Good morning, ladies and gentlemen, and welcome to the Babcock Full Year 26 results. I'm David Lockwood, the CEO. We'll do the normal format. I'll do a brief intro. David will go through the numbers. And then we have a special star turn from Harry, who is going to replace me shortly. And then we'll do Q&A. So please pay attention to me and David while you wait with bated breath for Harry, because I'm sure that's what you really care about. so when we were rehearsing we went through what are we trying to achieve with these results and really it's to make people look through two things which is the near-term turbulence in the UK and the type 31 and see the strong results of the company as as it moves into an even better position so if you look at the underlying results they're really good I'll come on to a slide with those later and we've reconfirmed the medium-term guidance that includes the cash guidance whilst absorbing the type 31 charge we have really strong differentiated defense and nuclear capabilities and when when I come back after David's done the numbers and talk about the the external drivers to our growth I think you'll see a really tight fit between what we're capable of delivering and what the market wants and that's come through with real strategic momentum the opportunity set across everything we do is growing quite significantly and the most important particularly for a business to government organization is to ensure that you retain strong disciplined capital allocation to make sure that we never lose sight of our core responsibility to shareholders. So I thought we'd take type 31 up front so that we can then talk about the balance of the business and David and I don't keep saying after type 31 all the way through. So from a contract point of view in the last 12 months rework and productivity did not proceed as planned particularly on outfit which really only kicked off in anger in the in the financial year we're reporting so particularly on rework although the number of incidents they were the top end of the expected range they were sort of out of range the cost of rectification was higher than we thought so we've got a revised cost estimate that's involved taking 140 million charge a significant portion of that we haven't split it but is is an increase in contingency so we have a very clear set of base operating assumptions to get the program back on track but clearly we have to work through curves of improved productivity and reduced rework so we have a contingency to cover that going slower than the base plan says and as I said earlier the cash impact is over the remaining life of the program and is absorbed within the medium-term guidance. The program itself however is making progress. Ship 1 is now outfitting as I've said. Ship 2 is floated off and is in the final top structural phase. ship three keel laying has taken place and block assembly is underway and ship four has commenced so the program itself continues to progress to deliver the capability the navy needs so when you look through that this is the strong underlying performance i started with which is organic revenue growth of eight percent above our mid-single digit margin improvement stepping towards our 9% plus, cash conversion continuing above 80%, and a strong balance sheet. Given the number of big programs we are looking at and some of the discussions with governments, plural, it's really important to maintain a strong balance sheet. Customers need to have very strong confidence that we will be a reliable supplier for multi-year critical programmes to the defence of their nations. And the fact that we can absorb the Type 31 charge inside our guidance is one of the things that gives people confidence that we are that strong company. So to take you through the numbers that underpin that strong company, my long-term partner in crime, Mr Mellors. Thank you David.
Good morning everyone. As this is David's last set of results I thought I'd take a minute to reflect on his Babcock career and I'll do it from a shareholder perspective because this is an investor meeting and I'm a shareholder, he's a shareholder, so we'll do it from a shareholder perspective. So David joined in FY21 and when we did these results five years ago at the end of 21, the only topic of debate was whether we could survive without a rescue rights issue. The share price touched £1.99 and the market cap was about a billion pounds, so we were quite low down in the £2.50. and as the track record shows, if I can flick it on, here we go, as the track record shows, not only did he not take money from shareholders in a rescue, in his time here he's returned or is returning half a billion to shareholders and that's on top of a 400% increase in the market capital capitalization of the group. So huge value creation in the time. From a strength point of view we were in quite a weak position five years ago. The balance sheet now is much stronger so again not just surviving he's built a platform that's really solid for the future success of the group and whilst doing all of that he grew the group over 50% organically, increased the level of profitability and all at a high cash conversion. And that was all done in an ever changing external environment. So it started off in lockdown with lockdowns and semi lockdowns in different countries. We've had wars. We've had in the UK alone, four prime ministers at the moment and four secretaries of state and six defence ministers, all of whom David's had to build relationships with so from the outside it's been an extremely impressive performance but having had the privilege of being on the inside and seeing all the things every day he's had to deal with particularly in the early years um i think he's made it a look look a lot easier than it really was. So from my point of view, it's been a really exceptional innings. So as a shareholder, and on behalf of my fellow shareholders, and there's quite a lot of them here, I'd like to congratulate you on and thank you for what you've done for the group, and I think you deserve a round of applause. Right, that's enough of that. Let's do the numbers. OK, so FY26 was a very positive year from a performance point of view, as these highlights show, meeting or beating expectations on all metrics. The majority of the underlying financials I'll present here exclude the type 31 charge. And that's not because I'm ignoring it. David touched on it earlier. We spent time on it last month. Happy to spend more time on it. but I'd like to give the right amount of time on the rest of the group performance. So stepping through these quickly and before going into detail, organic revenue growth was 8%. Operating profit margin improved again by 70 basis points to 8.2%. These first two delivered operating profit up 19% to £433 million. pounds and all the above led to earnings per share up 20 percent. Cash conversion was 84 percent delivering free cash flow of 262 million pounds and on shareholder returns we completed the 200 million pound buyback just after the year end and we've announced a further 200 million pounds to be executed in FY27 and the dividend is up 15 percent. So let's break down the revenue growth first. This summarizes the organic growth by sector. Three of the four sectors grew in the period led by nuclear as you can see but with good performances in marine and aviation. The land sector revenues were lower in the period as a result of the non-defense businesses. I'll come back to that and as the graph shows all of this led to a 10% organic growth before the type 31 revenue reversal and 8% after and I'll come back to the sectors in a moment next to the summary of profit in absolute profit terms all the sectors contributed to the profit improvement resulting in the group delivering £433 million for the year, up 19%. Furthermore, as you can see from the slide, all sectors improve their profit margins in the year, helping the group to 8.2% overall. As I've said before, each sector can get to the 9% target in the medium term and are moving in the right direction. And nuclear has made it already. And whilst we're on margin, as you know, we set ourselves two targets a year ago. The first to get to 8% margin for FY26, and the second, we raised our medium-term margin guidance to 9% plus. As the graph on this slide shows, we hit the 8% in FY26, and as the trend line shows, we make progress every year toward the medium-term 9% plus. The drivers of the margin improvement are on the right-hand side here. Basically, they boil down to three things. growth of quality business and that means price and terms as well as other things the productivity of our people and the efficiency of our processes and overheads and none of these drivers are new they're the ones that have delivered the improvements to date but there's still much more to do across the group so we're confident in the nine percent plus so we have the usual sector slides now with plenty of content for reference but I'll just pick out some key points I've set out the marine numbers before and after the type 31 charge for clarity but I'll concentrate on the numbers excluding the charges I said earlier so it was a good performance from marine with revenue growing 8%, organically profit up 14% and margins moving upwards by 40 basis points. As we said at H1, the revenue and profit performance improvement was largely driven by the LGE business and the Skynet contract in FY26. On LGE, you may remember in FY25, we won over £400 million of orders, which was a record period and we flagged at the time that this was a short-term surge in new contracts following the new shipbuild market lGE delivered 358 million pounds of revenue in fy26 and that's the biggest reason for the revenue and profit variances in marine year on year on top of that though the skynet contract which mobilized in fy25 had additional services contracted in the year. Just as a modelling point, Type 31 revenue before the reversal was £190 million in the year, which was booked at 0%. Nuclear, this has been another very good year in nuclear, in both the civil and naval nuclear businesses, with good progress on all measures. Just a note on order intake and backlog first. The main reason why the backlog looks low is that we traded the final full year of the FMSP contract revenue in the year, but only booked the six-month extension order. So apart from FMSP, nuclear had a booked a bill of comfortably above one in the year. And once we sign the new contract, the multi-year contract that follows FMSP, the backlog will be substantially more than it is now. On revenue, both Cavendish and submarine support activity grew well. more than offsetting the expected reduction in infrastructure revenues. So just expanding on all these points a little, Cavendish grew 18% largely in clean energy with more work at Hinkley Point but also growth in AWE. Submarine support work grew 26% with activity increases at both Clyde and Devonport benefiting from some of the infrastructure upgrades as well as productivity improvements in both locations. Infrastructure or MIP revenues reduced as we expected following the opening of 9Doc last year and then 15Doc and all of the above enabled the profit increase of 23% and the margins to reach 9.5%. Moving to land, revenue decreased 3% organically in the year due to the declines in rail and the South African vehicle business in our civil revenues. Defence revenues grew 6% in the year after a slow H1 as the new DSG contract mobilised and additionally we received some small but important GLV orders, some of which were delivered in Q4. Margins in land improved well in the year partly due to the change in revenue mix, the civil revenues reduced and defence increased, but also profits had a small net benefit of around £4 million from some contract completions. Aviation had another good year on all metrics. The 34% revenue growth was due mainly to three things. Firstly, the growth in France from the mobilisation of Mentor 2, as well as increasing military helicopter support activity. Second, scope growth and additional services in the UK defence contracts. And third, the mobilisation of the Canadian BC HEMS contract. The profit and margin in aviation are benefiting from the absolute growth in revenues and the increasing proportion of defence revenues. Now 55% of aviation revenues are from defence contracts. moving to the cash flow again this is a detailed slide for reference I'll only pick out a couple of the key numbers the most important number is the free cash flow number 262 million pounds at the bottom of the slide substantially up on prior year two things really drove this firstly a good operating cash conversion of 84 as you can see in the middle of the table and secondly substantially reduced pension deficit payments in the bottom half of the table and this is a result of all the work in prior years on pension deficits. And lastly I've put some full year guidance on this slide here for FY27. Capital allocation, this is the same capital allocation policy that we published some years ago and the priority order hasn't changed. We always repeat it to assure you that it hasn't changed and that we continue to apply it. Priority number one remains organic investment in the business. On top of the traditional capex for productivity improvements and the like we're working on a number of relatively significant investment opportunities to enhance growth. An example of this would be in Resyth with the upgrade of the missile tubes facility to allow higher production volumes. We normally expect a strong customer demand signal for such investments so which ones we end up backing and when will remain fluid until we know. The amount of capital we might need for such investments in the next 12 to 18 months is a key part of our assessment of whether we have surplus capital or not at any one time. The status of priority two here in the policy. The balance sheet strength is good, BBB plus. And as David said, this is essential for customer and supplier confidence, as well as investors and other stakeholders. So we'll retain the investment grade. Dividend is number three. And then on the three capital options at the bottom, on the left, we've looked at a number of potential bolt-ons, but nothing has yet met our requirements. No news on pensions this year in the middle and on shareholder returns you know we completed the £200 million buyback just after the year end and we announced a further £200 million to be done in FY27 and the buyback also provides an investment return floor for the higher priority options to beat. So just summarising before I hand back to David, it's been a really strong performance in FY26 meeting or beating on all metrics except obviously the type 31. We're confident in the FY27 expectations given the revenue cover at the 1st of April of 70%. We're reaffirming our medium-term guidance of mid-single-digit organic revenue growth 9% plus margins and 80% plus operating cash conversion and we'll execute another £200 million pounds of buyback for FY27 and now for the final time I'll hand back to David yeah for the final time so at the risk of making this a bit yucky over a beer David and I worked at so we've worked together for 10 years we have done over a thousand investor meetings over 20 investor conferences over 200 board meetings
so he was very nice about me but it has been a team sport and then just to finish the yuckiness about Babcock not Babcock's yucky but I'm being a bit yucky I would say that you cannot deal with what we dealt with without a chair who knows how to be supportive at the right time and challenging at the right time and Ruth completes the team So that's been a fortunate thing in dealing what we dealt with. And now for Harry in taking this platform to somewhere really exciting. Enough of that niceness. And I have to say that Rem's already sorted, so there was nothing in there, just to be clear. Right, so start outside in. These are very much the things we said a year ago. and they've only become more exaggerated in the last 12 months, leading to, I guess, two big things that drive opportunity. One is the scale of budgets and however they increase and when they increase, they are increasing. We're not in the UK talking about cuts, we're talking about the size of the increase and whether it funds everything people want to do. Not that the number isn't getting bigger, and no-one is walking away from their longer-term aspirations. The second is this move to hybrid warfare that Harry will touch on, when I think our core strength is that we intimately understand the existing portfolio of equipment, and therefore are in a tremendous position to look at how that equipment is integrated into the new equipment that comes along to create the hybrid warfare. In civil energy, we've seen tremendous progress, actually. Not just policy announcements, but genuine progress. Orders being placed for small modular reactors, sites being identified, planning regulations being changed to speed up the deployment. The government gets a lot of criticism about what it's not doing, But actually, the way it is enabling the resurgence of nuclear energy in the UK actually, I think, is a real success story that's probably undersold. And we see that both in large, large reactors like SARS-CoV-2 and in SMRs and indeed in AMRs in things like the announcement we made about working with X-Energy and Centrica in Hartlepool. For the UK, our core revenue stream in the UK is around conventional equipment, the support and supply of mostly support. As you can see on the Babcock current role, we support all the armies, land vehicles, all the nuclear submarines, 60% of surface ships. We do Skynet. So we are a major, major element of the UK's warfighting capacity today, and we are supplying new kit and bidding to supply new kit on things like the General Logistics Vehicle and the Petraea 6x6. And then we have a good training business that sits, high-end training sits behind that. So as we look at getting ready for warfighting, in the kind of conventional sense the the core skills could not be more important and you get volume increased through increased utilization and by the need to adapt for new warfighting underneath that the big growth opportunities of the move to hybrid warfare with autonomous uncrewed and so on and here I think Babcock does have a very unusual position because we are not a core technology OEM, we are a very benign partner to tech SMEs. So we can turn defense tech into defense capability by both productionizing and indeed offering build support and by integrating it into the overall system. And you will have seen through the year if you follow our press releases a number of announcements, most recently last week in France with a French drone SME when that is that is the role we play they these tech SMEs do not want to build lots of factories they don't want to manage the defense customer they want an interface so they focus on what they can do well which is high speed tech generation and we focus on what we do well which is turning that high speed tech into high speed capability and I think there isn't because we're not because we're not a tech builder of our own we're not predatory to these companies so we They are a very benign partner. And that leads to what I think is the Babcock advantage, which is we deliver mission-critical defence and strategic resilience by that lifetime capability, the tech conversion. And we can do that because we are deeply embedded with the customers. If you have that degree of support to your customers, you know everything about not just the equipment, but how they want to use the equipment today and tomorrow. And then we have flexible partnering models, whether it is with big companies like HII or smaller SMEs, like we do with Supercat, to deliver vehicles. They are a tech SME. We do volume. We do integration. We work with the Army on capability. It's a perfect model for us. So I think Babcock's advantage is very different from most of our peers. and that's led to a building of momentum so um four examples here indonesia you've heard about the four million frame in fact harry and i meeting the indonesians this afternoon um to to move this through to to the individual contracts this is a classic example of taking some of our core capability which is the type 31 and then combining it with offshore patrol vessels inshore patrol vessels, fishing vessels, long-range surveillance to create President Preboa's vision of maritime and protein security for an archipelago nation. The UK government export finance is secure. This is about delivery of a complex program that delivers a national imperative for a close ally of the UK. Submarine build. We're now qualified on the Virginia-class submarine, as well as, obviously, you know, qualified on the Columbia. Initial engineering contract has been placed, and then we're moving forward. And there's a detailed slide on this, but the HII relationship, really important. Light utility vehicle, we call it the GLV, General Logistics Vehicle. We've won contracts in Albania and the UK. As David said, we've started to deliver. We are Toyota's global partner, and there are a range of other opportunities in the UK obviously Land Rover replacement but more broadly one one army officer in one country said to me having done a trial I now know why the bad guys have used this for so long and I think it is it is a fantastic platform and then in nuclear we have the SMR rollout. We've won the owner's engineer contract in a JV model. Whoever buys SMRs is going to need an owner's engineer, a government side person. No one's ever done this before, so everyone needs engineering support on the buying side. Having won the first contract for supporting the Rolls-Royce reactor, clearly we're in a strong position to support any government who wants to buy the equivalent reactor. And that adds up to a 25-year growth story. So not just short-term perturbations or even medium-term guidance, but in almost everything we do, whether it's defence, nuclear or defence programmes, we can see a range of opportunities that means, as a board, The company can plan, obviously, for a budget year, a planning period, but also have a long-term vision. And this is before you layer on the world as it evolves. And just to go a bit deeper on a couple of those, so the HII collaboration is, I think, a really good example of the direction of travel of the company. So from nothing except just general conversations two or three years ago off the back of AUKUS, we now have the H&B Defence Joint Venture in Australia, which has its first contract, small, but it's up and running. We obviously have... And is the bridgehead almost certainly into infrastructure at Henderson as the Australians build out. We have what we call Armour Force, the hybrid navies, where HII already have an uncrewed platform, which is big enough to keep up with a frigate the size of the Type 31, but small enough to operate as a slave to the command ship. So we're collaborating on that. They have a UUV launch and recovery system, which we are taking into Europe. We are working together on civil nuclear, particularly decommissioning. And as I've already mentioned, we have a junior class submarine build. So we're broadly similar size in our markets. We have a very similar culture and some very significant opportunities in a relatively short period of time for our industry. And for Virginia-class submarine building in particular, the lack of capacity in the U.S. system is well known. The president's and, indeed, previous president's desire to get the build rate up is well known. Rosyth is, I think, the only nuclear-qualified shipyard outside the U.S. which is approved to build for either Virginia or Columbia. so it has fantastic potential to help fill that capacity gap in the US and the aim is to get up to block build so we started with a fairing then we're getting the aim is to get up to block build and really exciting opportunity where everyone the customer HII is the prime we as the partner everyone has the same objective and obviously UK nuclear is entering a multi-decade growth cycle I touched on it earlier, and Cavendish Nuclear is already scaling in that it is the UK's premier nationally owned nuclear contracting business. So outside any production that we might do of AMRs for people or any other partnerships we might have on the production side, You only have to look at that left-hand demand for nuclear-powered energy that sits in the government's clean energy plan to know that there is tremendous market potential. And even if that curve can't be achieved and it's slightly flatter, the potential for Babcock in clean energy is just enormous. and that's not a bad place to hand over to Harry because obviously he's just finished in our nuclear business. He's now operating as deputy, soon to take over and a lot of what's happened in nuclear on his watch has been that quiet transformation of Cavendish. So with that, the star turn.
Thank you, David. Hi, everybody. So I've met many of you before at the Capital Markets Day event that we held down in Devonport, actually, a couple of years ago, and then more recently at the nuclear teach-in that we did in May of last year. But for those of you that I haven't met, I'm Harry Holt, I'm the Deputy CEO, and I'm the incoming Chief Executive Officer. I've had a career of two halves. I spent over 20 years as an officer in the British Army, me, spending time leading men and women on operations around the world, as well as filling some of the key roles in the Ministry of Defence. So I understand our key customer very well, as well as understanding our ultimate end user community. Since then, I've had over 15 years in industry, the majority of that time spent with Rolls-Royce on their executive leadership team in a number of senior P&L and functional leadership roles, notably running Rolls-Royce's nuclear division, where I set up and initiated Rolls-Royce's SMR business all those years ago, and then latterly as their chief people officer, driving a group-wide transformation. I then spent a year in an electric aviation startup called Vertical Aerospace doing eVTL aircraft before joining Babcock some three years ago, where, as David said, I've been running the nuclear sector. So it's a huge privilege to be taking over from David. I am fortunate to know the business pretty well, and I'm also fortunate to have had a decent amount of time in transition, a period of time where I've been able to orientate around parts of the business that I know less well, particularly overseas, a period of time where David and I have been able to do work together to signal continuity and stability internally within the organisation, and a period of time where I've been able to get out, talk to customers, talk to stakeholders, and talk to our people to assess where we might further develop opportunities for the future. And I think it's testament to how well the transition has gone that I've actually been able to put out a series of internal organisation announcements under my signature but on David's watch, which has ensured that we maintain momentum, we don't have a lull as we go through this handover, and the organisation see David and I in strong alignment with one another, and they get that core theme of continuity and stability. so a lot of people ask me how do I feel about taking on the reins at Babcock well I feel both purposeful and excited purposeful because what we do really matters we are living through a pivotal moment in history where all of the major vectors of global change whether that's climate change societal change technological change or geopolitical change are all currently fueling and feeding off one another to create one of the most uncertain, unstable and dangerous periods in recent history. And that's what gives our purpose such relevance. And those underlying trends that I've just described, I think, are unlikely to diminish, irrespective of whether the various flashpoints in the world flare up or cool down. And it's those underlying trends that I think make what we do so purposeful. And excited because, of course, it's those same underlying trends that are driving growth in our core markets of defence and civil nuclear. So, purposeful and excited. So, this next chapter for Babcock, under my leadership, is going to be built on the strong foundations that I've inherited and that I've helped to build. And those strong foundations are made up of a core strategy that is still valid, made up of strong alignment between the board and the management team, are made up of a business that has strong capabilities and attractive positions to grow a resilient, to address a growing and a resilient market. That new chapter will have some enduring themes, obviously growth and performance to continue the trajectory that we've been on over the last few years. That growth will require strategic clarity and capital discipline. It will require us to stay very close to our customers, understand deeply their requirements and then only invest in the areas where we have strong competitive advantage and we can generate attractive returns. I expect focus on the new nature of warfare. This is more sophisticated and complex than simply drones. This new nature of warfare is about increasingly autonomous, uncrewed combatant platforms fighting alongside their crewed combatant counterparts in all of the fighting domains on land, at sea and in the air. And it's this connective tissue between the two, the communications, the cyber, the systems integration, and indeed the training and simulation, as well as the platforms themselves, where I expect us to grow. So expect focus on warfighting readiness. Warfighting readiness is really code for sweating the availability, the readiness, the integration and effect that we can achieve with today's suite of platforms and equipment. And as David said, and as you know, that is our core business. And expect focus on national strategic resilience. So the UK, other NATO partners and key allies are all focused on energy security, they're focused on critical national infrastructure, they are focused on their industrial and supply chain capacity and resilience. So national strategic resilience. And then the other theme of performance to maintain our focus on operational execution, we have commitments to the market. We have customers who rely on us for their products and services. And what we do is mission critical in an ever more dangerous world. So a continued focus on operational execution and an ambition to go on raising that performance bar over time. So my initial priorities are indeed on operational performance. I've been really clear with the company. they need to keep their head in the game and not get distracted by all the excitement of a CEO transition. Talent and team to make sure that I've got the right people in the right roles for this next chapter, and also managing the top team through this period of change. And strategic clarity to make sure that we take stock of the dynamically changing world in which we live, we assess where we've got the strongest right to win, and we identify the opportunities opportunities for high quality, sustainable midterm growth. So I will come back in November when we do our half year with more on all of the above. As I said, my very immediate focus over the next weeks and months is to make sure that we maintain our discipline, we maintain our direction, we maintain our delivery and we don't get distracted by David's departure. That gives me enough time to continue this engagement that I've been on with customers, stakeholders and indeed shareholders and the board so that I can come back in a few months' time in November and lay out our strategic priorities in a disciplined way to make sure that we maximise the opportunity set and maximise value in the mid-term. Thank you. Back to David.
So given the newsflash that's just come up, I desperately want to say that we've handled but our succession rather better than some other people. But I probably will resist saying that. Oh, shit. So, as you, I hope, can see from what I've presented, what Harry's presented, the board ran a really thorough process that led to Harry's appointment in January. By the time I leave next January, we will have had a fade-in, fade-out transition that I think enables continuity where it makes sense and change where it makes sense. If I had been staying, there would have been changes to deal with the changing external events. So change is necessary in all companies. So I just want to say that I am supremely confident in the next phase with Harry at the helm. will enjoy watching it and will actually not miss my 1,000th and 1,000th investor meeting. So the summary is where we started, which is strong underlying results that underpin a range of choices for the company and the ability to invest in that exciting future. Harry's just outlined. Differentiated capabilities, which I hope you've heard from both of us. that clear strategic momentum with a pipeline of opportunities, which means it's about choices, it's not about searching for things to do. But also, as Harry said, that ongoing capital allocation, so only going for areas which deliver the appropriate returns with the appropriate risk and the appropriate opportunities to win. So I think, not on my watch, but I think a truly great future for a truly great company is just opening up. And with that, I shall hand over for questions. I remember we do... Well, I shall say anything but religion, but since it's my last one, we'll do anything.
Thank you, Sash Tusa from Agency Partners. I wonder if you could give us an update in as much as one is possible, particularly given very recent news about FMSP and just lay out the process for renewal of the contract and what happens if, for political reasons, the government is incapable of signing a new contract by the end of September, which is the current deadline?
So I'll do a little bit, but then I'll hand over to Harry because he's led a lot of the negotiation. We support nuclear submarines that have nuclear reactors in and also retired submarines with nuclear reactors in. There is no way that is going to stop. so if for whatever reason we couldn't get under contract there will just be an extension to the extension from a financial point of view it's not a particularly big deal the the the really big thing is once we get under the long-term contract there are opportunities for both us and the government in terms of performance that can be released so it's a delay in an opportunity, not a threat, I would describe it as. But Harry?
Yeah, I agree. What we do down in Devonport and up in Clyde is absolutely at the centre of what defence does. I mean, we all know that the continuous at sea deterrent is the cornerstone of the UK's deterrence and defence policy. So as David said, you know, that work is not going to stop. We're currently on a six-month extension the majority of the actual work to get us to the gateway agreement is done but as David said it requires obviously funding certainty and it also given the size of the deal is going to require pan whitehall approval so those two things have to happen over the next few months so if I could just follow up on that when you say that it needs funding certainty Does that mean that this is all tied up inside the defence industrial plan or is it broader, I mean what's the nature of the funding certainty that this particular deal needs?
So no matter what the subject matter is, the list of everything they would like to do is bigger than the budget and the sequencing of that budget on the fringes always is an issue. so they used to be so so nuclear is a bit different from conventional but on the other hand it all has to coexist in a defense budget so I think there's moving around the fringes between years and so on and there are there is some discretionary scope which could be in or out so it's that it's not it's not the core being of the facilities the boats and so on thank you thanks um morning james beard at
deutsche bank uh two questions please um i was wondering if you could um give us a little bit more color on um progress with frigate um export sales um we obviously had slightly negative news from sweden so any more color around that and and sort of potential decision time frames in in Denmark now that they have a new government installed and then second question for David Mellors in terms of the progression towards the nine percent medium term margin targets just wondering if you could give us some color on the expected time frame there and and also the drivers of future margin uplift how materially do they differ from how you have delivered margin uplift historically?
Well, I'll answer David's question. So, David will say to you that the 9% plus will be delivered in the medium term. I would, actually. Yeah, Sweden was obviously a disappointment. It's not a Type 31. It's obviously a new frigate design. Actually, well, it's a frigate or a large Corvette. Take your pick. If you read the Swedish press release, Naval Group and the kind of ship actually comes quite a long way down. It starts with a lot of the geopolitical stuff, the government to government. And we have always said that these competitions comprise three elements and the weighting is different between the three elements. But there's an industrial element, there's a navy to navy element and as a political element and these decisions almost always get made by head of state not secretaries of defense so we we believe we had a very compelling probably the most compelling industrial offer but there are other forces at play in Sweden as you can see the easiest thing is to read their press release Denmark is different because it is the spec is a type 31 type spec so that's the first thing secondly the origins of type 31 are the Eiger Huggfeld the current incumbent Danish frigate and the industrial element matters a lot more in Denmark than it does in Sweden so the weighting is different in Denmark and the core drivers are different it is a head of state I mean it is a new government it's a head of state decision ultimately so difficult to put a timeline on it I think if you asked a low their procurement agency they would say their work is done so it's it's it's a it's when it gets the top of a Prime Minister's inbox and I'm not going to guess that David your
question right as David said it's in the medium term the drivers are the same they're the ones I laid out and you know we said a year ago the medium term we deliberately don't time box these things because you know we're all human it does lead you into silly things margin and risk go together there will be times when we deliberately take say cost plus type arrangements which typically would be lower margin because that's the sensible thing to do given the risk profile so the margin progression will continue obviously it's slightly easier when you're down at 5% than 8.2 so it won't always be at the same rate that we've done historically so for example I'll give you an illustration when we did the capital markets day in Devonport we said that the new team at the time had reduced the number of operational processes on the site from 5,000 to 2,000 and they've done that quite quickly now there are still plenty of productivity improvements to make but you can't keep taking big steps like that the higher up you get so so the medium term which last year was say three to five years away um was about the right time frame told you so next question thanks hi uh david farrell from uh jefferies i actually
think both my questions are for david mellers um i'm afraid um just when you look at the 30 delta for this year's guidance in terms of the top line can you just kind of explain what fills that 30 percent I think you said you're 70 percent covered for the current year from a revenue perspective um and then I think I read a couple of weeks ago the SSRO calculation had changed around the profit uplift on the risk side of things um potential uplift kind of being essentially 10 percent not 2 percent you just kind of talk to any changes in the SSRO calculation and how that might benefit I'll do the second one actually because I'm just feeling like I can So there is currently what is known as a sprint,
although it's not really a sprint, led by the Defence Joint Industrial Council looking at a whole SSRO consultation thing, and there was one of those two years ago that led to no change. So there is lots of talk, but at the moment... I can't remember who you've nominated for the sprint, but... Linda. So it's a joint government. Linda's really good. There's a joint government industry. What makes sense for everyone review? I think it's foolhardy to prejudge it because at the end of the last one, nothing changed. Sorry, do you want to give a different answer to that?
No, I'll give you a bomb. So the other 30%, which is normally just slightly higher than 30%, we still have really good visibility of. We have framework agreements, but as you know, we don't count orders until they're contracted. So a lot of it is the contracting of expected work under frameworks, which happens regularly. There'll be work that can't stop, but is just let on a slightly shorter term basis. And so a lot of that we would expect to just come through over time. Normally, we're at about 90% of the year under contract by the half year that's another measurement point I always put in and then we should have it all by kind of end of January February as it comes through there are some smaller businesses which have much less of a forward load like the vehicles business in South Africa but very much more marginal so for the defense businesses we've got pretty good visibility and it's mainly the contracting of stuff that we can see or is under frameworks anyway thanks morning Chris Bambry Peel hunts just to give a bit more flavor the m&a pipeline you had a couple of potential opportunities
in ndas at the interns they've obviously not come through just give any more flavor what happened there and what you and some of the current opportunities you have yeah i mean maybe harry should talk about the current opportunities because they're going to happen on his watch but i think if i talk about the discipline which i'm sure will remain so there were So, one in particular, which was outside the UK in a country we're very keen on, we got a long way through diligence and spent a decent amount of money and then we found a very significant accounting issue that was both a valuation point but also we were very much believed we were acquiring a strong management team probably stronger than our own and over time as we got underneath the skin of the problem that led us to conclude both that we couldn't get to the price but also particularly in terms of the people capital we weren't sure we were getting what we thought we were getting so that's a good example of just doing proper diligence taking time to reflect on what that diligence tells you and then acting in the interest of shareholders. So that's the kind of thing that happened.
Pipeline, Harry? So we've got a strong pipeline, which we keep under constant review. Obviously, given what's going on in the world, the valuations in our core markets of defence and civil nuclear are quite high at the moment. As David said, it's really important that we maintain discipline. We haven't done M&A for a while, So we need to make sure that when we get back into the acquisition market, it's with a business that makes sense for us and we can integrate it properly.
I was going to say, we've got time for one more.
Thank you. So I just wonder if you could give some colour on where the major infrastructure programme goes from here. Revenue's down last year. Does that now just continue to fade out or does it stay at broadly current levels for a bit? and what's the phasing of the last two docks at Devonport under that?
Do you want me to do numbers? You do it, Daniel. Okay, so from a numbers point of view, you know we can't forecast this accurately, so we'll give you a range. I would expect somewhere between 400 and 450 this year, and we'll keep you updated. So similar-ish. And again, as far as the out years are concerned, and we'll keep you updated as we go along.
Yeah, and more generally, at Devonport, obviously, we've got the 10-dot programme and we've got the 5-base and birth programme. But outside of Devonport, the requirement for the defence nuclear state to recapitalise is well known. So, you know, we would expect recapitalisation both at Clyde and maybe even in Rosyth. And then, as David mentioned earlier, the whole AUKUS opportunity is heavily focused in these early years on infrastructure, at both Osborne and Henderson, and so we would hope to be able to address that market as well.
Yeah, and the other thing we have mentioned in the past is, although they haven't decided how to contract it yet, there's potential infrastructure opportunities with AWE as well. So, thank you all very much for your time, and for those of you who I've known for a very long time, like Satch, who've come up with all the questions that have made these things interesting. Thank you for your participation.
