Good morning, and welcome to the Babcock FY 2024 Results Update and Type 31 Trading Update. There will be an analyst question and answer session through the phone lines, and to ask a question after the update, please press star one. I would like to remind all participants that this call is being recorded. I will now hand over to Babcock CEO and CFO, David Lockwood and David Mellors. Thank you.
Good morning, hello, and thank you for joining the call this morning. As you will have seen, today, we issued an update on our results and on the Type 31 contract. Yesterday, the board finished its final review of the results and all the final program estimates, and we wanted to take the opportunity to give you as much early transparency as we could before we get to the full prelims next week. We are obviously still in closed period, so, we will tell you as much as we can, recognize that we're in closed period and not actually doing the full prelims. So, kind of what do I think you should take? How do I think we're doing?
If you go back to the Capital Markets Day, we talked about the platform we were building, the strong growth opportunities, the opportunities to expand margin, the naturally cash generative nature of the business. And if you look at the underlying results, all of those have come through building strongly on last year's performance. I think that's all really positive. I think the other really big positive for me is when David and I started nearly four years ago, we talked about the, if you like, the real balance sheet, not just what's in the accounting balance sheet, but all the things off balance sheet, the window dressing, then the finance.
The last one left really is pensions, sitting off the balance sheet, and David will talk about it more, and it's right that he does because he's led the charge on this. But we have made really good progress with the pensions, both in reducing the off-balance sheet liability, but also in reducing the annual charge. And I think a bit like we've done with customers, changing the relationship we have with trustees, so that we now have a shared vision of what good looks like for our pensioners and the schemes themselves. So I think that's really good news in terms of future cash flows and if you like, the holistic balance sheet.
In terms of the actual balance sheet, the strong cash flow has taken debt down so that we're now at 0.8 on a the calculation basis that you use for net debt. So that's also really strong. So when I was a growing chap, probably the most important boss in my career once said to me, "Never look at a business through your weakest program, we will misunderstand it, but never ignore your weakest program." So we can't look at the whole business without looking at 31. So I'll remind you, we've said for 4 years, our destiny is set 50% in the contract we set, 30% in how we mobilize, and 20% then in how we either reap the benefits or have to manage the problems.
The truth of 31, as we've said repeatedly, is, is the terms are not terms that we would now take. They're terms where we take on-- we've taken on board risk we can't easily manage or in some cases, manage at all. We then tried to mobilize during COVID, and latent in that are a number of issues which are only surfacing as we go in, go into the deep production phases. So now we're in the 20% of actually really trying to make the best of what we've got. So in the year operation, and I'll-- again, I'll let David do the numbers, as is tradition.
In the year, we've effectively, with some external, some large external help, deconstructed the program, got under every line of every cost item, and then rebuilt it, re-understood the learning curve, and made sure that the gaps which have been occurring, we understand the program fully. So we've got into a really, I think, much greater understanding of what it takes. The downside of that is that we've identified cost driven by engineering overrun, and also last year, we talked about the inflationary costs on labor. Our contract protects us to CPI, but labor costs, particularly in the site area, are significantly above CPI, and that was not anticipated last year. So two big things there.
The upside is when we look at the program now, and we look at the latter ships, the ones which drive the affordability of the product for export markets, whether we build it or someone else builds it, actually, our core estimate of what those ships cost hasn't really moved that much. What's moved is the cost of getting there. The prize hasn't really changed that much, but the cost of getting to the prize has undoubtedly gone up. There obviously still remains risk. We haven't integrated the combat system, so we're not saying we're completely out of the woods, but the range of outcomes has definitely narrowed. So...
And the other thing is, and I know you all know this, but to the extent we have improvement plans, you only bank improvements as they occur, whereas when you can see a cost, you bank the entire cost.... the day you see it from a P&L point of view, even though you pay it out over the next five years of the program. So, so accounting in that sense is quite asymmetric between risk and reward. So, you know, we haven't given up on and have found quite a few things that could take the program forward in a, in a better way that are yet to be mature and off the bank.
So with all of that, and actually, and the only other thing I'd say is just again, to put 31 in context, it's about 5%-6% of our revenue and about 5%-6% of our workforce. So although it's really important, and while it's causing us pain, it's really important, yeah, we shouldn't judge the company by that program. David?
Okay, thanks very much, David. Good morning, everyone. So these are the results that we will be announcing next week at the prelims. The audit is largely complete, and we don't expect any changes from the figures we have here. I'll start with the cash flow and balance sheet numbers, as these are not impacted by the Type 31 charge, and then we'll come on to the P&L in a moment. So let's start with free cash flow. Free cash flow was GBP 160 million. That's significantly ahead of expectations, with good working capital performance being enhanced by some early customer receipts. Within that GBP 160 million free cash flow is an accelerated GBP 35 million of pension contributions, which I'll come back to in a moment. So significantly stronger cash flow.
This has helped us reduce net debt to GBP 435 million, or GBP 211 million, excluding leases. And the gearing ratio, as David mentioned earlier, is down to 0.8, so significant balance sheet strengthening in the year. On the pensions point I mentioned, we have made significant progress in the year in reducing the overall deficit and de-risking the outcome. So as many of you know, we have three large UK defined benefit schemes and a tail of smaller ones, and we've reached agreements with the trustees of two of the three large schemes in the last few months on long-term funding arrangements. And these plans give better visibility and predictability of the scheme for both pensioners, trustees, and obviously the company.
And there are many details in all of this, but fundamentally, the material points are, as a result of the GBP 35 million accelerated contribution that I mentioned before, one of these three schemes has now reached self-sufficiency. And therefore, we don't expect to make any further contributions to that scheme, and we expect it will be able to manage its own way to buy-in or buy-outs in years to come. The second scheme arrangement covers, among other things, the closure to future accrual of the scheme, which is our last big scheme that was open, as well as a long-term funding arrangement. So what does all of that mean?
That means on an actuarial basis, the total aggregate deficit comes down from an estimated GBP 400 million last year to an estimated GBP 200 million at the year-end, FY 2024, and the annual cash contributions drop from what we said previously at GBP 65 million, down to GBP 40 million. So, a material reduction. So onto the income statement then. So revenue grew 11% organically, with particularly strong growth in nuclear and land sectors, a continuation of what you saw at the half year, so very strong in both of those sectors.
Underlying operating profit was GBP 238 million, but as the statement shows, this included two things: a GBP 90 million charge on Type 31, which I'll come back to, and also a profit on the sale of a property of GBP 17 million, all of which completed in the year, so cash in the bank, et cetera, but it's still, it's a one-off. So if we look at the result, excluding those two items on a kind of go-forward basis, the underlying operating profit would be GBP 311 million, or a margin of 7%. And that comparator for FY 2023, as we presented last year, would be GBP 265 million or 6.6% margin. So, so progress on revenue, profit, and margin underlying.
The profit growth was driven by three of the sectors, actually, nuclear, land, and aviation sectors. We'll give you more detail on those at the preliminary results, but good progress in all three of those. Onto the Type 31 charge, taken at the year-end. We've rebuilt the forecast cost of the program, working with external consultants, as well as with the new group functions of engineering, supply chain, and project management, which we've told you about before, and you met at the Capital Markets Day. This has been a detailed bottom-up rebuild of the forecast costs to go. The GBP 90 million is the total impact over the life of the program, all of which we've recognized in FY 2024, although the cash impact of that 90 will be incurred over the life of the contract.
The two main impacts or changes in the forecasts, going forward, that generate that 90 are the maturing of the design, and the labor rates, as David said.
... We are also planning some future productivity improvements and potentially continuation of the contract, but they are not included in the accounting in FY 2024, although we expect to generate some benefit over the life of the contract that will be recognized as it comes, rather than upfront. So that's the Type 31 charge and the recognition during the year. And just to round off the results, having reintroduced the dividend at the interims, we will be proposing a final dividend of GBP 0.033, giving a full year dividend of GBP 0.05, in line with our capital allocation policy. So that's the summary of the results for the year. So, how to wrap up? I think David and I have broadly said the same thing.
In the tradition of tell them what you're gonna say, tell them, and then tell them what you told them, I think, we don't take 31 lightly. It's very important that, having narrowed the band about some of the, we absolutely nail the program. So we're not taking it lightly, but if you look at the results, actually, we've made significant progress, generated significant free cash despite 31. So we also need to keep it in context. If you look back at your Capital Markets Day presentations, then I think the really positive thing is that this, other than 31, is very in line with everything we told you, which is, you know, consistency is a pretty important thing in our world. So that, that's really good.
And to be honest, David and I are looking forward to seeing you next Friday when we can fill you in with all the color that we can't tell you now. So with that, we will open the floor to questions, bearing in mind, as I said at the beginning, we are in closed period, and therefore, we can't answer the kind of questions that we will be able to answer next Friday. Which is not a way of discouraging questions, it's just managing your expectations. Next Friday being the twenty-sixth of July, just to be clear.
If you would like to ask a question, please signal by pressing star one. We'll pause for a moment to allow questions to come in. As a reminder, please press star one to ask a question. Your first question comes to the line of Samuel Burgess from Citi. Your line is open.
Morning, guys. Thanks for taking the question. So I'll start with the obvious question, and that's, you know, what's your level of confidence here that this is the last charge you'll be taking on Type 31? And it's my understanding, you know, that the program will be significantly de-risked after delivery of the first ship. Do we have any update on the likely timing of first float for Type 31? Thanks.
Yeah. So one of the interesting things, and we'll talk about it more on the twenty-sixth, one of the interesting things about having deconstructed the program and really really got to understand it, is one of the things we understand much better is the relative cost and risk of things like out of sequence work, but also the relative efficiency of doing work in the shed or work afloat. And what it really proves in a nutshell is you want to do as much work as possible in the shed, so really, you don't want to move boat 1 out until you need to get boat 3 in, ship 3 in. So part of the reprogramming is to de-emphasize getting afloat, because actually it's much more efficient to be in the shed.
And as you can imagine, in the shed, you've got... If you're surrounded by scaffolding, the floors, if you came, yeah, you will have seen, if you've been and seen it or seen the pictures, but all of your access points, the moment you're afloat, your access points reduce. It's not about stability, it's very stable, but your access points reduce, therefore your ability to get stuff on and off the ship reduces. So one of the things we have done in the reprogramming is to de-emphasize float off and emphasize in sequence working.
Got it. Thanks.
Your next question comes from the line of Chloe Lemarie from Jefferies. Your line is open.
Yes, good morning. Thank you for taking my question. I'd actually have one on free cash flow performance. If you could help us understand the breakout between what was timing versus in your underlying beat, please.
Yeah, sure. So, this is all about working capital. You will remember that we've said previously that working capital, we've made huge progress on in recent years, and there was some risk of reversal. And we telegraphed that that could be over the next couple of years, a few tens of millions GBP. But that didn't happen during the year, so the risk is still there, but didn't happen. So we managed that, so that was a few tens of millions GBP. And about, I would say the other half of the increased performance was due to the early payment of customer debtors, which obviously takes it out of one period and into the other. I'd far rather have cash early, but you only get it once, so that is straight timing.
... everything else, CapEx, tax, interest, all the other line items were pretty much as we expected them to be. And the only other moving part, obviously, is that the GBP 160 million included the GBP 35 million accelerated pension payment, as I said earlier.
Fair to assume that the early payment of debt is obviously mainly pulled forward from fiscal 2025, right?
Yeah. So exactly. So that by itself would just come out of FY 2025. The other 2 moving parts for FY 2025, obviously, the cash impact of the GBP 90 million charge is recognized over the remaining life, so you need to think about that. But also on the plus side, the pension payments going forward are GBP 25 million lower every year, so that will be a positive for FY 2025. So you need to take all those 3 things into account. So would FY 2025 be more H2 weighted? Likely. Does that mean FY 2025 isn't achievable? No, it doesn't. So we should still be okay for FY 2025 cash.
Very clear. Thank you.
Your next question comes from the line of James Beard of Deutsche Bank. Your line is open.
Thanks. Morning, guys. Just one question, going back to Type 31. Are you able to give us some color around what has, what, if anything, has changed in the labor market precisely over the last 12 months, rather than when you were sort of last devising cost assumptions for Type 31?
I guess there were a couple of things I would pick out, David, maybe a couple of others. Three things, firstly. Demand from... We expected demand from competing people who compete for that resource to plateau, and it hasn't, number one. Number two, the inflation profile that we had when we set this provision isn't the one that played out, and therefore, wage settlements generically were higher than CPI. And finally, the framework we thought we'd have for non-UK workers has taken longer to enact than we thought, and so therefore, it's got... In the end, it's a supply and demand thing. You know, it's taken us longer to get the supply to where we need, and the demand in the region is higher. But David's probably got anything to add?
No, I think that's it.
All right, thanks.
As a reminder, if you wish to ask a question, please press star followed by one. Your next question comes to the line of Joe Brent of Liberum. Your line is open.
Good morning, gentlemen. Three questions, if I may?
Yeah. But one at a time, Joe. Remember, we're old.
Well, me, me too, but okay, one at a time it is. Firstly, on the... You talked about profit on disposal. Could you tell us what the cash on disposal is, and tell us that's not in the free cash flow guidance?
Yeah. So GBP 20 million with a profit of GBP 17 million, all received in year, so it is in the cash flow number.
It's in the free cash flow for equity number?
Yeah.
Okay, secondly, you know, my sense is numbers are probably going up a little bit today. Be interested to hear your perspective on where, where numbers could be a bit higher.
I think that's a conversation for next Friday. That's, that's not something we can comment on in closed period.
Okay, and finally, for now, on the pension, I think we originally expected 65, an additional 35. That's GBP 100 million in, which accounts presumably for half the reduction from GBP 400 million to GBP 200 million. Is that math right? And what's the other hundred?
So there's a number of things in the rest of the reduction. We've done a number of de-risking things, and obviously there's investment performance as well. All of the detail we'll give you next week, but you know, things like closure to future accrual obviously reduces overall deficits, so that's probably one of the big ones. We've mentioned before that we do several liability management measures. That's probably the most material. There's investment performance, there's contributions, so they're probably the big three.
Thank you.
Sorry, can I just reiterate? The ones outside contributions, which are just in our gift, but how those play out are driven by the relationship between the company and the trustees, and targeting what . . . and having an agreed view of what's in the interest of the members of the scheme. Being able to do those other things is a function of completely changing our relationship with the trustees. That's, that wasn't magic. That was three or four years of hard work.
As a reminder, if you wish to ask a question, please press star followed by one on your telephone. Your next question comes from the line of George McWhirter from Berenberg. Your line is open.
Good morning. Thank you for taking the question. 2, please. So firstly, on the labor cost issue, are you seeing any similar cost pressures outside of your site, or are they specific to the area? That's the first one.
Okay. So well, thank you for separating them as well. The answer is. There are two issues. One is, is there a cost pressure? And the second is, who pays? So the big issue on Type 31 is, under the contract, we pay for everything above CPI. So it's not just whether it's a cost pressure, it's who pays for the cost pressure. So that is the big area. It's probably one of the higher areas of cost pressure, but also it's the one where we pay. So it's the combination of the two.
Okay, thank you. And the second one is on the nuclear growth. Is this being driven by nuclear infrastructure spending? And if so, how do you expect this to trend in the future, in particular FY 25?
Yeah, sure. So we'll give you the numbers next Friday, but yes, that's one of the three things. If you remember at the half year, we said there are three things in the nuclear sector all going forward. So there was infrastructure revenue, and it did increase. So that is a big one. The submarine support work was also increasing at the half year, and that continued all the way through the second half. And also, the civil nuclear business grew again, as we expected. So all three areas went forward, which obviously drove the extremely strong revenue performance in nuclear and the profitability. On the infrastructure, we'll give you more detail next week. It will be a sizable number next year.
I'll give you more of a steer next week. It will largely be down to timing as to roughly how much it will be. But it will be a similar order of magnitude. Might be a bit lower, but a similar order of magnitude.
That's great. Thank you.
There are no further questions on the conference line. Now I'll hand back to David Lockwood for closing remarks.
Well, thank you all for taking the time. I recognize that this kind of call is quite frustrating because you can't ask and we can't answer the meaty questions. But I'm looking forward to having given you 10 days to prepare those meaty questions for next Friday, so we can have a really enjoyable session when we meet up then. So we look forward to seeing you then. And with that, enjoy the rest of your day.