Bae Systems Plc S/Adr

Good morning, everyone. As you'll hear this morning, our 2024 interim results reflect an excellent and busy six months for the business. Before I go further, I want to thank our employees, trade unions and supply chain partners for all they do to ensure we deliver on our critical commitments to our customers. As we walk through today's presentation, we hope to leave you with three clear messages. First, we have upgraded our full year guidance across all our key metrics after another six months of strong operational and financial delivery with high quality earnings growth. Second, we continue to make significant strategic progress that positions us well for the future. In particular, AUKUS, the Global Combat Air Program, or GCAP, the integration of our new US space business, and the strengthening of our autonomous unmanned aircraft systems and drone capabilities. And third, we have the visibility and are delivering on our value compounding model with the demand backdrop in the past six months enhancing the potential upside to our base case expectations. This has been another excellent half, building on the high operational cadence we delivered in 2023. Good order intake and the inclusion of our space business resulted in a new record order backlog. We've maintained contracting discipline and our focus on operational performance translated into double digit percentage sales and EBIT growth. Every one of our sectors contributed to the company's strong growth. enabled by the combination of operational performance, supply chain management and our diverse geography and capability portfolio. We are increasing investment in the business to support our growth profile. This includes expanding self-funded R&D by double digits, primarily in our electronic systems business, where we continue to see strong returns on investment. And we increase capital expenditure, primarily in maritime and platforms and services, reflecting programs with good visibility and longevity. The strength and outlook for the company, alongside our disciplined capital allocation, means that we are increasing the interim dividend by 8%. We've also started the follow-on buyback program. And as you'll hear in detail from Brad, we are especially pleased to increase our full-year guidance. Today I want to reinforce some key messages we laid out at the prelims in February. The increased threat environment is global and we are seeing the strength of our broad geographic footprint. A high proportion of our current and future long-term revenue and earnings profile is driven by helping our customers address global threats beyond the current Ukraine conflict. Our alignment to the US, UK, Australian, and Japanese defense strategies gives us confidence in the long-term picture. Our ambitions for the coming years are built upon these strong foundations and will enable us to continue delivering strong operational performance and contracting discipline, investing appropriately in technology and our people to support growth and our customers' priorities, and deepening our partnerships and collaborations We have unique capabilities to design, build, and support air, land, sea, and space platforms alongside our industry-leading electronic warfare and defense cyber portfolios. This diversity means we are well-positioned to offer superior solutions to our military customers as they focus on critical multi-domain and interoperable capabilities. Major multinational collaborations like AUKUS and GCAP are great examples of what we can achieve. Based on the portfolio and strategy I just detailed, we continue to expand our aspirations for the future, thanks to confidence in long-term defense spending commitments, political alliances, and a continued strong order flow and pipeline. The detailed slides we presented in February to illustrate our growth drivers are in the backup material. Today, I want to emphasize the visibility we have right now. At £74 billion, our order backlog continues to expand and provides a strong base for growth. However, we estimate our funded plus incumbent backlog is actually several times higher, and we've detailed some examples of the true long-term value of many of our programs. This includes our two leading revenue drivers for the group of Typhoon Support and Dreadnought, which highlight the strength of the core business. And remember, the 180 billion pounds plus contains little that is attributable to our U.S. business, nearly 50% of the group, as much of that is subject to the annualized U.S. budget process. On this new slide, we're providing color to the waves of growth drivers as we see them. Many of our major franchises ramp up, then enter steady state delivery over a long period before being replaced by follow-on programs. We expect good growth from all our sectors in the years to come. Here, I want to pull out some of the highlights. In the coming years, we see our Swedish and US combat vehicles, Hunter frigate program, and electronic warfare and precision electronics businesses acting as major growth drivers. The next wave comes from the AUKUS ramp up, electronic systems, space, MBDA, and munitions acceleration. Then, at the end of the decade and into the next, we see GCAP and a continued Orca submarine build stepping up. As a reminder, this is just our base view and excludes many of the opportunities we are actively pursuing. As detailed on the slide, the depth and breadth of our opportunity set is increasing and is supported by the global shifts in long-term defence spending. we are actively pursuing new work across all our sectors, domains and major geographical markets. This includes munitions restocking, electronic systems content for US FMS sales, exports for Typhoon, MBDA and Type 26, US combat vehicles and artillery FMS sales and backfilling, as well as backfilling and export of our Hagelands and Bofors products. Looking further out, we are working hard to position ourselves to deliver on space revenue synergies, the AUKUS Pillar 2 work, and rapidly evolving autonomy and drone markets. In one slide, this should help you understand our conviction on the delivery of our long-term growth and where we see the opportunities to enhance our already strong outlook. Wrapping up my section. 2023 was a year of significant strategic progress, and we've maintained that momentum in the first half of 2024. On AUKUS, we've made excellent progress on the UK programme in reaching key design maturity milestones. In March, as part of the AUKUS Trilateral Security Pact, we were selected to build Australia's new fleet of nuclear-powered submarines alongside ASC. On GCAP, we unveiled a new design a few days ago at the Farnborough Airshow, and we've made good progress on the Tempest flying demonstrator and the industrial construct between the three nations. We have been active in shaping our portfolio with the partial disposal of our shareholding in Air Astana, reinvesting the proceeds into high-end technology businesses in the autonomy and drone domains. And of course, we completed the acquisition of Ball Aerospace and established our space and mission systems business. And on that topic, I'll now hand over to Tom to update you.

Thanks, Charles. We are just over five months into the integration process since closing on the acquisition in mid-February. I am very proud of what the team has accomplished already. Let me give you a brief update on where we stand. As you can see, the SMS backlog has grown significantly since the acquisition as we converted pipeline opportunities into contracts, further establishing its base of business and visibility for future growth. I'll highlight a few of our recent wins a bit later. SMS revenue was stable in the first half. Expected growth was temporarily held back due to external factors such as the extended U.S. budget continuing resolution and the delayed passage of the defense supplemental by Congress, which resulted in delayed awards and program starts. As it stands now, we have the funding and momentum to support our growth outlook for the business. In fact, we see a circa 10% sequential revenue increase from H1 to H2 this year, which will get us to mid-single-digit top-line growth for the full year, but expanding into 2025 at our expected top-line growth rate after a strong second half of 2024. Other business performance factors are on track or above plan. Margin came in at 11%, which puts us firmly on track to achieve the circa 12% margins we are targeting over the medium term. Cash conversion is set to exceed our expectations and contributed to the overall strong group performance. So, all in all, we are now hitting our stride in this business, and we remain confident in SMS performance over the medium term. As our largest acquisition to date, integration planning and execution represents a top priority for us, and I am very pleased with the progress thus far. At the heart of things we remain focused on our new space and mission systems employees more than 5200 strong to ensure that we're retaining the diverse talent and expertise in the business. Preparations are on track to fully transition SMS employees onto our systems and HR plans to close out the transition services agreement with ball corporation during the second half. In other functions, we have identified and in some cases already implemented new systems and operating models where we can offer greater efficiencies. We continue to identify and pursue both cost and revenue synergies and we're on track to deliver on both to achieve our acquisition plan. As I touched on earlier, we remain keenly focused on unlocking the extraordinary value we saw in this acquisition through both top and bottom line synergies. We are on track to achieve our projected cost synergies of approximately $30 million per year within the targeted medium-term timeframe. In terms of revenue synergies, the team has held cross-sector and cross-functional synergy summits to identify opportunities where collaboration among SMS, electronic systems, as well as other segments will yield new business. In fact, we are already starting to submit joint bids on opportunities that neither of our companies would likely have pursued on our own. Meanwhile, we've had a lot to celebrate operationally since closing. The first few months with SMS, as part of BA Systems, has been marked by a number of notable accomplishments, both in achieving key program milestones and winning new awards. Within weeks of closing, we watched the launch of MethaneSat, a program the team has been working on since 2019, which will perform methane emission monitoring around the globe. In April, the Weather System Follow-On Microwave Mission was launched to support military operations with accurate, actionable environmental information. As you may have seen in May, the team won two more contracts as part of the National Oceanic and Atmospheric Administration's GEOEXO, or Geostationary Extended Observations, mission. With these significant wins, we have now been selected to build all three hyperspectral instruments for the platform. The three contracts total approximately $1.3 billion and are scheduled to launch in the early 2030s as NOAA's current geostationary weather satellites near the end of their planned mission. These achievements underline the strong position SMS enjoys on large programs, as well as the long heritage of technology and know-how that will continue to position the business for growth well into the future. This, together with the impressive pipeline, strong backlog, and revenue synergy opportunities our teams are identifying, underpins the confidence we have in the business outlook. I'll look forward to sharing another update after our first year during our preliminary results next February. With that, I will hand over to Brad.

Thanks, Tom. As you've heard from Charles, it's been another strong period of growth for the business, with all of our key performance indicators demonstrating that our business continues to compound value. The rising demand backdrop yielded 15 billion pounds of new orders. Combined with a contribution from SMS, our record backlog reached 74 billion pounds. Top-line sales of 13.4 billion pounds increased by 13%. with organic growth approaching 10%, with all of our sectors contributing. EBIT grew 13%, and with higher tax and interest, underlying growth in earnings per share was 7%. After increasing investments in our people, R&D, and CapEx, the group posted over 200 million pounds of free cash flow, and we allocated over 800 million for shareholder returns in the form of dividends and buybacks. These strong results reflect the focus, care, and commitment that our teams show every day, and I want to thank all of my colleagues for their hard work. We won a number of notable orders in the period, including a 4.6 billion pound order for Hunter-class frigates in Australia, full-rate production orders for AMPV and PNS, along with continued high orders for CV90s. MBDA posted strong orders in the air sector, and our new U.S. space business landed several key wins. On sales, our 13% top line growth featured strong contributions from each of our sectors. Like-for-like growth was 10%. The biggest sector gains were in electronic systems, up 34%, which includes four months of activity from space and mission systems. Excluding SMS, ES was up by 11% organically. Within ES, precision strike led all other business in terms of growth, while flight controls and avionics and electronic combat also made strong progress. The maritime sector rose by 14%, with large gains on the Hunter program in Australia, Type 26 in the UK, and continued growth in submarines. P&S delivered a 13% increase on the ramp of CV90 and full reproduction of AMPV volumes. The air sector rose 7%, with sales surpassing 4 billion pounds for the half year, with the growth in typhoon support and MBDA helping to offset the maturing Qatar program. Cyber and intelligence sales were up 4%, lifted by higher activity with the US Air Force. It's also worth noting that at the head office level, this year's half year shows a drop of around 130 million pounds from the IPO of Aristana in February. Moving to EBIT, the group was up 13% to nearly $1.4 billion. The return on sales of 10.4% highlights our strong operational delivery and the benefits of the margin accretive acquisition of SMS, all helping to offset the 30 basis points of margin headwinds of in-year FASCAS pension effects at group level. We expect this year to be the last material reduction to margin from the diminishing FASCAS impact. At sector level, the fast gas effects show up in the ES margins of 14%, while the move to full-rate production on the AMPV helped drive P&S margins into double digits. In line with our guided range, AIR delivered over 11% return on sales, with the prior year benefiting from the timing of risk retirements. Maritime's EBIT grew by 19%, with margins expanding slightly to reach 7.8%. Cyber intelligence also posted some margin expansion to reach 8.5%. Operating cash flow was 474 million pounds. The decrease from last year was driven by lower advances in the air and P&S sectors. The group continued to invest in CapEx, including key projects to improve efficiency of our delivery, like the ship assembly hall in Glasgow. As usual, we expect to see a strong second half waiting for cash flow, and we are upgrading our guidance, as I'll talk about shortly. We started the year with net debt of just over 1 billion pounds. After free cash flow of 200 million pounds, shareholder returns of 800 million, and the M&A activity, we ended the period with net debt of 6.1 billion. We were pleased to see the strong oversubscription to the debt issuance for the Ball transaction, with interest rates below our original guidance across a desirable maturity range. All three credit ratings agencies affirmed our ratings last summer when we agreed to acquire Ball Aerospace, reflecting the quality of acquisition and the continued strength of the balance sheet, and there was a subsequent upgrading by Moody's to be AA1. With the higher overall debt, we still expect to exit the year at a net debt to EBITDA ratio of less than 1.7, with expectations of continued deleveraging. Turning now to guidance, with a strong first half delivery across the group, we are pleased to be in a position to upgrade our key numbers. We now expect sales to be up 200 basis points from previous guidance to up 12 to 14%. EBIT will be up in line with sales at 12 to 14%. And we're upgrading the earnings per share range by 100 basis points with a new increase of 7 to 9%. Free cash flow is expected to exceed 1.5 billion pounds. And with this upgraded outlook for free cash flow, we are on target to deliver over 6 billion pounds in free cash flow for the three-year period ending in 2024. Refined guidance on finance costs and tax are also shown here. We have been consistently delivering against our now well-established approach to capital allocation. That includes investing in our people, as you can see with the soon-to-be completed Shipbuilding Skills Academy in Glasgow. Our increase in capex once again underlines our focus on efficient delivery, as well as building capacity to deliver growth. While our investments in R&D help to enhance our longer-term ambitions and widen our considerable technologies, Even after increasing these key investments, the profitable growth in our business allows us to increase our dividend in line with the coverage ratio of about two times earnings. The group's strong balance sheet has been put to work with M&A activity that strengthens the portfolio and enhances earnings and cash flow over the medium term with the clear intention of maintaining our investment grade credit rating. Finally, we continue to deploy surplus cash to repurchase shares. That brings me to our ambitions for the medium term and how we will deliver them. While it is hard to quantify the impact of company culture, I am convinced that it has been a key enabler of our strong performance and allows us to do a better job of retiring risk rather than consuming it. This focus on operational excellence ultimately leads to better financial outcomes. And our close partnership with our customer and alignment to their current and future needs drives the way we've been shaping our portfolio, whether that's in our new space and mission systems business or smaller acquisitions in the uncrewed platform space. Our record backlog and opportunity set gives us a very strong platform for continued top-line growth margin expansion, and strong cash conversion. We will allocate our growing returns in ways that continue to create value. In turn, this will provide the platform for a reliable compounding business model, featuring consistent growth in sales and earnings with our cash flow deployed with discipline to drive even higher returns. Our half year results and the across the board upgraded guidance for the full year are evidence of this approach in action. And in this time of rising global tensions, we are proud of the role we play in helping to protect those who protect us.