of invoicing milestones.
However, when assessed on a two-year timescale to lessen the impact of
seasonality, the combined cash conversion for FY23/24 and FY24/25 is expected
to be above 85% and hence trending back towards the Company's 90% cash
conversion target. The expected improved performance on cash reflects
continued management focus on invoicing and collections. In addition, in the
second half of FY24/25 the Company has recovered £5m of R&D tax credits
with a further £1m expected before year-end and has received an increase in
the Defense disposal proceeds to reflect the collection of a major delayed
customer receipt.

Ricardo has also been taking actions to manage the phasing of its capital
expenditure. As a result of these actions, the Company expects reduced capital
expenditure in FY24/25 and capital spend to be towards the lower end of its
medium-term target range of 3% to 4% of sales in FY25/26, a period which
includes material initial investment for the large marine framework contract.
Key actions include realigning elements of the marine framework expenditure to
better match the timing of project cash inflows, which will not impact the
overall project timeline, as well as prioritising capital expenditure in other
business units.

The Board expects the strong second half cash performance and the rephasing of
the capital expenditure profile to support a year-end net debt towards the
lower end of analyst estimates at year-end FY24/25, before any exceptional
restructuring charges.

Against this background, the Board is confident that the Company will remain
compliant with its leverage and interest cover covenants.

Portfolio transformation

In May 2022, the Board announced a 5-year strategy to transition the business
to become a world-leading strategic and engineering consultancy focused on its
Environmental and Energy Transition portfolio. The Company's strategy is to
focus on strategic, technical, and engineering solutions at the intersection
of transport, energy and global climate agendas.

Consistent with the Company's strategy, Ricardo has completed a series of
strategic acquisitions and disposals to reposition its portfolio:

·      Environmental & Energy Transition:

o  Acquisition E3 Advisory (January 2025)

o  Acquisition of Aither (March 2023)

o  Acquisition of E3 Modelling (January 2023)

o  Acquisition of Inside Infrastructure (March 2022)

·      Established Mobility:

o  Divestment of the Defense business unit (January 2025)

o  Divestment of Ricardo Software (August 2022)

In addition, the Rail business unit has accelerated growth in the new markets
of North America, Asia and the Middle East, offsetting slower growth in more
mature markets. These growth markets now represent 48% of the Rail business
unit's orders compared to 38% in 2022.

Overall, the Company has made good progress in implementing its portfolio
strategy and today Ricardo's Environmental and Energy Transition portfolio
accounts for approximately 85% of the Company's underlying operating profits.

Alongside the transformation of the EE and Rail business units, Ricardo has
proactively diversified its sector exposure in its engineering (A&I) and
production (PP) businesses away from automotive end markets and expanded to
broader industrial sectors. As a result, the non-automotive mix of orders in
A&I has increased from 25% in 2022 to 60% in H1 2025, including new orders
in marine, aerospace & defence and commercial vehicle markets.

The success in developing the engineering and production businesses in
targeted industrial end markets has been achieved through increased
collaboration and joint go-to-market strategies between the Company's business
units. The combination of the design engineering capabilities in A&I, and
the ability to take the design into production in PP, creates a unique
end-to-end service capability for small volume niche manufacturing. This was
the key differentiator that enabled the successful award of the new marine
framework contract. Ricardo is seeing an increased pipeline of opportunities
to continue this momentum and will be looking at ways to accelerate this
alignment between the two business units.

Ricardo's strategy to reorientate the business to focus on its Environmental
and Energy Transition portfolio, and more closely align our engineering and
production portfolio, is leading to a simpler, more efficient, faster growing
business with greater exposure to higher divisional margins. The Board
believes that this transformation offers a significant value creation
opportunity for shareholders.

Following the recent completion of the divestment of the Defense business
unit, and the acquisition of E3 Advisory, the Board has been proactively
evaluating a range of options for the next steps in its strategic
transformation to maximise shareholder value.

Science Group

On 28 February 2025, Science Group plc ("Science Group") announced it owned an
8.46% stake in Ricardo. Since then, Science Group has continued to build its
stake and as of 8 April 2025 it owned approximately 20.08% of Ricardo's issued
share capital.

Since it became a shareholder, Science Group has engaged in a hostile campaign
to attack Ricardo's performance and change members of its Board. It initially
threatened to requisition a general meeting to replace three members of the
Board and since that time has seemingly amended its position to focus on
replacing the Chairman of Ricardo with the Executive Chairman of Science
Group. The Board believes the replacement of the Chairman would be a first
step only and attempts by Science Group to make further changes to the Board
would soon follow with the intention of taking full control. If successful,
this would give Science Group effective control of the Company without paying
a premium for that control.

The Board notes that Science Group adopted similarly aggressive tactics,
including stakebuilding and driving through board changes, in two prior
situations which resulted in Science Group subsequently forcing through
takeovers of each of those companies on terms which the Board believes were
unattractive to those companies' respective shareholders. For context:

·      Acquisition of TP Group plc ("TP Group"), completed in 2023

o  In 2021, Science Group started building a stake in TP Group's shares and
engaged in an aggressive campaign attacking the performance of the management
and board

o  After building its stake, Science Group requisitioned a general meeting to
replace two directors with its own nominees, and shortly thereafter
requisitioned a second general meeting to replace TP Group's Chairman with
Martyn Ratcliffe, Executive Chairman of Science Group

o  After having taken control of the board, Science Group oversaw a collapse
in the company's share price prior to pursuing a takeover in 2023 at a price
which was approximately 40% lower than the prevailing share price had been
when Science Group announced the acquisition of its initial stake

·      Acquisition of Frontier Smart Technology Group ("Frontier"),
completed in 2019

o  In 2019, Science Group built a stake in Frontier's shares, submitted
various proposals relating to a possible acquisition of Frontier, and employed
aggressive tactics, similar to the TP Group situation, including installing
its nominees on Frontier's board

o  Science Group's hostile campaign culminated in the takeover of Frontier at
25p per share, an approximately 30% discount to an unsolicited offer of 35p
made by Science Group less than two months beforehand

o  Frontier's financial performance has significantly deteriorated under
Science Group's ownership with a 42% decline in revenue and a 97% decline in
operating profit between the year ended 31 December 2020 (the first full year
of ownership under Science Group) and 2024. This has resulted in Frontier's
operating margin declining from c.16% in 2020 to c.1% in 2024

Science Group's stakebuilding in Ricardo has come at a time when the Company
has been facing significant market headwinds which have impacted its
short-term financial performance and share price. Science Group has criticised
Ricardo for citing challenging market conditions as a major reason for its
recent trading issues and share price performance. The Board of Ricardo notes
that Science Group itself, while present in different areas of the market, is
hardly immune from challenges in global consulting markets currently being
experienced. Science Group reported an (11)% year-on-year decrease in its
consulting revenues for the year to 31 December 2024.

Conclusion

The Board continues to expect Ricardo to deliver trading within the range of
analyst expectations for FY24/25, which reflects the adverse impact of
increased market uncertainty on short-term orders and currency volatility
being largely offset through additional cost actions in the second half of
FY24/25.

Confidence in Ricardo's medium-term outlook is underpinned by the encouraging
order book, recent contract wins and the material cost saving and cash
initiatives outlined in this announcement. Taken together, the Board believes
that the Company has a robust underpin for trading in FY25/26 and beyond.

Management has continued to make good progress against the strategy announced
in 2022, in particular to refocus the Company and reinforce its competitive
differentiation by shifting its portfolio from mobility services towards
environmental and energy transition solutions. The Board believes that the
continued simplification of the Company's portfolio over time will provide
further significant value creation for all shareholders.

The Board believes that Science Group's efforts to replace the Chairman of
Ricardo with its own Executive Chairman would, if successful, give Science
Group effective control of the Board without paying a premium for that
control. The Board believes Science Group's actions are being taken solely for
the benefit of Science Group and its own shareholders and are contrary to the
interests of Ricardo's other shareholders. The Board therefore urges the
Company's shareholders to support it in rejecting Science Group's demands.

 

 Investor and media relations
 Ricardo plc  Graham Ritchie    Tel 01273 455 611

              Judith Cottrell   Investors@Ricardo.com (mailto:Investors@ricardo.com)

              Natasha Perfect
 SEC Newgate  Bob Huxford       Tel 020 757 6882

              Ian Silvera       Ricardo@secnewgate.co.uk (mailto:Ricardo@secnewgate.co.uk)

This announcement has been issued by, and is the sole responsibility of
Ricardo plc. This announcement contains inside information as defined under
assimilated Regulation (EU) No. 596/2014 which is part of the laws of
the United Kingdom by virtue of the European Union (Withdrawal) Act 2018 (as
amended).

The person responsible for arranging the release of this announcement on
behalf of Ricardo is Harpreet Sagoo (Group General Counsel and Company
Secretary).

 

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 transport
solutions. 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 (http://www.ricardo.com) .

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