22nd Apr 2008 07:00
22 April 2008
Announcement of plan to revitalise Logica and improve returns to shareholders
Logica is today announcing the outcome of the business review instigated by Andy Green when he became CEO in January 2008. He will present his conclusions later today in London at a meeting with investors and analysts.
Highlights
The plan to revitalise Logica and to improve returns to shareholders will be based around actions in four key areas
Focus for growth: increased investment to enhance our sales and marketing operations, our consulting capability, and to focus on creating innovative propositions in selected high growth areas for European customers
Accelerate blended delivery: driving our model that blends offshore and local resources, to more than double offshore and nearshore headcount to 8,000 by the end of 2009
One Logica: a programme to put in place the right organisation, processes and incentives to ensure a deeper integration of the group
Competitive costs: a significant reduction in costs resulting from streamlining the organisation, rationalising property and a reduction of approximately 3% of overall headcount (primarily driven by a 15% reduction in non-billable headcount)
The plan is designed to deliver above-market growth, funded by a ‚£110 million restructuring programme that will deliver increasing cost savings reaching an annualised amount of approximately ‚£80 million from 2010
In addition to confirming 2008 guidance, new targets have been set for revenue growth and margin improvement in 2009 and 2010
2008 revenue growth of around 3% at constant currency
Revenue growth above the market from the end of 2008, with outsourcing revenue the fastest growing area
2008 adjusted operating margin ("margin") similar to the underlying 7.6% achieved in 2007
A c.0.5% increase in margin in 2009, with a further 0.5% to 1.0% increase in 2010
Over the medium term, Logica expects the plan to deliver sustainable double-digit margins which are amongst the best of European peers
The company's progressive dividend policy, which ensures that shareholders benefit from the growth in the business, will remain unchanged.
Commenting on this announcement, Andy Green, CEO of Logica said:
"Logica is a sharply focused European business with strong positions in its key markets and excellent local teams who really understand the diversity of European customers.
We have set out an exciting programme for growth, built upon our great strategic position. We will be increasing our investment in growing the Logica business, funded by a cost-cutting programme that will reduce overheads. I am confident that this plan will allow us to outperform the market and revitalise Logica, delivering sustained value for shareholders, customers and employees alike."
No further information on current trading will be disclosed during today's presentation. The company's Q1 interim management statement is scheduled for 14 May 2008.
Details of the plan to revitalise Logica
In 2007, 95% of Logica's c. ¢â€š¬4 billion/‚£3 billion revenues were from Europe. The European IT services market is a fragmented one. Logica has a number of key strengths. It has leading and sustainable positions in most of its markets with one of the strongest and most evenly spread European footprints. It has excellent long term relationships with high quality customers, including government organisations, across its European geographies. It is valued for its blended global delivery model, its sector skills and the innovation of its people.
The plan for growth has four key elements:
Focus for growth: Increased investment, funded by cost savings, allocating resources to the areas of highest growth;
The growth strategy, which will drive revenue growth above the market, will be focused on organic growth from Logica's existing footprint. The plan is designed to fund the necessary investment from cost savings. The highest priority will be in the UK commercial sectors, where the business underperformed the market in 2007.
The main areas of investment will be enhanced sales and marketing capability, increased investment in consulting and a focus on high growth areas such as automated metering infrastructure and security which are expected to grow faster than the market over the next few years. Outsourcing will be our fastest growing area, increasing its share of Group revenue towards 35%. Consulting resource will increase from 2,500 to 3,500 by 2010. The number of major accounts around which Logica focuses its sales efforts will be doubled.
Approximately ‚£8 million in 2008 and ‚£25 million in 2009 will be invested to allow Logica to grow revenue ahead of the market from 2009.
Accelerate blended delivery: combining local presence with greater use of offshore resources;
The accelerated expansion of Logica's blended delivery model is based on a detailed re-examination of the activities that Logica believes customers will want from offshore and near shore centres as the mainland European markets become more receptive to a blended model. An investment of c. ‚£10 million will be made over 2008 and 2009 in these areas. The business is expected to have 8,000 employees in its nearshore and offshore centres by the end of 2009, more than double the 3,450 today. Growing Logica's second site in India will be an important element of the plan, with the new centre in Chennai operational by the fourth quarter of 2008. One of Logica's main differentiators will continue to be an ability to be more flexible in blending the use of onshore, nearshore and offshore resources than many of its competitors.
Creation of One Logica: creating a sales and customer service driven culture and Logica wide processes, introducing a matrix structure to drive collaboration and ensuring incentives support delivery of the plan;
A strong team is forming to deliver the plan, with a number of new appointments made in recent months. The Outsourcing Services business is now operational and will work with the country organisations, which continue to represent Logica's local face to market. In order to facilitate wider integration across the group, Logica will make an investment of c. ‚£10 million over two years in a series of new tools and processes, including global resource management planning which will allow Logica to resource projects effectively across its geographies. In addition, an expanded knowledge management system will allow better knowledge sharing across the group.
An important element of the One Logica programme will be a new management incentive programme, the Partnership Plan, aimed at the c.300 senior managers who are responsible for profit generation. For the participants, this programme is designed to replace the current Long Term Incentive Plan (LTIP) after 2009. It will be based on achieving the company's overall three year business plan, and maximising the year-on-year performance of each manager's business unit. Awards under the plan will be provided in shares vesting after three years and earned out of a profit-sharing pool amounting to 5% of pre-tax profits, if Group profit targets are achieved. In addition to this, a Performance Multiplier Plan is being proposed, which is designed to give an additional incentive to about thirty to forty of the top executives if adjusted EPS in 2010 is very significantly higher than in 2007. We intend to consult shareholders in relation to this latter plan.
Competitive costs: improved profitability and freeing up resources for reinvestment in winning new business
A primary conclusion of the business review is that Logica's overhead structure is high compared to industry peers and that it has underinvested in sales and marketing. The competitive costs programme will fund the investments in the three areas above and support margin growth. It is expected to deliver cost savings of between ‚£15 and 20 million in 2008, around ‚£50 million in 2009 and annualised savings of around ‚£80 million from 2010. The major sources of savings from the restructuring programme will arise from 1) streamlining the organisational structure, 2) transitioning activities offshore, 3) reducing property costs, 4) rationalising IT and back office functions and 5) procurement savings.
As part of this plan, it is anticipated that Logica will make around 1,300 redundancies, subject to consultation with employee bodies. The majority is expected to be related to a reduction of around 15% of Logica's non-billable staff.
In the UK, it is anticipated that this programme could impact approximately 500 employees; this will include the impact of reductions in UK-based corporate functions
In mainland Europe, where growth has been strong, around 2% of the employees are expected to be affected.
The reinvestments of the savings in the three key elements of the plan (above) would total approximately ‚£15 to ‚£20 million in 2008 and ‚£30 to ‚£40 million in 2009. A further targeted ‚£50 to ‚£55 million would be spent in 2010, mainly in the focus-for-growth areas, following on from the benefits of earlier investments.
Financial impact of the plan
The net impact of the programme at the adjusted operating margin level (after reinvestment in the other elements of the programme) is expected to be a c.0.5% per annum increase in 2009, with a further 0.5% to 1.0% increase in 2010. These margin improvements will also increase return on capital. Logica's return on capital is expected to exceed its cost of capital in 2009.
In order to achieve the cost savings programme, the company will take a ‚£110m one-off restructuring charge. Approximately ‚£70 million of this cost will be taken in 2008, with the remainder in 2009.
The incremental cash outflow from the programme (net of tax) is expected to be between ‚£80 and ‚£90 million, evenly phased over 2008 and 2009.
Gearing will remain well below net debt/adjusted EBITDA banking covenants of 2.65x throughout the period of the plan.
For further information, please contact:
Logica Media relations: Carolyn Esser/Louise Fisk +44 (0) 7841 602391/+44 (0) 7798 857 770
Logica Investor relations: Karen Keyes/Frances Gibbons +44 (0) 20 7446 4372 (mobile: +44 (0) 7801 723682)
Brunswick: Tom Buchanan/Craig Breheny +44 (0) 20 7404 5959
About Logica
Logica is a leading IT and business services company, employing 39,000 people across 36 countries. It provides business consulting, systems integration, and IT and business process outsourcing services. Logica works closely with its customers to release their potential - enabling change that increases their efficiency, accelerates growth and manages risk. It applies its deep industry knowledge, technical excellence and global delivery expertise to help its customers build leadership positions in their markets. Logica is listed on both the London Stock Exchange and Euronext (Amsterdam) . More information is available at www.logica.com.
The company is a public company incorporated and domiciled in the UK. The address of its registered office is Stephenson House, 75 Hampstead Road, London, NW1 2PL, UK.
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