Babcock International Group H2 2025 Earnings Report

Babcock International Group EPS Results

• Actual EPS: GBX 50.30
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Babcock International Group Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Babcock International Group Announcement Details

• Quarter: H2 2025
• Date: 6/25/2025
• Time: Before Market Opens
• Conference Call Date: Wednesday, June 25, 2025
• Conference Call Time: 4:00AM ET

Babcock International Group (LON:BAB), together with its subsidiaries, provides value-add services for aerospace, defense, and security in the United Kingdom, rest of Europe, Africa, North America, Australasia, and internationally. The company operates through four segments: Marine, Nuclear, Land, and Aviation. It designs, procures, operates, and manages critical utility and process equipment; offers asset management, defense and maritime training, information and intelligence, equipment and system, and facilities and infrastructure services, as well as naval platforms; and designs, manufactures, and provides through-life support for mechanical and electrical systems and equipment. The company also offers naval architecture, engineering, and project management services; submarines and complex engineering services in support of various decommissioning programs and projects, training and operation support, new build program management, and design and installation; critical vehicle fleet management, and equipment support and training services for military and civil customers; and designs, assesses, manufactures, installs, maintains, and decommissions vehicles for police, fire and ambulance, civil service, military, and other security-focused organizations. In addition, it provides plain line track renewal services; and engineering services for track projects, signaling, telecommunications, and on-track plants. Further, the company offers critical engineering services to defense and civil customers, including pilot training, equipment support, and airbase management, as well as operates aviation fleets that provide delivering emergency services. The company was founded in 1891 and is headquartered in London, the United Kingdom.

Babcock International Group H2 2025 Earnings Call Transcript

Key Takeaways

• Preliminary FY2025 results delivered 11% organic revenue growth, 17% uplift in underlying operating profit and margins up 50 bps to 7.5%, with 82% cash conversion and £153 m free cash flow despite heavy investment.
• Medium-term guidance was upgraded with a target of at least 9% operating margin, mid-single-digit revenue growth and 80%+ cash conversion, reflecting confidence in ongoing margin improvement.
• Shareholder returns strengthened via a 30% increase in the ordinary dividend and a £200 m share buyback, executed under a disciplined capital allocation policy alongside organic and selective M&A investment.
• Balance sheet metrics improved markedly, with gearing down to 0.3x (BBB+), aggregate pension deficit cut to ~£125 m and future pension contributions of £20 m p.a., freeing up capital for growth and returns.
• Long-term defense market tailwinds—driven by rising government spend, civil nuclear expansion and AUKUS—underpin growth beyond the medium-term window, though timing and contract phasing remain uncertain.

Presentation

[David Lockwood, CEO at Babcock International Group]

Perfect. Well, good morning, everyone, in the room and online. So welcome to the preliminary results for the year ended thirty first March twenty twenty five for the Babcock International Group. So quite a lot to cover. It's been quite a year for the group and quite a year for The UK and quite a year for the world.

[David Lockwood, CEO at Babcock International Group]

So I think it's clearly a new era for defense. If you look at what's going on at NATO today, Babcock is represented there because industry is close to government in working out how to make the world a safe place. So that that is one of the key things that's making the global market conditions increasingly supportive for companies like Babcock. When you have declining budgets, we've had for most of my working life, Industry is somewhere where you make cost savings. So everything about your relationship is set up like this.

[David Lockwood, CEO at Babcock International Group]

At a time when the free world is having to think about how to defend its values, industry becomes part of the solution. So you have a completely different relationship. So if I look at the tone of discussions I was having with governments at the Paris Air Show last week, it's about how do we drive capability, it's about how do we move faster together. It's a together thing. Yes, we need contract.

[David Lockwood, CEO at Babcock International Group]

Yes, we need to be measured. Yes, governments need to get value for money, look after look after taxpayers' money. But the way in which we're doing it is is completely different from a year ago. And that's true also in civil nuclear where we're looking to progress civil nuclear as a key part of the green energy agenda. So to partake in that kind of discussion, you need to be a strong company.

[David Lockwood, CEO at Babcock International Group]

And we spent the last few years making Babcock that strong company. That is now coming through in financial performance, which has enabled us to upgrade in year, has given us balance sheet strength, and has actually given us some capital to allocate, which not so long ago seemed a bit of a fanciful thought. So probably the the core of most board discussions in one way or another is about capital allocation both through the year and then at checkpoints at the half year and full year. And we will come back to our capital allocation policy, but it is primarily about investing for growth, but also having a focus on shareholder returns. And we've increased the dividend this year and we've announced our first buyback.

[David Lockwood, CEO at Babcock International Group]

But most importantly, we've announced an upgrade to our medium term guidance. David will take you through that later. But just to set the scene, medium term in the city a bounded number of years. David will touch on it. But clearly beyond that, we're seeing increases in spend outside that time window.

[David Lockwood, CEO at Babcock International Group]

And when I come back, I want to try and give a picture of the overall landscape both within the medium term guidance and beyond. But that excitement comes after the key part of the show, which is my esteemed colleague.

[David Mellors, CFO at Babcock International Group]

Thank you, David. Good morning, everyone. FY 2025 was a good year on pretty much every measure. And my main three messages today are: number one, this is a strong set of results with revenue and profit growing well and ahead of our expectations at the start of the year number two, cash flow was very strong alongside significant investment in the business, which when coupled with the pensions progress further strengthened the balance sheet. And number three, we've upgraded our medium term guidance and announced the share buyback.

[David Mellors, CFO at Babcock International Group]

So on to the trading results then. There are some very positive numbers on this summary slide. Some of these were announced in our April post close statement, and there have been no changes to those numbers. So stepping through them quickly. Organic revenue growth was another year of double digit growth at 11%.

[David Mellors, CFO at Babcock International Group]

Underlying operating profit was up 17% and margins continued the upward trajectory by 50 basis points to 7.5%. Cash conversion was 82% despite the high capital investment in the business. And free cash flow was £153,000,000 again despite the high capital investment and £40,000,000 of an accelerated pension contribution. All the above led us to earnings per share growing by 23%, And this enabled a 30% increase in the ordinary dividend growing ahead of earnings and a £200,000,000 share buyback announced this morning. So we'll now move on to revenue.

[David Mellors, CFO at Babcock International Group]

This shows the 11% organic revenue growth by sector before we go into the detail. Marine and Nuclear were the real drivers of the top line, although three of the four sectors grew in the year. And aviation, we expected to be roughly flat due to project phasing. And I'll come back to the sectors in a moment. Next, profit.

[David Mellors, CFO at Babcock International Group]

This slide reconciles the various numbers to avoid confusion. You may remember that FY 2024 had a couple of material one off items netting to a £73,000,000 charge. There was a £90,000,000 program charge in Marine and a £17,000,000 profit on disposal of property in Land. So last year's reported profit and margin are on the far left of this slide. And then we add back the £73,000,000 net charge to get to the £311,000,000 or 7% in the middle of the slide.

[David Mellors, CFO at Babcock International Group]

And that's a more meaningful baseline of FY 'twenty four performance. And against that baseline, we achieved the 17% organic profit increase in FY 'twenty five to £363,000,000 and the 7.5% margin. The sector detail that I'm about to go through will use the reported comparative numbers just so that you are aware. So on to the sectors, and there's a lot of content on these slides for reference, but I'll just pick out the key points. Marine first.

[David Mellors, CFO at Babcock International Group]

It was a good year in Marine, a good performance with revenue growing 12% organically. This growth was driven mainly by the ramp up of the Skynet program in the first full year and the return to growth of the liquid gas business. Now profit and margin variances in Marine need some explanation as there were a couple of lumpy items last year. As I said, last year had the £90,000,000 program charge in the sector. So whilst the reported profit and margin improvement on this slide looks huge, if you add back the program provision to last year, it then looks like performance went backwards.

[David Mellors, CFO at Babcock International Group]

However, FY 2024 also had very strong profit contribution from the Arrowhead license sales we made, which were never going to be an annual event. They weren't a one off, but they were never going to be annual. So my summary of all of that is that Marine has made real progress in the year operationally on both profit and margin. And the FY 2025 numbers are a clean baseline for the future. And the 6.1% margin was a decent return from where we were and importantly is heading in the right direction.

[David Mellors, CFO at Babcock International Group]

And for those new to the story, this sector has about £200,000,000 of zero margin revenue going through it, which is primarily Type 31. And this weighs on the margin in Marine by about 100 basis points and will do for the next four years or so. Also on the margin, the first year of the Skynet program has been recognized at a prudent level, and we expect that to improve over time. So the nuclear sector had a very strong year, growing at 19% organically. Cavendish Nuclear led the way with a 28% revenue growth due to increased demand in civil new build and decommissioning.

[David Mellors, CFO at Babcock International Group]

Submarine support revenues also increased, including the ramp up of the Victoria's Deep Maintenance work. And infrastructure revenues, or MIP, grew in the year to $5.00 £4,000,000 but they did peak in H1 following the opening of 9 Dock. Moving to profit. Cavendish Nuclear not only benefited from the very high growth, it also improved its margins in the year as we disclosed at the Investor Teach In Day last month. And as we said then, Cavendish makes double digit margins.

[David Mellors, CFO at Babcock International Group]

The Naval Nuclear revenue growth also helped drive a better profit performance, and this was assisted by improved contract delivery, some contract change and inflation recovery within some programs. And all of these factors restored the margin to a more normal level for this business at 8.8%. Moving to Land. The highlight of the year was the signing of the £1,000,000,000 reframe contract, which is the five year extension of the Army equipment support. And this is not only because it's a really important order, but it's the culmination of several years of recovery from a position where neither the customer nor we were happy with DSG.

[David Mellors, CFO at Babcock International Group]

Revenue growth was more modest in Land overall. We had a good growth period for U. K. And International Defense with vehicle support and build. And there was also growth in South Africa, particularly with equipment sales to the mining industry.

[David Mellors, CFO at Babcock International Group]

And this was partially offset by lower revenues in the Rail business. On the profit line, last year, Land had the £17,000,000 property disposal profit, which I mentioned earlier, and that distorts the reported numbers on here. Ignoring that one off, then profit was up 10% and the margins were up 50 basis points, so good progress. And overall then land reached 7.7 margin, which is much better than the 5% it was on a few years ago and is on the way to a more normal margin for the business. On to Aviation.

[David Mellors, CFO at Babcock International Group]

The highlight of the year in Aviation was the signing of the French Mentor two contract we announced a few months ago. This is another important milestone in the building of a French defense business. On the revenue line, expected, organic revenues went backwards by 4%, which is the impact of last year's H160 aircraft deliveries in France with the program now in the longer term support phase. These types of contracts do have lumpy revenues as aircraft are delivered, and I expect more of that in the future. Moving to profit.

[David Mellors, CFO at Babcock International Group]

Profits and margins both increased in Aviation with margins now up to 6.2% and further progression expected. And this is obviously much better than a few years ago when the sector was breakeven. Moving to the cash flow. This is the usual detailed slide, but I'll only pick out a few key numbers. In the middle of the table, we have the operating cash flow of £296,000,000 and cash conversion of 82%.

[David Mellors, CFO at Babcock International Group]

The first thing to note is that this good cash conversion was delivered while still investing heavily in the business. And you can see this when comparing the CapEx line and the depreciation line for both of the years on the table there. And this is the continued upgrade of infrastructure and systems around the group to drive better business performance. Organic investment in the business is our number one capital allocation priority. The second thing to note in the operating cash flow was the very small change to working capital.

[David Mellors, CFO at Babcock International Group]

So the combination of advanced receipts from customers and program milestones allowed the working capital to be flat year on year, whereas we were expecting a reversal. And this reversal will happen in future, but we'll work hard to minimize the impact on any one year. Now down the bottom half of the table, we have free cash flow of £153,000,000 which was good especially as it's after an additional £40,000,000 of pension contributions, which I'll come on to. So to me, the business generated nearly £200,000,000 of free cash flow in the year despite the high levels of investment. I know some investors view pension deficit as debt and therefore consider free cash flow before pension deficit contributions.

[David Mellors, CFO at Babcock International Group]

And on that basis, the result would have been about £240,000,000 of free cash flow in the year. The second priority in our capital allocation policy is the retention of a strong balance sheet. And this is important for customers as well as other stakeholders given the critical things we do. For those new to Babcock, this slide shows how quickly the group has deleveraged from a very weak position a few years ago to a BBB plus company now with a gearing ratio of 0.3x. And this shows how cash generative the group is.

[David Mellors, CFO at Babcock International Group]

The other topic which has historically impacted the assessment of balance sheet strength is the pension deficit. As I've said before, we always focus on the actuarial technical provisions measure of a deficit, not the accounting numbers as this more accurately reflects the cash flows. The key points to note on this slide are that the aggregate deficit of the schemes is now around £125,000,000 so substantially less than it was in prior years. And during the year, we completed long term funding agreements with all of our top three schemes, giving both the trustees and ourselves better visibility of the route to self sufficiency and beyond for the schemes. And as consideration for these deals, we accelerated £40,000,000 of deficit repair contributions in FY 2025.

[David Mellors, CFO at Babcock International Group]

And as a result of all of that, we now expect future deficit repair contributions to total just £20,000,000 per annum for the next six years or so. And so that's substantially less than historically. So just to tie things back to capital allocation. Our policy states that accelerating pension contributions is a capital allocation option should it be attractive. And so the £40,000,000 accelerated contribution in the year and the benefits it unlocked was capital allocation at work.

[David Mellors, CFO at Babcock International Group]

So to the medium term guidance. At one level, this is really simple. Medium term revenue guidance and medium term cash flow guidance continue on the same trajectory as previous, and we've had a double upgrade to the margin guidance. The first upgrade is to achieve the 8% margin earlier than we originally expected, and the second is to raise the target by 100 basis points to at least 9% within the medium term. At the Capital Markets Day last year, I said that 8% was a waypoint, not a destination, and we expect to achieve that waypoint in FY 2026.

[David Mellors, CFO at Babcock International Group]

On the revenue line, the mid single digit growth is a realistic target given the pipeline of opportunities we have today. And the cash conversion of 80% plus recognizes that this is a highly cash generative group that continues to invest but also that we expect some unwind of working capital over the medium term. Given that the margin guidance is the one that's changed, I just wanted to add some color on how this is achieved. As you can see from the graph on the left, we've established a track record of margin improvement over the last few years, and you can see that in the sector numbers. The right hand side illustrates the actions that get us to 9%.

[David Mellors, CFO at Babcock International Group]

These are a continuation of the margin accretion actions delivered to date. The zero margin revenue of £200,000,000 on Type 31, when that trades out over the next four years, that gives us about 30 basis points on the journey. And the remainder is driven through improved delivery, better risk management and increased efficiency. And the actions that get us there are similar to the ones we've already taken around the group. And there are many examples I can give of things we've already done around the group and many of those that we that are to come.

[David Mellors, CFO at Babcock International Group]

And this is continuous improvement everywhere rather than pulling one big lever in the center. And this underpins our confidence in the delivery. So 9% plus, it is. And with that, I'll now hand back to David.

[David Lockwood, CEO at Babcock International Group]

Right. I'm going to explain the world in ten minutes. So David said, everything is underpinned by performance. I was asked in a recent investor conversation, what is the biggest risk in this group? And the biggest risk is one we will definitely avoid, which is complacency on delivery.

[David Lockwood, CEO at Babcock International Group]

There we have done a great job, I think, in getting us to a place where we do deliver. But there is still loads to go for, as you saw on David's last slide. And so growth is underpinned by today's performance. And keeping driving performance will underpin all of the subsequent slides. So whilst I talk about the big stuff, the thing you need to remember is we will never take our eye off the ball of performance Because that performance drives access to this market.

[David Lockwood, CEO at Babcock International Group]

There are major structural drivers which are going to be around for a very long time. However, the various conflicts end, the world will feel unstable. Governments will feel the need to look after their citizens. So for the first time in my career, I just told a journalist that actually I had to wait till my sixties become cool as a business leader because it's now cool to be in defense, which is amazing. The we actually matter and people recognize we matter.

[David Lockwood, CEO at Babcock International Group]

So whether it's global insecurity, but also the drive towards green energy, All of these things are moving in the direction of Babcock. Only a high performing Babcock is able to access those opportunities. And one of the key things in this is to try and combine that with the medium time guidance and the long term upside. The medium term guidance, I mean, David was supposed to say he didn't, medium term is three to five years kind of stuff. Hopefully, the front end of that.

[David Lockwood, CEO at Babcock International Group]

So it's this this term of this government in The UK, it's the current Australian government. We're talking about the current political cycle. So we're not counting things that are committed into future government. So in The UK, we've got a commitment to increase defense spending in the next parliament and then defense and security in the parliament after that. That's outside the medium term guidance window.

[David Lockwood, CEO at Babcock International Group]

So our medium term guidance is based on what we can see of this and manage and it's largely in our control in that window. There is clearly significant growth opportunity beyond that as governments commit to their increased spending. So to access that, you need to be in the right markets. Defense spending almost speaks for itself where we are with the five eyes. So we do some stuff in The States with things like missile tubes, but particularly the other four, a very strong place to be and with a growing capability for the export markets.

[David Lockwood, CEO at Babcock International Group]

You know our capabilities, you've been to capital markets days, whether it is military flying, whether it's land support as we've seen with the DSG refresh, the ability to operate in the near term is about optimizing what you have today, whether through training or upgrade or greater availability. That's core to Babcock's existence. As we look forward, the nuclear subs program is underpinned in The UK. We're already doing some work on AUKUS. So there's a whole bunch of key programs that sit in our time window.

[David Lockwood, CEO at Babcock International Group]

And then finally, I think we've talked a lot about whether we operate through strategic partnerships with Saab, HII, in Poland, with Safran we signed last week in at the Paris Air Show, whether it's a licensing model with PTPOW in Indonesia or whether it's direct export working in conjunction with the UK government. That's ability to to collaborate with governments, with industry is core to driving success and we'll use different models in different places. And as David said, sometimes we'll get a lumpy license fee, sometimes we'll have a more enduring revenue stream when we're building for an export customer. We'll pick the right model for the right market. So The UK, as I've touched on, point 6% within the medium term guidance window, 3% next parliament is outside the window, and then the 5% national security by 2035 clearly outside.

[David Lockwood, CEO at Babcock International Group]

But all of it providing a long term trajectory. And whether it's ultimately five or 4.8 or 5.2, what Rachel Reeves said recently is true, which is for the first time in generations, plural, the defense industry can plan on growing budgets, not shrinking budgets. The UK SDR, I'll come on to the next slide, but it largely underpins what we want to do. And within as countries are looking at how they're really going to defend themselves, the kind of British first approach in The UK, the Europe first approach is very much driving to identifying key long term partners. And that's not just capability as David said, that's strong balance sheet.

[David Lockwood, CEO at Babcock International Group]

Are you going to be here? Can we absolutely depend that if we commit to you for twenty years that there's tangentially zero risk of you not being here in twenty years? So being the shape of company that can make those kind of commitments and can be trusted to deliver on them is fundamental to drive the growth. So if we look at the SDR requirements, I would describe this as largely confirmatory of our strategy. I don't some of the stuff which is growth orientated, which sits outside this parliament, you know, has the caveat when money allows on it.

[David Lockwood, CEO at Babcock International Group]

That's the stuff that's in the next parliament, which will drive further growth. But the commitment to the existing nuclear fleet, obviously fundamental and the growth into a bigger nuclear fleet. To put that in context on a timeline, Dreadnought is a 2030s platform. Orkus is a 2040s platform. So when we think of it in terms of upside versus medium term guidance, within medium term guidance, it's largely about the support of existing plus a small plus getting ready for dreadnought instructions through things like MIP, plus a bit of front end AUKUS.

[David Lockwood, CEO at Babcock International Group]

And then outside that, get the growth into the larger fleet. Cutting edge frigates and an affordable Navy is obviously core to who we are. And we have the ten year contract to support the carriers, so we're in a strong position to support the transforming of the aircraft carriers into a multi role platform. And I can keep going down. So in the Army, obviously, DSG gives more availability.

[David Lockwood, CEO at Babcock International Group]

A lot of the training we do will help with this conversion into a more flexible Army. Training for next gen Air Force is obviously key through ascent and stuff we then that we can then take some of those skills, particularly skills on non flying training into export markets. So all of that fundamental. And then the engine for gross sovereign warhead, well, you know from if you were at the Cavendish teaching that we're a big player in AWE. And defense exports having I've said many times, we can only export where The UK has a strong presence and is welcome.

[David Lockwood, CEO at Babcock International Group]

It's it's it's soft and hard power together. And when we've when we look at where we've succeeded and where we failed, success is where we go hand in hand with government into export markets. Defense dividend is really important. We kind of talked about it quite a lot, but never in this language. So this is about effectively how you get societal support for a growing defense budget by showing its broader value add to society.

[David Lockwood, CEO at Babcock International Group]

So we already make a significant contribution to The UK economy well beyond the spend by the government. We do a lot of regeneration. A lot of our sites are in quite low social mobility, low economic growth areas. And so we've already been putting a lot of effort in, in terms of how we recruit, how we train, use of local SMEs. That is now getting ramped.

[David Lockwood, CEO at Babcock International Group]

We're already The UK's largest employer of veterans. We offer every person who is leaving the armed forces an interview guaranteed for, you know, we help them find the right job and then they get an interview. The government has ambitious targets for spend with SMEs. We already spend over half a billion with SMEs. So you can go down the list.

[David Lockwood, CEO at Babcock International Group]

Do we already do a lot of what was defense dividend, but do think that being able to put a wrap around that and have government value it properly will help secure our position in The UK. And then probably the thing that will excite our employees most is we're going to launch our first ever all employee free share scheme. Well, I guess I've just done it actually. Sorry, Louise. Anyway, I've just done it.

[David Lockwood, CEO at Babcock International Group]

There I have launched it. That's the flattest launch you'll ever hear. There's going to be one. In the civil market, I think the the graph on the left is the most astonishing. That's the history of nuclear in The UK.

[David Lockwood, CEO at Babcock International Group]

So up to a peak in the late nineties and then in decline. And now in a very short period, if you look at that graph, doubling what the maximum we've ever achieved. So that's that's the government's ambition in nuclear. So quite hard to put numbers on what that means to Babcock except for it's big. And quite a chunk of it, you look at the shape of the graph, you get that big step up just outside the medium term guidance period.

[David Lockwood, CEO at Babcock International Group]

So we will see consistent growth in Cavendish as you saw. And as if you were at the teach in, there is just really big upside beyond that, but difficult to quantify. So David touched on capital allocation. Organic investment really matters. A lot of our sites were tired, a lot of our systems were poor.

[David Lockwood, CEO at Babcock International Group]

David's talked for the last few years about the need to have mandraulic systems to achieve control where the automated systems were letting us down. So it will drive efficiency. So we need both physical and IT investment and that will continue. But it is clearly making us not only a more cost effective business, it's also improving our operational performance. Financial strength, I've touched on why customers need to believe in the long term.

[David Lockwood, CEO at Babcock International Group]

There's also in The UK, Rachel Reeves has talked a lot about so called crowding in private sector investment on the capital front end to level up effectively the spend profile for government and to accelerate capability. Now we're not quite sure exactly how those will play out. We're starting exploratory discussions. But it's really important that we can always play. And it's quite difficult to know at the moment what that ticket price is.

[David Lockwood, CEO at Babcock International Group]

But as one of the two major UK defense contractors, it would be a shame if we missed out on opportunities because something came along we couldn't fund. So difficult to know now and I expect that to evolve with the appointment of the National Armaments Director, the publication of the Defense Industrial Strategy, I expect that to become much clearer over the next twelve months. Ordinary dividend up 30. I think we'll focus on the increase, not the absolute. And David's touched on pensions.

[David Lockwood, CEO at Babcock International Group]

And that leaves two things. It leaves M and A and shareholder returns. So we take M and A very seriously. There are key areas where we think it could add value to the business. But we are custodians of shareholder money like governments are custodians of taxpayers' money, and it has to make sense.

[David Lockwood, CEO at Babcock International Group]

So we have got quite a long way through two in the year and walked away, I think, for very, very, very good reasons. So we won't do it just because we feel desperate to do it, but we'll do it when we find the right thing on the right terms. And because and the other alternative is shareholder returns. So we've looked at the balance sheet, we looked at M and A, and we decided we can do a buyback this year because that's part of our capital allocation policy. Doesn't mean it will be every year.

[David Lockwood, CEO at Babcock International Group]

It could be that there's acquisitions one year. But the board spends under Ruth's guidance spends a lot of time talking about capital allocation and the right choices. And then obviously, that crystallizes at certain points, typically half year and year. So I think you can be confident as shareholders that the board understands its responsibilities on capital allocation to drive shareholder value. The other thing I'd say about the buyback is when we look at our plan and we look at the opportunities, we still think that's good value.

[David Lockwood, CEO at Babcock International Group]

It wasn't buyback in the absence of any alternative. It was because it was the right value alternative compared with, for example, the two acquisitions we looked at. So if you look backwards, strong financial performance in the year as David laid out. If you look a long way forward, the global momentum is in our direction. And if you look in this near term, that's enabled us to up upgrade medium term guidance.

[David Lockwood, CEO at Babcock International Group]

And then finally, we have a marine investor event in Rosyth on the September 4. Now, September is traditionally a really good time for weather in Scotland, and that is a small window. So I really encourage you to come up and see all of the exciting things that we do in ReSythe beyond Type 31. And with that, exciting questions please. There is a roving mic.

[David Lockwood, CEO at Babcock International Group]

And I'm not quite sure if we're taking questions online, are we? No, just in the room. Just in the room. That will teach you to not come.

[Sash Tusa, Partner, Aerospace & Defence Analyst at Agency Partners LLP]

You. Sach Tusa from Agency Partners. Looking at the medium term guidance for revenue growth, would it how much of the GBP 500,000,000 roughly of MIP and GBP 200,000,000 of Type 31 do you expect to have dropped out from the revenues by the end of far distant part of your guidance period, five years? Should we see that 5% as being 5% including GBP 700,000,000 of fade and so closer to double digits underlying? Or do you still expect to have a big chunk of that GBP 700,000,000 in there, albeit it won't have been growing very fast, if at all?

[David Lockwood, CEO at Babcock International Group]

Well, I'll let David do the detail because, as you know, I get into trouble if I talk about numbers. But we certainly don't expect to stop shipbuilding. So we expect Type 31, this program, to be replaced by the shipbuilding program. So it depends how you whether you count that as a fade or a replace.

[David Lockwood, CEO at Babcock International Group]

We expect MIP to continue, but probably not at these levels, but

[David Mellors, CFO at Babcock International Group]

Yes, good answer. So I'm not sure what I can add to that. So MIP, as you know, is hard to be precise on the forecast. We do think it's peaked. We don't think it's going to disappear, so it may tail off a bit.

[David Mellors, CFO at Babcock International Group]

And yes, Type 31, as the program, will be going for the next four years or so, but we expect to replace that with future programs. So and all of that is baked into the medium term guidance.

[Christopher Bamberry, Research Analyst at Peel Hunt]

Chris Bamboo, Peel Hunt. Just a couple of questions, please. With the margin guidance for 9%, you highlighted about 30 bps of the improvements coming from zero fade. Of the other factors, are any of those particularly important? Or is it relatively well spread in getting to the target?

[Christopher Bamberry, Research Analyst at Peel Hunt]

And secondly, on FMSP, could you please give us an update on the progress of the discussions and perhaps how the new contract might differ from the existing one? Thank you.

[David Lockwood, CEO at Babcock International Group]

Yes. I'll do FMSP and then David can do margins. So we signed the heads of terms on the replacement program, and now we're into the detail. And it's a big program. If you look at the annual revenues, you multiply that by any number of years, it's a big number to go through the system.

[David Lockwood, CEO at Babcock International Group]

The current program finishes by at the March this year, so it needs to be replaced, clearly. I would say the big differences and it kind of goes back to my opening remarks about how the market has changed. The big drivers really for the last twenty years have been cost out. The big drivers going forward are about on time and accelerated capability. Being incentivized us being incentivized and actually the government partners to being incentivized to work with us to deliver more faster.

[David Lockwood, CEO at Babcock International Group]

And bizarrely not bizarrely, as you can imagine, if you deliver faster, generally, it's also ends up being cheaper. So yeah, the big shift is from a cost analytic to an output analytic.

[David Mellors, CFO at Babcock International Group]

Yes. And on the margin, we did have a go at this actually. But if you remember at the Capital Markets Day, we said those six things are quite interlinked. So they're not actually separable when you look at it. And you think, well, is growth at a higher margin just growth?

[David Mellors, CFO at Babcock International Group]

Or is it better productivity as well? So actually, you can't split. But I think the simple answer is it's probably broadly spread across all of them. And if you look at the number of actions we've got, it's probably broadly spread. It might be slightly different in different sectors.

[David Mellors, CFO at Babcock International Group]

So for example, aviation, I think, will be more driven by the move to being a defense business. And obviously, that's going quite well in France, you've seen that. But across the group, it's probably evenly spread.

[David Perry, Analyst at J.P. Morgan]

It's David Perry at JPMorgan. I've got three, please. First one probably for you, David L. Can you just talk a little bit about the nuclear deterrent in the SDR? I'm intrigued that it was the second bullet point in the press release.

[David Perry, Analyst at J.P. Morgan]

And I'm a bit embarrassed to say I don't really understand what they were talking about. I'm a bit about renew Mhmm. And a sovereign nuclear deterrent slash warhead. I'm just intrigued what renew means. I didn't know these things wore out.

[David Perry, Analyst at J.P. Morgan]

And they do about 15,000,000,000 pounds. I don't know what that includes and what is the accessible pot for Babcock is the first So

[David Lockwood, CEO at Babcock International Group]

from a submarine point of view, if I don't I'll talk about it as I think about it, not as late as the press release. So there are two constituent elements of the deterrent. There are the submarines and the weapon system. On the submarines, they said on that firstly, they said Dreadnought wouldn't get life exed, which is actually quite important. So I should be not of this world when these decisions get made.

[David Lockwood, CEO at Babcock International Group]

But you've got Dreadnought, then you've got SS and R, then you've Dreadnought replacement. That's kind of laying out the time line. So that's quite important because, obviously, we're LifeX V boats at the moment. That doesn't reduce our workload. It just means that we'll do proper deep maintenance rather than LIFX, which is different.

[David Lockwood, CEO at Babcock International Group]

The on the deterrent, there is a program at Old Marston to effectively develop a new warhead including material, and that's what that GBP 15,000,000,000 is. And a sizable chunk of that is accessible to us.

[David Perry, Analyst at J.P. Morgan]

Okay. And has it always been? Or is this a new opportunity?

[David Lockwood, CEO at Babcock International Group]

So I would say that there is a growing chunk that's excess. But if you look at the history of Oldhammerston going or AWE going back a few years, for a while, was a GOCO, government owned, contractor operated, if you're not British, run by Serco and Lockheed Martin. That was then taken in house, so it wasn't renewed. And then they ran it largely in house. Now they're kind of going back to a more traditional government owned but with significant subcontracts.

[David Lockwood, CEO at Babcock International Group]

So that so they're moving to a new model. So I would say it's an evolving opportunity.

[David Perry, Analyst at J.P. Morgan]

I was going to ask my next question is to David M, but I'm going be greeting, just keep the mic. And just follow-up on Sach's Can

[David Lockwood, CEO at Babcock International Group]

I just say how much that doesn't surprise me?

[David Perry, Analyst at J.P. Morgan]

Well, Sach asked the question really politely, but I'll just ask it more bluntly. If I read the first 10 pages of your release and I listened to your comments, I can't reconcile it to mid single digit organic growth. It just seems like it should be a lot higher. What is it we're missing? Or do you think you're just being very prudent?

[David Lockwood, CEO at Babcock International Group]

I don't think we're being very prudent because we have got a tail off in MIP to compensate, first of all, because we're not doing the if you don't count this kind of thing, it's in aggregate. So we've got a tail off in MIP, number one. Number two, if you actually just do it from a budgets down point of view, within the time window, budgets aren't growing that much for spend. Governments don't just spend on industry, they spend on the armed forces, they spend on pensions, they spend on all sorts of things. So budgets aren't growing that much in the time period of the medium term guidance.

[David Lockwood, CEO at Babcock International Group]

And so I think it's well centered. I think the could it be better? Of course, it could be better. I certainly hope it's not worse. So it but I think it is what we can see today that makes sense.

[David Lockwood, CEO at Babcock International Group]

We don't to pull rabbits to make it happen. If we pull a rabbit, we'll beat it. I think what I was trying to lay out is I think sort of beyond that three or four if governments get around the world get near their targets, then there is real opportunity to go significantly beyond outside that time window.

[David Perry, Analyst at J.P. Morgan]

Okay. Very clear. And then maybe the next two for David. David, you said in your speech 8% was seen as a waypoint. What about 9%?

[David Perry, Analyst at J.P. Morgan]

I mean is there anything about the government contracts that sort of give you a natural ceiling like the single source regs or anything? Or would nine also be a waypoint? And then the second and last one is you had a slide on capital allocation, but if I can just probe a bit more. Mean you should, based on the new guidance, generate well over GBP 200,000,000 of free cash flow every year now. So just to split in particular, I'm intrigued between dividends and share buybacks unless you do something else, if you could just talk to that.

[David Mellors, CFO at Babcock International Group]

Right. Okay. Fine. So 9%, I think it's a little early to say whether that's a waypoint or not. I think certain businesses, so Cavendish, for example, are already past it.

[David Mellors, CFO at Babcock International Group]

I think certain others, particularly ones with regulated pricing, as you suggest, may have a ceiling. So I think for us at the moment, it's definitely a good target. We did say 9% plus, but I think it's a little early to say with the current business mix whether it's just a waypoint that we would then go beyond. So that's that one. I've forgotten your

[David Lockwood, CEO at Babcock International Group]

second I'll answer the second one. So we've seen dividend as a board as a long term commitment that we won't step back from. At the moment, given where we are and all of the potential capital allocation opportunities, including working with governments plural, Buyback is a point in time decision. We're not saying that buybacks will happen every year. We're saying this is a buyback because it's this year's decision.

[David Lockwood, CEO at Babcock International Group]

If we see a big organic or inorganic growth opportunity that consumes capital, there might not be a buyback in a year. So one is a long term commitment, the other is an in year decision.

[George Mcwhirter, VP - Equity Research at Berenberg]

George McGuire from Berenberg. Two questions, please. Firstly, on the nuclear dismantling and refueling opportunity. I think you won a contract on that recently for about GBP 100,000,000. And I think it was also in the SDR.

[George Mcwhirter, VP - Equity Research at Berenberg]

Can you just comment on how you expect the revenue from that to trend in your midterm guidance, please?

[David Mellors, CFO at Babcock International Group]

Yes. So that contract so there's the contract and then there's the overall program. We do expect it to be a growth engine, and therefore, it is part of medium term. It will obviously go beyond the medium term window. That contract will spread over a number of years.

[David Mellors, CFO at Babcock International Group]

So in the scheme of things, will be relatively small, but obviously, it's a new contract stream, so it's growth. But we are hoping, and we can't predict the phasing exactly, that this will be the start of a much bigger program.

[George Mcwhirter, VP - Equity Research at Berenberg]

Thank you. And the second one was just on the JVs that you've talked about. So we've got a few different companies. Which ones of these do you think will be most relevant for you in the midterm guidance,

[David Lockwood, CEO at Babcock International Group]

please? Gosh. I think that's really difficult to answer, and I wish you hadn't asked. I think that's why it's good to have multiple choices. So if I look at PGZ in Poland, it could just be a bit more frigate support, which is currently GBP 100,000,000 order that runs over a number of years or it could be much bigger.

[David Lockwood, CEO at Babcock International Group]

If I look at the deal we did with Safran last week, If we win two or three of the orders we targeted, that could be material or we might not win. Dissault Saab, so I think I would look at it slightly differently, which is we take them all very, very seriously. We don't need to land them all big to hit medium term guidance. Going back to David's point, if they all landed big, would be more than we're planning.

[James Beard, Director - Support Services Research at Deutsche Numis]

James Beard from Deutsche Bank. Two questions, please. Firstly, you mentioned you walked away from two M and A opportunities during the year. Could you give us a little bit more color about why you walked away from those opportunities? And secondly, on AUKUS, there's been some recent press speculating that the new U.

[James Beard, Director - Support Services Research at Deutsche Numis]

S. Administration might be slightly more doubtful about that program going forward. Can you just give any sort of additional color from your side on that?

[David Lockwood, CEO at Babcock International Group]

Yes. Okay. I'll do so the first one, because the business plan so I think in both cases, the upside that we could see no, actually, mean, that's not true. So basically, when we diligence the business plan, it didn't stack up. In one case, our view was the CapEx requirement was materially different to the one in their plan, enough to make the plan not valid.

[David Lockwood, CEO at Babcock International Group]

In the other case, there were business winning assumptions that we didn't believe were valid and in fact proved not to be valid. So those are the two reasons. In terms of AUKUS, I guess any new administration reviews all its big programs, particularly its international one, The UK reviewed GCAP within the SDR. You could argue it reviewed AUKUS within the SDR since the SDR restated its commitment. It must have reviewed it.

[David Lockwood, CEO at Babcock International Group]

So I don't think it's unusual for an administration to review a program seriously. I think it's a natural thing to do. Nothing we're hearing from our U. S. Partners, I would describe as worrying at the moment, but they've obviously only just started the review.

[Sash Tusa, Partner, Aerospace & Defence Analyst at Agency Partners LLP]

Thank you. It's Ash Tusa again. On the Single Source Regulations Office, SDR has some quite interesting comments about in two separate places about how the government intends to change that and how that SSRO appears even to them to be a burden on industry rather than a benefit to government. What would you like to see in terms of changes? And do you think we will ever see any material impact from that?

[David Lockwood, CEO at Babcock International Group]

So that could the answer to that could take up the rest of this. So I'll try and be It's a very good question. It's a really important question. It goes back to what I said about the last two decades. The last two decades has been about cost.

[David Lockwood, CEO at Babcock International Group]

SSRO is about cost, inspecting cost and then auditing cost. It's all about cost. And if you if that's not your primary concern, it's a key concern, but it's not your dominant concern going forward. If you want to motivate industry to be innovative, if you want to motivate industry to take on more risk, deploy more capital, the way the rules are written don't make that easy. So when government talks about collaboration, I think what it's trying to talk about is changing the capital risk innovation delivery, change that whole dynamic to motivate industry to step up.

[David Lockwood, CEO at Babcock International Group]

And the current regs aren't designed to do that. They're designed to control cost. So I think it will be a big part of the National Armaments Director's job to work out what how to measure those things. And the government has indicated they want to do it collaboratively with industry to work out what motivates industry to do those things. So I think it's actually quite a big opportunity where government gets more, but we can take on more of the things we're good at, so we get more.

[Sash Tusa, Partner, Aerospace & Defence Analyst at Agency Partners LLP]

Thank you. And then a couple of questions on aviation. Again, STR states fairly bluntly that the Hawks need to be replaced as soon as possible. Yes. It then says The UK needs new fast jets.

[Sash Tusa, Partner, Aerospace & Defence Analyst at Agency Partners LLP]

It uses the term fast jets, but you seem to be proving in France that you can train pilots to go straight into a combat capable jet using turboprops. Can you persuade The UK or the RAF of the efficacy of the Mentor process as opposed to buying a Hawk Group placement?

[David Lockwood, CEO at Babcock International Group]

Okay. So I read fast jet says they need to replace F-thirty five, not they need a fast jet. They don't the Hawk is not a fast jet, it's a slow jet. What's a medium speed jet? It's a subsonic jet. It's a subsonic jet.

[Sash Tusa, Partner, Aerospace & Defence Analyst at Agency Partners LLP]

My body, it still says jets and

[David Lockwood, CEO at Babcock International Group]

I think the evolution of Ascent from its current training environment into a new one is one potential opportunity for collaboration. Not saying it will happen, but clearly, it runs for another few years and could be adjusted to deal with a number of these questions.

[Sash Tusa, Partner, Aerospace & Defence Analyst at Agency Partners LLP]

And then just final aviation question. You seem to be dipping your toe in the water of some sort of red air capability in France, which is something that a couple of years ago, you said you didn't want to get into. Now that was specifically related to ASDOT, which had extremely demanding requirements and similarly very high costs. What's changing now? And what do see as being the next opportunity?

[David Lockwood, CEO at Babcock International Group]

Now what we said was we wouldn't do fast jet Red Air, and we're not doing fast jet in France. We're using we're doing L39, we're doing the slow the subsonic jet part in our bid. We're working with a company called Top Aces on fast jet Red Air. We wouldn't do fast jet Red

Participants

Executives

• David Lockwood, CEO
• David Mellors, CFO

Analysts

• Sash Tusa, Partner, Aerospace & Defence Analyst at Agency Partners LLP
• Christopher Bamberry, Research Analyst at Peel Hunt
• David Perry, Analyst at J.P. Morgan
• George Mcwhirter, VP - Equity Research at Berenberg
• James Beard, Director - Support Services Research at Deutsche Numis