Babcock International Group PLC

Good morning, ladies and gentlemen, and welcome to the Babcock F26 post-closed trading update conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session for analysts through the phone lines, and instructions will follow at that time. I would like to remind all participants this call is being recorded. I will now hand over to David Lockford, Group CEO, to begin the call. Please go ahead.

Thank you very much and good morning ladies and gentlemen. Thank you for joining this call at relatively short notice to discuss our financial year 26 results. I ought to start by saying we're still in closed period, so we're not doing a full results presentation today and we can't give any financial information beyond what's in the statement. As usual, we'll do an overview, some of the key strategic points, from today's announcements before I hand over to David to talk about some numbers. Obviously, you all know this is my last calendar year, so it is bittersweet for me because so much is going really, really well. And that actually includes some Type 31 stuff when we get to it. But we have got the type 31 provision which David will talk about. But overall the financial year was really strong performance across all of the underlying businesses, across all of our medium term targets. And in November I talked about the good momentum and delivering growth. And obviously we are significantly past our mid single digit guidance. And encouragingly, that's across a range of activities. And that's because what we do in defence and security is still really relevant. And even as different wars ebb and flow and different debates happen about different capabilities, the core of what Bangkok delivers is going to remain and become more relevant for at least a decade, I would say. and probably much, much longer. We're delivering growth strategy with an ever-expanding set of opportunities across all the divisions, and that's helped deliver the top-line growth of 10%. And if you look at the underlying results, we're making significant progress in all areas against our margin targets. And finally, on the cash flow, Obviously you will see the balance sheet remains very very strong so we've been able to announce a further 200 million buyback program on top of the 200 million program we completed recently. At a strategic level I think some of the most encouraging developments are in the way we've approached some of the international business. The relationship with RISP Saab continues to strengthen. The relationship our French company has with a number of innovative companies in France and working on how to go to market. The relationship with HII around AUKUS, Virginia and so on. Which is that and things like the Indonesia program for the initial 4 billion but with plenty more to follow. So What would I pick out? Well, firstly, Indonesia. I was there quite recently. This is a whole government effort on behalf of Indonesia, multiple cabinet ministers and led by the president. And we have real impetus to get that under contract across the whole range of activities. We talked before about the opportunity for US Virginia class build. And despite some of the noises out of the US, one of the consistent things is the need highlighted by both the political and the official class to grow the supply chain into the Virginia class to accelerate production. We won our initial GLV orders, both UK and export. This is the Land Rover replacement vehicle, general logistics vehicle, which has, we believe, huge potential and where we are Toyota's global partner. The FMSP bridging contract is quite important. It's unfortunate that we had to have a bridging contract and not move to the next long-term relationship. But within it, we see the moves to the new ways of working which are beneficial for us and for the government. And finally, in a joint venture, we became the government's owner's engineer partner in civil nuclear for the SMR. So across a range of activities, turning prospects into business wins. As I said, the bittersweet is obviously Type 31. At the highest level, when you look at all of the reprogram, the re-evaluation, we still end up with certainly Europe's and possibly the world's most affordable, most capable general-purpose frigate. So the endpoint still remains a highly desirable endpoint. As we've said before, the way we're getting there isn't the most desirable way to get there. And I've said for some time now, Ship 1 is really the prototype where we debug both engineering and production um we debug a lot of the stuff that took place is from the bid phase in 17 through his contract award in 19 engineering through covid um ship one project after that we're into program uh there is some contamination of ship two by ship one because it's caught up because we are getting better um So although we've hit a very significant number of operational and delivery milestones, as part of that debugging we have identified the need, particularly in outfit for rework, which has led to updated drawings, which is uh created additional cost and in particular has made us re-evaluate our risk contingency to make sure that we have a properly balanced financial view of the program going forward but david will talk about that um rework isn't unexpected but because because of where it's occurred some of the cost of fixing it because we've had burrow deep into the ship has been more complex and more expensive than we thought. One of the things we've done is entered into an up-to-date engineering maturity review, so to take the learning from the compartments we've reviewed and therefore be able to tackle the issues earlier elsewhere. The charge is obviously $140 million. You've seen that. In accounting, you provide for it now, but the cash cost will go out over the rest of the period. It is really disappointing. I can't tell you how disappointed I am. It's not what I would have wanted in this year. But I think it demonstrates that as an executive team and as a board, to be honest, having been on a board call last night, We are determined to always do the right thing and always be straight with you about the state of the business, all the good stuff I've been through, but also some of the less good, in particular this. So with that, I will hand over to David.

Thanks very much, David. Good morning, everyone. So, as usual, I'll start with three performance messages. We've had strong underlying performance, excluding the Type 31 charge. Obviously, good growth across the board and margin expansion. Number two, we've had very strong cash generation, which I'll come on to. And number three, we've got a positive outlook. So, FY27 opening backlog was good, and we're reconfirming both. our medium-term guidance, and obviously no change for FY27 expectations. As I've done before, I'll start with cash flow and balance sheet numbers, because these aren't impacted by Type 31, and then I'll come back to the income statement afterwards. So if I start with free cash flow, we delivered underlying free cash flow of £262 million, which was a significant impact on last year. And this was driven by underlying operating cash conversion of 85% before the charge. And that's ahead of our medium-term target of 80% on average, as you know. We can come back to the detail of that later. We've achieved this while continuing to invest in the business through the CapEx line, in line with our capital allocation priorities. And we've looked at the short-term investment pipeline as well as the year-end balance sheet when deciding if we have surplus capital, as we talked you through before, and we worked through our capital allocation policy. As a result of the cash and what we see in the very near-term pipeline, we've decided we do have $200 million that we will commence buying back our shares after the preliminary results with, and that will be executed over FY27. The balance sheet at the year end remains strong, so gearing is 0.2, net debt is $329 million. I'll now move to the income statement. At a group level, organic revenues grew 10%. We will take an estimated revenue reversal of about $100 million on this Type 31 charge. It goes into revenue and cost provisions. It will be about $100 in revenue and about $40 in cost. But before that, 10%. And this organic growth was driven by strong performances in nuclear and aviation, which grew at 14% and 34% respectively. In marine, revenues grew at 8% on a constant currency basis, largely a continuation of what we saw in the first half. And whilst land declined over all 3%, it returned to growth in H2. And if you remember in H1, we were mobilizing the new DSG contract, so the defense businesses picked up in the second half, despite the lag in the civil businesses of rare in South Africa. Underlying profit for the year increased 19% from $363 million to $433 million before type 31, resulting in an 8.2% margin, which is 70 basis points up on FY25. And looking at the sector performance, we put the detail, some of the detail in the statement. We'll also give you more of the preliminary results. But if we look at operating profit improvements across the sectors, nuclear increased 23%. Land was up 10%, aviation 52%, and marine was up 15% before the Type 31 charge. And also at the sector level, nuclear's margin increased 70 basis points to 9.5%, so they're already meeting the group medium-term target of at least 9%. Land increased 110 basis points to 8.8%. Aviation was up 90 basis points to 7.1%. And in marine, underlying margin improved to 6.5% before, obviously, the charge. So a good performance across the business, revenue, profit, margin, cash, which will obviously give you far more detail about the preliminary results. So now on to the Type 31 charge, which David talked about the causes. So this $140 million is a full redistribute of the program. Given recent performances, Ship 1 completed the structural build and moved into the outfit and commission stage. The revised estimates cover not only production costs and material and labor, but also a revised program risk contingency for future risk Obviously, the charge will be subject to audit. It will be fully recognized as a charge in FY26 with the cash costs being incurred over the life of the program. The $140 million, as I said before, will be recognized. We estimate about $100 million of revenue reversal just because of the technical accounting way we do it and around $40 million as a charge. within the income statement. So the whole thing will be recognised in FY26. And so we'll give more guidance at the preliminary results, but our expectations for FY27 today are unchanged. We started the year with a good revenue cover of around 70% of FY27 revenue under contract at the 1st of April. It's a similar percentage to last year, but it is good if I look back over the last few years, it's usually high 60%. So 70% is a good start point. We reconfirmed our medium-term guidance of average revenue growth from this single digit, underlying operating margin of at least 9%, and underlying operating cash conversion of at least 80%. And obviously, these numbers are subject to audit and the detailed review by the audit committee. That will all happen in the proper way before we announce our preliminary results. And with that, I'll now hand back to David.