Earnings Transcript for BA.L - Q4 Fiscal Year 2023

Charles Woodburn: Good morning, everyone. I'm incredibly proud of the results we're presenting today and of the work our people have done to get us here. Before we talk about our 2023 performance, it's worth reflecting on the increased conflict and instability we're facing in Europe, the Middle East and other parts of the world. These global events bring into sharp focus how essential our work is in the defense sector, helping protect national security and providing critical capabilities. As we walk through the financials and opportunities ahead, we hope you'll be left with three clear messages. First, 2023 was another year of strong operational and financial delivery with high-quality earnings and cash flow. Second, we have made significant strategic progress that positions us well for the future particularly with GCAP, AUKUS and our newly completed acquisition of Ball Aerospace. And third, for the reasons I will outline in the next few minutes, we have the visibility and confidence to deliver on the value compounding model that we've spoken about before. 2023 has been another excellent year for the business. Through our continued focus on operational performance, we have translated our order backlog into record annual sales and quality earnings supported by another year of outstanding cash flow. That performance was driven by our second consecutive year of exceptional order intake, totaling £75 billion over two years with a focus on appropriate contract structures. Importantly for the future this has significantly increased our backlog, positioning us even more strongly than last year for sustained top-line growth, good cash generation and margin expansion for the long-term. It is worth noting that once again most of this order volume was driven by program positions, which existed prior to the Ukraine conflict. While some Ukraine-related orders are starting to come through restocking and the impact of ongoing defense spending increases will be evident further down the line. We ended the year with a strong balance sheet, which supports our disciplined capital allocation approach. Reflecting our strong in-year performance and our confidence in the outlook for the group today we're announcing a proposed final dividend of 18.5p per share, an 11% increase on last year. In 2023, we further enhanced our track record of operational and financial performance as we delivered against the business evolution targets we laid out three years ago. The macroeconomic backdrop has been challenging with COVID impacts supply chain disruption and high inflation, which is why I'm particularly proud that in the last three years we have delivered 20% sales growth, 80 basis points of margin expansion over 100% cash conversion and £4.2 billion in shareholder returns, while simultaneously increasing our investment in the business. 2023 was a year of significant strategic progress with three major advancements, which all point to our enhanced long-term strength and relevance. First, AUKUS, the groundbreaking three-nation announcement last March was followed up in October by around £4 billion of funding for the next phase of work on the UK's next-generation attack submarine and early design and mobilization activities are underway. Second, on the Global Combat Air Programme, or GCAP, ministers from Japan, Italy and the UK signed an important treaty for the shared design and development of this next-generation fighter aircraft. Third, in August we announced the acquisition of Ball Aerospace, which marks a step change in our space domain capabilities. In parallel, we have expanded our investment in the business to support our growth outlook with increases in CapEx and total R&D. Given the long cycle nature of many of our programs, I'm particularly pleased with how our teams have stepped up recruitment with nearly 7,000 net employees hired including just under 2,500 new apprentices and graduates. This is vital for the future delivery of our long-term projects. Moving to the acquisition of Ball Aerospace. From my part, I want to underline a few key points. This was a unique opportunity to add a high-quality technology-focused business in the highly relevant space domain. Its capabilities strengthen our world-class multi-domain portfolio and broaden our customer exposure in the US and to fast-growing areas of the defense and intelligence community budgets. We see the business as an excellent cultural fit and expect that down the line we have the opportunity to drive revenue synergy with our electronic systems business and through our global reach. We are delighted to have completed the transaction and Tom will cover the wide breadth of capabilities in the business later. With strong momentum behind us from our last three years of consistent delivery a record order backlog and our largest ever acquisition completed, we look forward to the next three years with even greater confidence. Our ambitions for the coming years are built upon strong foundations and will enable continued strong operational performance and contracting discipline; investing appropriately to support growth and our customers' priorities, deepening our partnerships and collaborations. Brad will cover capital discipline for the group, but I would add here that we expect the acquisition of Ball Aerospace to be additive to our top-line growth, margin expansion and cash conversion outlook over time as we look to deliver a compelling and predictable value compounding model for our stakeholders. Brad over to you for the financials and 2024 guidance.

Brad Greve: Thanks, Charles. It has been a very strong year across the business. At BAE Systems, we take great pride in helping our government customers meet their primary obligation of keeping us all safe. In a time of rising geopolitical tensions, our teams delivered at record levels to protect those who protect all of us. I thank them for their outstanding efforts their dedication to the mission and their enduring commitment to operational excellence. And across the board our financial metrics showed the results of their hard work. With orders of £38 billion surpassing last year's record, our backlog hit a new record of £70 billion. And as Charles will later describe the unrecorded backlog of contract positions and visible demand is nearly four times higher than this. For 2023 top-line growth was 9% surpassing our guidance expectations with all sectors delivering above the expected ranges. A key feature of this growth was the accelerated pull forward of Dreadnought activity contributing to a 22% overall increase in Maritime's top-line. We also had strong commercial gains in our ES business while Hägglunds' growth lifted P&S results as CV90 programs gathered pace. The Air sector was up 4% led by work on our sixth generation Tempest program. Our profitability in the form of underlying EBIT rose by 9% to just under £2.7 billion. Improved margins in Air and P&S offset the margin headwind presented by the mix effect of higher growing submarine activity which trades at a regulated profit. EPS grew by 14% on the higher profit figure further complemented by higher interest income and the impact of the ongoing share buyback program. We delivered a record £2.6 billion of free cash flow with the business well on track to achieve our in-flight cash guide. In addition to the cash effects from the record profits we received a net increase in customer advances of £1 billion. We continue to invest in the business as CapEx exceeded depreciation by £300 million. We continued to follow our disciplined capital allocation policy returning £1.4 billion in dividends and share buybacks in 2023. As Charles mentioned, we have proposed another increase in our dividend taking it to 30p marking our 20th year in a row of increased dividend. So as you can see this picture reflects a well-positioned business delivering strong top-line growth double-digit increases in earnings with balanced capital allocation driving value-accretive returns. I will now break down a few of the headline numbers starting with the record-setting order volume of £38 billion. Our ES business posted a book-to-bill of 1.2 featuring a number of key wins across electronic combat C4ISR Precision Strike and Commercial Air. P&S expanded its backlog to £11 billion on the back of nearly 8 billion in new orders including the Czech CV90 award and higher volumes of combat vehicles in the US including Bradley, AMPV and PIM. Archer orders for Sweden and Radford ammunitions also contributed. The air sector posted £11 billion of orders including the Typhoon support renewal for KSA orders for MBDA including missile defense in Eastern Europe and further renewals of F-35 volumes. In the UK important funding for the Tempest program was added along with funding for the next-generation radar for Typhoon. The Maritime sector achieved £10 billion in orders led by the £3.9 billion order for the SSN-AUKUS design work representing the important milestone for the program. Maritime also recorded a further £3 billion in Dreadnought funding, along with new awards in Australia and Munitions in the UK. Finally, the Cyber and Intelligence sector posted a book-to-bill over one, across a number of restricted programs in the US, and key national security and C5ISR wins in the UK. On to sales the group posted £25.3 billion representing a 9% increase over 2023. By sector ES grew by 9% reaching £5.5 billion, led by large gains in the commercial business in both Civil Aviation and Power and Propulsion along with strong gains in electronic warfare-related sales. ES classified programs increased by 22% year-on-year. P&S rose by 8% to £3.9 billion pounds with Hägglunds accounting for two-thirds of the sector's growth while ship repair increased by 9%. Across the P&S portfolio nearly 600 vehicles were delivered in the year. The Air sector hit £8.1 billion in sales rising by 4%. The sector posted strong gains in F-35 MBDA and KSA, while the Tempest program more than doubled year-on-year. These gains helped to offset the maturing Qatar Typhoon build activity. Across the group the biggest increase in sales came from our Maritime sector which rose by £1 billion or 22% to reach £5.5 billion. Higher and accelerated activity across the submarine programs led to the largest share of growth accounting for two-thirds of the sector's expansion. Work on Type 26 Batch 2 provided a further uplift, while Australia sales were up by 12% on Hunter Class activity. The Cyber and Intelligence sector rose by 6%. Growth was 9% normalizing for the divestment of the financial services business last year. There was a strong 10% growth in the US part of the business, while growth in the U.K. included a 19% increase in National Security cyber. The high sales growth for the group led to a 9% increase in underlying EBIT to just under £2.7 billion. Strong operational delivery across the group enabled a stable margin, despite the mixed headwinds from the unprecedented maritime growth which trades at a lower margin. ES grew EBIT by 5% with margins of 16.1% in the guided range. The sector absorbed lower pension FAS/CAS recoveries accounting for about 60 basis points of the margin reduction, partially offset by higher commercial activity. As you know, the FAS/CAS story is one that impacts the broader industry and this will be something, I will mention when we get to 2024 guidance. P&S expanded margins by 20 basis points reaching 9% for the year on improved profitability in ship repair and strong delivery from Hägglunds. Air delivered 80 basis points of margin expansion to reach 11.8% on higher activity and risk retirement. Maritime's EBIT rose by 20% on the strong sales growth. The margin of 7.7% reflects the more dominant portion of submarine revenues in the mix this year. Finally in line with guidance the Cyber and Intelligence sector's EBIT fell due to research investments in the UK on space and multi-domain networking. The business delivered record operating cash flow of over £3.2 billion representing a 26% improvement over the prior year. In addition to the increased profit of £200 million, there was a net inflow of customer advances of over £1 billion. These positive moves more than offset the higher CapEx over depreciation as we continue to invest for future growth. The lower cash conversion in Maritime is an example of this investment as work continued on the ship haul in Glasgow to further improve the efficiency of the Type 26 delivery. With the strong cash delivery net debt was cut in half ending the year at just over £1 billion. As you can see in the waterfall, the £3.2 billion operating cash flow, net of interest and tax led to a free cash flow of £2.6 billion. We allocated £1.4 billion in dividends and buybacks and entered 2024 with a strong balance sheet positioning us well for continued strategic flexibility and the upcoming financing for the Ball acquisition and debt maturities. Turning now to guidance. Given all the moving parts this year, I wanted to start with a simple view of organic growth expectations excluding Ball. On the back of the very strong 9% growth in sales in 2023, which featured about 300 basis points of pull-forward sales in Maritime organic topline growth in 2024 is expected to be between 5% and 7%. We expect growth across all sectors led by continued momentum in submarines for Maritime commercial sales in ES and Hägglunds and Bofors growth from P&S. Further sector details are in the supporting material. For EBIT organic growth is up 6% to 8% with modest margin expansion. This year we will have the last material impact related to FAS/CAS US pension credits rolling off, which represents about a 30 basis point decremental hit at group level. This is more than offset by P&S moving to double-digit margin, as AMPV moves to full rate along with some expected margin progression across the rest of the group. In terms of EPS, the organic growth would be up 7% to 9% as we absorb the impact of higher tax rates in the UK. We have modeled £500 million in buybacks. Having sharply outperformed the free cash flow in 2023 and given much of this came from higher-than-expected advances which will partially unwind, free cash flow is expected to be in excess of £1.2 billion for 2024. With 2023 free cash at £2.6 billion that's in excess of £3.8 billion over the '23 and '24 period. On this slide, you will also see the impact of the Air Astana IPO, which takes 100 basis points off of the organic outlook just presented on sales EBIT and EPS. The IPO resulted in an incremental cash inflow of £180 million. And while this does not count as free cash flow, the proceeds will of course strengthen the balance sheet and enhance our strategic flexibility. Now that I have discussed the organic picture, I wanted to highlight the assumptions around Ball, so you can understand this impact to total guidance. We were very pleased to complete the acquisition last week. Our US team is already implementing a comprehensive integration plan and we are very excited to welcome our newest team members into BAE Systems. At the top of this slide, you can see a screenshot of the assumptions we presented to you for the acquisition back in August. You might have seen their 2023 numbers released earlier in the month. They highlighted an opportunity pipeline of $9 billion which is an improvement from what we presented in August and gives us good visibility of growth in the coming years. While their sales number was flat due to some timing delays, we expect low double-digit growth in 2024 and across the medium term, consistent with our acquisition case. Pleasingly Ball's return on sales of 11.1% demonstrated strong operational delivery producing EBIT in line with our acquisition assumptions. And we expect this group accretive margin to carry on in 2024, which combined with the revised sales guide aligns the estimated earnings outcome with what we outlined last August. Looking further out, you will recall that we expect to convert synergies over time, which should see this business get to at least 12% return on sales once matured. In terms of cash flow, we expect the acquisition to be accretive in 2024, including the benefit of the tax asset. Across the medium term, our assumption of 80% cash conversion remains unchanged. Here is our stated guidance at group level taking into account the IPO and the Ball acquisition. For sales, I previously outlined the 5% to 7% organic growth range. The Air Astana impact removes 100 basis points and the inclusion of 10 months of Ball Aerospace sales adds 600 basis points, which moves us to a 10% to 12% top line guidance range over 2023 for the group. For EBIT, the 6% to 8% organic growth is reduced by 100 basis points from the Air Astana transaction. The addition of Ball adds 600 basis points of EBIT growth, taking us to a revised growth target of 11% to 13%. For EPS, the organic guide of 7% to 9% is impacted by 100 basis points from Air Astana. The 10-month earnings of Ball are offset by the interest expense, leading to a revised EPS guide of 6% to 8% growth. The higher tax rate in 2024 is expected to impact earnings growth by around 300 basis points. As a reminder, we have not included any synergy estimates in our Ball assumptions for 2024 and these allowed at least a further $30 million of incremental profit as a run rate once converted over the medium term. We continue to expect Ball to be accretive to earnings in 2025, the first full year post-acquisition. Free cash flow will be improved by £100 million from the inclusion of Ball taking 2024 guidance to greater than £1.3 billion. And to remind you, there are also IPO proceeds of £180 million not included in this number. There are some more detailed bridging schedules in the supporting material. We continue to provide three-year cash guides as we feel this helps to iron out some of the in-year volatility that can arise from advanced movements, offering a better reflection of cash delivery. Since 2020, our sharper emphasis on cash conversion and our strategy has included initiatives to derisk the pension, improve operational delivery, create incentive targets based on cash delivery, and place a stronger focus on working capital efficiency. Those measures together with higher levels of advanced intake have led to consistent outperformance since we began our three-year guidance back in 2019. With our 2024 guidance our in-flight 2022 to 2024 cash flow should now exceed £5.5 billion. Our 2023 to 2025 delivery should exceed the £5 billion mark. And for the period of 2024 to 2026 we expect to exceed £5 billion. And with the higher cash flows we have been able to grow our investments in our people, invest in our capacity to drive efficient growth, and invest in R&D to drive differentiation in what we deliver to our customers. After increasing our allocation across these internal investments, we have also been growing our dividend consistently as earnings have grown. And we have maintained our policy of having dividends covered approximately two times by earnings. And we have also used our strong balance sheet to enhance the portfolio through M&A. The Ball acquisition is an exciting example of that strategy in action. But others including the GPS and Radio's business in ES, Prismatic in space missions and Bohemia Interactive, all form a pattern of value-accretive additions to the portfolio. We have also divested out of non-core businesses as we continue to dynamically reshape the composition of our business aligned with our strategy. Our share buyback program has also been an important part of our capital allocation toolkit. Since we started this in 2020, we have retired over 7% of our share count. We continue to value this form of allocation as an important way of returning cash to our shareholders. As can be seen in our recent financial history as well as our outlook, we have a proven model of a strong business driving top line growth, increased profitability and higher cash conversion fueled by capital allocation that results in a compounding effect through effective deployment. We are well positioned to drive this compounding model into the future. Back to you Charles.

Charles Woodburn: Thanks, Brad. Now I'll outline why we believe we're well positioned for good sustained topline growth. As we have explained, the business has made significant strides in recent years, and we're well positioned for a period of sustained growth. Our confidence comes from the focus we have brought to operational execution and contracting discipline that has resulted in better performance for our customers and financial results for our shareholders. Our geographic breadth and domain strength mean that our portfolio does not rely on a few major programs. The pension is now in surplus. And we are growing our workforce across the group and attracting our next generation of talent through expanding our apprenticeship and graduate programs. We have taken a dynamic approach to reshaping our global portfolio to higher growth, more advanced technology businesses that align with our customers' priorities and divested businesses that are not core to our strategy. Building on that foundation our aspirations for the future grow as our customers around the world address the elevated global threats. Long-term defense spending commitments political alliances and record orders all strengthen this conviction. Our market differentiators start with our capabilities and technologies. Within BAE systems we have evolved diversified and strengthened our portfolio so that no one program represents more than 10% of group revenues. We have unique capabilities to design, build and support air, land, sea and space platforms alongside leading electronic warfare and defense cyber portfolios. Many of these are proving highly relevant at this time. This diversity means we are well positioned to offer superior platform and technology solutions to our military customers, as they focus on critical multi-domain and interoperable capabilities with major multinational collaborations like AUKUS and GCAP being two excellent examples. We are continuing to invest in our existing capabilities and new technologies to maintain a competitive advantage. The five core technology areas listed are driven by the evolving threat landscape and support our aspirations for growth. At a tactical level, the conflict in Ukraine is highlighting the importance of a number of these key technologies, especially autonomy, space, synthetic training, digital and multi-domain capabilities. We are driving innovation through research labs embedded in our business sectors, including FAST Labs in the U.S., Red Ochre Labs in Australia and FalconWorks in our Air sector. These hubs are agile innovation centers aimed at delivering breakthrough technologies to keep our customers ahead of the challenges they face. They also foster collaborative partnerships with academia and other organizations to bring even greater levels of creative and diverse thinking into BAE Systems. Of course, space is one of our focus areas, and I will pass to Tom to talk about our new Space & Mission Systems business. Over to you Tom.

Tom Arseneault: Thanks, Charles. When we announced our intent to acquire Ball Aerospace back in August, we described three important trends in our world for which the Ball Aerospace team was particularly well positioned. These trends are the inexorable shift of our customers' priorities to the space domain, the increased interest in earth and solar science and the health of our planet. And finally, the realization driven by the conflict in Ukraine that global munitions capacity had atrophied over the years and needed recapitalization while stockpiles needed replenishment. These trends have continued and we expect will continue for years to come. Well positioned for these trends, Ball Aerospace now a new operating segment within the BAE Systems US business called Space & Mission Systems, brings a robust portfolio of solutions across a broad spectrum of customers in space, tactical solutions and ground systems. These three key growth businesses driven by significant technology differentiators, align well with high priority areas in the US National Defense Strategy and the US Intelligence Strategy. Ball Aerospace brings a deep understanding of their customers' missions, along with the know-how and technology to deliver winning solutions in areas like space domain awareness, environmental monitoring, highly advanced antenna systems and remote sensing analytics. Adding to BAE Systems' broad portfolio of long-term programs, the new Space & Mission Systems business enjoys a similarly strong program mix across the various life cycle stages, from early design through production and into operations and support. These programs underpin the significant long-term value embedded across all three business areas. Throughout the acquisition process, we reaffirmed the excellent cultural fit that Ball Aerospace has with our broader business with a mission-focused team, world-class capabilities and a spirit of innovation that are very well aligned with our mission and our values. High-quality businesses are characterized by talented people, differentiated technology and a commitment to excellence. Ball Aerospace has demonstrated all of these key qualities and will help us build on the long and distinguished track record of trusted innovation and performance we share. In sum, our new Space & Mission Systems business is a very welcome addition to our portfolio, aligning us well with key growth trends and customer priorities. From here, and as we've demonstrated with previous acquisitions in recent years, we are focused on ensuring a smooth and effective integration to unlock the considerable value and growth this business promises to deliver. Back to you Charles.

Charles Woodburn: Thanks, Tom. Moving on to the forward visibility we have and the longevity of our programs. At £70 billion our backlog has increased 50% in the last three years, providing a strong base for growth. We've always said, this is really just a subset of the actual visibility we have. In the past, we have looked to illustrate the medium- to long-term outlook across various programs. On this slide, we have brought this together to show that our estimate for funded plus incumbent backlog is several multiples higher with some examples detailed of the true long-term value for the likes of our F-35 program work share Dreadnought submarine and Typhoon support. Additional information is in the backup material which shows that many of our core programs and franchises run well into the next decade. This underpins our high degree of confidence in our medium- to long-term growth prospects. This long-term program evolution is reflected on this slide with even our shorter cycle work often running for several years. We are essentially a long-term contracting and delivery business, which means that our awards made now will be traded out over many years to come, often with slow starts as new programs ramp up. And you can see a number of our major programs like Hunter, AUKUS, GCAP and even combat vehicle programs like CV90 exports are in their early phases, and will be delivered over the coming years with corresponding financial returns and retirement of risk. We are now seeing the genuine power of our global portfolio. Our business is uniquely diverse in terms of geographic footprint and the broad spectrum of our capabilities. And that's proving to be a real strength with all sectors growing sales in the year. Looking ahead, our key growth drivers are also spread across our major geographies and include huge multinational endeavors. Although in an early phase, the AUKUS agreement is significant for the group in the medium and long-term as is the Global Combat Air Programme. These multinational endeavors highlight the global reach scale and longevity of our business. So where do we see future opportunities? Put simply, we have a strong pipeline across all sectors as countries around the world face up to the increasingly multifaceted threat environment. The need to restock and upgrade heavy armor ammunitions is an area where our portfolio is particularly relevant and has already seen strong order flow. In addition, we have a pipeline of new opportunities in long-term structural growth markets to further enhance our current base expectations. These are listed here but include orders for more Typhoons, US combat vehicles from foreign military sales, CV90, BvS10 and Archer Awards and MBDA exports, as well as the electronic systems content we have on many US helicopter, combat air and precision munitions platforms. Wrapping up, the BAE Systems team delivered a strong year as we build on our reliable track record of operational and financial performance. Strategically we aim to generate long-term value and leverage core technology capabilities to position the portfolio for evolving customer priorities and future growth areas. We're performing well, but I see tremendous potential in the coming years due to our continued focus on program performance and driving margin expansion. Our record order backlog and leading technology solutions, the investments we're making to support the future, our geographic diversity and broad spectrum of capabilities combined with our global opportunity pipeline and our strong balance sheet and cash generation and disciplined value-enhancing capital allocation. We achieved a significant amount in 2023 as our people continued to deliver for our customers and other stakeholders. That includes our leadership teams, managers, employees, trade unions and partners up and down our supply chains. These strong results would not have been possible without them. We will now turn it over to questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Robert Stallard from Vertical Research. Thank you. Please go ahead.

Robert Stallard: Hi, guys. Good morning.

Charles Woodburn: Good morning, Rob.

Robert Stallard: Hi guys. A couple from me. First of all Charles, you mentioned about contract discipline and on this whole issue of fixed-price contracts, I was wondering how you're assuming with regard to cost inflation on the fixed price contracts in 2024 and are there any fixed price development contracts we should be keeping an eye on? And then secondly, a couple of quick numbers questions for Brad. What are your thoughts on debt paydown post-Ball from here and the interest cost? And also do you expect the tax rate to stay at around 21%? Thank you.

Charles Woodburn: Yeah. I think what I meant on the fixed price contracts specifically we've been -- we've taken a pretty prudent position on these for quite some time as you know Rob. And it means that -- when I look at our contractual backlog, I feel pretty comfortable around our position from fixed-price contracting. Certainly when I came to BAE, I inherited a few quite challenging contracts and it actually meant that we were -- we've been very disciplined in recent years. And it means as I look at our contractual backlog now, I think that we I'm pleased with where we are and I don't see any really challenging contracts within that mix. So it's a continuation of that strong contracting discipline, I think positions us well for the future. Maybe over to you Brad for the second one.

Brad Greve: Yeah. Good morning, Rob. So I think on the leverage question, first of all, you noted our much better cash performance in 2023 led to a pretty solid 0.3 net debt to EBITDA. So I think we started the year with a really strong position. And that means that what we guided to back in August when we talked about the debt required for the acquisition of Ball Aerospace being circa £1.7 billion. What we're seeing now is a number that's going to be less than that in the outturn for 2024. So I think that's a really good position to be in. So yeah relative to our US peer group for instance, it's a really strong leverage ratio. So I think we're in good shape. We will continue to delever as we move forward across the medium-term just as free cash builds in the business. But I'm certainly comfortable with the -- a net debt of -- between £1.5 billion, £1.7 billion which is what we're guiding to. And then I think you asked about the tax rate Rob. Yes. So we are seeing an increase as we talked about in 2024 and that's largely from the UK tax regime. That's steps up this year. So that takes us up to about 21%. And that's a number that we think will be stable across the medium-term. So I think it's going to be in that range.

Robert Stallard: That’s great. Thank you very much.

Operator: Thank you for the question. One moment for the next question. Next question comes from the line of Ian Douglas-Pennant from UBS. Please go ahead.

Ian Douglas-Pennant: Thank you very much for taking my questions. So I've got three if that's quick -- if that's okay they're all quite quick. First on Maritime business so the Dreadnought pull forward it looks like that continued in the second half of this year. What is your expectation for 2024? Should we continue to see business pulled forward? Or will you give some of that back? Secondly, your cash flow guidance I guess I've got two questions here. Cash flow guidance 2024 looks conservative to me why would you not expect continued deposits being received given your -- what your current statements just on order strength? And then also on cash flow it also seems conservative your 2023 to 2025 stack of more than £5 billion. This would imply something like £1.1 billion for 2025 which seems unlikely perhaps you could comment. Thank you.

Charles Woodburn: Maybe I will give Brad.

Brad Greve: Yes. Good morning. So -- yes I think the Dreadnought acceleration was pretty profound in 2023. So that type of growth rate is not going to continue into 2024. We do see Dreadnought revenues picking up from 2024 -- from 2023 levels so there will be an increase but the rate of increase should start abating a little bit. And then on cash flow I think the first thing is to reflect on the really strong cash delivery across these last couple of years. And if you take the number that we trended at 2023 combined with the 2024 number that's a pretty strong two-year total so that's one. And I think you're right to reflect on the advances. And we never guide to material cash advance inflow. And not all orders have cash advances associated with them. So I think the reality is we're likely to see some net advance burn in 2024 on the back of the really high advance we received in 2023. So I think that's really what kind of colors that £1.3 billion guide for 2024. And there could be upside if we do have orders that have higher advances associated with them but we never guide to those material order inflows that have advances. So I think that's also the same answer for your question on the 2023 to 2025 range. I mean if we are to receive advances on order inflow across that period it could be upside to what we put it there.

Charles Woodburn: Yes. Just worth reminding that's why we do a three-year cash guide because of the in-year volatility as things move from one year to the next.

Ian Douglas-Pennant: Thank you.

Operator: Thank you for the questions. One moment for the next question. Next question comes from the line of David Perry from JPMorgan. Please go ahead.

David Perry: Yes. Good morning, Charles, Brad and Tom. I've got a couple of questions for Tom if I may just on Ball Aero. It seems that's the sort of new bit of the business. And then some for you Charles, if I may. Tom just educational questions, if I may. On Ball it's -- on slide 18 it says 15% of sales are in the civil space. Can you just clarify what that is? Is that commercial telco? Is it institutional or government? And then slightly less for your question it's just been a lot of press coverage this week about Russia using space as a new frontier for warfare just makes me wonder whether Ball can play a role in stopping that. Shall I stop there and then maybe come back for Charles if that's okay? Thank you.

Tom Arseneault: Yes, very good. And good morning, David. As to the civil space question, civil space in the context we describe it has to do with the civil agencies in the US and nothing to do with commercial telecoms. Civil space and civil agencies in the US include the likes of NASA, NOAA which is the National Oceanic and Atmospheric Administration. These are agencies that are responsible for Earth observation, some of the scientific missions that took place in space and Ball played a big role in the James Webb Space Telescope for example. And so these are programs where we're talking about highly sophisticated instruments, which Ball is very highly qualified for. These are some programs and capabilities that date back decades and require unique technologies. And so Ball is not a part of what we would refer to as commercial telecom satellites. I hope that's helpful. And then with respect to the question – very good and then with respect to the recent press around Russia's aspirations in space, I mean this is not a surprise. And in fact it's back some time both in Russia and China. China, as you might recall shut down one of its own satellites back in 2007, which sent a bit of a shock wave around the world as they were making the point that these satellites are not invulnerable out there. And so that you'd imagine would spark interest in the ability to defend these satellites through a variety of means, none unlikely to defend aircraft at lower altitudes against enemy threats. And so the kinds of technologies that Ball has demonstrated coupled with the sorts of things we do in our electronic warfare business, you could imagine might be of interest in that sort of situation.

David Perry: Okay. One to watch. Thanks. Charles my questions for you. I know that's slightly sensitive topics so you're limited in what you can say. But is there anything you can share with us on GCAP talks in terms of timing, work share that might be planned? And also interesting that Germany seems to be rolling back a little bit on sanctions on exports to Saudi Arabia. So is there anything you can say there vis-à-vis the Eurofighter? Thank you.

Charles Woodburn: It was obviously the limit, as you can imagine David is what I can say. I mean GCAP we're making good progress both company – the three companies and the three nations. And I think that things are cracking on now. And there's not much more I can say other than we continue to get good support from the UK government on this. On Eurofighter, I think that we are – I mean as I said previously, I think we're well placed for further Eurofighter orders. There's a range of opportunities from existing Middle East customers and also from Europe, either follow-ons from Germany or Spain and actually a range of other countries that are considering the Eurofighter platform, as we speak. So I think that the Eurofighter platform as for planning assumption worth reminding everyone is sort of a stable outlook for quite some years to come based on existing orders but there is upside potential there.

David Perry: Okay. Again, one to watch. Thanks, gents. Appreciate it.

Charles Woodburn: Thanks very much, David.

Operator: Thank you for the questions. Next question comes from the line of George Zhao from Bernstein. Please go ahead.

George Zhao: Hi. Good morning, everyone. First one for Tom I guess. In the US, if we don't see the 2024 budget path and that triggers the 1% automatic cut in April, I guess how do you evaluate what that impact will have across your US business this year? And second one for Charles or Brad. You've talked about this enhanced visibility, confidence in the long-term outlook. We don't – we know that you typically don't give longer-term growth target. But based on your order book and featured opportunities, how do you think about this year's 5% to 7% organic growth within this upcoming period of sustained growth?

Charles Woodburn: And maybe Tom do you want the US budget first and then...

Tom Arseneault: Good morning. Thanks for the question. Certainly, all eyes are on Congress at the moment, as we watch the deliberations over the budget. As we consider its impact on our portfolio, first and foremost with respect to a CR as you know, it has the biggest impact on new starts. It prevents the start of new programs in that current government fiscal year. We're fortunate in that much of our portfolio does not depend on that sort of event. And so we're hopeful and optimistic that this continued resolution period, which will end for the defense budget on March 8, will result in the passage of a budget. Although, I think we're confident that the impact up to that point in time will not be material, and we'll just have to watch it much beyond that. We're also watching the supplemental and that represents upside to the plan. Remember also that, much of the US portfolio or a good portion of the US portfolio does not depend on the DoD budget and including our commercial business the work we're doing over at Hägglunds in combat vehicles in Eastern Europe, et cetera. And so, we're obviously watching the budget closely, but we're feeling like our portfolio is in pretty good shape.

Charles Woodburn: Yeah. On the second point, George, I mean the comments in the outlook. I mean I point to the fact that we've got a record order backlog as we speak having it to cracking years in terms of order intake. I mean that gives us really good visibility for the next five years. And then we've got, as we've said already, these sort of huge programs like AUKUS and GCAP that give us the long-term visibility beyond that for another 5, 10 years well into the future. And I think it's that sort of stronger for longer outlook that we're really thinking about here, that we see momentum in the business that carries us, I mean, well into next decade and beyond. And I think it's that concept that we're now looking at these longer growth rates and the recruiting numbers that we're already planning for that long-term growth trajectory ahead of us.

George Zhao: Great.

Operator: Thank you for the question. One moment for the next question. Next question comes from the line of Ross Law from Morgan Stanley. Please go ahead.

Ross Law: Hi. Good morning, everyone, and thank you for taking my questions. The first just following up on the free cash flow guidance, so out with advances who would you highlight as the key moving parts that will determine to what extent you go beyond the £1.3 billion? And then, a few follow-ups also on Ball. So, the revenue missed in 2023. Can you maybe just flesh out exactly what those delays were due to? And do we see that being caught up in 2024? And is that being baked into the guidance? And then lastly on the margin, obviously, 11% was much better than the 10% you were initially forecasting. Is it fair now to assume that that probably puts a bit of upward pressure on your 12% plus margin guide for Ball over the medium-term? Thanks.

Charles Woodburn: Brad, first one.

Brad Greve: Yes, good morning, Ross. So I think on the cash flow. I mean obviously our ability to deliver our CapEx above depreciation is going to have an effect on that, but we're investing in important areas of the business to drive efficiency as we continue to do. I think working capital efficiency in general is something that we are driving hard on, and we did have a little bit of inventory build at the end of 2023. So, we have some room for improvement on working capital efficiency. And then I think the biggest variable is going to be the advance story, advance burn relative to advance intake. But all those factors are going to play a role. But we give a guide and we hope to beat it.

Charles Woodburn: Tom on Ball?

Tom Arseneault: Yes, sure. Thanks Ross. Good morning. So, I would say like others in national security space Ball saw some delays and shifts in customer sequencing in 2023 driven by budget priorities and continuing resolution which began at the end of calendar year, at the beginning of the government fiscal year. We're fully confident as the budget settles in that those sales will play through in 2024 and beyond. The specifics of the programs given these are restricted programs, there's not much more we can say about that in detail. But we do expect that to all come back here in 2024 and beyond. I hope that's helpful.

Charles Woodburn: On the margin story, the fact.

Tom Arseneault: The margin side of the story is a good one right? I mean you saw the margin expansion as we had predicted. It demonstrates the ability of Ball to reach those kind of margin levels. And as we look at the cost synergies, we described during our announcement of the acquisition, which we're already beginning to lay in the plans for we expect that will continue.

Brad Greve: Yes. And if I can just add to that, Tom, the one of the drivers for margin in Ball was the increase in their tactical business and their mix. And that is a higher-margin part of their business. And what we are seeing is that that part of the business is growing faster across the medium term, which is only helpful for margin. And as Tom mentioned, the synergies on top of that is what gives us confidence that we can do better than 12% for that business over the medium term.

Ross Law: Great, very clear. Thank you, all.

Brad Greve:

Operator: Thank you for the questions. Our next question comes from the line of Nick Cunningham from Agency Partners. Please go ahead.

Nick Cunningham: Good morning. Thanks. Yes, I'm heading into my 39th year of analyzing BAE. And I'm not used to things going quite so well. So, I mean it tends to make me a bit nervous and look around for problems. And the only sort of really obvious identifiable area is the U.S. budget, which has already been touched upon. But it does seem to be becoming more extensive as an issue. We've seen for accounts sold and reportedly F-35 is going to be cut back in the PBR. And also we've seen profit hits in all throughout Lockheed and Boeing. So, the question is that you've touched upon the fact that commercial in Sweden help a lot in offsetting any of that. But presumably another offset should be direct exports out of the U.S., particularly for armor given that you have such a large installed base worldwide of legacy programs. So, the question is what's the prospect for that? And what kind of time scale can we expect to see that start to happen? And in the longer run what sort of proportion of revenues out of that business are you going to be able to sell overseas? Thank you.

Charles Woodburn: I'll pull you in Tom. But I think just worth remembering Nick is one of our great strengths is that global portfolio of us, which means that we are much more widespread than I think any of our peers and that gives us real visibility as we look forward. But maybe over to you Tom to say a little bit about that. I think the other thing to remember of course is our relative lack of exposure to some of the big fixed-price inter-developmental type programs that we deliberately and not just in the U.S., but elsewhere taken very prudent approaches towards. And over to you Tom.

Tom Arseneault: Thank you, Charles. And good morning Nick and happy 39th anniversary.

Nick Cunningham: Thanks. 78th set of results I think.

Tom Arseneault: So, directly at the question around the potential for international sales on combat vehicles, I mean clearly as AMPV, the Armored Multi-Purpose Vehicles makes its way into full rate production, we find ourselves in a position where international interest in that is starting to pick up a bit. You'll recall that the AMPV is the replacement for the M113, a Vietnam era vehicle of which by some counts there are 100,000 of around the world in some 30 variants. And so we think the potential for AMPV as a replacement in the longer run for these M113s around the world is good. We are with the U.S. Army on contract for five variants currently. We've got a couple of others that we've demonstrated as we look to expand the potential of that vehicle. Remember the MP stands for Multi-Purpose. And so that's the goal as to expand the scope of that vehicle and in so doing make it that much more attractive for various services around the world. I think the performance in Ukraine of systems like the M777, everyone has read the news clips around the -- how well a number of these systems are performing. And again not just vehicles and combat and artillery, but also APKWS, right the laser-guided rocket system that is now being deployed in counter UAS applications very successfully. That is being taken notice of around the world and we expect to see an uptick in foreign military sales there as well. And of course we mentioned CV90 a bit earlier. So, we are optimistic Nick that the visibility of these systems have gotten in Ukraine and the opportunity to take what is the first next-generation combat vehicle in production in the U.S. into international markets is good. Just quickly to Charles' point we are -- knock on wood, as we say this, but we don't see a significant set of write-downs across our programs. We've been very diligent in our portfolio around the risk levels and appetite that we have for that. And so that has put us in a good position and we expect that diligence to continue. I think Ball, as we learn more about their programs now that we've owned them for three days, we see they had taken a very similar posture, especially with respect to some of that early fixed-price space related activity. So I'll leave it there. I hope that's helpful.

Nick Cunningham: Thank you. Just a very short follow-up, in terms of physical capacity in armor and also personnel, given the issues that the industry has been facing in the US in getting people do you have the capacity to look at near-term exporting?

Tom Arseneault: Great question. We have worked with the US Army to project the ability to expand that capacity, actually have some of that going on. We've described in the past what we refer to as our combat vehicle manufacturing network. That Transcend the main facility in New York, down into Aiken South Carolina; Elgin Oklahoma; and beyond. And the point we've worked to spread some of these programs around, so that we are not dependent on one, geography. As far as talent goes, we are fortunate by virtue of that geography that, the concentration of people in that area the concentration of competing industries in that area is pretty low. And so we've been able to retain that talent. We work through as many did, the various union agreements in places where that's, relevant and have come out of that successfully. We're confident that will continue.

Nick Cunningham: Thank you.

Charles Woodburn: Yeah. I mean just on that point on talent, it's worth saying that yes we have identified last year that our ability to hire retain -- what training and retaining the talent was obviously one of the risk areas for us as we saw the strength of the order pipeline. But I'm very pleased with the progress that we've made. And with that 7,000 net addition over the course of the -- over the entire global portfolio last year, I think that really underlines the strength of our early careers programs, and our ability to attract and train those people coming into the business. So I'm pleased with that progress. More still to be done in 2024 and 2025. But having achieved what we've achieved in 2023, I think we've tested the system and shown that we can deliver those, sort of numbers.

Nick Cunningham: Thank you.

Operator: Thank you for the questions. Next question comes from the line of Chloe Lemarie from Jefferies. Please go ahead.

Chloe Lemarie: Yes. Good morning, Charles, Brad and Tom. If I could have three questions please. The first one is on the Australian decision to cut the Hunter class program to six frigates. What would that mean for order intake this year, if you booked anything on the last three frigates already? And are there any offsetting impacts for you given there's strong investment into naval overall? The second is on P&S the 2023, margin guide calls for quite strong margin improvement. Given that this division was the key driver for the group's overall margin momentum should we assume that from 2024 you will kind of reach your full margin potential beyond the -- both synergies impacts? And third question is on Maritime. The Dreadnought pull forward didn't seem to come with the margin headwind that I expected. So could you share maybe any of the offsetting impact you've seen in 2023 please?

Charles Woodburn: Yeah. So let me take Hunter myself. So we hadn't -- we didn't even have Batch one in the order intake so the fact that we've got a class of six confirmed and an important point from the announcement is continuous shipbuilding at the Osborne precinct. I mean that gives us visibility of work right the way through the next decade and beyond. So I think that -- that leaves us I think very well positioned. Part of that decision as you are probably well aware was decision of the Australian government to buy nuclear-powered attacks -- Hunter-killer attack submarines does change the requirement for an ASW frigates or number of ASW frigates which is reflected in the number. But as I said I think that commitment to continue a shipbuilding in the Osborne precinct is very good news. And I think that the decision will be now to bring the six Hunter-class frigates put that on to contract. And obviously at some point here I expect this year that will come into the order backlog and be a significant order for the business. On P&S margins I mean some good news there. Over to you Tom on that, I'll bring you in on...

Tom Arseneault: Chloe, thanks for the question. So yeah, we have been on a very deliberate journey at P&S over the last handful of years, as we've worked to modernize our facility through investment. We have as I've mentioned before robotic welding capability brand new machining towers and all with the design around, putting ourselves in a position to expand margins there. That coupled with the fact that, we are winding down the LRIP or long -- or excuse me, limited-rate initial production phases of the AMPV contract, and we are now fully priced in our fixed rate -- full rate production programs to transition into that spot. As to the question of can we go beyond, we will -- we have not given up on our ability to further expand margins there. And we suspect again, as the program mix continues to mature, we will continue to look for ways to deliver that expanded margin.

Charles Woodburn: On the Maritime margins, Brad?

Brad Greve: Good morning, Chloe. I think, first of all, looking at a group level, I think we did see this really profound increase in Maritime sales in 2023. And you're right to point out that as a mix effect that puts a little bit of a headwind on the profit. But that's why we're really pleased to see us having a stable margin in 2023. And it really is a testament to really strong performance across the group. When you look at 80 basis points of expansion in the Air sector, I was part of the story, good margin expansion in P&S. So, across the group, we were able to offset that higher lower-margin Maritime activity, with really strong performance and overall keep margins stable. And as we move to 2024, as Tom has mentioned, we still have a pathway up on margin expansion in P&S in particular. So, getting to 10% as a sector is a really good milestone. And I think, there are some opportunities to continue to drive that margin higher and we're guiding in 2024, as you can see to have a higher EBIT growth than our sales growth. So, we are focused on margin expansion across the medium term and we continue to see pathways to do that.

Chloe Lemarie: Very clear. Thank you.

Operator: Thank you for the questions. One moment for the next question. Next question comes from Christophe Menard from Deutsche Bank. Please go ahead.

Christophe Menard: Yes. Good morning, Charles. Good morning, Tom. I had three questions. The first one, going back on Nick's question on the FMS sales, can you quantify what share of the £37.7 billion of order intake it represents in 2023? And do you expect that to continue to grow in 2024? And are they coming with prepayments? That's the first question. The second question is on CapEx and R&D in 2024. Can you or have you quantified the -- I mean, basically the levels you're expecting in the year? And the last question is on slide 9, you mentioned strong cash conversion in 2024 to 2026. Again, any possibility to quantify this in the light of, of course, your free cash flow guidance? Thank you.

Charles Woodburn: On FMS sales, as a percent, I'm not sure we have that.

Tom Arseneault: Yeah, we mentioned that, as we're pointing out is just in the very formative stages of being able to clarify what that will be. We expect that would manifest in the medium term. But the demand signals are just starting to come through. Very difficult to predict the levels to which they will get.

Charles Woodburn: And then CapEx R&D in 2024 and cash conversion rates as we look forward?

Brad Greve: Yeah. So, hi, Christophe, I think you'll see again a higher CapEx and depreciation in 2024. So we're investing across our sectors for the growth that we see. And then -- so you will see higher CapEx over depreciation. And I think on R&D, I think you'll continue to see us increase our self-funded R&D across the medium term. We see a lot of opportunities to bring differentiation in our key areas of business. And so, R&D has been an important part of delivering that and you'll see us invest in Electronic Systems. And the Air sector primarily, is how we allocate that self-funded R&D. Then -- those are two sectors that have very strong return on capital employed, so we're putting our money where we get really good returns.

Q – Christophe Menard: And on the cash conversion, you mentioned in on Slide 9?

A – Brad Greve: Yes. I mean we -- for 2023, you saw a fantastic cash conversion. Also, we have to remember the influence of advances on that number. And as we move forward across 2024 to 2026, the 2024 to 2026 period will have a little bit of a net advance burn. So, I think the cash guide we're giving is with that burn assumption. And as I said earlier in the call, we don't model or guide to material cash advance inflows. And so to the extent that those come in that could increase the conversion level.

Q – Christophe Menard: Okay. Thank you. Just last the thing FMS sales, are they coming with prepayment or not?

Tom Arseneault: Yes. I mean, that will vary from one country to the next depending on their budget cycles and so forth. I mean, we do see the dominant portion of these sorts of advance payments will come from -- during this -- it's been our experience, but very difficult to predict.

Q – Christophe Menard: Okay. Thank you very much.

Tom Arseneault: Thank you, Christophe

Operator: Thank you for the question. The next question comes from Ben Heelan from Bank of America. Please proceed.

Q – Ben Heelan: Yes. Good morning. Thank you for taking the question. I just had one on M&A. I mean the leverages in 2024 are still going to be relatively manageable. So how are you feeling about M&A from here? Are you still focused on technology bolt-ons? Have you changed anything about how you're thinking geographically around opportunities? Is there still a good pipeline of opportunity? So just some color around the M&A environment would be super helpful. Thank you.

Charles Woodburn: Yes. I mean, we're very much still in the market for small bolt-on M&A opportunities as we've done in the past. You saw already this year, we announced the acquisition of Malloy. These are small tuck-ins, but we'll continue to look for those in the kind of areas that we've spoken about before sort of multi-domain, autonomy, space if we can find the right sort of areas to tuck into the business.

Q – Ben Heelan: Very clear. Thank you, Charles.

Operator: Thank you for the question. [Operator Instructions] The next question comes from the line of Aymeric Poulain from Kepler Cheuvreux. Please go ahead.

Q – Aymeric Poulain: Yes. Thank you very much folks for taking my question. I have three, please. The first one, is on the industrial bottleneck that could emerge. Obviously, we see booming conditions in a number of areas in Europe in particular. And I was curious, about the potential critical bottlenecks in the supply chain, whether it's components or materials. So, if you could give us some color on that and how BAE is prepared for this, and how it could cap perhaps the growth prospect of the company compared to the demand potential? Secondly, you mentioned Ukraine is starting to having an impact on the top line. Would you be able to quantify this for '23? And how you see that panning out in the coming two years in light of the restocking impact you also flagged? And last you mentioned your M&A focus. But clearly the Ukraine War has probably highlighted some lessons in terms of the type of equipment and the tactics that are now more relevant and perhaps other programs may become less strategic. So would that mean that within the portfolio there may be some areas, you would consider as less relevant in the future and potential disposal candidates? Thank you.

Charles Woodburn: On industrial bottlenecks, it's something that we obviously monitor very carefully. And obviously challenges through the pandemic, and then the impact of the Ukraine conflict, has obviously challenged all of us. But I think we've done a pretty good job of navigating through that, largely trying to stay ahead of the curve, identify those bottlenecks before they become real issues for us. So it's not without challenge, but one that we're now I think well used to and handling quite effectively. Ukraine impact is actually quite hard to quantify because the sort of restocking the sort of immediate impacts and then there's government defense spending increases starting to come through in the light of the elevated threat environment and European nations, obviously trying to increase their defense spending and get either 2% or above the 2%, so some of that is coming through. But I wouldn't put a number on it. We've been in the past said that, about 10% of our business is sort of short-cycle activities, things like munitions, our share in MBDA and some of those things. And obviously they are seeing an impact because of it, but it's quite hard to quantify. And the bulk of our performance has come from these big long-term programs, not directly related to Ukraine. From an M&A focus, yes, I mean we are learning lessons as you can imagine from Ukraine. I don't -- from my perspective it's -- there's nothing that causes this dramatically to relook at our portfolio, but there are certain areas. I mean obviously things like effective ISR, autonomy the multi-domain drivers that we've been looking at for a number of years. It just reinforces some of the themes in some areas like electronic warfare where we already have very strong leadership positions. I mean they are really coming to the fore in a contested sort of multi-domain near-peer environment.

Aymeric Poulain: Thank you, very much.

Charles Woodburn: So I think we're -- if I'm not mistaken, we're now all done on questions. So, I'd just like to wrap the call up here and thank you all for joining. Many of you on the call, we'll be seeing out on the road shows which we're actually starting tomorrow in Miami. So, we're looking forward to meeting many of you in the next couple of weeks. Thank you very much.