Delivering on our strategy Analyst presentation 2 March 2009
1 David Andrews Chief Executive Officer
Another strong year in 2008 2007 2008 Increase Revenue 468.2m 557.8m 19% XEBIT margin 6.8% 7.3% 50 bps XEBIT 31.6m 40.8m 29% Pro forma EPS 10.51p 14.67 40% Dividend per share 2.0p 2.5p 25% Free cash flow 27.7m 33.0m 19% Group net cash 98.4m 117.8m 2 creating value for our shareholders
Delivering on our strategy Growing existing platforms Expanded our Broking Services platform through Cooper Gay contract Significant progress in moving from paper-based to electronic processing in the London insurance market Expanded our Hosting services including signing contract with Northgate Arinso and implementing a new technology trading infrastructure for the London Metal Exchange Completed acquisition of Mercuris SA, French Procurement outsourcing services provider Expanded the Central Price Services capabilities and automated the valuation process for our financial services customers Upgraded our securities processing platform to address new German withholding tax laws (Abgeltungssteuer) Adding new platforms Successfully completed re-alignment phase of EP with Allianz Global Investors Grew 3rd party Open Architecture customer accounts for Fondsdepot Bank by c.40% Signed contracts to acquire Cambridge Solutions Ltd Becoming the lean processor Implemented a set of standard production methods across our top 10 centres globally Commissioned a new technology to support complex processing Increased sharing to balance work loads across processing centres 3 for rapid international growth
4 Richard Houghton Chief Financial Officer
Profit & Loss (1) m 2007 2008 % increase Revenue 468.2 557.8 19% Cost of Sales (414.2) (491.4) Gross profit 54.0 66.3 Administrative expenses (15.2) (16.7) Adjusted operating profit 38.9 49.7 28% Net finance income 2.3 4.7 Adjusted profit before tax 41.2 54.4 32% Taxation (13.4) (15.0) Adjusted profit for year 27.7 39.4 42% Profit attributable to minority interests 4.9 6.4 Profit attributable to equity holders of the Group (XPAT) 22.8 33.0 44% (2) Pro forma EPS basic 10.89p 15.22p 40% (2) Pro forma EPS diluted 10.51p 14.67p 40% (1) Pre exceptional items and post add backs which include share-based payments of 2.3m (2007: 0.5m) (2) Pro forma number of shares for the year ended 31 December 2007 has been calculated by adding weighted average number of shares issued between IPO and 31 December 2007 to the actual number of shares in issue at IPO 5
Revenues ( m) 650 550 450 350 250 150 50 (50) 468 150 394 103 350 96 167 254 97 165 63 136 116 131 115 108 262 40 147 176 216 58 66 28 59 67 86 12 (0) (3) (3) (3) (9) (14) (15) (21) 2001 2002 2003 2004 2005 2006 2007 2008 19% 558 Business lines Insurance Financial markets Intercompany (1) (1) Includes BPS and Corporate. 6
Revenue visibility Visible revenue Basis of preparation 86% 84% 80% Visible revenue comprises the following: ( m) 600 500 400 300 200 394 340 468 394 558 446 527 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. 100-2006 2007 2008 2009 Renewals where there is an ongoing relationship and for which contracts renew within a year. Visible revenue Revenue achieved 7 84 expected to remain at similar levels
Profits Xchanging share of EBIT (XEBIT) Xchanging share of profit after tax (XPAT) 45 40 35 30 31.6 29% 40.8 35 30 25 22.8 44% 33.0 ( m) 25 20 19.7 22.2 ( m) 20 15 13.6 17.1 15 10 5 9.0 10 5 6.1 0 2004 2005 2006 2007 2008 0 2004 2005 2006 2007 2008 Note: Pre exceptional items and after add backs including share-based payments of 2.3m (2007: 0.5m) 8
Margin upside Xchanging EBIT margin Margin drivers 10% 8% 6% 4% 2% 3.6% 5.6% 5.6% 8.3% 6.8% 8.9% 7.3% Leveraging central costs Productivity improvement Offshoring Partly offset by dilutive impact of: 0% 2004 2005 2006 2007 2008 XEBIT Margin EBIT Margin (including minorities) addition of FDB additional discounts weakness of Business Support revenues Note: Pre exceptional items and after add backs including share-based payments of 2.3m (2007: 0.5m) 9 84 strongly underpinned
Segmental performance Business Lines Revenue ( m) 300 250 200 150 100 50 0 176.1 215.8 21% 261.8 Strong organic growth in procurement Increased volumes from existing long-term customers Full-year effect of new contracts which were being implemented in 2007 Mercuris SA acquisition 2006 2007 2008 FY XEBIT 25 20 19.7 9% 21.4 Improvements in procurement margins ( m) 15 10 5 9.8 Diluted by weak performance of the Business Support offerings which operate at higher margins 0 2006 2007 2008 XEBIT margins 5.6% 9.1% 8.2% 10
Segmental performance Insurance Revenue 200 150 135.7 164.7 167.0 Higher claims volumes ( m) 100 Automation of insurance processes 50 0 Offset by impact of discounts and loss of certain policy preparation services 2006 2007 2008 FY XEBIT 25 20 15 16.7 20.8 20.6 Cost savings in Xchanging Broking Services resulting from offshoring ( m) 10 productivity improvements 5 0 2006 2007 2008 XEBIT margins 12.3% 12.6% 12.3% Offset by increased discounts and non-recurring implementation costs associated with offshoring and electronification of the London market 11
Segmental performance Financial Markets Revenue 200 150 46% 150.3 Contribution from FDB ( m) 100 96.2 102.9 Strong transaction volumes in XTB 50 Strengthening of the Euro against Sterling 0 2006 2007 2008 FY XEBIT 20 15 13.3 45% 15.1 Productivity gains ( m) 10 5 10.4 Arbitrage savings from offshoring in 2007 Strengthening of the Euro against Sterling 0 2006 2007 2008 Partly offset by guaranteed discounts to Deutsche Bank and margin dilution due to FDB XEBIT margins 13.8% 10.1% 10.0% 12
Finance income and tax Adjusted net interest (1) 5.0 4.7 Higher cash balances held by the Group driven by ( m) 4.0 3.0 2.0 2.0 2.3 strong cash conversion full year effect of the primary funding received from the IPO 1.0 0.0 2006 2007 2008 (1) Excludes imputed interest on put options and employee loans FY Adjusted tax (2) 35% 30% 25% 20% 15% 10% 31.8% 26.6% 27.0% 2006 2007 2008 Utilisation of tax losses in the central services entity 2007 effective tax affected by decrease in corporation tax rates in Germany and the UK, resulting in a reduction in deferred tax assets (2) Effective tax rate on Xchanging s share of adjusted profit before tax 13 84
Operating cash flow Cash generated from operations and cash conversion (pre investment) (1) ( m) 80 70 60 50 40 30 20 10 92% 17.4 34.5 99% 29.4 91% 49.7 128% 69.7 139% 160% 140% 120% 100% 80% 0 2004 2005 2006 2007 2008 60% Cash generated from operations Cash conversion (pre investment) (1) Cash conversion ratio, calculated as cash generated from operations divided by the Group s adjusted operating profit 14 91
Capital expenditure 8% 7% 6% 5% 4% 3% 2% 5.0% 3.1% 6.1% 2.6% 4.0% 3.0% 3.1% 2.9% 7.0% 3.1% Expected longterm rate 1% 0% 2004 2005 2006 2007 2008 Capex as % of revenue Depreciation as % of revenue 15 tangible and intangible
Strong cash flow 70 60 69.7 8.9 50 ( m) 40 30 32.8 5.0 33.0 5.9 27.1 20 10 0 Cash generated from operations Tax Capex Net interest received Free cash flow Minority dividend Xchanging free cash flow (post minority dividend) 16
Strong balance sheet m 2007 2008 Cash/ debt Assets Non-current assets 193.8 231.3 Trade and other receivables 100.9 112.5 Cash and cash equivalents 98.4 117.8 Net cash of 117.8m at 31 December 2008 includes 25.5m held in escrow in relation to the Cambridge acquisition. Of this net cash, 75.3m was centrally controlled cash. Liabilities Current liabilities (109.6) (129.9) Net current assets 89.6 100.3 Total assets less current liabilities 283.5 331.7 Pensions Pensions deficit of 18.2m (2007: 8.7m). Increase primarily due to falls in the value of the schemes investments during 2008. Non-current liabilities (61.5) (73.3) Net assets 221.9 258.4 17 90
Update on Cambridge process January 2009 February 2009 March 2009 April 2009 David Andrews and Letter of Offer dispatched Open Offer closes on 16 Sale of shares under the two Richard Houghton to Cambridge Shareholders March share purchase agreements appointed to the Board of Cambridge on 12 January on 20 February Open Offer to the public opened on 25 February Open Offer completes on 31 March expected to complete on 2 April 2009 18 acquisition expected to complete in early 2009
Financial overview of Cambridge business Financial overview (fiscal YE 31 March) Geographic segments m Revenue ( m) (1) 200 150 144.3 100 170.5 159.0 Revenue (2) Europe 8% RoW 5% Australia 17% North America 70% 50 0 Adjusted EBIT ( m) (1) 2006 2007 2008 16% Employees (3) 4.0 2.0 19 m 12.0 10.0 8.0 6.0 4.0 2.0 0.0 9.5 6.6% 7.7 7.0 4.6% 4.4% 2006 2007 2008 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% EBIT EBIT Margin (1) Cambridge consolidated revenues and adjusted operating profit under Xchanging s IFRS accounting policies excluding discontinued operations; GBP:Rs exchange rate of 1:79.6049. North America 30% Australia 9% (2) Cambridge reported revenue by geography for fiscal year ended 31 March 2008. (3) As at 31 March 2008. substantial revenue base with opportunity to increase margin India 61%
Significant potential to create value Acceleration of consolidation of US BPO business to reduce fixed costs Strategy to create flagship processing centre to appeal to US buyer sentiment Existing and new customers have responded well to the acquisition and there is evidence of increased interest in the USA and Australia Scale benefits in Indian BPO and IT as spare capacity is utilised 20 27 through access to enhanced global sales opportunities
Investment Guidance Current view m $m m $m Exceptional costs 9 17 15 22 (1) Capex 7 13 8 13 Total 16 30 23 34 (1) At original $/ exchange rate of $1.8/ Total capex for the enlarged Xchanging Group in 2009 including implementation investment is expected to be 5% of revenue 21 27
Strong cash position post Cambridge acquisition Pro forma controllable cash position Headroom = c. 93m ( m) 100 80 (1) 75.3 70.5 60 53.0 40 Central cash as at 31 December 2008 of 75.3 million (including 25.5m in escrow account) Lloyd s facility extended to 90 million in October 2008 20m utilised under LOC 70.5m un-drawn facility remains Post completion, pro forma group central cash of c. 22 million 20 22.3 Available central cash plus unused facility is c. 93 million 0 Centrally controlled Cash (31/12/2008) Cash consideration (incl. non-compete and fees not yet paid) Central cash after consideration Unutilised Facility Cambridge net debt of 36 million to be refinanced using some combination of external debt and Xchanging facility (1) Centrally controlled cash includes a 25.5 million cash balance in escrow account 22 90
In summary Continued strong strong organic organic growth growth Significant margin margin improvement High High revenue revenue visibility visibility Confident in in the outlook for 2009 and beyond Cambridge acquisition on on track track 23
24 David Andrews Chief Executive Officer
Xchanging s vision is to be 25 THE global business processor
Making change happen Policy / Strategy Industry Specific Core Business Human Resources Procurement Accounting IT & Hosting 26 in non-core processing
THE global business processor vision >$1.3 trillion Fortune 500 non-core cost base $68 billion IDC 2012 BPO market size 27 is there to go after
THE global business processor vision c.1,300 employees c.3,900 employees Revenue 78% Revenue 17% (1) c.3,400 employees Revenue 5% Operations in 9 countries 28 (1) % of illustrative pro forma Enlarged Group revenues. Pro forma Enlarged Group revenues comprise: Xchanging revenues for year ended 31/12/2008 ( 558m) and Cambridge revenues for year ended 31/03/2008 ( 159m) is there FOR US to go after
THE global processor vision Customers in 38 countries 29 is what the market expects
Our 3-pronged strategy Grow existing platforms Add new platforms Lean Processor 30 to achieve the vision
Our 1 + 4 Go to Market offerings Business Support Straight Through Processing Products Outsourcing Partnering 31 for sustaining rapid growth
A good pipeline Continue to see accelerated market demand with a high number of opportunities 1 + 4 Go to Market Strategy trend towards bigger and more complex opportunities with an international dimension 2008 emphasis on our outsourcing, products and additional services to existing and new customers Major partnering opportunities take longer to conclude in uncertain conditions aggressively pursuing several partnering opportunities Arrangement Letter Memorandum of Understanding MOU Letter of Intent LOI Pipeline visibility Interest Shaping Validation Conclusion Contract Authority to Proceed Authority to Continue 1 Authority to Continue 2 Authority to Start 32 20 of well-qualified opportunities
Our lean processor strategy Global Balancing Repeatable Standard Operating Model Standard Processing Centres Large Scale 33 a proven formula
Becoming the lean processor Lloyd s Building Farnborough Preston Hof Employees c.18% Deutsche Bank Branch c. 10% Employees c. 67% Sossenheim c. 51% Xchanging (excl. Cambridge) Xchanging (incl. Cambridge) Xchanging (excl. Cambridge) Xchanging (incl. Cambridge) Employees c. 15% c. 39% 34 Malaysia (Kuala Lumpur) India (Gurgaon) India (Cambridge, Bangalore) Xchanging (excl. Cambridge) Xchanging (incl. Cambridge) through processing precision and Global Balancing
What will lean processor look like? 35 large scale, standard and repeatable
Global business processing Service Definition Service Academy Customer Experience Change Register Performance Control Entrepreneurial Spirit Improvement Pipeline Service strives for very satisfied customers Baselining delivery Inspiring service professionals Optimising relations Anticipating new requirements Meeting obligations Optimising the value chain Enhancing results Production Definition Process Flow Work Package Capacity Schedule Workflow Control Global Balancing Improvement Pipeline Production attains precision processing Baselining productivity Reducing friction Eliminating duplication Maximising resource usage Managing throughput effectively Driving cost efficiency Increasing productivity Sales Definition Partnering Outsourcing Straight Through Processing Products Business Support Revenue Control Sales finds new revenues Baselining channels Maximising value together Guaranteeing sustainable savings Optimising the value chain Delivering the best solution Applying know-how for results Increasing predictability Relations Relations Definition Network Management Relationship Management Pioneering Regional Cooperation Stakeholder Management Value Management builds high reputation Defining stakeholders Establishing contacts Building the network Targeting opportunities Leveraging relationships Satisfying stakeholder requirements Optimising relationships Technology Technology Definition Enterprise Map Processing Components Technology Blueprint Risk Balancing Platform Innovation Technology Agenda builds long-term competitive advantage Baselining technology Linking technology with business Driving standardisation Enabling reusability Mitigating business risk Deploying best technology Targeting superior platforms Quality Quality Definition Quality System Risk Register Control Universe Compliance Regime Contract Repository Corporate Social Responsibility controls risk Implementation Raising standards Improvement Definition Deploying best practice Component Library Controlling risk Best Practice Driving rigour Ensuring adherence People Pyramid Capacity Schedule making change happen Honouring commitments Project Control Making a difference Business Plan makes change happen Progressing to the next level Capitalising on reusable assets Boosting effectiveness Enhancing career opportunities Maximising resource usage Securing results Improving performance 36 power, precision, performance
Measuring performance Classes 1 Types 2 3 4 We Measure: Empirical Discipline Perception 37 the Xchanging Way
Our imperatives in 2009 Seize Seize the the global global business business processing opportunity Capitalise on on our our German German track track record record Position Position Xchanging in in the the USA USA Consolidate our our global global reach reach in in claims claims processing and and procurement Leverage Leverage our our UK UK market market position position Drive Drive lean lean processing 38 for building a global business processor of choice