Babcock International Group PLC (LON:BAB) has announceds its half year results for the six months ended 30 September 2023.
Statutory results
| 30 September 2023 | 30 September 2022 | |
| Revenue | £2,177.0m | £2,144.0m |
| Operating profit | £144.2m | £72.8m |
| Basic earnings per share | 20.4p | 6.8p |
| Cash generated from operations | £163.2m | £75.2m |
| Underlying results (ii) | ||
| 30 September 2023 | 30 September 2022 | |
| Contract backlog (i) | £9.6bn | £9.9bn |
| Underlying operating profit | £154.4m | £121.7m |
| Underlying operating margin | 7.1% | 5.7% |
| Underlying basic earnings per share | 20.6p | 15.8p |
| Dividend per share | 1.7p | – |
| Underlying free cash flow | £67.2m | £(24.7)m |
| Net debt | £(492.5)m | £(1,039.4)m |
| Net debt excluding operating leases | £(287.8)m | £(629.3)m |
| Net debt/EBITDA (covenant basis) | 1.1x | 1.9x |
David Lockwood, Chief Executive Officer, said:
“We have made a strong start to the year, as we continue to build on the exciting momentum we see across the Group. We are delivering for our customers, reducing risk and positioning for growth through a number of significant new global teaming agreements.
“We have a clear capital allocation policy, which is providing the Group with the flexibility it needs to capture the growing number of value creation opportunities we see ahead. We are reinstating our dividend following a four-year hiatus, reflecting our confidence in the future, and our expectations for the full year remain unchanged.”
Financial highlights
– Contract backlog £9.6 billion, down year-on-year due to the impact of disposals, up slightly since year end
– Revenue up 2% to £2,177 million. Organic growth of 18%, including major infrastructure programme growth, offset FY23 disposals
– Underlying operating profit up 27% to £154 million, ahead of expectations, primarily due to earlier than anticipated receipt of licence income from the Polish frigate programme
– Underlying operating margin increased 140 basis points to 7.1%, boosted by the licence income
– Underlying basic earnings per share up 30% to 20.6p
– Underlying free cash flow of £67 million, driven by 82% underlying operating cash conversion
– Net debt to EBITDA reduced to 1.1x on a covenant basis (FY23: 1.5x). Net debt reduced by £72 million to £493 million
– Dividend reinstated following a four-year hiatus. The interim dividend of 1.7 pence per share is expected to be around a third of the full year dividend
Outlook
The Board’s expectations for another year of organic revenue growth, underlying operating margin expansion and positive cash flow generation are unchanged, and we continue to build momentum to achieve the medium-term guidance set out within our FY23 results.
Strategic highlights
– Strategic cooperation agreement with Saab, including the development of an advanced naval corvette design
– Collaboration agreement with Huntington Ingalls Industries (HII) for US and UK naval and civil nuclear opportunities
– Teaming partnership with HII to collaborate on nuclear-powered submarine capabilities to support the AUKUS endeavour
– Babcock Skills Academy launched in Devonport to develop submarine support capabilities in our growing workforce
– Babcock General Logistics Vehicle (GLV) launched to target the upcoming UK Army Land Rover replacement programme
– Established partnership with Zero Petroleum to explore the use of synthetic fuels across air defence platforms
Operational highlights
Marine
– Type 31: HMS Venturer (ship 1) superstructure progressing, keel laid for HMS Active (ship 2)
– Critical Design Review completed for the UK Royal Navy’s next-generation Maritime Electronic Warfare Programme
– Cut steel on first MIECZNIK Class frigate for the Polish Navy. Three Arrowhead 140 licences delivered
Nuclear
– Major Infrastructure Programme (MIP) continuing to ramp up across Devonport Dockyard – revenue more than doubled to £218 million. Further contract (£750 million over four years) signed in November 2023
– Commenced deep maintenance and LIFEX on the second of the UK’s Vanguard Class nuclear submarines, HMS Victorious
– Five-year contract with the UK MOD to collaborate on the Ship Submersible Nuclear AUKUS (SSN-A) submarine detailed design
Land
– Awarded second land defence contract to manage and maintain ground support equipment at military bases across France
– Babcock’s contract to support UK-gifted platforms to Ukraine now operating at full capability
– Secured rebid on the six-year Royal Electro-Mechanical Engineers (REME) contract
Aviation
– Two additional H160 helicopters modified and delivered to the French Navy as part of a 10-year contract
– Secured a four-year contract extension with the South Australian Government for aerial emergency services
– Awarded a four-year support contract for H145 aircraft with French Securité Civile, partnered with Airbus
Notes to statutory and underlying results on page 1
(i) Contract backlog: The £9.6 billion contract backlog represents amounts of future revenue under contract. This measure does not include £3.0 billion of work expected to be done by Babcock as part of framework agreements (HY23: £3.4 billion). Contract backlog and framework definitions can be found in the Financial Glossary on page 25.
(ii) Alternative Performance Measures (APMs):
The Group provides APMs, including underlying operating profit, underlying operating margin, underlying earnings per share, underlying operating cash flow, underlying free cash flow, and net debt to EBITDA to enable users to have a more consistent view of the performance and earnings trends of the Group. These measures are considered to provide a consistent measure of business performance from year to year. They are used by management to assess operating performance and as a basis for forecasting and decision-making, as well as the planning and allocation of capital resources. They are also understood to be used by investors in analysing business performance.
The Group’s APMs are not defined by IFRS and are therefore considered to be non-GAAP measures. The measures may not be comparable to similar measures used by other companies, and they are not intended to be a substitute for, or superior to, measures defined under IFRS. The Group’s APMs are consistent with the year ended 31 March 2023. The Group has defined and outlined the purpose of its APMs in the Financial Glossary on page 25.
Results presentation:
A webcast presentation for investors and analysts will be held on 14 November 2023 at 09:00 am (UK time). The presentation will be webcast live and will be available on demand at www.babcockinternational.com/investors/results-and-presentations.
A transcript of the presentation and Q&A will also be made available on our website.
CEO STATEMENT
The first half of FY24 has been another period of progress for the Group, both operationally and financially, as we continued to build on the good momentum with which we entered the financial year. We have delivered 18% organic revenue growth, 140 basis points of underlying operating margin(1) expansion and 82% underlying operating cash conversion(1), boosted by the receipt of licence fee income. Beyond the strong financial performance in the half, we have also made excellent operational and strategic progress, delivering on existing contract milestones and entering into some significant long-term partnerships, such as our wide-ranging Strategic Cooperation Agreement with Saab, which includes the development of an advanced corvette design and an agreement with HII to collaborate in naval and nuclear opportunities in the UK, US and Australia.
Equally critical, given that our people are paramount to our success, is the progress we have made in enhancing and strengthening our corporate culture. We were delighted with the increased levels of engagement and satisfaction we saw reflected in our recent Group wide employee survey and were proud to have been named in The Engineer’s ‘Top Ten Employers 2023’ list in October. We enter the second half of the year with a strong order book and continue to be excited by the positive underlying trends and expanding opportunity set for the Group, which make us more confident than ever in the prospects for the business across the short, medium and long term.
HY24 results
We delivered strong financial results for the first six months of the financial year. Group revenue of £2,177 million was slightly up on the prior year. Organic revenue growth of 18%, including double-digit growth in three of our four sectors, more than offset the impact of disposals. Underlying operating margin(1) of 7.1% (HY23: 5.7%) and underlying free cash flow(1) of £67 million were both ahead of expectations, albeit largely due to earlier than expected licence receipts on the Polish MIECZNIK frigate programme. While the licences are one-off in nature, they demonstrate further progress on a key naval programme and, more broadly, the attractiveness to international markets of the modular Arrowhead 140 frigate design and our flexible acquisition model.
In April 2023, the Board stated its intention to reinstate a dividend in FY24, underpinned by our strengthened balance sheet and cash outlook. The Board has declared an interim dividend of 1.7 pence per share payable on 19 January 2024.
Increasing momentum and reducing risk
The global threat environment and geopolitical situation remains unstable, meaning that the services and products we provide across our diverse international footprint have never been more important, as reflected by the good operating and financial momentum across the Group. Our contract backlog of £9.6 billion was £0.3 billion lower than a year ago due to the impact of disposals. However, contract backlog increased slightly in H1 compared to the end of March, despite the trading of long-term contracts, reflecting multiple new contract awards and agreements that will help drive future growth.
We play a critical role in support of the UK’s nuclear deterrent, which lies at the heart of the nation’s defence. We have now completed the highly complex, multi-year life-extension (LIFEX) programme on the first Vanguard Class submarine, HMS Vanguard, representing a major reduction in fixed price contract risk. In July, we signed an initial contract with the MOD for the second Vanguard boat, HMS Victorious, enabling deep maintenance of the complex submarine to begin at our Devonport dockyard. We expect the full cost recovery agreement to be replaced with a contract covering the entire programme on similar terms in the coming months.
The Vanguard Class submarines will begin to transition to the UK’s next generation nuclear deterrent submarine, the Dreadnought Class, in the early 2030s. Babcock is playing an important role in the Dreadnought programme, specifically in support of the design and future support solutions. In the period, we also won a contract to deliver weapons handling launch systems (WHLS) and specialist equipment for these future submarines.
In October 2023, we also signed a five-year contract with the MOD to provide input in the detailed design for the new Ship Submersible Nuclear AUKUS (SSN-A) submarine, which will replace the Astute Class in the UK Royal Navy and is planned to be the design on which the Australian Navy builds its future fleet. Ensuring that future support is properly considered at the design stage is expected to result in increased availability throughout the life of the submarine.
The Major Infrastructure Programme (MIP), to modernise submarine infrastructure across Devonport, ramped up further during the period, driving strong revenue growth. In November 2023, we signed a four-year £750 million contract to secure the capability required to support and sustain the UK’s submarines for decades to come. The upgraded dockyard facilities will support all current and future UK submarine classes as the fleet progresses through a multi-year class transition, including commencement of deep maintenance of the Astute Class in the next few years. In the period, the first Astute boat to undergo in-dock maintenance at Devonport arrived for surveying works ahead of its programme of work.
In Poland, we finalised the design licence agreement with the PGZ-MIECZNIK consortium, which allows for the build of three frigates for the Polish Navy. First steel-cut for MIECZNIK ship one was held at the PGZ shipyard in Gdynia in August. We also signed a framework agreement as the next step to a potential joint venture which could see Babcock support MIECZNIK through the complete design and build programme. The agreement further strengthens our strategic partnership with the Polish Armaments Group PGZ SA, one of the largest defence groups in Europe, supporting ambitions for wider international naval and defence opportunities.
Multiple new international contracts are driving growth in the Land sector. Ramp up of the Australian Defence High Frequency Communication System (DHFC) programme almost doubled our Australian Land revenues compared to HY23. In France, we were awarded a second Land contract to provide in-service support to airfield support equipment throughout France’s national and international military bases for seven years. In July, we were awarded an initial 12-month contract from the MOD to support UK-gifted platforms to Ukraine, covering the provision of operational support to armoured vehicles, training of Ukrainian personnel and management of vital equipment, supply chains and spares. After the period end, we opened an office in-country where a dedicated team will focus on supporting Ukraine and our industry partners.
Positioning for the longer-term growth – the right capabilities in a supportive market
Our long-term growth strategy is to leverage our technical capability to grow our defence business, both internationally and in the UK. We have made excellent progress in the period, establishing a number of strategic relationships that position the Group for longer-term opportunities.
In Marine, we signed a wide-ranging strategic cooperation agreement with Saab, including the development of an advanced naval corvette design. The joint development will benefit from Babcock’s expertise in platform design and integration, to create a new class-leading capability, and Saab’s expertise in naval combat management systems and composite structures.
In Nuclear, discussions continue with the UK Submarine Delivery Agency (SDA) and the Royal Navy with the intention to finalise a long-term strategic partnership to ensure the stable, safe, effective and efficient delivery of deep and base maintenance of submarines. We expect to replace current commercial arrangements, currently under the Future Maritime Support Programme (FMSP), by March 2025.
In recognition of increasing long-term capacity requirements in the Nuclear sector, we launched the Babcock Skills Academy at Devonport to enhance our growing workforce’s capabilities. Focusing on submarine support and critical nuclear expertise, the Skills Academy’s training facilities enable learning of the complex requirements to perform submarine deep maintenance. More than 2,000 people are expected to pass through the Academy in its first three years and a further 10,000 over the following five years.
We have entered into a strategic agreement with US-based HII to collaborate on naval and civil nuclear decommissioning and construction opportunities in the UK and US. Under a memorandum of understanding both companies will apply their complementary capabilities to existing nuclear decommissioning contracts for US ships and UK submarines, as well as explore opportunities for cooperation in civil nuclear, including power plant and component design, fabrication and construction in North America and the UK.
We have already built on the HII agreement above, with a further agreement to combine forces in Australia to develop the optimal models for submarine capability to support the long-term ambitions of the AUKUS programme, including infrastructure, sustainment and the necessary skills development to support the future programme.
The Land sector is leading the strategy to strengthen our data capabilities in defence with a new data platform aimed at transforming, capturing, integrating, modelling and building data-driven solutions across all areas of our defence business. For example, in our Land DSG support contract, we are combining this smart data approach with our deep engineering expertise to improve fleet availability and real time identification of any issues throughout the asset lifecycle.
In Aviation, Babcock France announced an MOU with light jet company AERALIS to explore the operation of a flexible aircraft ‘as a service’ in support of March’s UK France Joint Leaders Declaration on Anglo-French interoperability of future air systems.
Underpinned by enhanced execution and risk reduction
We made further progress in the period improving operational delivery, which was underpinned by a strengthened corporate culture. In October, our second Group-wide people survey since we began our turnaround saw increased levels of engagement and satisfaction. Following the first survey in 2022 we have been developing and implementing action plans to transform the employee experience, including the launch of a framework to standardise role categorisation and open development pathways and career opportunities across the Group.
There is still much to do, but I believe we are creating a more integrated, unified and aligned workforce with common purpose and common processes that will support significant value creation in the future.
We continue to see improved operational delivery across existing contracts, for example the 10-year DSG contract to support the British Army land vehicles fleet, where an overhaul of operations over the last few years has further improved contract delivery and operating margin. Following formal notification by our UK MOD customer of its intention to exercise up to five option years, we continue to negotiate contract terms that will contribute to better outcomes for all stakeholders.
There was no material change in the period in the impact of onerous contracts, which will diminish over the coming years as they trade out. We continue to focus on replacing them with higher quality orders through our enhanced bidding and programme risk management processes, as highlighted by the new initial submarine deep maintenance support contract for the second Vanguard Class nuclear submarine.
We continue to meet production milestones on the Type 31 programme with the first in class ship, HMS Venturer, progressing through construction and assembly, and the keel laid on ship two, HMS Active, in September. The dispute resolution process (DRP) relating to the Type 31 contract has been paused following customer discussions. Both parties are currently working towards a collaborative solution.
During the period we were pleased to announce the appointment to the Board of Sir Kevin Smith CBE as a Non-Executive Director. In addition, Paul Armstrong was appointed CEO of our Marine business and Harry Holt was appointed CEO of our Nuclear business.
Capital allocation – dividend reinstated
In our FY23 results, we set out a refreshed capital allocation framework underpinned by a commitment to maintain a strong balance sheet and investment grade credit rating, with a target leverage of 1.0x to 2.0x net debt to EBITDA. The framework is aligned with our strategy to maximise value for our shareholders while balancing near-term performance and long-term growth objectives.
As part of our capital allocation strategy, in April 2023, the Board stated its intention to reinstate a dividend in FY24, with the return to the dividend payers’ list an important milestone in the turnaround of Babcock. As such, the Board has declared an interim dividend of 1.7 pence per share, with the interim dividend expected to be around one third of the full year dividend.
The Group’s aim is to deliver long-term dividend growth via a progressive dividend. The level at which the dividend has been reinstated also reflects a desire for there to be ongoing strengthening of the balance sheet and for prioritisation to be given to investment for organic growth in the business.
Outlook
With over 90% of FY24 forecast revenue under contract at the end of September, we enter the second half of the year with good momentum. The Board’s expectations for another year of organic revenue growth, further underlying operating margin expansion and positive cash flow generation are unchanged, and we continue to build momentum to achieve the medium term guidance set out within our FY23 results.
David Lockwood OBE
Chief Executive
OTHER INFORMATION
Dividend
An interim dividend of 1.7 pence per ordinary share (HY23: nil) is payable on 19 January 2024 to shareholders whose names appear on the register at the close of business on 24 November 2023. Shareholders may participate in the dividend re-investment plan and elections must be made by 28 December 2023. Details of the dividend re-investment plan can be found, and shareholders can make elections, at www.babcock-shares.com.
