Slide 1: Centrica plc Preliminary Results
Centrica plc Preliminary Results for the year ended 31 December 2017
Slide 2: Disclaimer
Disclaimer This presentation does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Centrica shares or other securities. This presentation contains certain forward-looking statements with respect to the financial condition, results, operations and busi
Slide 3: Iain Conn, Group Chief Executive
Iain Conn Group Chief Executive
Slide 4: Summary
Summary • H2 financial results weak, particularly in Business energy supply • Extremely poor 2017 shareholder experience even though 2017 targets delivered • Addressing important questions • Phase 1 of Centrica’s strategic repositioning completed - Encouraging progress as we focus on the customer an
Slide 5: 2017 financial performance
2017 financial performance • Adjusted operating profit down 17% to £1.25bn; adjusted earnings down 22% to £698m • Adjusted EPS down 25% to 12.6p • Adjusted operating cash flow of £2.07bn; EBITDA down 9% to £2.14bn • Centrica Consumer adjusted operating profit down 1%, demonstrating resilience • Cent
Slide 6: Important questions we will address today
Important questions we will address today • Strategy: Are the components of the strategy right and how do they reinforce each other? • Cost efficiency: Potential to offset gross margin pressure and underpin financial confidence? • Resilience: In the face of competition and potential price cap in UK?
Slide 7: Jeff Bell, Group Chief Financial Officer
Jeff Bell Group Chief Financial Officer
Slide 8: Commodity prices & weather
Commodity prices & weather Average Brent oil Average UK NBP gas Average UK baseload prices ($/bbl) prices (p/th) power prices (£/MWh) $70/boe 75 60 $54/bbl 60 46p/th 50p/th £47/MWh 50 £50/MWh 40 40 35p/th £42/MWh $44/bbl $35/boe 35p/th £35/MWh 20 20 25 0 0 0 Jan 16 Jan 17 Jan 18 Jan 16 Jan 17 Jan 18
Slide 9: Financial headlines
Financial headlines Year ended 31 December 2016 2017 ∆ Revenue (£m) 27,102 28,023 3% Adjusted operating profit (£m) 1,515 1,252 (17%) Adjusted effective tax rate (%) 25% 22% (3ppt) Adjusted earnings (£m) 895 698 (22%) Adjusted basic earnings per share (p) 16.8 12.6 (25%) Full year dividend per share
Slide 10: Adjusted operating profit
Adjusted operating profit Year ended 31 December (£m) 2016 2017 ∆ Centrica Consumer 899 890 (1%) Centrica Business 481 161 (67%) Customer-facing businesses 1,380 1,051 (24%) Asset businesses 135 201 49% Total Centrica 1,515 1,252 (17%) The above figures are stated before exceptional items and certai
Slide 11: Centrica Consumer
Centrica Consumer ADJUSTED OPERATING PROFIT / (LOSS) Consumer gross margin (£m) Year ended 31 December (£m) 2016 2017 ∆ UK Home 810 819 1% 2,913 2,781 Ireland 46 47 2% North America Home 93 119 28% Connected Home (50) (95) (90%) Centrica Consumer 899 890 (1%) ADJUSTED OPERATING CASH FLOW 2016 2017 C
Slide 12: Consumer: adjusted operating profit drivers
Consumer: adjusted operating profit drivers Weather, FX, Pricing, prepayment CH accounts, cap investment Efficiencies other £219m £899m (£49m) £890m (£134m) (£45m) Like-for- External Choices Efficiencies like 2016 adjusted 2017 adjusted operating profit operating profit 12 Preliminary Results 2017
Slide 13: Centrica Business
Centrica Business ADJUSTED OPERATING PROFIT / (LOSS) Business gross margin (£m) Year ended 31 December (£m) 2016 2017 ∆ UK Business 50 4 (92%) 1,100 North America Business 221 71 (68%) 904 Distributed Energy & Power (DE&P) (26) (53) (104%) Energy Marketing & Trading (EM&T) 161 104 (35%) Central Powe
Slide 14: Business: adjusted operating profit drivers
Business: adjusted operating profit drivers DE&P Legacy gas investment, contracts, Weather, FX, acquisitions/ UKB/NAB commodity disposals Efficiencies performance £481m £55m (£8m) (£35m) (£332m) £161m Like-for- External Choices Efficiencies like 2016 adjusted 2017 adjusted operating profit operating
Slide 15: Business: UK energy supply
Business: UK energy supply UK Business gross margin Customer account holdings (£m) (‘000) 300 305 717 653 200 212 100 0 2016 2017 2016 2017 15 Preliminary Results 2017
Slide 16: Business: North America energy supply
Business: North America energy supply Gas Power 5,930 91 5,827 84 2016 2017 2016 2017 2016 2017 2016 2017 Total customer Unit gross margin Total customer Unit gross margin energy consumption ($c/th) energy consumption ($/MWh) (mmth) (TWh) Impact of accounting adjustment 16 Preliminary Results 2017
Slide 17: Business: NA energy supply gross margin
Business: NA energy supply gross margin North America Business Weak performance in H2 gross margin ($m) 800 • Lower gas gross margin reflecting reduced optimisation opportunities 600 • Power supply margins significantly lower 400 - Increased competitive intensity - Market structure and capacity char
Slide 18: Business: NA energy supply response
Business: NA energy supply response North America Business Response to improve profitability and reduce 2017 gross margin ($m) volatility of power business 500 • Thorough review and investigation 400 • New standard product offering 300 200 • Completion of system enhancement to provide granularity of
Slide 19: Business: DE&P and EM&T gross margin
Business: DE&P and EM&T gross margin DE&P gross margin EM&T gross margin (£m) (£m) 40 250 37 200 30 29 150 20 100 10 Legacy gas contracts 50 0 0 Core EM&T 2016 2017 2016 2017 19 Preliminary Results 2017
Slide 20: Exploration & Production
Exploration & Production E&P Production volumes Total (mmboe) Year ended 31 December (£m) 2016 2017 ∆ Gas and liquids realisations 1 1,440 1,424 (1%) 2016 71.2 Adjusted operating profit 187 184 (2%) 2017 61.0 Adjusted operating cash flow 655 448 (32%) Free cash flow 166 376 127% Average gas Average
Slide 21: Exploration & Production - CSL
Exploration & Production - CSL CSL Production volumes Total (mmboe) Year ended 31 December (£m) 2016 2017 ∆ Gross revenue 93 148 59% 1.6 2016 Adjusted operating profit / (loss) (52) 17 nm 2017 4.2 Adjusted operating cash flow (49) 61 nm The above figures are stated before exceptional items and certa
Slide 22: Operating costs
Operating costs Year ended 31 December (£m) 2016 2017 ∆ Reported operating costs before exceptional items 3,054 2,848 (7%) FX impact 50 - - Adjustments (494) (376) - Adjusted operating costs 2,610 2,472 (5%) Growth investment (21) (73) - Adjusted operating costs excl. growth investment 2,589 2,399 (
Slide 23: Efficiency programme delivery
Efficiency programme delivery £103m £83m £4,675m £4,516m (£308m) (£37m) Efficiency FX Inflation programme Other1 2016 2017 controllable costs like-for-like Costs of goods sold controllable costs Operating costs 1. Other includes costs that are related to portfolio change, costs that are non-repeatin
Slide 24: £750m p.a. cost efficiency programme delivered
£750m p.a. cost efficiency programme delivered £54m £746m £308m £5,017m £384m £103m 2015 2016 2017 2018 run rate Total from from 2017 existing projects projects Costs of goods sold Operating costs 24 Preliminary Results 2017
Slide 25: Net investment
Net investment Year ended 31 December (£m) 2016 2017 Centrica Consumer 144 166 Centrica Business 1 82 233 Exploration & Production 518 439 Other 2 98 105 Capital expenditure (including small acquisitions) 842 943 Cash acquired through Spirit Energy transaction - (78) Material acquisitions 3 322 - 4
Slide 26: Cash flow
Cash flow Year ended 31 December (£m) 2016 2017 EBITDA 2,365 2,142 Tax (206) (102) Dividends received 117 58 1 Working capital & other 410 (29) Adjusted operating cash flow 2,686 2,069 Net investment (1,039) (46) Interest (113) (296) Dividends (532) (463) 2 Other (383) (325) Equity placing 700 - Adj
Slide 27: Debt repurchase programme
Debt repurchase programme • Offers to repurchase £0.6bn-£1bn of outstanding gross debt £5.7bn (£0.4bn) • Forecast gross debt reduction (£0.6bn–£1.1bn) of £1.0bn-£1.5bn in 2018 2018 • One off exceptional interest charge maturity and cash outflow of £4.2bn-£4.7bn £80m-£140m • Interest savings of £25m-
Slide 28: Credit rating metrics
Credit rating metrics Moody’s retained cash flow/debt S&P funds from operations/debt Current rating: Baa1 (Stable Outlook) Current rating: BBB+ (Negative Outlook) 35% 45% 40% 30% 27% 35% 24% 24% 35% 35% 25% Mid 20’s % 30% 28% 20% 30% 27% 20% 25% 15% 20% 2014 2015 2016 2017 2014 2015 2016 2017 2017 c
Slide 29: Iain Conn, Group Chief Executive
Iain Conn Group Chief Executive
Slide 30: Important questions we will address today
Important questions we will address today • Strategy: Are the components of the strategy right and how do they reinforce each other? • Cost efficiency: Potential to offset gross margin pressure and underpin financial confidence? • Resilience: In the face of competition and potential price cap in UK?
Slide 31: Centrica's purpose
Centrica’s purpose “To provide energy and services to satisfy the changing needs of our customers” 31 Preliminary Results 2017
Slide 32: Fundamental trends in energy and services
Fundamental trends in energy and services • Decentralisation of the energy system • Increased choice and power shifting to the customer • Advancements in digital and technology 32 Preliminary Results 2017
Slide 33: Centrica's strategy
Centrica’s strategy • Energy and services company • Deliver for the changing needs of our customers • Delivering long-term shareholder value through returns and growth • Trusted corporate citizen • Employer of choice • ‘21st Century energy and services company’ 33 Preliminary Results 2017
Slide 34: Centrica's simplified portfolio
Centrica’s simplified portfolio Energy Consumer Business E&P supply • UK Home • UK Business • Spirit Energy • Ireland • NA Business • CSL • NA Home • DE&P • Connected Home • EM&T • CPG Energy 2017 gross revenue supply £12.1bn £15.5bn £1.7bn 2017 gross margin £2,781m £904m £357m 34 Preliminary Result
Slide 35: Consumer and Business divisions
Consumer and Business divisions • Customer needs are global, and seeking more than just energy • New capabilities built, helped by targeted acquisitions • Centrica more scalable and replicable enabling synergies and efficiency • Large market opportunity in growth areas - Attractive growth rates - Hi
Slide 36: Consumer strategic framework
Consumer strategic framework Energy In-home Peace Home energy Home supply servicing of mind management automation • Gas supply • Cover products • Home insurance • Energy insight • Home control • Electricity supply (protection plans, • Home security and • Energy efficiency • Appliances control warran
Slide 37: Business strategic framework
Business strategic framework Energy Wholesale Energy Energy Energy Supply Energy Insight Optimisation Solutions • Gas supply • Trading partner • Energy resource • Asset optimisation • Multi-technology • Electricity supply • Energy management & • Aggregation and solutions commodities & risk monitorin
Slide 38: First phase of strategic repositioning complete
First phase of strategic repositioning complete • Reduced scale in E&P and Central Power Generation in line with strategy - >£900m of divestments - E&P capex down by ~£300m p.a.; Spirit Energy JV established - Rough a production asset • Enhanced capabilities, technology, propositions in customer-fac
Slide 39: Next phase - priorities for performance delivery
Next phase - priorities for performance delivery • Demonstrating customer-led gross margin growth • Driving cost efficiency towards being ‘most efficient price-setter’ • Improving organisational effectiveness • Securing the capabilities we need for 2020 and beyond . . . while ensuring continued focu
Slide 40: £1.25bn per annum of cost efficiency 2015-20
£1.25bn per annum of cost efficiency 2015-20 £750m £500m Efficiency programme delivered New efficiency programme £203m (£692m) £288m Inflation £5.0bn FX (£298m) £350m (£500m) Efficiency Other/one off/ programme £4.5bn (£54m) portfolio change/ phasing Other/one off/ ~£4.3bn 2018 run rate Inflation po
Slide 41: New cost efficiency programme 2018-20
New cost efficiency programme 2018-20 Split of efficiencies • £500m p.a. additional cost efficiencies by 2020 - 65% of savings in opex; 35% in COGs - £300m p.a. in UK Home; energy supply cost per dual fuel customer improved by ~£20 - Cost to achieve of £300m-£400m UK Home - 4,000 like-for-like headc
Slide 42: Customer-led gross margin growth
Customer-led gross margin growth Consumer Business 1 15 25% 15 25% 20% 20% 10 10 15% 15% 10% 10% 5 5 5% 5% 0 0% 0 0% 2015 2016 2017 2015 2016 2017 Closing accounts 27.4m 26.7m 25.3m 1.4m 1.4m 1.3m Gross margin /account £104 £109 £110 £638 £663 £523 Revenue (£bn) Gross Margin (£bn) Gross Margin (%) 1
Slide 43: Consumer accounts and gross margin quality
Consumer accounts and gross margin quality Customer accounts (‘000) 26,668 (1,172) (195) (358) 373 25,316 Collective tariff/ white Prepayment label/ aggregation Competitive Connected roll-off pressures Home growth FY 2016 2016 Collective tariff / Prepayment Competitive Connected Home FY2017 2017 agg
Slide 44: Gross margin and cost efficiency – UK Home
Gross margin and cost efficiency – UK Home 2,500 2,000 Gross margin (£m) 1,500 Opex (£m) 1,000 2015 2016 2017 Adjusted operating profit £880m £810m £819m Closing accounts 22.4m 21.7m 20.3m EBIT/ average account £39 £37 £39 44 Preliminary Results 2017
Slide 45: UK energy supply - default tariff cap
UK energy supply - default tariff cap • UK Government draft bill published October 2017 • Unintended consequences - cap likely to impact competition, choice and average prices • Centrica ‘14 point plan’ to improve UK energy supply market • Centrica’s unilateral actions being implemented by 31 March
Slide 46: Exposure to UK default tariff cap risk
Exposure to UK default tariff cap risk Standard tariff price and market share (£) • 4.3m customers on SVT at end of 2017 1,300 • Expecting 3m customers on SVT by end 2018 1,200 Average large supplier SVT - £1,1421 • Cost efficiency delivery 1,100 British Gas SVT - SVT cheaper than 85% of standard du
Slide 47: British Gas household bills and profits
British Gas household bills and profits Breakdown of average British Gas combined gas and electricity bill (£/customer) 1,400 1,200 Profit after tax 1,000 Other costs Corporation tax and VAT 800 Environmental and social policies 600 Delivery to your home 400 200 Wholesale energy costs 0 2009 2010 20
Slide 48: Consumer growth indicators
Consumer growth indicators North America Home protection plans Local Heroes cumulative jobs completed (‘000) (‘000) 300 25 20 200 15 10 100 5 0 0 2014 2015 2016 2017 Jan Apr Jul Oct UK Home services account growth (‘000, Total British Gas Rewards sign ups H1/H2) (m) 100 0.80 2012 2013 2014 2015 2016
Slide 49: Connected Home growth
Connected Home growth 1,630 • Momentum building • 71% increase in cumulative hubs installed • 27% increase in revenue; gross margin remaining 1,042 at ~20% 759 900 • First international partnership in Italy • 2017 the peak year for net cash outflow 403 660 527 • 2018 targets: 292 364 - Revenue to do
Slide 50: Connected Home competitive position
Connected Home competitive position Cumulative smart thermostat sales 1 Ecosystem deployment 2 (m customers / hubs) (m customers / hubs) 5.7 4.2 1st in UK 1st in UK 1st in Western 2nd in Western 3.4 Europe 4.2 Europe 3.1 4th globally 6th globally 2.2 1.4 1.2 1.0 0.7 0.9 0.7 0.7 0.4 0.4 0.3 0.2 0.2 S
Slide 51: North America Business
North America Business • Customer needs similar in North America and UK • Material and established business serving 240k customers • Second largest retail energy supplier • Plays to Centrica strengths – large customer book, energy risk management, value-add services • Insight, optimisation and solut
Slide 52: North America Business performance
North America Business performance NAB return on average capital employed • Weak H2 2017 performance predominantly in power supply book 2015 2016 2017 • Market and internal changes occurring simultaneously ROACE 10% 10% 3% • Thorough investigation • Response designed to reduce power book volatility
Slide 53: Distributed Energy & Power growth
Distributed Energy & Power growth Capacity under management (MW) Underlying gross revenue1 • 34% increase in underlying gross revenue (£m) 1,907 170 • 26% increase in order book revenue; 127 accelerated growth rates in Q4 928 80 • REstore adds enhanced Demand Response optimisation capability 2016 20
Slide 54: Exploration & Production
Exploration & Production • Spirit Energy creates stronger and more sustainable self- financing E&P business • Further consolidation targeted - Centrica would dilute - Prepared to reduce shareholding to <50% • Spirit Energy creates optionality for both shareholders • Centrica Storage now a separate E
Slide 55: Capability
Capability • Enhanced business capabilities developed since 2015 - Customer service - Customer segmentation and propositions - Digital platforms (Connected Home, Centrica Business Solutions) - Intellectual property and technology (Centrica Innovations) - Device development and integration (Hive) - P
Slide 56: Acquisitions and disposals
Acquisitions and disposals • No major growth M&A - Uncertainty of UK default tariff cap - Desire to maintain balance sheet strength • Bolt-on acquisitions to build capability within limits of financial framework • Spirit Energy – potential for further consolidation, partnership • Nuclear investment
Slide 57: Strategy - conclusions
Strategy - conclusions • Phase 1 of repositioning Centrica completed and Group strengthened • Focus remains on the core of ‘energy supply and services’ - Strong positions in core energy supply and in-home servicing - New capabilities and sources of gross margin developed to reinforce the core • Incr
Slide 58: Group financial framework
Group financial framework Targets Metric Adjusted operating cash flow • 3-5% underlying growth p.a. on average Dividend • Progressive in line with adjusted operating cash flow Controllable costs • Operating cost growth < inflation Capital re-investment • Investment <70% of adjusted operating cash fl
Slide 59: 2018-2020 guidance
2018-2020 guidance • Targeting AOCF of £2.1bn-£2.3bn p.a. on average; possible risk in 2019 from tariff cap • Capital re-investment of no more than £1.2bn p.a. including 100% of Spirit Energy • Expect to maintain current dividend subject to - Generating sufficient AOCF within target range - Net debt
Slide 60: Sources and uses of cash
Sources and uses of cash Capital expenditure Material acquisitions AOCF Dividends Equity placing Other Disposals Interest 2015 2016 2017 2018-20e Closing net debt £4.7bn £3.5bn £2.6bn £2.25bn-£3.25bn Assumes commodity price environment as at 21 February 2018. 60 Preliminary Results 2017
Slide 61: 2018 Group targets
2018 Group targets • Adjusted operating cash flow of £2.1bn-£2.3bn • Capital reinvestment <£1.1bn; Spirit Energy capex ~£500m • Expect flat 2018 full year dividend per share of 12.0p • £200m of efficiency savings in 2018 • Like-for-like headcount reduction of around 1,000 in 2018 • Net debt in a £2.
Slide 62: Summary
Summary • H2 financial results weak, particularly in Business energy supply • Extremely poor 2017 shareholder experience even though 2017 targets delivered • Addressing important questions • Phase 1 of Centrica’s strategic repositioning completed - Encouraging progress as we focus on the customer an
Slide 63: Q&A
Q&A Iain Conn Jeff Bell Mark Hodges Mark Hanafin Group Chief Executive Group Chief Financial Chief Executive, Chief Executive, Officer Centrica Consumer Centrica Business 63 Preliminary Results 2017
Slide 64: Adjusted operating profit
Adjusted operating profit Year ended 31 December (£m) 2016 2017 ∆ UK Home 810 819 1% Ireland 46 47 2% North America Home 93 119 28% Connected Home (50) (95) (90%) Total Centrica Consumer 899 890 (1%) UK Business 50 4 (92%) North America Business 221 71 (68%) Distributed Energy & Power (26) (53) (104
Slide 65: Adjusted operating cash flow
Adjusted operating cash flow Year ended 31 December (£m) 2016 2017 ∆ UK Home 1,053 928 (12%) Ireland 84 62 (26%) North America Home 146 154 5% Connected Home (58) (121) (109%) Total Centrica Consumer 1,225 1,023 (16%) UK Business 418 131 (69%) North America Business 285 87 (69%) Distributed Energy &
Slide 66: Disclaimer: Rules of thumb
Disclaimer: Rules of thumb The rules of thumb were provided in February 2018 based on the then current prevailing range of oil, gas and power prices. They are illustrative and are intended as directional only and exclude any potential impairment or impairment write-back. The actual impact of price c
Slide 67: Rules of thumb: E&P and Nuclear
Rules of thumb: E&P and Nuclear Please refer to disclaimer on slide 66 of this presentation before using this information. The table shows Centrica’s unhedged profit after tax (PAT) sensitivity to changes in commodity prices Movement PAT impact Gas UK 5p/therm ~£35m Oil UK $10/boe ~£30m Baseload pow