Good morning, everyone. Welcome to the half year results for the six months ending 30 September 2022. David and I will take you through this. Then we'll go to Q&A. When we do get to the Q&A, in case I forget to say at the time, we'll be linking this call with the webcast, and there'll be a moderator, so there'll be a slight time lag.
That's intentional. Before we start, we announced last week the results of an independent review by Oxford Economics into the impact Babcock has on the U.K. economy and the U.K. society. Extremely positive review. Kind of reflects what we knew internally, but maybe not what the outside world knew about us. We have a short video now just so you can have a really good insight into what a special business Babcock is.
Every day, all over the U.K., people count on Babcock to keep us safe, to drive us forward, to engineer the world we want to live in. In the 2021/2022 financial year, Babcock contributed GBP 3.3 billion to U.K. GDP and GBP 770 million in tax revenues. We directly employ 22,000 skilled people across the country. Our business provides essential support to the Armed Forces across more critical Ministry of Defence programs than any other company.
We play a leading role in the civil nuclear sector, and we're a proud partner to the emergency services. From Devonport in the south to Rosyth in Scotland, the Royal Navy relies on Babcock's state-of-the-art infrastructure and engineering, keeping those who go to sea safe and putting our sights and skills at the heart of the U.K.'s shipbuilding strategy, as well as at the heart of local economies.
Wherever we are, minimizing our environmental impact is fundamental to every decision we make, integral to a safe and secure world. Like the ships we build, we know our company leaves a wake, a commitment to the people we employ and the communities we serve. Babcock works with thousands of local suppliers and businesses, securing jobs and upskilling where it's needed most, promoting inclusion and diversity. We're one of the largest U.K. employers of military veterans.
To nurture the next generation of technicians, engineers, data scientists, and business leaders, we partner with schools, universities, and scientific institutions to bridge the skills gap and promote the science-based subjects that underpin our business. Babcock is a defense company with a long history of keeping people safe. Our purpose is more important than ever in today's world to meet the global challenges we face. Working every day to create a safe and secure world together.
I guess that's why David and I think we have such special jobs really. Turning that into a value proposition to shareholders is a great privilege. I thought I'd just go back to this slide. This is a slide we used at the full year. If you're in the middle of a turnaround, being able to say the same thing six months after six months off is actually a really good thing, 'cause a turnaround isn't a straight line, and therefore navigating it is more difficult. Therefore, being able to be repetitive is a really good thing. I just want to touch on each of these. Stabilize is about the strength of the balance sheet, the strength of the P&L, and the portfolio.
Once we have completed the two transactions in process, the civil training transaction and the bigger aerial emergency services transaction, that is us complete on portfolio from what we want to do. Clearly, people approach you all the time, and if people approach you have to consider it. That's the rules. From a kind of proactive sense of portfolio, that's us done. In terms of building resilience, as a number of the analysts have commented, we are in line, and that's despite a GBP 6 million hit on our challenged program. I think a few years ago, a GBP 6 million hit would have bounced this company around a bit, but we can absorb things like that now, which is a sign of the balance sheet and P&L resilience. I think stabilize is going really well.
Operational improvement, you'll see in a number of the numbers that David will talk you through in some detail, so I won't steal his thunder. Still, lots more opportunity. You're never done on operational improvement. There's still lots more opportunity to drive output for customers and also to drive value for shareholders and create a better working environment for our people. That is the platform we always said for profitable growth. Throughout this, both David and I will talk a lot about the improvements we've put in the control environment.
I've always believed that if you want profitable growth, the more entrepreneurial you want to be, the more robust your control environment needs to be. Those two things aren't in conflict. They're in support. The combination of fixing the execution and fixing the control environment will create a platform where we can take advantages of the quite considerable opportunities the market offers. I'll come back to some of that later, but now I'll hand over to David for the numbers.
Thank you, David. Good morning, everyone. To summarize, before we go into detail, the main messages are: Overall performance was in line with our expectations with cash flow ahead. The balance sheet is now much stronger and the FY2023 outlook is unchanged. We're on track and very pleased with where we are. The key financial headlines for H1 are set out here. Organic revenue growth was 5%, driven by the nuclear and aviation sectors. The underlying operating profit increase was 10%, excluding FX and disposals. EPS was in line with expectations at 15.8 P, and cash flow was better than expected despite the unwinding of the historic working capital stretches and the catch-up pension deficit payments.
Resulting net debt is GBP 1 billion, including all leases, or GBP 629 million on a pre-IFRS 16 basis, which is the start point for the covenants. On covenants, the gearing ratio at the bottom there is 1.9 times better than we expected. To group revenue. If we skip over the foreign exchange, effects and the revenue sold with disposals, the main drivers of the 5% organic increase are the ramp-up of the infrastructure programs in nuclear and growth in the aviation sector, which we'll come onto in a moment.
On profit, again, skipping over the FX and disposal impacts, the other trading variance of GBP 12 million is driven by good performances in marine and land, which more than covered a GBP 6 million nuclear program provision and a GBP 4 million increase in fuel costs in aviation. The resulting profit for the period is GBP 122 million. The overall margin is up to 5.7%. Looking at the sectors, with marine first. Again, I'll pick out just the key points. 2% organic revenue growth was largely due to growth in the Mission Systems and liquid gas businesses. Type 31 program revenues were lower this period following the ramp-up last year.
In the period, there was approximately GBP 100 million of low or zero margin program revenue, which as we've said before, we would look to increase the margin on over time. The profit impacts, which I've set out on the slide here, show growth and improved margin mix, resulting in a 7.1% margin for marine. The main points for nuclear are the 8% organic revenue growth is driven by the infrastructure projects in Devonport in the period. We're expecting H2 infrastructure revenue to be similar to that in H1. The profit margin reduction is largely due to the GBP 6 million program provision I mentioned earlier.
The margin mix is also affected by the early stage revenues of FMSP and infrastructure work is slightly lower margin than other work. Moving to land, which also includes South Africa. The key points here are in South Africa, the increase in vehicle sales to the mining industry more than offset the loss of the Eskom contract last year. Just to note on that, our exclusion from the Eskom contract tender has just been overturned by the South African courts. In the U.K., this sector has delivered better program margins in fleet management and training and has managed the cost base well overall.
The resulting sector margin of 7.9% was also boosted by a one-off credit of GBP 3 million in the period. On to aviation. Revenues grew 10% as we ramp up the H160 and Mentor defense contracts in France. Despite cost savings, the profit in the period was impacted by higher fuel costs in the European AES business and bid costs on a large tender, which is due to be submitted in H2.
Cash generation in the period was better than previously expected, but this is mainly due to timing. The two key drivers are, one, net CapEx was lower due to more aircraft disposals and the later phasing of capital projects. Two, the working capital outflow was lower than we first expected, but this is largely timing of customer receipts and supplier payments. Below operating cash flow, interest tax and pensions were all as we expected, therefore leading to a free cash outflow of GBP 25 million for the period. I've put some guidance for the full year on the slide here, all of which is before the effects of the aviation disposal. This is the bottom half of the cash flow statement, and there's nothing particular to pull out this period.
At the bottom of the slide, you can see the closing net debt of GBP 629 million pre-leases and the gearing ratio of 1.9x . Completion of the European aviation disposal is expected in H2, and that should generate cash proceeds of approximately GBP 115 million before completion adjustments and the divestment of around GBP 200 million of leases. The much smaller civil training disposal is also expected to complete in H2. I've put this slide up at previous results presentations to show the progress on repairing the balance sheet over the last 24 months. Three points to make on our progress to date.
As the top box shows, net debt has materially reduced over this two-year period with a much better gearing ratio, and this has largely been achieved through the disposal program. Second, as the middle box shows, we've now effectively completed the unwind of the historic window dressing practice at period ends. Three, if we add the pension deficit, the aggregate of all of these debt and debt-like items in the three boxes has substantially improved by approximately GBP 1.4 billion in that two-year period. In summary, we're in a much better place from a balance sheet resilience point of view than we were. To add to the resilience point, if we look at liquidity and debt maturity, there are three things to note.
Firstly, we've reduced the exposure to variable interest rates by fixing more of our debt, so we now have only GBP 125 million of debt floating. Secondly, we have over GBP 1 billion of liquidity headroom, having paid off the Eurobond in October. That's the yellow bar on the chart here. Thirdly, if we assume the GBP 300 million RCF lapses in 2024, we have no refinancing events until 2026, so very long duration. Next, I'll touch on inflation and supply chain risk management. I've set out a rough split of the contract revenues between those fixed or firm price and those with some inbuilt inflation protection. As you can see in the top box, currently about 30% of our revenue is generated from fixed price contracts.
Most of these contracts end in the next one to three years. We then have the opportunity to renew on improved terms. Of the costs within these contracts, roughly 50% is labor or labor-related. The remaining 70% of revenue is derived from contracts that already have a measure of inflation protection within them. That's the bottom box there. I've also listed out some of the things we've been doing to proactively manage inflation and supply chain risks over the last year on the right-hand side. This has been enabled by the new center-led procurement and commercial teams delivering a standard approach across the group. We intend to continue this series of measures in this uncertain macro environment.
As you know, we have pretty good visibility of our FY 2023 cost base, both payroll and other costs, and have so far managed to cover the majority of the inflationary increases through efficiencies and negotiations with partners, customers, and suppliers. We currently intend to manage these risks in future as we have done to date. To finish, this is the board's outlook from the statement this morning. With a good level of revenue visibility for FY 2023, we're maintaining our expectations for the year, as we continue to expect the retained group to turn cash positive during H2. With that, I'll now hand back to David for the operational update.
Thank you, David. We used this slide at the full year, and I think it explains really well the compelling offer that Babcock has. Geopolitical uncertainty has only increased since we did the full year, and that creates, as David has just said, both opportunity and risk. The core skill in managing this group at the moment is to have active plans, which David leads on a lot of, to manage the risk whilst being nimble and entrepreneurial and taking advantage of the opportunities. I think in the 6 months, we managed that balance in the geopolitical situation pretty well, actually. On budget pressures, we've seen in the U.K. alone how overall budgets have moved around in 6 months, plans have moved around at a national level.
It is still a fact that the defense requirements are focusing on the areas where Babcock excels. It's not just the absolute budget, it's the priorities. The priorities are very much aligned with what we have to offer. David just touched on supply chain and inflation. Clearly, of all of the risks, those are the ones we have to have really proactive cross-group plans to measure. So far, they are working very well. All of that leads to customers wanting value for money, clearly. Value for money that we're prepared to contract for on a risk basis we're prepared to take. You know, we're not gonna chase value-for-money deals where we think it's not in the interest of the company. There's plenty of good work out there.
We are being robust in our bid approach, and I'm gonna come on to that in a minute. Customers want high utilization, which means they need availability, which means they want things like our land support in the U.K. to be producing vehicles that are ready for use in completely different time scales and with a greater predictability, and we've made real operational progress in areas like that. Modernize. It's very difficult to get new equipment into service faster than originally planned. It is relatively possible to upgrade existing equipment. That's a core part of what we do. Then flexibility, that is operational and commercial, always staying with the bounds of what we consider to be good business. That drives Babcock at the heart of availability, affordability, and capability.
I think the six months has shown that when we deliver that well, and we are increasingly delivering that well across the group, we have a very attractive market. Driving operational improvement, I'm gonna go right to left here. I should have put the slide up the other way around. When I started this job, I said, "Babcock is a people business." We employ lots of people, as you saw from the video, making it possible for those people to do their job well, in a positive mindset with the right culture is fundamental to delivering this group. We have detailed people plans by sector and by country. We've got a first group-wide survey of employees with a 79% response rate, which is very high.
Over 100,000 comments, which are gonna take some filtering, but it shows that people are engaged and want this company to be a success, which I don't think, to be honest, we'd have got that three years ago. It's a real progress on engagement. The role framework's important in terms of retention. I f you progress in this company, you want to see where you can go, which means you need to know a route through quite a large company. We didn't have a role framework. We're now making it much easier for people to see a long-term future in the company. Recently, 300 new apprentices and 150 grads, and you saw the number in the video that we employ on an ongoing basis. I said, create the right environment.
We've touched on before how we have lots of legal entities, lots of arrangements. It makes bringing the company together more difficult than it should be, and we're working on that. One thing you can do is have a single global business management system, so wherever you work in the company, it looks and feels the same. That makes moving around easier. It means your quality is better because people are not having to relearn every time they move. It means your health and safety is better, and it means people feel part of one group. This is not just an administrative thing. This drives efficiency, which ultimately drives profitability. David has touched on the new functions. This is not central control. We call it centrally led, not centrally managed.
This is to provide common ways of doing things, which are then implemented locally. Again, that is beginning to show real benefit. That focus on driving delivery is, and culture change, is ultimately gonna drive profitability. The last bullet on the left, bidding governance, I was gonna touch on in a bit more detail. We have a simple five-gate process. Some people have nine or 12. We have five. Left to right, first three are tracking. Are we looking for the right opportunities? Are we gonna be competitive? Is the customer gonna contract on terms we want to undertake? Does the customer know what they want? 18% of our business is support. As I said, that's at the center of what we do.
In many cases, customers know the problem, but not necessarily the answer. In that gate one to three, this is about shaping, helping the customer shape what they want, but also how they want to buy it to make it business we want to do. Then into gate four, by the time you get to the bid phase, you should really be in a position where what you are bidding is what you want to win. Getting, moving the whole process to the left is fundamental to winning good business. We've said it before, but 50% of the risk and the value in a contract is set in the contract you book in our world. Getting that phase right really matters. Next phase is mobilize.
We have some pretty horrible examples in the past of orders being thrown over the wall to a delivery team. We've joined up much more actively on some of the wins, like the JP9101 in Australia. We were pre-mobilizing well before contract, so we got a good start, and we had a properly managed risk plan. You get that bit right. Delivery becomes that extra 20%. It doesn't become delivery to fix everything you've got wrong. It becomes course correction, customer change, it becomes that final piece. It's not a solving the sins of the past activity. All of this is ultimately about risk management because it's about having the right order book, and therefore, that your bid margin becomes your reported margin.
Having done all of that, you need to capture some things. The Polish program is a really good example of what I've just said. It went through that process. It was one of the first programs to go through that process. We had a deep understanding of how our partner wanted to work. We have a team in Gdynia working on the infrastructure, as well as a separate team working on the design. We've got the next two orders that came through on that, but it was pre-mobilized. We knew the name of the person who was prepared to go out to Poland and working in it and do it. It's a classic example of having the right product with the right commercial terms. Asset availability.
The world has become a bit urgent operational requirement, so people have not only want higher availability of mainstream, they also want equipment fast. This ability to be entrepreneurial but under control has come through in a number of areas. Unfortunately, clearly, because they are operational, the best examples I'm not allowed to talk about, so you have to trust me on that one. There are some really exciting things going on. Defense Digital, I've just talked about the Defence high-frequency comms, the JP9101 program in Australia. A really good example of how we actually modified the approach we were in to get to the new way. Had the Australian team leading the customer with the U.K. team leading the technology joined up. I've met with the Australian customer.
They're super pleased about having a local delivery, but backed up by the core knowledge in the U.K. Really pleased about how we've mobilized. Also in Australia, we won the Regional Maintenance Provider West. They've gone to a regional model, not a platform model. Again, very innovative bid, but on terms we would want. If you go down the left-hand column, we're addressing in different ways customer needs in all of those programs, but booking them on commercial terms that balance risk and reward for us and for the customer. My summary, good momentum. I wasn't sure if I was gonna say this, but I will say it. I think you can feel the momentum pick up on a global basis as COVID restrictions have disappeared and groups can genuinely meet and work together.
There's only so much team building you can do on Zoom and Teams. If I look at JP9101, it's a classic example of post-COVID working, really making a difference. I think we're seeing a real acceleration from that. As David said, half year 2023 in line with expectations. Actually confidence in the future. I think we see real growth potential, and we can deliver that growth potential and hold 2023 unchanged. With that, we're now gonna go through to what I said right at the beginning, which is merging two IT systems and introducing a moderator. If it all goes wrong, it isn't me.
Ladies and gentlemen, to ask a question, please press star one. We will take our first question from Kean Marden with Jefferies.
Morning, all. It's a bit echoey, so please bear with me. My first question just regards civil nuclear, which I appreciate is a very fast-moving space at the moment. I'm wondering whether you can just give us an overview of some of the U.K. and international opportunities. In particular interested in decommissioning Sizewell, which sort of got parked for a while. That new build announcement recently at Sizewell C and also the U.S. office that you mentioned in the text.
Secondly, just wondering if you can provide an update, please, on your operating performance for some of the key rebids coming up over the next 12 to 18 months. In particular, just looking at the contracts at the, at the back of the slides, Met Police, Phoenix II, and WAMA in Australia. Thank you.
Right. I'll do the latter one first, I think. It's quite difficult to talk about progress on rebids 'cause by definition, they're governed by our, the contract things we sign up to. I've suddenly started with that, so I can hand it to David and say, "Can you have a think about what I'm gonna say?" What you're gonna say on that, 'cause you can answer that one, 'cause I can't think what I'm allowed to say. On civil nuclear decommissioning in the U.K., the Nuclear Decommissioning Authority obviously has undertaken a well-publicized review. We are seeing more work coming out. What do I think? You said it's fast-moving. I've never heard civil nuclear described as fast-moving before.
I think decommissioning rates will pick up. Do I think it will affect the numbers at a group level? It might on the margins in a couple of years, but it'll be on the margins. In terms of build, obviously, we've got Hinkley, where our work steps up, as we said at the full year. We've got into the next phase and work scope for Sizewell because it's a different commercial structure still being sorted. Again, that's some way out for us 'cause we don't, we don't do the heavy civils, the concretey stuff. We do the higher-end stuff. We need that done first. That will be some years out. The Hinkley is increasing.
We've obviously done, have an MOU with an SMR company in America, which effectively does small SMRs. They don't compete with the Rolls-Royce one, and its primary role is hydrogen generation. That's quite exciting, but again, that's back end of this decade. I think in terms of the U.K., I think there'll be a pickup in decommissioning, but I think it's on the margins. There'll be a pickup in our work in Hinkley, but that's in our plan. The other stuff's probably back end of the decade. In terms of international, we opened the office in the States because we have been asked to join a couple of consortiums to bid for decommissioning work there, and you need to do it through a U.S. entity.
For me, it definitely falls into the bluebird category. I think there's a chance they'll want our capability, 'cause we do have some quite special skills, in which case it will be upside. There's also a chance they'll stick to American-only providers, so... I think we've advanced enough that we can, excuse me, take that measured step into the U.S. market. Back to contracts.
On the rebids, without going into too much detail on any of them, obviously, there are two things that you really need to do one , not surprisingly, is prepare a competitive rebid, but two, as the incumbent, is to make sure the performance on the current contract is as good as it can be. You'll have seen, you mentioned, two that are in the land sector. You'll have seen what the land sector's performance has been like in the first half, and it's very pleasing from an operational point of view, that's good. In terms of, I think you mentioned WAMMA in Australia.
Australian ship support will be configured slightly differently in the future into the RMPs or regional maintenance providers that David referenced earlier. A key part of us buying the NSM joint venture and consolidating that as a subsidiary earlier in the year was to address that. We mentioned RMP West in the presentation, and the East will come up in the not-too-distant future.
Thanks very much. Much appreciated.
We will now take the next question from Robert Plant with Panmure Gordon.
I can't hear that.
Please go ahead, Robert.
I can't hear it on way up.
Robert Plant, please make sure you're not on mute.
Let me try that again. Can you hear?
Yeah, perfect.
Since the full year 2022 results, have you had any other fixed price contracts renew, and if so, were you able to capture any cost inflation? Thanks.
Many in the smaller space. In the charts I put up, I said there's a lot of the fixed price ones are between one and three years. Actually, there's a bunch of them, smaller in value, that are short term and that do roll on a relatively frequent basis. Obviously every time we're rebidding new work, we would update our assumptions, not just for external inflation, FX, suppliers, and everything else.
Right. Thanks.
We will now take next question from Sash Tusa with Agency Partners.
Yeah, good morning. I've got three questions. First of all, the contract bids that you referred to that's depressing aviation margins at the moment, can you just confirm that that's the Canadian SAC program? Secondly, the nuclear contract that's caused the GBP 6 million provision in this half, is that the same program that caused the GBP 22 million charge in the second half of last year? If so, how long do you expect before you can finally resolve that program one way or another? Finally, could you just make some comments about the FMSP program and how that fitted into or didn't fit into your bid criteria process? Thank you.
The answer to the first one is yes. The answer to the second one is yes, hopefully this financial year. The answer to the third one was that obviously it was only announced as preliminary selection last week, so we've had no detailed feedback. Yes, we bid in accordance with the framework I outlined.
Thank you.
We will now take the next question from David Perry with JP Morgan.
Good morning, gentlemen. I have three questions, please. First one, there's a couple of fleeting references in the release to opportunities, current and future, in Eastern Europe. Just wonder if you could elaborate a little bit where you're allowed to. The second, slide 17, David Mellors, you talk about free cashflow positive in the second half. I just wonder if you could elaborate on the range of outcomes there.
Then the last one, let me see if I can provoke you or not to reply. You know, on your slide two, you have in the top right-hand corner Full year 2026. I mean, it feels to me things are a lot more stable now. Is there any chance you could kind of tell us with the, you know, where the company might be in terms of FY 2026 perhaps in terms of margins or sales? Thank you.
It sounds like the first one's for me and the second one and the third one are for David. Obviously, as we said in the presentation, we have been supporting the U.K. government's efforts in Ukraine, and that continues as we speak. A number of nations in the East have reflected on what they've learned from the conflict, and there's an opportunity to replicate some of the support in those countries, both NATO and non-NATO. The U.K. government, its primary focus in defense is actually that region. Clearly, quite a lot of that is, in other countries will be either supported by or in support of the U.K. government's ambitions.
On the free cash flow, you're right, David, that's what we said. We mean it, obviously, for the retained group. Y ou probably know that the cash flow profile of the aviation business we're disposing of does vary through the year. The reason we've qualified it with retained group is it actually depends what month we complete the aviation disposal on as to whether they're negative, which they often are in the winter, or whether they get the positive as the work starts again in March. There is a bit of a variability around the disposal, but put that to one side.
The retained business has now cleaned up the past. You've seen in the first half that the window dressing is gone, the pension payments lower down the cash flow statement. GBP 25 million more of the pension payments that, their catch up, they've gone as well in the first half. Now it's more about just turning ongoing trading into cash flow. We always said FY 2024 would be our first clean year, and that's still absolutely the case. In the second half, we won't have those hangovers, if you like, from the past. However, you do know that the first half was significantly ahead on cash because of some timing differences, and you only get those, you only get cash in once.
We had a better first half, of course, that's come out of the second. Without getting too caught up on it, the full year is still largely gonna be as we expected it would be. Within that, the full year will have settled, you know, GBP 25 odd million of additional pension catch-up payments, as we always said it would, and it will have settled about GBP 70 million of window dressing. So that's what it'll have to swallow. Most of that's obviously all gone in the first half, the timing differences will carry over into the second. Key message is the full year is unchanged. You won't be surprised, we won't be giving margin targets out for 2026.
Just to remind you, we've always said that margins in all four of these sectors are capable of improvement, and we expect to do that through the turnaround. You'll have seen very pleasing progress in two of the sectors in this first half, marine and land. They were never all gonna move at the same speed, and they have different challenges and headwinds to overcome. At least you've seen real progress in two of the four in the period we've just reported.
David, internally, we've been very clear about it's the quality of work, not an absolute margin target. Any order, going back to what I said about the bid, is a combination of cash profile, risk profile, and margin. If you chase one to the exclusion of the other two, you end up booking bad business. If you set a margin target, it's very hard to retain control of the other two. It's about the right balance between the three, and that will vary on different contracts.
Understood.
We will take the next question from [Annelies Vermeulen] with Morgan Stanley.
Hi, good morning. I got only one question, and just an extension of the previous question, really. As you sort of stabilize the business with the portfolio rationalization now largely complete, pending the sale of AES, how do you sort of think about the long-term growth outlook for this business? Is sort of defense growth plus the right way to think about it, or defense growth across your end market is probably the better way to think about it? Also, just the free cash flow, again, what do you think is a sustainable working capital consumption for this business? Should this be neutral working capital business or consume a little bit of working capital going forward?
I think of growth as in the U.K., where we, as the video said, are on more major programs than any other contractor. If we grow in line or are slightly ahead of budgets, you know, that's pretty good. 'cause we'll never do heavy lift aircraft or helicopters . There are plenty of things in that budget that we will never do. If we grow in line or slightly ahead of budget, that's pretty good. Growth beyond that is about the international success, and we've seen it in Australia and France, in Poland. I think take internationalizing our proposition is the big growth opportunity. Do you wanna do the other half?
On free cashflow, we did say from 2024 onwards, when we got rid of the past, that this would be a cash generative business, and it will be. Profits will turn to cash at a very high conversion rate. Obviously, we still have pension payments below operating cashflow and interest and tax, but operating cashflow should be over the long term, you know, at least 80% of operating profit. There'll be good periods and bad periods because cash flows are often lumpy and often lumpy for good reasons.
You know, we try and get mobilization payments and milestone payments as early as we can in contracts that we're now negotiating. You only get the cash in once, so it's a great period when you get the lump, but obviously it brings it forward from another period. There'll always be lumpiness in working capital. Over the long term, if you were to look at many periods together, we should be at a high cash conversion rate.
Okay. That's pretty clear. Thank you.
We will now take next question from Suhasini Varanasi with Goldman Sachs.
Hi, good morning. Just one question from me, please. Appreciate it may be a little bit difficult to predict, but you've seen a lot of changes on inflation interest rates in the U.K. Given where they are at the moment, can you please talk about potential impacts to the pension cash outflows, please, in the medium term? Thank you.
Yeah.
Thank you.
Okay. The pension cash flows are driven by the triannual valuations, as you know. Although we have several schemes, we have three main ones. We rotate the valuations so that one of the major valuations comes up each year, and that's to avoid having a sort of cliff edge of market assumptions on hitting all three schemes at the same time. Actually, the cash flows are pretty well-defined for the next three years or so in each scheme, depending upon the valuation. In terms of inflation and interest rates, you'll have seen in the statement that we do have LDIs, we do hedge inflation.
Even though liabilities and assets have moved very materially in the period, not surprisingly, that this has largely done its job because the assets and liabilities have moved by about the same amount. We've put the levels that we are hedged to inflation on a self-sufficiency basis, not an accounting surplus basis, on a self-sufficiency deficit basis in the statement. It is something that the trustees of these schemes are looking to, over time, step all the way up, so that when we get to self-sufficiency, we'll be there with a fully hedged position.
Thank you.
As a reminder, to ask a question, press star one. We will now take the next question from Alex O'Hanlon with Liberum.
Good morning, both. Just one quick question from me. On the disposal of the sale of certain aerial emergency services business, I believe that was expected to complete by the end of this calendar year. I just wanted to check if that's still on track.
We expect it to complete, well, we said in the half year, second half. We can't put a month on it because obviously it's due to regulatory approvals coming through. We have had a number of those. We've only got one major one remaining, but I can't predict the timing of that because it's outside of our control. We're expecting that to go very soon, whether it's this side of the calendar year end or just pops over, I can't tell you.
Okay. Thank you very much.
We will now take the next question from Christopher Bamberry with Peel Hunt.
Good morning. Just 1 question. Could you please elaborate on some of the operational improvements you've made on the DSG contract? Thank you.
In fact, in general, it kind of follows the same as all of the improvements. If you've got a frontline operator, whether they're in a shipyard or in a workshop in DSG, there are two things that limit the amount of time they're actually productive. The first is what we call enablement. Have they got the tools? Do they have a full kit, so they've got all the parts they need? If an individual machine needs to be certified, is it certified, et cetera? That's true in a shipyard, it's true in DSG. People can't start work until they've got all of that. When they finish the work, there's assurance. Someone has to sign off the job.
In general, in Babcock, but it was a big issue in DSG, both enablement and assurance were slow and cumbersome and incomplete on many occasions. We've gone right back to basics really and said, "How do we, how do we make it easy for our frontline colleagues to do their job?" That is all about the job being fully kitted, all the tools, all signed off, and then minimizing assurance without losing quality. It's those two things really, and you can replicate that across the group really. That's true whether it's in support or build. It's about enablement and assurance.
Thank you very much.
There are no further questions, so I will turn the call back to David Lockwood to summarize.
Okay. Well, thank you very much for those questions. Thank you for listening. I think, hopefully you've got a very clear view from your questions and our presentation of both the operations and the opportunity. Just to reconfirm, guidance remains the same, most importantly, free cashflow second half, and all to play for. Thank you.