Abbott Laboratories H1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
November 13, 2024

There are 7 speakers on the call.

Operator

to start.

Speaker 1

All right then. So good morning, everyone. Welcome to our half year results for the 6 months, 30th September 2024. Obviously, this is a result for 6 months, but we only stood up doing a business update 12 weeks ago for the full year, and we've had the AGM statement as well since then. So this will be kind of a comprehensive walk through the numbers from David and then a kind of what's happened since we last spoke to you from me.

Speaker 1

For the 6 months, successfully delivered performance and growth. We'll touch on it quite a lot between us. But we said when we first started in Babcock, performance drives growth in a company like Babcock because we have a lot of frame contracts where customers have a lot of discretion about whether or not to take optional work. So if you're performing badly, they don't. If you're performing well, they do.

Speaker 1

Those frames then generate further growth. So in terms of securing the position of the company, performance is the bedrock of growth. So that's why those are in that sequence. We did deliver 11% organic revenue growth in the period. Order book broadly flat, but as David will talk to as he goes through the detail, largely driven by consuming frame contracts because our order intake is necessarily lumpy.

Speaker 1

And indeed, in some ways, the lumps get bigger the best you perform because if you're performing well in a support contract, people tend to give you longer periods, which means you get fewer, bigger lumps. So it's nothing to concern about. Strong cash conversion again and progress on our towards our margin target. So yes, really, I think, significant progress in the period towards our medium term guidance. But to fill all the color on that before I come back and just talk through the highlights of the last period, David will take you through the numbers.

Operator

Thank you, David. Good morning, everyone. My three main messages today are: Number 1, this is a really strong set of results with revenue and profit growing well. Number 2, cash flow is significantly ahead at H1, albeit with some favorable timing. And number 3, FY 'twenty five will be another good year of progress towards our medium term guidance.

Operator

So these are the financial headlines released this morning. The key points to note are that the organic growth was up at 11%, and that's on top of the last 2 years of double digit growth. Underlying operating profit was up 10% at constant currency, notwithstanding the strong comparator period. Margins were 7%, which was flat. And margins, we had a very strong comparator period.

Operator

EPS was up 14%. Cash conversion at 80%, assisted by some timing impacts I'll come on to. But this cash conversion, coupled with the reduced pension obligations, delivered much higher free cash flow of £95,000,000 and debt reduction to 0.6x on the gearing ratio. And finally, the dividend is up 18% to 2p. So let's start with the income statement with revenue first.

Operator

This is the summary revenue bridge by sector before we go into the sector detail. You can see the organic growth for the group of 11% broken out by sector. And 3 of the 4 sectors are growing well, particularly nuclear and land, which I'll come on to in a moment. Next, profit. This summary shows the 10% organic profit increase by sector.

Operator

And again, we'll come on to the sector detail in a moment. But the summary here shows the very strong performance in nuclear, good performance in land, partially offset by Marine. And this is what we expected given that the prior year was particularly strong in Marine with the recognition of significant license fee income on Arrowhead 140, which we disclosed a year ago. So now moving to the sectors with Marine First. The key points here are revenue grew 6% organically in the half despite the prior year having license fee revenue.

Operator

This growth was mainly driven by the ramp up of the Skynet program and the return to growth of the liquid gas business. SkyNet revenues in the first half were approximately £70,000,000 and additionally, 0 margin program revenue was approximately £100,000,000 and that's Type 31 is the largest part of that. Profit decreased to £40,000,000 in the sector, which actually was a similar level to H2 last year if you take out the Type 31 charge. The reason for the period on period drop versus H1 last year, again, was the absence of license fees this period, which were very strong last year. On top of that, I mentioned last year the increase in Rosyth overhead and support expense.

Operator

And obviously, we had that for the full 6 months this period. So the low margin of 5.1% was also diluted by the prudent initial margin recognition on the Skynet program, which we expect to increase over the next year as we work through the program. So whilst 5% is low for Marine, we still expect that to achieve the medium term goal of 8% or above. Nuclear, on the other hand, had another very strong period. The organic growth was 22%.

Operator

We saw very significant growth in civil nuclear, 30% up with growth in both newbuild and decommissioning. Submarine support volumes also increased, including the ramp up of the Victoria's Deep Maintenance work. And Infrastructure, or MIP, revenues in the half increased to £273,000,000 leading up to the point where we reopened 9 Dock in September, which is one of the 3 big infrastructure projects ongoing. So for the full year, infrastructure revenues are not easy to forecast accurately. I do expect the infrastructure revenues to decrease on the first half peak.

Operator

Now 9 Dock is open. Broadly, I think the full year will be similar to last year but with risk on the upside. Moving to profit. All the revenue increases helped the profit growth, obviously, But margins were also boosted by the new revenue mostly being at better margins than historically. And furthermore, inflation recovery within some contracts improved partly due to contract changes.

Operator

And we also have a small amount of risk release into profit as milestones are achieved, and I've noted that on here. So all these factors help the margins take a big step forward to 8.7%. So Nuclear hit its medium term goal ahead of schedule. Moving to land. So the main factors driving the revenues 9% higher are set out here and includes increased land support activity in the DSG contract and higher vehicle volumes, both jackal production and South African mining trucks.

Operator

And this revenue growth drove profit increases, too, but also profit was helped by the improved DSG performance in the final year of the contract. And this sector also benefited from better inflationary better inflation recovery, again, partly due to contract change. And also, there was a small property provision release that I've noted here, £3,000,000 just for transparency. Overall then, the land margin at 7.7 percent is much better than the 5% we had 3 years ago or so and well on the way to 8% plus. So on to Aviation.

Operator

Thankfully, we don't have any divestment impacts to strip out of the numbers anymore, so it's a lot cleaner. As expected, organic revenues went backwards 4%, which is the impact of last year's H160 aircraft deliveries in the comparator. And now that program is in the longer term support phase. And on that topic, I flagged before there are other programs in the pipeline with this similar sort of upfront revenue profile, largely due to aircraft delivery, which boosts the early phasing of revenue, which we hope to win. So revenues may be a bit lumpy.

Operator

And you may have seen in the announcement this morning that we have been notified with the preferred bidder on the Mentor 2 program in France, which is a significant program of this type. So we intend to get that under contract in the second half of the year. And I can give you more about the financial profile at the full year. So that's a good news story. Moving to the profit in the half.

Operator

Profits were flat in Aviation. And again, the comparator had some one off credits in it to a small degree. Margins were 5%. This is obviously much better than 3 years ago when the sector was hovering around breakeven and is progressing towards the 8% goal. So on to the cash flow.

Operator

This is the usual busy slide that gives you all the detail, and I'll only pick out a couple of numbers. But the key point is in the title, and that is that free cash flow is significantly ahead at H1. So into the detail then, in the middle of the table, we have the operating cash flow of £135,000,000 and cash conversion of 80%. This operating cash flow was higher for H1 than expected, and this was due to working capital. So in short, there was very little working capital reversal in the half, and that flattered the H1 performance.

Operator

At the full year last year, we disclosed about £50,000,000 of early receipts from customers, and we flagged that they would reverse this year. And not surprisingly, most people expected them to reverse in H1 as did we. And indeed, they did. But would you believe it at the H1 period end, we got a similar amount from a number of customers, which is great news to have that cash early. But it is over and above the normal cash cycle, and it's unlikely to keep happening.

Operator

So that will reverse in H2. So looking down to free cash flow. You can see the pension deficit repair contributions have reduced period on period following the 2 pension scheme funding deals we disclosed last year. And everything else landed where we expected. So this all delivered £95,000,000 of free cash flow.

Operator

Or if you think of the pension deficit as debt, £119,000,000 of free cash before debt pay down. Lastly, I've added some detailed guidance on the slide here for the full year. Overall, given the performance to date and the timing differences, the full year will be H1 weighted. And so on to the balance sheet. I put this slide up at each results presentation to show the progression of the main balance sheet captions all in one place because I think it is important to see them all together.

Operator

The key takeaway of the slide is that the balance sheet is in a much more robust position than it has been. In the top box, you can see the deleveraging over the period to a gearing ratio of 0.6x. And that's a rolling 12 month calculation, that gearing ratio. So it still includes the €90,000,000 charge from Type 31 at the year end. The middle box is the pension deficit and the important actuarial deficit as well as the accounting one.

Operator

I'll come on to pensions on the next slide. But as deficits are not included in the gearing ratio, it's important to have them set out alongside. The 3rd box is working capital. So we've overachieved on working capital now for the last 3 years, leaving us with a very negative working capital position, which is good. But as I've said before, this leaves us with a risk of reversal, particularly on big programs.

Operator

And this remains the case. Also to remind you, included in here is the Type 31 contract liability, which is about £180,000,000 So there's no new news on working capital, but just reminders of what we have flagged before. And there's nothing really to say about the last box, the window dressing box at the bottom, but we just keep it on to convince you we're not dipping in that pot. Pensions. Pension deficit position next.

Operator

This is the updated slide showing the journey from the £700,000,000 deficit to where we are today. So on an actuarial technical provisions basis, we're now down to £160,000,000 or thereabouts compared to £300,000,000 a year ago or £200,000,000 at the year end. We disclosed in the summer, we've agreed long term funding deals with trustees of 2 of the 3 big schemes. And these schemes are now closing to future accrual right now at the moment. And this derisks the schemes and reduces the annual deficit repair contributions to the £40,000,000 that we mentioned.

Operator

And that will be the case for the next few years. And the 3rd big scheme, Rosyth, we're undergoing the valuation as at March 24 right now. So there'll be more on that hopefully at the year end. So lots of good progress on the pension obligation. This is the capital allocation framework we published last year.

Operator

So just to touch on the top three priorities. Priority 1, organic investment in the business. As you know, we're in an investment catch up phase, both through CapEx and OpEx to support delivery, improve control and enhance growth. We're spending £50,000,000 a year CapEx on submarine infrastructure. We're investing in systems and capability around the group amongst other things.

Operator

That's priority 1. Number 2 is financial strength. And you've seen the balance sheet improvement. You know we're now BBB plus with Standard and Poor's. And it's very important for all our stakeholders we protect that strong balance sheet.

Operator

The 3rd priority is the ordinary dividend. And we said last year, we reinstated the dividend at a prudent level given the investment priority and the need to trade out onerous contracts and get the pension schemes to a better place. And we intend the dividend to be progressive over time. And then there are the 3 options in the boxes below those three priorities. And you know we've already taken the pension option, the acceleration of the pension schemes.

Operator

We did that at the year end to enable the long term funding arrangements. And we started to look at a couple of potential bolt on acquisitions. Any bolt ons we do will be very focused and of course, we'll ensure we keep a strong balance sheet. So to finish on the outlook. H1 was a really strong start to the year, and we're confident we can get to the FY 'twenty five expectations.

Operator

Just to support that, we had around 90% of this year's revenue under contract at the half year, which is about the right shape. So that supports what we thought was the right shape for H2. And we remain confident that we are progressing towards the medium term guidance. And with that, I'll now hand back to David.

Speaker 1

Thank you. Can I just go off script for a second and just say I've waited for 8 years for David to say, and that's a good news story? So delivering sustainable growth. The bedrock is operations and delivery, as I've said. We've talked a bit about the market dynamic.

Speaker 1

We also talk a bit about how military need is greater than budget growth. And how is that reconciled? It's reconciled by the kind of things Babcock does, availability, capability and affordability most crucially. So everyone has talked about across all of the Western defense scene, everyone has talked about getting better capability, better lethality from existing budgets as well as budget growth. And that's kind of central to what we do.

Speaker 1

So that reconciliation, we see ourselves as a big part of. And we deliver that through ever enhanced through life support, delivering greater availability, through developing products. And Type 31, I don't like focusing too much on 31 because it's a relatively small amount of our revenue, but it's a good example of taking our experience in creating enhanced support environments and turning that into highly capable but highly affordable new platforms. So yes, 31 grew out of our understanding of support. And finally, advanced training because that again is about helping the people who operate the equipment use them and utilize them more effectively, so they deliver more capability from existing platforms.

Speaker 1

And we've talked about our strategy for growth. This was in the Capital Markets Day, which is about optimizing our position and selecting new programs in the U. K. And that's about what we bid, but also what we don't bid. So you will have seen in the announcement we withdrew for a competition in the training environment in the U.

Speaker 1

K. That was because we have very, very clear criteria for bidding or not bidding. And probably in the past, we've carried on too long to the point when we've it was we might as well finish. This was a very we can't see how this program would shape up to meet our investment criteria, so we stopped. And a couple of people have written that up as a bad news story.

Speaker 1

For me, I think it's a really good news story because it shows the discipline we now have in where we invest our bidding resources. We want to expand in the focus countries. These are Canada, France, South Africa, Australasia. And you've seen the down selects in France to support that. Good progress on JP-nine thousand one hundred and one in Australia.

Speaker 1

Drive direct exports, but also strategic partnerships. And I'm going to touch on that because I think in a number of markets, going in with a local partner to grow our presence is the best way to do it. But as I keep saying, successful program delivery drives growth. So the infrastructure at work at Devonport, which is astonishingly complex, turning Victorian docks into something that will last through to the second half of this century is an amazingly complex task, working very closely with our customer to make that happen. The DSG contract, we talk about a lot.

Speaker 1

But when I arrived, it kind of was the thing that hung around our neck in terms of coverage. Now it's seen as performing really well. We have lots of incoming international delegations looking at how we do it. The extension is on really takes us to the next level. So a good example.

Speaker 1

Secure Comms. I just wanted to focus on Skynet because we talk about the difference between the old world and the new world. And I've said since I got here, 50% of our destiny is the contract we signed. This was a good contract. 30% is how we mobilized.

Speaker 1

We put huge amounts of effort, not just the business, but the corporate functions, which didn't used to exist, working with the business to mobilize. That has gone super well and has already generated additional work, which wouldn't have happened if we'd been kind of bouncing along the bottom. And then energy transition, David touched on the growth in civil nuclear. And how we are growing our resources to support energy transition and civil nuclear, very important. I said I'd just touch on collaboration.

Speaker 1

So the first one is the joint venture with HII in Australia. We have a broad relationship with HII, looking at a range of opportunities. I was out with Chris, my opposite number, 3 weeks ago. We're just running down the list of things we can do together. And it's a very positive list.

Speaker 1

The one that's got the most attention is a joint venture in Australia looking at helping build Australia's sovereign nuclear capability. Australia will be the 1st country ever to go military nuclear without a civil nuclear industry to base it on. So that's a really important business. And David sits on the board of it to make sure that it's joined up to the mother ship, but has real potential. 2nd is PGZ.

Speaker 1

Again, we have a central contract, which is Miecznik, their version of Type 31, where we've extended the contract support contract through to 2,031. Again, I was there a couple of months ago. And definitely, there's options to grow use that to grow the broader PGZ relationship. Saab, well, we have the design contract for the corvette, which should lead to further work, part of a broader relationship with Saab. And then probably the new one for everyone, ST Engineering, so Singapore based, who have some great technology.

Speaker 1

This is initially for a U. K. Program. This is collaborating with a company for the U. K.

Speaker 1

Program. But in that collaboration, we own a number of export markets. So and we've just completed a very successful field test in South Africa witnessed by the U. K. Government.

Speaker 1

So very significant relationship and again can go beyond this single product. So I think this idea of a company of our scale working with local champions to grow in their market, our market and then more broadly is kind of going really well. U. K, everyone has talked about this, additional $3,000,000,000 for Defence, recommitment to the 2.5%. We've spent a lot of time pre election and post election with the government and officials.

Speaker 1

I think both the defense review and the whole shaping is going well. And if you look at the sovereignty messaging coming out from government and if you look at the value for money messaging coming out from government, both defense and treasury, I think all of those very much work in our favor. So we are a people business. We are not an IP business. We're a know how business.

Speaker 1

Know how travels in people. So having the right people in the organization, recruit, train and retain, is fundamental to our success. In many parts of the business, civil nuclear, I've highlighted, our growth is dependent on having a supply of people. So we have, as it says here, our largest ever intake of early careers, that's apprentices and grads, all schemes oversubscribed. To help train them, we've launched a nuclear skills academy with City College in Plymouth.

Speaker 1

We've just got I won't read the whole lot. We've got exchange programs now going with Poland. We've completely stepped up our people agenda in the last 2 or 3 years. And that's gone really well. We've just completed our 3rd global people survey and the encouraging thing there is that people that the really growth scores are in how people now see Babcock as a place to grow their career much more than they did 2 or 3 years ago, how they see us focused on them, their communities and the mission.

Speaker 1

So the whole kind of almost corporate well-being scores about why would I want to be in Babcock have advanced year on year, which is going to drive our retention statistics. So it's a good lead indicator on retention. So it's not something we will ever get complacent on because it is, for us, a super important metric. But the whole people pipeline going very well. So kind of what we said 12 weeks ago, which is we're on track to deliver the medium term guidance.

Speaker 1

We want the value we deliver to shareholders to be sustainable in the long term. We're a long term business, we should be a long term sustainable business. And all of the numbers point to that answer. So with that, we'll take questions from any God, that was quick. I didn't even get to say we'll take questions except for anyone over there.

Speaker 2

Thank you. Good afternoon, David. Sam Burgess from Citi. Just 2, if I may. Firstly The

Speaker 1

model in the normal tradition.

Speaker 2

Yes. Once HMSVentura is delivered next year, it sounds like everything is well on track with it. Would you be comfortable in saying that the risk of further provisions to the program is very low? You've spoken before about substantial retirement of risk once the first one is delivered. If you could just comment on that first, that would be great.

Speaker 1

So from an operational point of view, once we've the big thing now is to integrate the combat system. That's the last big thing. Once that's done, yes. But from an operational point of view, we're in a much stronger place. Do you want to add anything?

Speaker 2

Great. That's helpful. And just on DSG, great to see the strong performance. Given you've negotiated new terms on the contract, which will come in, in H2, should we expect the profitability of that contract to improve even more?

Speaker 1

I'm not allowed to talk about numbers, but look at David.

Operator

So yes, it will be a better contract. The performance has picked up on the old one, but there will still be yes, we may initially be prudent as we have been on Skynet, but I don't think that needs to worry you. So will it help towards the trajectory of 8 medium term? Yes, it will.

Speaker 2

Great. Thank you.

Speaker 3

Sash Tusa from Agency Partners. Nuclear keeps on getting stronger and stronger. I wonder whether you could just and it seems to continue to exceed your the expectations that you would have had of it even 6 months ago, but certainly a year ago. Part of that is just the flow coming through MIP. And you said that may peak or that may have peaked.

Speaker 3

But I wonder whether, more broadly, you think that there's a sort of risk that MIP and your other nuclear contracts are being used as risk mitigation by the U. K. Government in case there's slippage on Dreadnought?

Speaker 1

No, because the because if you look at the dock we just finished, that is to make it capable to take Dreadnought, not the slippage. So no, I don't think that's the case. And I think we're still in a position where, particularly for non U. K. Work, our ability to bid is resource constrained.

Speaker 1

So if we can continue to drive the people agenda, I still think there's plenty of particularly in Civil, there's plenty of growth opportunity in nuclear. So it's a no.

Speaker 4

It's Joel Spungeon from Investec. Just a couple of questions. The first thing is on, David, probably for you on SkyNet. Did you say it was a £70,000,000 contribution in the first half? And you mentioned that you've been prudent in terms of the margin.

Speaker 4

Can you just maybe elaborate on that in terms of what the margin profile roughly is going to look like and how long it's going to take to get to a normal level?

Operator

Okay. We never talk about individual contracts and margins. So let's imagine that in the fullness of time, it won't be a 1000000 miles away from our group target. And let's imagine that in the initial year, it started off at a very prudent level. But over the next year or so so it's the 1st year or so.

Operator

It's that mobilization phase we've talked about before where 50% of the issues are in the contract, 30% is in the mobilization. So once we're through the full mobilization, so give it a year, and we should be more confident to recognize it at a different rate.

Speaker 4

And then maybe just one other one, which is I was wondering if you could maybe talk about the impact of the increase in NII on costs in your U. K. Business and how you are planning to recover that?

Operator

Yes. Okay. So that overall for the group will probably the gross impact will probably be £20,000,000 a year. As you know, we have some contracts that are cost recovery. So some of that will be recovered straight away through those contracts.

Operator

Others, we have rolling contract renewals or what have you. So it will be picked up in the force of time anyway. And then the sort of net impact is sort of in the noise. I mean as far as our trajectory to 8% goes, it's just another road bump really.

Speaker 5

Chris Banbury. You mentioned you didn't want to go ahead with the tender for the Army Collective training scheme. Just really elaborate a bit more on what you didn't like about the risk profile there, that sort of thing?

Speaker 1

Well, so there are well, when we look at any program, there's what's the capital employed, what's the risk and what's the margin. Yes, there's some very basic things when we and the more capital employed, the more risk, the higher margin you need. And it just didn't meet our criteria. And we have a sufficiently strong pipeline of opportunities. We don't need to chase things that don't.

Speaker 1

So Alan, one of the reasons for highlighting it was the fact that it was part of our pipeline was mentioned in the Capital Markets Day. But also, I think that bidding discipline, getting that first 50% right, not talking yourself into something you shouldn't really be doing, is one of the core things that grows the quality of the revenue and grows the margin. And it's very easy to take a bad opportunity and put stretch and help and in the end, talk yourself into something. And I think it's a good example of the discipline we now have in our bidding process.

Speaker 5

So second question, if I may. The upcoming strategic defense review, mean, what are kind of your hopes and expectations around that, particularly in terms of the reform of procurement? What do you think might happen?

Speaker 1

So I mean, the government has both the party, both in opposition and the government, has said a bit like actually the last government said, they want more collaboration where it makes sense and less competition. I think that's good for us because in long term frameworks, collaboration means you can do things that are good for both sides. So I think that's positive. They've talked a lot about sovereignty, but we're British, so that's positive. So I think there are a number of positive themes.

Speaker 1

I think what we need to wait and see is how those themes turn into practical policy and process change.

Speaker 3

Sash Tiefs of Agency Partners again. Mentor 2, I think you said in the statement it's €800,000,000 I can't remember if that's euros or £1,000,000 or that's close enough. Roughly, what do you would you expect the proportion of capital equipment to long term services revenues to be? Is it a third upfront over the 1st over the mobilization phase or a quarter or something?

Operator

Yes. So the reason I said I'll give you more detail at the full year is I think we need to get the contract finalized first.

Speaker 1

It can be shaped differently.

Operator

Yes, it could be shaped slightly differently. But I do expect there to be an upfront revenue phasing.

Speaker 3

Okay. But for previous contract, Mentor 1, roughly, what was the proportion?

Operator

So I don't think it will I don't think you can be Sorry,

Speaker 1

it's not going to look at all like Mentor 1. It's not. Mentor 1 is not a relative benchmark to Mentor 2. The way the customers contracted it is quite different. David?

Speaker 6

Yes. Good morning. One for each of you, please. David, you had your slide on the sort of international partnerships, maybe just a bit more color on AUKUS and also the Saab JV, just timing on any contracts there. And then for David M, please.

Speaker 6

On your divisional slides, you talk about EBIT. On 3 of the slides, you actually mentioned inflation, but I think maybe in a more positive way than before. Can you just sort of put it all together and sort of say what the risks and non risks are of inflation for the group as of today?

Speaker 1

Yes. So mine is relatively easy. So for Saab, we are under contract for the design phase. So like any procurement of its nature, the customer has to sign off the design before you move into the next phases. But so far, our relationship with Saab, which is very, very strong, continues to hold up well.

Speaker 1

And the Swedish customer appears to be content with what we are or more than content with what we're doing. So I think that's positive. As far as AUKUS is concerned, we have, as we've said before, I think last year, we are under contract for some AUKUS support work already in the U. K. Do you want to talk about the JV since you're on the Board?

Operator

Yes. So the JV, actually largely the same as we said 12 weeks ago, there's a lot of engagement with the ASC in Australia. No significant contracts to date. We are obviously working hard with HII around skills, skills development, infrastructure, that kind of thing. And we'll keep you posted.

Operator

But both us and HII are very, very positive and committed to it. And on your inflation question. So in both nuclear and land, there were a few contracts where we have had a level of contract change to protect against inflation where historically we may not have had. In the main, we're in a much, much better position than we were 2 or 3 years ago on inflation. There was a secondary sort of benefit, if you like, in that even those contracts that had indexation, often it was lagging indices.

Operator

So whilst inflation was spiking up, it would go against you. But when it's coming down, it's slightly more favorable. So I think there are a few million in both sectors is the impact, but I think the message is we're in a lot better place from an inflation point of view than we were.

Speaker 1

Any other questions? Well, that could be the quickest half year a year we've ever done. So thank you for coming. And we will see you after the year end audit. Thank you.

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