Babcock International Group H2 2026 Earnings Report

Babcock International Group EPS Results

• Actual EPS: GBX 42.10
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Babcock International Group Revenue Results

• Actual Revenue: $5.18 billion
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Babcock International Group Announcement Details

• Quarter: H2 2026
• Date: 6/22/2026
• Time: Before Market Opens
• Conference Call Date: Monday, June 22, 2026
• 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 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Babcock reported strong FY 2026 underlying performance, with organic revenue growth of 8%, operating margin up 70 bps to 8.2%, operating profit up 19% to £433 million, and EPS up 20%.
• Negative Sentiment: The company took a £140 million charge on the Type 31 frigate program after rework and productivity issues, although management said the cash impact is spread over the remaining life of the contract and absorbed within guidance.
• Positive Sentiment: Cash generation remained strong, with 84% cash conversion and free cash flow of £262 million, supporting a strong balance sheet and continued shareholder returns, including another £200 million buyback in FY 2027 and a 15% dividend increase.
• Positive Sentiment: All major sectors improved, led by Nuclear and supported by Marine and Aviation, while Land saw mixed results due to weaker civil activities; management said Nuclear already exceeds its 9% margin target and the group remains on track toward 9%+ medium-term margins.
• Neutral Sentiment: New CEO Harry Holt outlined a strategy centered on defense, civil nuclear, hybrid warfare, warfighting readiness, and national strategic resilience, while emphasizing capital discipline and a smooth leadership transition.

Presentation

[David Lockwood, CEO at Babcock]

Good morning, ladies and gentlemen, and welcome to the Babcock full-year 2026 results. I'm David Lockwood, the CEO. We'll do the normal format. I'll do a brief intro, David will go through the numbers, then we have a special star turn from Harry, who is going to replace me shortly. Then we'll do Q&A. Please pay attention to me and David while you wait with bated breath for Harry, because I'm sure that's what you really care about. When we were rehearsing, we went through, what are we trying to achieve with these results? Really it's to make people look through two things, which is the near term turbulence in the U.K. and the Type 31, and see the strong results of the company as it moves into an even better position. If you look at the underlying results, they're really good.

[David Lockwood, CEO at Babcock]

I'll come onto a slide with those later. We've reconfirmed the medium-term guidance. That includes the cash guidance, whilst absorbing the Type 31 charge. We have really strong differentiated defense and nuclear capabilities, when I come back after David's done the numbers and talk about the external drivers to our growth, I think you'll see a really tight fit between what we're capable of delivering and what the market wants. That's come through with real strategic momentum. The opportunity set across everything we do is growing quite significantly. The most important, particularly for a business-to-government organization, is to ensure that you retain strong, disciplined capital allocation to make sure that we never lose sight of our core responsibility to shareholders.

[David Lockwood, CEO at Babcock]

I thought we'd take Type 31 up front so that we can then talk about the balance of the business, and David and I don't keep saying, after Type 31, all the way through. From a contract point of view, in the last 12 months, rework and productivity did not proceed as planned, particularly on outfit, which really only kicked off in anger in the financial year we're reporting. Particularly on rework, although the number of incidents, the top end of the expected range, they weren't sort of out of range. The cost of rectification was higher than we thought. We've got a revised cost estimate that involves taking GBP 140 million charge.

[David Lockwood, CEO at Babcock]

A significant portion of that, we haven't split it, but is an increase in contingency. We have a very clear set of base operating assumptions to get the program back on track. Clearly, we have to work through curves of improved productivity and reduced rework. We have a contingency to cover that going slower than the base plan says. As I said earlier, the cash impact is over the remaining life of the program, and is absorbed within the medium-term guidance. The program itself, however, is making progress. Ship 1 is now outfitting, as I've said. Ship 2 is floated off and is in the final top structural phase. Ship 3, keel laying has taken place and block assembly is underway. Ship 4 has commenced. The program itself continues to progress to deliver the capability the Navy needs.

[David Lockwood, CEO at Babcock]

When you look through that, this is the strong underlying performance I started with, which is organic revenue growth of 8% above our mid-single digit. Margin improvement stepping towards our 9%+. Cash conversion continuing above 80%.

[David Lockwood, CEO at Babcock]

A strong balance sheet. Given the number of big programs we are looking at and some of the discussions with governments, plural, it's really important to maintain a strong balance sheet. Customers need to have very strong confidence that we will be a reliable supplier for multi-year critical programs for the defense of their nations. The fact that we can absorb the Type 31 charge inside our guidance is one of the things that gives people confidence that we are that strong company. To take you through the numbers that underpin that strong company, my long-term partner in crime, Mr. Mellors.

[David Mellors, CFO at Babcock]

Thank you, David. Good morning, everyone. This is David's last set of results, I thought I'd take a minute to reflect on his Babcock career, I'll do it from a shareholder perspective, because this is an investor meeting and I'm a shareholder, he's a shareholder, we'll do it from a shareholder perspective. David joined in FY 2021, and when we did these results five years ago at the end of 2021, the only topic of debate was whether we could survive without a rescue rights issue. The share price touched GBP 1.99, and the market cap was about GBP 1 billion, we were quite low down in the FTSE 250. As the track record shows, There we go.

[David Mellors, CFO at Babcock]

As the track record shows, not only did he not take money from shareholders in a rescue in his time here, he's returned or is returning GBP 500 million to shareholders, and that's on top of a 400% increase in the market capitalization of the group. Huge value creation in the time. From a strength point of view, we were in quite a weak position five years ago. The balance sheet now is much stronger. Again, not just surviving, he's built a platform that's really solid for the future success of the group. Whilst doing all of that, he grew the group over 50% organically, increased the level of profitability and all at a high cash conversion. That was all done in an ever-changing external environment. It started off in lockdown with lockdowns and semi-lockdowns in different countries.

[David Mellors, CFO at Babcock]

We've had wars, we've had in the U.K. alone, four prime ministers, at the moment, and four secretaries of state and six defense ministers, all of whom David's had to build relationships with. From the outside, it's been an extremely impressive performance. Having had the privilege of being on the inside and seeing all the things every day he's had to deal with, particularly in the early years, I think he's made it look a lot easier than it really was. From my point of view, it's been a really exceptional innings. As a shareholder and on behalf of my fellow shareholders, There's quite a lot of them here, I'd like to congratulate you on and thank you for what you've done for the group, I think you deserve a round of applause. Right. That's enough of that. Let's do the numbers. Okay.

[David Mellors, CFO at Babcock]

FY 2026 was a very positive year from a performance point of view, as these highlights show, meeting or beating expectations on all metrics. The majority of the underlying financials I'll present here exclude the Type 31 charge, and that's not because I'm ignoring it. David touched on it earlier. We spent time on it last month. Happy to spend more time on it, but I'd like to give the right amount of time on the rest of the group performance. Stepping through these quickly and before going into detail, organic revenue growth was 8%. Operating profit margin improved again by 70 basis points to 8.2%. These first two delivered operating profit up 19% to GBP 433 million. All the above led to earnings per share up 20%. Cash conversion was 84%, delivering free cash flow of GBP 262 million.

[David Mellors, CFO at Babcock]

On shareholder returns, we completed the GBP 200 million buyback just after the year-end, and we've announced a further GBP 200 million to be executed in FY 2027. The dividend is up 15%. Let's break down the revenue growth first. This summarizes the organic growth by sector. Three of the four sectors grew in the period led by Nuclear, as you can see, but with good performances in Marine and Aviation. The Land sector revenues were lower in the period as a result of the non-defense businesses. I'll come back to that. As the graph shows, all of this led to a 10% organic growth before the Type 31 revenue reversal and 8% after. I'll come back to the sectors in a moment. Next is a summary of profit.

[David Mellors, CFO at Babcock]

In absolute profit terms, all the sectors contributed to the profit improvement, resulting in the group delivering GBP 433 million for the year, up 19%. Furthermore, as you can see from the slide, all sectors improved their profit margins in the year, helping the group to 8.2% overall. As I've said before, each sector can get to the 9% target in the medium-term and are moving in the right direction. Nuclear has made it already. Whilst we're on margin, as you know, we set ourselves two targets a year ago. The first, to get to 8% margin for FY 2026, and the second, we raised our medium-term margin guidance to 9%+. As the graph on this slide shows, we hit the 8% in FY 2026, and as the trend line shows, we make progress every year toward the medium-term 9%+.

[David Mellors, CFO at Babcock]

The drivers of the margin improvement are on the right-hand side here. Basically, they boil down to three things. Growth of quality business, and that means price and terms as well as other things, the productivity of our people, and the efficiency of our processes and overheads. None of these drivers are new. They're the ones that have delivered the improvements to-date. There's still much more to do across the group. We're confident in the 9%+. We have the usual sector slides now with plenty of content for reference, but I'll just pick out some key points I've set out the Marine numbers before and after the Type 31 charge for clarity, but I'll concentrate on the numbers excluding the charges I said earlier.

[David Mellors, CFO at Babcock]

It was a good performance from Marine, with revenue growing 8% organically, profit up 14%, and margins moving upwards by 40 basis points. As we said at H1, the revenue and profit performance improvement was largely driven by the LGE business and the Skynet contract in FY 2026. On LGE, you may remember in FY 2025, we won over GBP 400 million of orders, which was a record period, and we flagged at the time that this was a short-term surge in new contracts following the new ship build market. LGE delivered GBP 358 million of revenue in FY 2026, and that's the biggest reason for the revenue and profit variances in Marine year-on-year. On top of that, though, the Skynet contract, which mobilized in FY 2025, had additional services contracted in the year.

[David Mellors, CFO at Babcock]

As a modeling point, Type 31 revenue before the reversal was GBP 190 million in the year, which was booked at 0%. Nuclear. This has been another very good year in Nuclear in both the civil and naval nuclear businesses, with good progress on all measures. Just a note on order intake and backlog first. The main reason why the backlog looks low is that we traded the final full-year of the FMSP contract revenue in the year, but only booked the six-month extension order. So apart from FMSP, Nuclear had a book-to-bill of comfortably above one in the year. And once we sign the new contract, the multi-year contract that follows FMSP, the backlog will be substantially more than it is now. On revenue, both Cavendish and submarine support activity grew well, more than offsetting the expected reduction in infrastructure revenues.

[David Mellors, CFO at Babcock]

Just expanding on all these points a little. Cavendish grew 18%, largely in clean energy with more work at Hinkley Point, but also growth in AWE. Submarine support work grew 26% with activity increases at both Clyde and Devonport, benefiting from some of the infrastructure upgrades as well as productivity improvements in both locations. Infrastructure or MIP revenues are reduced as we expected following the opening of 9 Dock last year and then 15 Dock. And all of the above enabled the profit increase of 23% and the margins to reach 9.5%. Moving to Land. Revenue decreased 3% organically in the year due to the declines in rail and the South African vehicle business in our civil revenues. Defense revenues grew 6% in the year after a slow H1 as the new DSG contract mobilized.

[David Mellors, CFO at Babcock]

Additionally, we received some small but important GLV orders, some of which were delivered in Q4. Margins in Land improved well in the year, partly due to the change in revenue mix as civil revenues reduced and defense increased. Also profits had a small net benefit of around GBP 4 million from some contract completions. Aviation had another good year on all metrics. The 34% revenue growth was due mainly to three things. Firstly, the growth in France from the mobilization of Mentor 2, as well as increasing military helicopter support activity. Second, scope growth and additional services in the U.K. defense contracts. Third, the mobilization of the Canadian BC HEMS contract. The profit and margin in Aviation are benefiting from the absolute growth in revenues and the increasing proportion of defense revenues. 55% of Aviation revenues are from defense contracts. Moving to the cash flow.

[David Mellors, CFO at Babcock]

This is a detailed slide for reference. I'll only pick out a couple of the key numbers. The most important number is the free cash flow number, GBP 262 million at the bottom of the slide, substantially up on prior year. Two things really drove this. Firstly, a good operating cash conversion of 84%, as you can see in the middle of the table. Secondly, substantially reduced pension deficit payments in the bottom half of the table. This is a result of all the work in prior years on pension deficits. Lastly, I've put some full year guidance on this slide here for FY 2027. Capital allocation. This is the same capital allocation policy that we published some years ago, and the priority order hasn't changed. We always repeat it to assure you that it hasn't changed and that we continue to apply it.

[David Mellors, CFO at Babcock]

Priority number one remains organic investment in the business. On top of the traditional CapEx for productivity improvements and the like, we're working on a number of relatively significant investment opportunities to enhance growth. An example of this would be in Rosyth with the upgrade of the missile tubes facility to allow higher production volumes. We normally expect a strong customer demand signal for such investments, so which ones we end up backing and when will remain fluid until we know the amount of capital we might need for such investments in the next 12-18 months is a key part of our assessment of whether we have surplus capital or not at any one time.

[David Mellors, CFO at Babcock]

The status of priority two here in the policy, the balance sheet strength is good, BBB+, and as David said, this is essential for customer and supplier confidence, as well as investors and other stakeholders. We'll retain the investment grade. Dividend is number three. Then on the three capital options at the bottom, on the left, we've looked at a number of potential bolt-ons, but nothing has yet met our requirements. No new news on pensions this year in the middle. On shareholder returns, you know we completed the GBP 200 million buyback just after the year end, and we announced a further GBP 200 million to be done in FY 2027. The buyback also provides an investment return floor for the higher priority options to beat.

[David Mellors, CFO at Babcock]

Just summarizing before I hand back to David, it's been a really strong performance in FY 2026, meeting or beating on all metrics, except obviously for Type 31. We're confident in the FY 2027 expectations, given the revenue cover at the 1st of April of 70%. We're reaffirming our medium-term guidance of mid-single digit organic revenue growth, 9%+ margins and 80%+ operating cash conversion. We'll execute another GBP 200 million of buyback for FY 2027. Now for the final time, I'll hand back to David.

[David Lockwood, CEO at Babcock]

For the final time. At the risk of making this a bit yucky, over a beer, David and I, we've worked together for 10 years. We have done over 1,000 investor meetings. Over 20 investor conferences. Over 200 board meetings. He was very nice about me, but it has been a team sport. Just to finish the yuckiness about Babcock, not Babcock's yucky, but I'm being a bit yucky. I would say that you cannot deal with what we dealt with without a chair who knows how to be supportive at the right time and challenging at the right time. Ruth completes the team. That's, that's been a fortunate thing in dealing what we dealt with, and now for Harry in taking this platform to somewhere really exciting. Enough of that niceness.

[David Lockwood, CEO at Babcock]

I have to say that RAM's already sorted, so there was nothing in there, just to be clear. Right. If you start outside in, these are very much the things we said a year ago, and they've only become more exaggerated in the last 12 months, leading to, I guess, two big things that drive opportunity. One is the scale of budgets, and however they increase and when they increase, they are increasing. We're not in the U.K. talking about cuts. We're talking about the size of the increase and whether it funds everything people want to do. Not that the number isn't getting bigger, and no one is walking away from their longer-term aspirations.

[David Lockwood, CEO at Babcock]

The second is this move to hybrid warfare that Harry will touch on, when I think our core strength is that we intimately understand the existing portfolio of equipment, and therefore, are in a tremendous position to look at how that equipment is integrated into the new equipment that comes along to create the hybrid warfare. In civil energy, we've seen tremendous progress, actually. Not just policy announcements, but genuine progress. Orders being placed for small modular reactors, sites being identified, planning regulations being changed to speed up the deployment. The government gets a lot of criticism for what it's not doing, but actually, the way it is enabling the resurgence of nuclear energy in the U.K., actually, I think, is a real success story that's probably undersold.

[David Lockwood, CEO at Babcock]

We see that both in large reactors like Sizewell C and in SMRs, and indeed in AMRs, in things like the announcement we made about working with X-energy and Centrica in Hartlepool. For the U.K., our core revenue stream in the U.K. is around conventional equipment, the support and supply of, mostly support. As you can see, on the Babcock current role, we support all the Army's land vehicles, all the nuclear submarines, 60% of surface ships. We do Skynet. We are a major element of the U.K.'s war-fighting capacity today, and we are supplying new kit and bidding to supply new kit on things like the General Logistics Vehicle and the Patria 6x6. We have a good training business that sits at high-end training, sits behind that.

[David Lockwood, CEO at Babcock]

As we look at getting ready for warfighting in the kind of conventional sense, the core skills could not be more important, and you get volume increase through increased utilization and by the need to adapt for new warfighting. Underneath that, the big growth opportunities are the move to hybrid warfare with autonomous, uncrewed, and so on. Here, I think Babcock does have a very unusual position. Because we are not a core technology OEM, we are a very benign partner to tech SMEs. We can turn defense tech into defense capability by both productionizing and indeed offering build support and by integrating it into the overall system. You will have seen through the year, if you follow our press releases, a number of announcements, most recently last week in France with a French drone SME, when that is the role we play.

[David Lockwood, CEO at Babcock]

These tech SMEs do not want to build lots of factories. They don't want to manage the defense customer. They want an interface, they focus on what they can do well, which is high-speed tech generation. We focus on what we do well, which is turning that high-speed tech into high-speed capability. I think because we're not a tech builder of our own, we're not predatory to these companies, we are a very benign partner. That leads to what I think is the Babcock advantage, which is we deliver mission-critical defense and strategic resilience by that lifetime capability, the tech conversion, and we can do that because we are deeply embedded with the customers. If you have that degree of support to your customers, you know everything about not just the equipment, but how they want to use the equipment today and tomorrow.

[David Lockwood, CEO at Babcock]

We have flexible partnering models, whether it is with big companies like HII or smaller SMEs, like we do with Supacat, to deliver vehicles. They are a tech SME. We do volume, we do integration, we work with the Army on capability, that it's a perfect model for us. I think Babcock's advantage is very different from most of our peers. That's led to a building of momentum. Four examples here. Indonesia, you've heard about the GBP 4 billion framework. In fact, Harry and I are meeting the Indonesians this afternoon, to move this through to the individual contracts. This is a classic example of taking some of our core capability, which is the Type 31, and then combining it with offshore patrol vessels, inshore patrol vessels, fishing vessels, long-range surveillance to create President Prabowo's vision of maritime and protein security for an archipelago nation.

[David Lockwood, CEO at Babcock]

The U.K. government export finance is secure. This is about delivery of a complex program that delivers a national imperative for a close ally of the U.K. Submarine build, we're now qualified on the Virginia-class submarine, as well as obviously, qualified on the Columbia. Initial engineering contract has been placed, we're moving forward, there's a detailed slide on this. The HII relationship, really important. Light utility vehicle, we call it the GLV, General Logistics Vehicle. We've won contracts in Albania and the U.K. As David said, we've started to deliver. We are Toyota's global partner, and there are a range of other opportunities. In the U.K., obviously Land Rover replacement, but more broadly.

[David Lockwood, CEO at Babcock]

One army officer in one country said to me, having done a trial, I now know why the bad guys have used this for so long. I think it is a fantastic platform. Then in nuclear, we have the SMR rollout. We've won the owner's engineer contract in a JV model. Whoever buys SMRs is going to need an owner's engineer, a government-side person. No one's ever done this before, so everyone needs engineering support on the buying side. Having won the first contract for supporting the Rolls-Royce reactor, clearly we're in a strong position to support any government who wants to buy the equivalent reactor. That adds up to a 25-year growth story.

[David Lockwood, CEO at Babcock]

Not just short-term perturbations or even medium-term guidance, but in almost everything we do, whether it's defense, nuclear, or defense programs, we can see a range of opportunities that means, as a Board, the company can plan obviously for a budget year, a planning period, but also have a long-term vision. This is before you layer on the world as it evolves. Just to go a bit deeper on a couple of those. The HII collaboration is, I think, a really good example of the direction of travel of the company. From nothing except just general conversations two or three years ago, off the back of AUKUS, we now have the H&B Defence joint venture in Australia, which has its first contracts, small, but it's up and running. Is the bridgehead almost certainly into infrastructure at Henderson as the Australians build out.

[David Lockwood, CEO at Babcock]

We have what we call ARMOR Force, the hybrid navies, where HII already have an uncrewed platform, which is big enough to keep up with a frigate the size of a Type 31, but small enough to operate as a slave to the command ship. We're collaborating on that. They have a UUV launch and recovery system, which we are taking into Europe. We are working together on civil nuclear, particularly decommissioning, and as I've already mentioned, we have a Virginia-class submarine build. Yeah, we're broadly similar size in our markets. We have a very similar culture, and some very significant opportunities in a relatively short period of time for our industry. For Virginia-class submarine build in particular, the lack of capacity in the U.S. system is well known. The President's, and indeed previous Presidents', desire to get the build rate up is well known.

[David Lockwood, CEO at Babcock]

Rosyth is, I think, the only shipyard, nuclear-qualified shipyard, outside the U.S. which is approved to build for either Virginia or Columbia. It has fantastic potential to help fill that capacity gap in the U.S. The aim is to get up to block build. We started with a fairing, then we're getting the aim is to get up to block build. A really exciting opportunity where everyone, the customer, HII as the prime, we as the partner, everyone has the same objective. Obviously U.K. nuclear is entering a multi-decade growth cycle. I touched on it earlier. Cavendish Nuclear is already scaling in that. It is the U.K.'s premier nationally owned nuclear contracting business.

[David Lockwood, CEO at Babcock]

Outside any production that we might do of AMRs for people or any other partnerships we might have on the production side, you only have to look at that left-hand demand for nuclear-powered energy that sits in the government's clean energy plan to know that there is tremendous market potential. Even if that curve can't be achieved and it's slightly flatter, the potential for Babcock in clean energy is just enormous. That's not a bad place to hand over to Harry, because obviously he's just finished in our nuclear business. He's now operating as Deputy, soon to take over. A lot of what's happened in nuclear on his watch has been that quiet transformation of Cavendish. With that, the star turn.

[Harry Holt, Deputy CEO at Babcock]

Thank you, David. Hi, everybody. I've met many of you before at the Capital Markets Day event that we held down in Devonport actually a couple of years ago, then more recently at the nuclear teach-in that we did in May of last year. For those of you that I haven't met, I'm Harry Holt. I'm the Deputy CEO, and I'm the incoming Chief Executive Officer. I've had a career of two halves. I spent over 20 years as an officer in the British Army, spending time leading men and women on operations around the world, as well as filling some of the key roles in the Ministry of Defence. I understand our key customer very well, as well as understanding our ultimate end-user community.

[Harry Holt, Deputy CEO at Babcock]

Since then, I've had over 15 years in industry, the majority of that time spent with Rolls-Royce, on their executive leadership team in a number of senior P&L and functional leadership roles. Notably running Rolls-Royce's nuclear division, where I set up and initiated Rolls-Royce's SMR business all those years ago, then latterly as their Chief People Officer, driving a groupwide transformation. I then spent a year in an electric aviation startup, called Vertical Aerospace, doing eVTOL aircraft, before joining Babcock some three years ago, where, as David said, I've been running the nuclear sector. It's a huge privilege to be taking over from David.

[Harry Holt, Deputy CEO at Babcock]

I am fortunate to know the business pretty well. I'm also fortunate to have had a decent amount of time in transition, a period of time where I've been able to orientate around parts of the business that I know less well, particularly overseas. A period of time where David and I have been able to do work together to signal continuity and stability internally within the organization. A period of time where I've been able to get out, talk to customers, talk to stakeholders, and talk to our people to assess where we might further develop opportunities for the future.

[Harry Holt, Deputy CEO at Babcock]

I think it's testament to how well the transition has gone that I've actually been able to put out a series of internal organization announcements under my signature, but on David's watch, which has ensured that we maintain momentum, we don't have a lull as we go through this handover, and the organization see David and I in strong alignment with one another, and they get that core theme of continuity and stability. A lot of people ask me how do I feel about taking on the reins at Babcock. Well, I feel both purposeful and excited. Purposeful because what we do really matters.

[Harry Holt, Deputy CEO at Babcock]

We are living through a pivotal moment in history where all of the major vectors of global change, whether that's climate change, societal change, technological change, or geopolitical change, are all currently fueling and feeding off one another to create one of the most uncertain, unstable, and dangerous periods in recent history. That's what gives our purpose such relevance. Those underlying trends that I've just described, I think, are unlikely to diminish, irrespective of whether the various flashpoints in the world flare up or cool down. It's those underlying trends that I think make what we do so purposeful. Excited because, of course, it's those same underlying trends that are driving growth in our core markets of defense and civil nuclear. Purposeful and excited.

[Harry Holt, Deputy CEO at Babcock]

This next chapter for Babcock under my leadership is going to be built on the strong foundations that I've inherited and that I've helped to build. Those strong foundations are made up of a core strategy that is still valid, made up of strong alignment between the board and the management team, and made up of a business that has strong capabilities and attractive positions to address a growing and a resilient market. That new chapter will have some enduring themes. Obviously, growth and performance to continue the trajectory that we've been on over the last few years. That growth will require strategic clarity and capital discipline. It'll require us to stay very close to our customers, understand deeply their requirements, and then only invest in the areas where we have strong competitive advantage and we can generate attractive returns.

[Harry Holt, Deputy CEO at Babcock]

I expect focus on the new nature of warfare. This is more sophisticated and complex than simply drones. This new nature of warfare is about increasingly autonomous, uncrewed combatant platforms fighting alongside their crewed combatant counterparts in all of the fighting domains on land, at sea, and in the air. It's this connective tissue between the two, the communications, the cyber, the systems integration, and indeed, the training and simulation, as well as the platforms themselves, where I expect us to grow. Expect focus on warfighting readiness. Warfighting readiness is really code for sweating the availability, the readiness, the integration, and effect that we can achieve with today's suite of platforms and equipment. As David said, and as you know, that is our core business. Expect focus on national strategic resilience. The U.K., other NATO partners, and key allies are all focused on energy security.

[Harry Holt, Deputy CEO at Babcock]

They're focused on critical national infrastructure. They are focused on their industrial and supply chain capacity and resilience. National strategic resilience. The other theme of performance to maintain our focus on operational execution. We have commitments to the market. We have customers who rely on us for their products and services, and what we do is mission-critical in an ever more dangerous world. A continued focus on operational execution and an ambition to go on raising that performance bar over time. My initial priorities are indeed on operational performance. I've been really clear with the company. They need to keep their head in the game and not get distracted by all the excitement of a CEO transition.

[Harry Holt, Deputy CEO at Babcock]

Talent and team to make sure that I've got the right people in the right roles for this next chapter, and also managing the top team through this period of change. Strategic clarity to make sure that we take stock of the dynamically changing world in which we live. We assess where we've got the strongest right to win, and we identify the opportunities for high-quality, sustainable midterm growth. I will come back in November when we do our half-year with more on all of the above. As I said, my very immediate focus over the next weeks and months is to make sure that we maintain our discipline, we maintain our direction, we maintain our delivery, and we don't get distracted by David's departure.

[Harry Holt, Deputy CEO at Babcock]

That gives me enough time to continue this engagement that I've been on with customers, stakeholders, and indeed shareholders and the board, so that I can come back in a few months' time in November and lay out our strategic priorities in a disciplined way to make sure that we maximize the opportunity set and maximize value in the midterm. Thank you. Back to David.

[David Lockwood, CEO at Babcock]

Given the newsflash that's just come up, I desperately want to say that we've handled our succession rather better than some other people. I probably will resist saying that. Oh, shoot. As you, I hope, can see from what I've presented, what Harry's presented here, the Board ran a really thorough process that led to Harry's appointment in January. By the time I leave next January, we will have had a fade in, fade out transition that I think enables continuity where it makes sense and change where it makes sense. If I had been staying, there would have been changes to deal with the changing external events. Change is necessary in all companies.

[David Lockwood, CEO at Babcock]

I just want to say that I am supremely confident in the next phase with Harry at the helm, will enjoy watching it, and will actually not miss my 1,001th Investor Meeting. The summary is where we started, which is strong underlying results that underpin a range of choices for the company and the ability to invest in that exciting future Harry's just outlined differentiated capabilities, which I hope you've heard from both of us. That clear strategic momentum with a pipeline of opportunities, which means it's about choices. It's not about searching for things to do. Also, as Harry said, that ongoing capital allocation, only going for areas which deliver the appropriate returns with the appropriate risk and the appropriate opportunities to win.

[David Lockwood, CEO at Babcock]

I think, not on my watch, but I think a truly great future for a truly great company is just opening up. With that, I shall hand over for questions. I remember we do well, I was told to say anything but religion, but since it's my last one, we'll do anything.

[Sash Tusa, Analyst at Agency Partners]

Thank you. Sash Tusa from Agency Partners. I wonder if you could give us an update inasmuch as one is possible, particularly given very recent news about FMSP, just lay out the process for renewal of the contract and what happens if, for political reasons, the government is incapable of signing a new contract by the end of September, which is the current deadline.

[David Lockwood, CEO at Babcock]

I'll do a little bit, then I'll hand over to Harry because he's led a lot of the negotiation. We support nuclear submarines that have nuclear reactors in, and also retired submarines with nuclear reactors in. There is no way that is going to stop. If, for whatever reason, we couldn't get under contract, there will just be an extension to the extension. From a financial point of view, it's not a particularly big deal. The really big thing is once we get under the long-term contract, there are opportunities for both us and the government in terms of performance that can be released. It's a delay and an opportunity, not a threat, I would describe it as. Harry?

[Harry Holt, Deputy CEO at Babcock]

Yeah, I agree. What we do down in Devonport and up in Clyde is absolutely at the center of what defense does. We all know that the Continuous At-Sea Deterrent is the cornerstone of the U.K.'s deterrence and defense policy. As David said, that work is not going to stop. We're currently on a six-month extension. The majority of the actual work to get us to the gateway agreement is done. As David said, it requires, obviously, funding certainty, and it also, given the size of the deal, is going to require pan-Whitehall approval. Those two things have to happen over the next few months.

[Sash Tusa, Analyst at Agency Partners]

If I could just follow up on that, when you say that it needs funding certainty, does that mean that this is all tied up inside the Defence Industrial Plan, or is it broader? What's the nature of the funding certainty that this particular deal needs?

[David Lockwood, CEO at Babcock]

No matter what the subject matter is, the list of everything they would like to do is bigger than the budget, and the sequencing of that budget on the fringes always is an issue. Nuclear is a bit different from conventional. On the other hand, it all has to coexist in a defense budget. I think there's moving around the fringes between years and so on, and there is some discretionary scope which could be in or out. It's that, it's not the core being of the facilities, the boats, and so on.

[Sash Tusa, Analyst at Agency Partners]

Yeah. Right. Thank you.

[James Beard, Analyst at Deutsche Bank]

Thanks. Morning, James Beard at Deutsche Bank. Two questions, please. I was wondering if you could give us a little bit more color on progress with frigate export sales. We obviously had slightly negative news from Sweden, any more color around that and sort of potential decision time frames in Denmark now that they have a new government installed. Second question for David Mellors. In terms of the progression towards the 9% medium-term margin target, just wondering if you could give us some color on the expected time frame there, and also the drivers of future margin uplift. How materially do they differ from how you have delivered margin uplift historically?

[David Lockwood, CEO at Babcock]

I will answer David's question. David will say to you that the 9%+ will be delivered in the medium term.

[David Mellors, CFO at Babcock]

I would actually.

[David Lockwood, CEO at Babcock]

Yeah. Sweden was obviously a disappointment. It's not a Type 31. It's obviously a new frigate design. Actually, well, it's a frigate or a large corvette, take your pick. If you read the Swedish press release, Naval Group and the kind of ship actually comes quite a long way down. It starts with a lot of the geopolitical stuff, the government to government. We have always said that these competitions comprise three elements, and the weighting is different between the three elements. There's an industrial element, there's a navy-to-navy element, and there's a political element, and these decisions almost always get made by . We believe we had a very compelling, probably the most compelling industrial offer, but there are other forces at play in Sweden. The easiest thing is to read their press release.

[David Lockwood, CEO at Babcock]

Denmark is different because the spec is a Type 31 type spec, that's the first thing. Secondly, the origins of Type 31 are the Iver Huitfeldt, the current incumbent Danish frigate. The industrial element matters a lot more in Denmark than it does in Sweden. The weighting is different in Denmark, and the core drivers are different. It is a head of state. I mean, it is a new government. It's a head-of-state decision, ultimately. Difficult to put a timeline on it. I think if you asked DALO, their procurement agency, they would say their work is done. It's when it gets to the top of a Prime Minister's inbox, and I'm not going to guess that. David, your question.

[David Mellors, CFO at Babcock]

Right. Well, as David said, it's in the medium-term. The drivers are the same. They're the ones I laid out. We said a year ago, the medium-term. We deliberately don't time-box these things, because we're all human, it does lead you into silly things. Margin and risk go together. There will be times when we deliberately take, say, cost-plus type arrangements, which typically would be lower margin, because that's the sensible thing to do given the risk profile. The margin progression will continue. Obviously, it's slightly easier when you're down at 5% than 8.2%, it won't always be at the same rate that we've done historically. For example, I'll give you an illustration.

[David Mellors, CFO at Babcock]

When we did the Capital Markets Day in Devonport, we said that the new team at the time had reduced the number of operational processes on the site from 5,000 to 2,000, and they'd done that quite quickly. Now, there are still plenty of productivity improvements to make, but you can't keep taking big steps like that the higher up you get. The medium-term, which last year was, say, three to five years away, was about the right timeframe.

[David Lockwood, CEO at Babcock]

Told you so. Next question.

[David Farrell, Analyst at Jefferies]

Thanks. Hi, David Farrell from Jefferies. I actually think both my questions are for David Mellors, I'm afraid. Just when you look at the 30% delta for this year's guidance in terms of the top line, can you just explain what fills that 30%? I think you said you're 70% covered for the current year from a revenue perspective. I think I read a couple of weeks ago that the SSRO calculation had changed around the profit uplift on the risk side of things. Potential uplift kind of being 10%, not 2%. Can you just kind of talk to any changes in the SSRO calculation and how that might benefit-

[David Lockwood, CEO at Babcock]

Okay. I'll do the second one, actually, because I'm just feeling like I can.

[David Farrell, Analyst at Jefferies]

Please do.

[David Lockwood, CEO at Babcock]

There is currently what is known as a sprint, although it's not really a sprint, led by the Defence Joint Industrial Council, looking at a whole SSRO consultation thing, and there was one of those two years ago that led to no change. There is lots of talk, but at the moment, I can't remember who you've nominated for the sprint, but-

[David Mellors, CFO at Babcock]

Linda

[David Lockwood, CEO at Babcock]

Linda. It's a joint government. Linda's really good. There's a joint government industry, what makes sense for everyone review. I think it's foolhardy to prejudge it, because at the end of the last one, nothing changed. Sorry, do you want to give a different answer to that?

[David Mellors, CFO at Babcock]

No. I'll give you a bump. The other 30%, which is normally just slightly higher than 30%, we still have really good visibility of. We have framework agreements, as you know, we don't count orders until they're contracted. A lot of it is the contracting of expected work under frameworks, which happens regularly. There'll be work that can't stop, but is just let on a slightly shorter-term basis, a lot of that we would expect to just come through over time. Normally, we're at about 90% of the year under contract by the half year. That's another measurement point I always put in. We should have it all by kind of end of January, February as it comes through.

[David Mellors, CFO at Babcock]

There are some smaller businesses which have much less of a forward load, like the vehicles business in South Africa, but very much more marginal. For the defense businesses, we've got pretty good visibility, and it's mainly the contracting of stuff that we can see or is under frameworks anyway.

[David Farrell, Analyst at Jefferies]

Okay, thanks.

[Chris Bamberry, Analyst at Peel Hunt]

Morning, Chris Bamberry, Peel Hunt. Looking for a bit more flavor of the M&A pipeline. You had a couple of potential opportunities in NDAs. They've obviously not come through. Can you give any more flavor on what happened there and some of the current opportunities you have?

[David Lockwood, CEO at Babcock]

I mean, maybe Harry should talk about the current opportunities because they're going to happen on his watch. I think if I talk about the discipline, which I'm sure will remain. There were one in particular, which was outside the U.K. in a country we're very keen on. We got a long way through diligence and spent a decent amount of money, and then we found a very significant accounting issue that was both a valuation point, but also we were very much believe we were acquiring a strong management team, probably stronger than our own. And over time, as we got underneath the skin of the problem, that led us to conclude both that we couldn't get to the price, but also particularly in terms of the people capital, we weren't sure we were getting what we thought we were getting.

[David Lockwood, CEO at Babcock]

That's a good example of just doing proper diligence, taking time to reflect on what that diligence tells you, and then acting in the interest of shareholders. That's the kind of thing that happened. Pipeline, Harry?

[Harry Holt, Deputy CEO at Babcock]

We've got a strong pipeline, which we keep under constant review. Obviously, given what's going on in the world, the valuations in our core markets of defense and civil nuclear are quite high at the moment. As David said, it's really important that we maintain discipline. We haven't done M&A for a while, we need to make sure that when we get back into the acquisition market, it's with a business that makes sense for us, and we can integrate it properly.

[Chris Bamberry, Analyst at Peel Hunt]

Thank you.

[David Lockwood, CEO at Babcock]

I was going to say, we've got time for one more.

[Sash Tusa, Analyst at Agency Partners]

Thank you. I just wonder if you could give some color on where the major infrastructure program goes from here. Revenue's down last year. Does that now just continue to fade out, or does it stay at broadly current levels for a bit? What's the phasing of the last two docks at Devonport under that?

[David Mellors, CFO at Babcock]

Yeah. Do you want me to do numbers? You do general.

[Harry Holt, Deputy CEO at Babcock]

You go numbers, and I'll do general

[David Mellors, CFO at Babcock]

Okay. From a numbers point of view, you know we can't forecast this accurately, we'll give you a range. I would expect somewhere between GBP 400 million and GBP 450 million this year, we'll keep you updated. Similar-ish. Again, as far as the out years are concerned, we'll keep you updated as we go along.

[Harry Holt, Deputy CEO at Babcock]

Yeah. More generally at Devonport, obviously we've got the 10-dock program, we've got the 5 Basin and berth program. Outside of Devonport, the requirement for the defense nuclear estate to recapitalize is well known. We would expect recapitalization both at Clyde and maybe even in Rosyth. As David mentioned earlier, the whole AUKUS opportunity is heavily focused in these early years on infrastructure at both Osborne and Henderson. We would hope to be able to address that market as well.

[David Lockwood, CEO at Babcock]

Yeah. The other thing we have mentioned in the past is, although they haven't decided how to contract it yet, there's potential infrastructure opportunities with AWE as well. Thank you all very much for your time, and for those of you who I've known for a very long time, like Sash who've come up with all the questions that have made these things interesting, thank you for your participation

Participants

Analysts

• Chris Bamberry, Analyst at Peel Hunt
• David Farrell, Analyst at Jefferies
• David Lockwood, CEO at Babcock
• David Mellors, CFO at Babcock
• Harry Holt, Deputy CEO at Babcock
• James Beard, Analyst at Deutsche Bank
• Sash Tusa, Analyst at Agency Partners