Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Strong financial performance with a 34% increase in underlying operating profit and a 40 basis point improvement in margins.
- Significant progress in cash flow, with free cash flow reaching GBP160 million and operating cash conversion at 98%.
- Reduction in net debt to GBP211 million, resulting in a gearing ratio of 0.8 times.
- Reinstatement of the dividend, with a first full-year dividend of 5p.
- Strong organic revenue growth of 11%, marking the second consecutive year of double-digit growth.
Negative Points
- Type 31 program incurred a significant charge of GBP90 million, impacting overall profitability.
- Potential risk of reversal in working capital, particularly on large programs, estimated at up to GBP70 million.
- Continued investment in infrastructure and systems leading to capital expenditure outstripping depreciation.
- Challenges in the Marine sector with flat revenue growth and increased overhead expenses.
- Potential political and operational uncertainties related to the AUKUS program and the upcoming UK general election.
Q & A Highlights
Q: Could you refresh us on the scope of the Combat Management System Integration (CMSI) for Type 31? Does it include the integration of sensors?
A: The combat system is a complete system from Talus, which has already undergone factory acceptance tests. The integration we need to manage is the physical integration into the ship, such as ensuring brackets are in the right place and the system weighs what it should. This is more about mechanical integration rather than systems integration. β David Lockwood, CEO
Q: What is the timescale for the integration process on the first ship?
A: We will break the back of it in FY25. β David Lockwood, CEO
Q: Can you clarify the potential for the Type 31 contract to be extended? Does it mean more ships or additional scope?
A: The capability insertion program has already been sole-sourced to us, and historically, there has been talk of Type 31 batch two or Type 32. However, we are currently treating it as a discrete five-ship program. β David Lockwood, CEO
Q: When you talk about low-margin work, what is the expected fade over the next three years?
A: The only significant low-margin work left is Type 31. The DSG contract has improved, and other low-margin contracts are much smaller. Type 31 was about GBP200 million in the year. β David Mellors, CFO
Q: Can you give us an indication of the Ukraine effects on your business?
A: The impact is relatively small in terms of the group, amounting to a few tens of millions, but there is plenty of opportunity for growth. β David Lockwood, CEO
Q: What is your latest view on the AUKUS partnership, given recent press about progress and political uncertainty?
A: The focus in Australia is on getting Australians working on Virginia-class submarines and preparing infrastructure to support them. The joint venture with HII is progressing well, with senior-level commitment and a list of opportunities being pursued. β David Lockwood, CEO and David Mellors, CFO
Q: When do you expect to finalize a funding agreement for the third pension scheme?
A: The valuation for the third scheme is coming up, which is an ideal time to look at long-term funding. This should happen within the next couple of years. β David Mellors, CFO
Q: How should we think about the cash phasing on the Type 31 program?
A: The cash impact is spread over the course of the contract, not exactly linear but slightly more front-end loaded. The losses mentioned will be spread over the five-ship contract. β David Lockwood, CEO
Q: Given your strong free cash flow in FY24, how should we think about FY25 in terms of growth and margin trajectory?
A: We don't give point forecasts for individual years, but there should be progress on the margin. Revenue growth may be flattish due to infrastructure revenues, but overall, we expect consistent performance. β David Lockwood, CEO and David Mellors, CFO
Q: With your net debt-to-EBITDA ratio below your midterm target, how should we think about capital allocation priorities, especially regarding shareholder returns?
A: We are considering bolt-on M&A opportunities and potentially closing the pension scheme. We also keep an eye on negative working capital. Before considering one-off shareholder returns, we see significant value-creating opportunities. β David Lockwood, CEO
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
