More Diversification And Sustainability Ahead For Ricardo

/ November 1, 2021/ Automotive, Financials, Ricardo, Train, UK, Unknown, US Federal

More Diversification Ahead for Ricardo

Ricardo announced in September its priorities for the years to come: further client diversification, a focus on Asia and North America, a continued refresh of its service portfolio, and sustainability in all its forms. These priorities are very much in line with Ricardo’s strategy in the past few years.

Expansion Outside Automotive

Since FY17, Ricardo facing revenue stagnation in its core automotive and European markets, has gone on a diversification journey.

Ricardo expanded outside of automotive, with success: in FY21, 50% of its revenues were outside of automotive (64% in FY17). However, while non-automotive revenues were up by 26% during FY19-FY21, automotive revenues went the opposite way, going down 28% during the period.

Within automotive, Ricardo aims to refresh its services portfolio. The company maintained its investment and expanded the capabilities of its Shoreham Test Center to include hydrogen development and testing. The company is also shifting its portfolio toward EV. This portfolio is not yet showing in the numbers: 17% of FY21 bookings were in EV/hybrid technologies vs. 19% in FY20.

Facing automotive revenue decline, Ricardo logically moved into cost rationalization. The company sold its Cambridge Technical Center. It rationalized its office presence, selling one office in Detroit. Ricardo also conducted two job redundancy plans in Europe. The company also folded its Consulting & Software into two divisions: Automotive & Industrial (A&I) and Performance Products (PP) to reduce structural costs. Overall, this effort has not paid off yet, with automotive’s adjusted operating margin reaching 2.9% in FY21 (unchanged vs. FY20).

The Sector Expansion Is Working

Meanwhile, Ricardo expanded into other sectors, creating several units: Rail, Energy and Environment (EE), and Defense. This diversification has gone well, despite occasional hiccups due to the economic conditions.

Rail engineering is doing well in Asia and Australia and is promising in North America. However, it suffered from its exposure to two large clients in the UK and Europe (Netherlands) in FY21. Each UK and Europe accounted for 17% of Rail revenues.

EE has its core activity in the UK but has expanded to Europe, servicing the EU and its member states.

Ricardo’s Defense business is a US activity, with a large part of niche manufacturing activities. Its two main contracts are with the US Army and GM. Defense is growing fast (+16% in FY21). Nevertheless, it is exposed to a lack of client diversification (its top four clients account for 80% of revenues).

International: Australia and US Lead the Growth

Along with its sector diversification, Ricardo also accelerated its international expansion outside its UK and European core markets. The company ramped up in North America and Asia, occasionally making tuck_in acquisitions to jump-start its operations. For instance, Ricardo expanded in Australia, taking over a rail business and an infrastructure and environmental engineering firm.

Ricardo was successful in North America and Australia, reaching respectively revenues of GBP 70m and 27m in FY21.

The company has grown in North America during the period to GBP 70m (+15% during FY19-21) and Australia from almost zero to GBP 27m. China has been a disappointment and declined by 23% due to its exposure to automotive.

In the meantime, however, Ricardo’s core UK and European markets declined as fast as international was up. The UK went down by 22% during FY19-21 to GBP 119m. Europe declined at the same speed to GBP 76m.

Flat Growth

Despite its transformation program, Ricardo has been a flat business since FY17. The company reached in FY21 (ending June 30, 2020) revenues of GBP 352m, flat. Its profitability has been mild, reaching 6.5% FY20: 6.3%). Ricardo’s challenges data back well before the pandemic. The company went, however, through the pandemic fairly well and managed well its financial performance.

Ricardo’s transformation is not over yet, and Ricardo still expects a 15% reduction in A&I in FY22, coming from Europe. The company expects delays in the ramp-up in its production in PP and fewer software product sales. Rail and E/E should also slow down their growth. The company will launch another job redundancy plan in automotive in Europe but still expects a 25% decline in its adjusted operating profit.

Frankly, Ricardo’s expectations for FY21 are a surprise when all competitors are on a serious rebound, if only because of the favorable comps.

Unsurprisingly, Ricardo announced a new CEO. It and appointed the former Financial Controller of Intertek, a testing and certification firm headquartered in London. Intertek is quite sizeable compared to Ricardo. It had GBP 3.0bn in revenues in 2020. The new CEO has a background outside of the engineering industry. His background suggests an accelerated focus on financial performance, in line with FY22 expectations.

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