Dec 7, 2021
So that’s disclaimer if you could all quickly read it. Well done.
So, we’re going to cover a brief introduction by me, David will then take you through the financial performance a bit late in the half year there are some complexities, and comparators and so on because of the restatement. And then I'll put a bit of color around our strategic priorities and strategic direction.
But if I was to summarize the six months from my perspective actually it's gone largely to plan or a bit better than plan. And that's true across all dimensions.
So, the inorganic, the portfolio alignment, the organic, the reset of the operating model and the ESG agenda. On the ESG agenda, I think, it's probably the most encouraging thing.
There's lots of noise around ESG in our industry, but the people who work in it are committed, in our business, are committed to pulling it to the center of the organization. So, if I look at how we go about bids, now, it's gone from being a kind of thing you check off at the end to how we're going to execute the business from the beginning.
If you look at the FAcT program in Canada, the way in which we're now embracing first nation work is not a compliance issue; it's a genuine commitment to the strategy of the Canadian government. So, I just think we're seeing across the company a complete change in mindset on ESG, on the societal, on the environmental and on the governance.
I think that's great. Business development, some really interest orders in the period which we'll come to.
And particularly, I've got a slide later on defense digital, where we've made significant progress. So that kind of enthusiasm could lead you to a really positive view on the outside world.
The macro environment is a bit difficult. We are still seeing a lot of volatility around COVID.
I would say that compared with 18 months ago, we kind of know how to manage that. Our agile working strategy helps mitigate some of it, but we are a people-based business.
We employ 30,000 people and therefore restrictions on how those people can operate and behave undoubtedly have an impact. So COVID and exactly how it plays out over the next period is uncertain.
There are inflation pressures. David will touch on that a bit.
We do have some decent protection in some of our contracts, but not a hundred percent. And supply chain we have strengthened our corporate supply chain capability, and we are now taking a much broader view, but it is a FAcT that supply chain pressures do exist because we're not a product business, we are less susceptible, but we are taking it very seriously.
So, I'll come back to most of that later, but I didn't want to delay your opportunity to see David.
Thank you, David. Good morning, everyone.
Before we go into the results, a recap on the contract profitability and balance sheet review. Hopefully everyone has seen the slides we published yesterday, covering the restatements and the presentational changes of last year, consistent with the March 21 CPBS.
There's more detail in the interim statement this morning. So, I'll just summarize four points.
The total restatement of H1 last year is £885 million. And I've split the adjustments out in the same buckets as the year end on this slide.
Secondly, the biggest of these buckets is specific adjusting items, and this is dominated by £760 million of a goodwill adjustment as at September, 2020. Third, underlying operating profit for H1 last year was restated by £26.8 million, of which £21 million were one, offs and £5 million recurring using the same terminology we used at the year end.
And four, we don't restate for changes in estimates. We only restate for prior period errors or accounting policy changes.
And you'll remember, there are a significant number of estimate changes at the end of last year. So those estimate changes will be a variance when we look at first half profit and second half profit, because we haven't restated and that's the £7 million box at the bottom of this slide.
So, the key financial headlines for the period is set out here. Organic revenue growth was 10%.
Approximately 4% was due to the recovery of activities curtailed in the prior year due to COVID restrictions and 6% was assisted by the ramp up of existing programs in Marine and Nuclear. The underlying operating profit increase was caused by several items I’ll come onto in a moment, but the largest of these was the lower COVID impact compared to the prior period.
As expected, operating cashflow and free cashflow were negative as a result of the partial unwinding of historic working capital stretches, higher CapEx and the catch-up pension deficit payments. Resulting net debt is £1.3 billion, including all leases or £938 million on a pre-IFRS 16 basis, which is the start point for the covenant ratios.
And on covenants the gearing ratio is 2.8 times at the period end, but it would have been 2.1 times if the Frazer-Nash disposal proceeds have been received in September, they actually came in, in October. So, to Group revenue, if we skip over the foreign exchange effects and the revenue lost on disposals, the main categories of the revenue variances against last year are firstly, CPBS, the impact on revenue is £52 million and this largely are the reassessments of contract progress and profitability across the group outlined at the year end.
Next COVID, last year the biggest revenue impacts from COVID were the shutdowns in South Africa, the cessation of activities in civil training and lower flying hours in aviation. These activities have broadly recovered.
Hence the revenue variance here. After these impacts the £155 million variance was a result of the organic growth in all four sectors, although driven by the ramp up of existing programs in Nuclear and Marine, which we'll see in a moment.
On to profit, we've touched on the CPBS £21 million and £7 million movements, so, I'll cover just the last three variances here over towards the right-hand side. The COVID variance of £25 million has the same caveat as to estimation and judge, as before.
We've estimated this to cover the revenue deltas due to activity level changes from site closures and staff absence, as well as direct costs like testing and equipment purchases, and also any indirect impacts such as inefficiency. So, the £25 million is caused by the recovery of many of the impacted activity levels.
And also, we have been able to recover many of the additional costs of keeping sites open and safe. Whether recovery of these costs continue in H2 is uncertain.
The pension charge increase is as we flagged at the year end; this is an IAS 19 charge and has no direct impact on the funding profile of the schemes. And the other variance of £6 million is largely down to lower margins on projects, including the first year of FMSP and higher SG&A costs relating to increased bidding activity and improving the control environment that we began in the second half of last year.
So, the resulting profit for the period is a £115 million and the overall margin of 5.2% is something we plan to improve over time with the new operating model. So now we move on to the sectors with Marine first.
Again, I'll pick out just the key points. 6% organic revenue growth was larger due to the ramp up of the Type 31 and warship support programs, as well as growth in the liquid gas business.
Within H1, there was approximately £120 million of low or zero margin program revenue, which as we've said before, we would aim to get back to sector average margins over time. And the profit impacts which I've set out on the slide result in a 6.2% margin for Marine similar to where it finished last year end.
The main points to note on Nuclear are the contract backlog is significantly increased due to the new FMSP contract signed in H1. The 14% organic revenue growth reflects the ramp up of infrastructure work and higher activity in submarine support.
We had about £60 million of infrastructure work in H1. On margin, FMSP is a five-year contract and we'll be at a lower margin early on until the transformation is delivered and infrastructure work, as well, is a slightly lower margin than the sector average.
Moving to Land, which also includes South Africa, the key points are COVID had a very material impact on this sector in the early months of last year with the South African business and civil training, as well as the airport's contracts affected. Hence the recovery this year.
The CPBS adjustment here is the reduced profitability on programs, the largest of which was DSG. The resulting sector margin is only 4.9%, but note there is around a £100 million of pass-through revenue in the H1 number; and a further £80 million of low or zero margin revenue on programs.
Onto Aviation, in the prior period COVID also had a large impact on this sector with reduced flying hours and additional costs required to maintain the services. And those couldn't be recovered from customers for the most part.
The flying hours broadly recovered this year. But the additional costs remain.
Revenues also grew as a result of the H160 program in France, which had only just begun a year ago. And sector margins are obviously very thin at 2%, but at least are beginning to move in the right direction.
Moving to the cashflow. As we said at the year end, cashflow was expected to be significantly negative this year, as we started to clear up the buildup of creditors and continue to invest in CapEx.
So, within operating cashflow in the period the main two impacts therefore are the higher CapEx due to investment in Type 31 and other infrastructure investment within the nuclear sector. And two, the working capital outflow, which included about £75 million of reversal of the year end creditors stretch that we disclosed last year, as well as an increase in contract assets, mainly in Aviation.
Below operating cashflow, the pension contributions included the first catch-up payment into the Roysth scheme in the period and the interest and tax cashflows were as expected. I’ve also so included some guidance for the full year on this slide.
Regarding exceptionals, as you know, we're going to restrict the use of this category significantly in future. The restructuring cashflow to date was £9 million.
And that's the start of the operating model restructuring impact. And some of the operating model reductions are being achieved through natural attrition.
Of the amounts this year there's up to £40 million of restructuring cost, which will go into exceptionals, as we said and potentially the settlement of the Italian fine, which if it does happen is estimated at £20 million. Below free cashflow are the impacts of disposals.
The oil and gas disposal was completed within the period and the net proceeds were £8 million, but it took with it £130 million of leases. And again, I've included some full year guidance on here repeating that there would be no dividend paid in FY’22.
And our near-term priority is to strengthen the balance sheet and get the gearing ratio below two times. So, to liquidity, this slide shows that we've ample liquidity in place over the medium term.
In the period, we signed a new £300 million three-year RCF facility and extended the bulk of the main RCF out to 2026. And note again that the net debt numbers on this slide as stated before the receipt of the Frazer-Nash disposal proceeds and the air tanker proceeds which should come in H2.
So, to finish the outlook for FY22 from the announcement this morning is copied verbatim on this slide, and you'll be pleased to know, I won't read it, I'll just summarize three points. First, our full-year expectations are unchanged.
There's a range of outcomes due to the macro uncertainties of COVID and increasing inflation and we are in the first-year of a turnaround, but we are on track. Second, we continue to expect free cashflow to be significantly negative for FY22 as the pension contributions and restructuring costs go out, and we unwind the historic working capital stretches; this is the same guidance we gave at the year end.
And third, we are confident that we can significantly improve profitability and cashflow generation at the group in the medium-term. So with that I will now hand back to David for the progress update.
Thank you. I lost my notes.
Oh completely lost my notes. So align the portfolio the – what we said a year ago was – six months ago was the portfolio alignment was a strategically driven thing.
We wanted to – we identified the markets we wanted to serve and the capabilities we wanted to deliver and that led to a disposal program. We did do a sense check because we needed a minimum of 400 million proceeds to also make the balance sheet in a safe place to get below 2 times as David said, and we're on track to do that.
So having got that, we still are going to complete the disposal program. Clearly people always ask what else is on the list.
And we always say, we can't talk about that it's commercially sensitive, not good for the business. But the aim is to be finished substantially in this financial year.
That will enable us to then define the group, define there for what the right risk profile of the group is, capital structure and everything and talk about that at the full year. As we said, we would when we did the full year results this year.
The new operating model as I said at the beginning, this is about being a better business, as much as it is about delivering the £40 million savings. It's about how the business can operate much more globally with less layers, better communication, how I have line of sight of all the people who do all of the important work in the business.
So I won't say that the 400 million – the £40 million is a byproduct of that, but the most important thing to drive an international operating model for this company is to have the right shape of business so that the company can join up. That's going well.
It also makes us more resilient against the COVID uncertainties because the business is cleaner with shorter lines of communication. If we have to implement short-term actions to deal with how government might respond to a new variant or whatever, we're in a much better place to respond with a less streamlined organization.
In alongside that we've implemented a number of new processes. The one I've picked out here is the new approach to project management and bidding.
It's much simpler, it's much more proactive, so I once said to someone; a risk register is one of two things, it's either something that you actively manage and drive how our program outturns both operationally and financially, or it's a list of pending excuses. And we are very much culturally and operationally driving the former, and I'm not suggesting it used to be the latter or anything, but just we are really driving in and the way we bid and run programs is to make it something we proactively drive.
People's strategy, I'm actually going to use the principal slide in a minute to talk about the Australia down select on Monday. So I won't touch on it now.
We've gone for this thing. We've called it agile working.
We don't call it flexible working because that has connotations in some of our union agreements. So agile work is two things agility in terms of location where work is conducted and that doesn't just mean home, it can mean more than one workplace; and agility on timing because the other thing we have discovered is by being flexible on when people work, not only where they work mean that it's easier for people particularly without caring either for elderly people or for children, caring responsibilities, easier for them to commit to the company, if we can be flexible.
So this is – this is identifying ways of working which are good for us and good for our employees. That's been rolled out.
It's been an interesting journey because typically if you – if you attend offices, you pay for attendance, you clock people in and clock people out, you pay for their attendance. If they're working in a more agile way, you pay for output.
So it's forced us to think a lot about not what – about what people actually deliver as much as their attendance. It's been a great, great journey for us culturally.
ESG, I've got a slide on some won't touch on it here. Growth opportunities we've got three up there.
The Indonesia Type 31, the MO with Ukraine and the mental program in France, we can now add the down select in Australia, three key non-UK order wins. The ship build a total program, pilot training and HF comms, so across the – across the gambit of what we do, all outside the UK.
So these are our new principles. They are quite a shock to the system for some in the company, but they really matter.
So if I look at the HF comms business that we won in Australia, this was driven by a massive collaboration between our Australian business and the UK business. So they certainly started with be curious, how might we beat a very strong incumbent.
So how would we do it differently? What is our – how would we make the customer change?
Be kind that is not been nice that is do things in a respectful way. There's a lot of challenges working at distance.
It's very easy to point fingers and that's worked really well. Be courageous, but believe me bidding this is always courageous.
Be courageous really go for it, outcomes sounds obvious but actually in a poor culture, success of a meeting can be planning the next meeting. This is about, actually getting stuff done, and that's been a real thing to drive to the schedule say John Howie, who is sitting just there, who has shared a group Board review to have really driven through outcomes.
Collaborate with a given what you've said and then own and deliver. This is not just the lead in Australia but in particularly the ownership of the delivery in the UK to support successful collaboration persuading and convincing Australian customer that the technology transfer that we committed will happen that will have full capability in country fast.
And with hard evidence not just words with already compelling. So the principles which were launched midway through this bid, undoubtedly people started referencing them and the calls I were on – I was on started referencing them and calling out bad behavior using them and can really help drive an international business.
ESG, so the three of them; net zero, Scope 1 and 2 by 2040. We have quite a significant aviation business in our current perimeter.
That's one of the things that drives the date because we have to estimate when the aviation business and technology in aviation is such that you can head towards net zero. Obviously other parts of the business will get there earlier.
We've got climate related risks and opportunities into the strategic process, but I do think as we drive the engagement in the business, we're seeing lots of opportunity here and not opportunity as in climate change creates opportunity, but opportunity to differentiate ourselves. So we now have a portal where people load up their ideas.
So for example in support business and the infrastructure support about how you can do it in a more environmentally beneficial way. So there's now a sharing of environmental opportunities for the group in a way, which we've never had before.
So sure, I touched on it with the FAcT bid, but we are in a war for talent and our people care on not just the young people, the whole all organization cares about how we are regarded. We are 14% of the direct economy in Plymouth and probably double that direct and indirect.
So we have a huge opportunity to influence the west – southwest of the UK agenda across a range of things, and that's what our people expect. If we're going to recruit the thousands of people we need over the next five to 10 years, people are going to want to join a company that is playing its role.
So this isn't just being nice, this is about, about delivering social impact for business reasons. I've touched on what you're working.
The other thing we're starting to do is set ourselves some hard targets on IND. So for example, 30% of senior managers to be female by 2025, but currently at 21.
So that's 50% increase. We've just appointed our first two female manager directors, which is a step in the right direction because this is not only about the number 30%, but the risk of getting this wrong, not just in the places where you might typically expect females to be so comms or finance or HR, but also in – so our new group head of programs is a lady.
I would say it’s a woman, a female. I'm not allowed to use the word lady.
Oh, I was doing so well. It's Donna.
Okay. She's Donna.
So we to actually – it's we want a balance representation across the organization, not clusters. And finally governance matters a lot.
Improved internal controls, so that we actually do what we say we're going to do. Delegations of authorities totally align with the D-layering, so that D-layering empowers the front that's where best decisions are made.
And things like a new sustainable procurement policy. I thought I'd touch on here that we kind of commentary that's around our sector on ESG and the defense sector.
My view, particularly for a company like Babcock, which is so people driven is that those countries, which have the capacity to address ESG issues properly are strong and robust countries, and they need strong and robust defense to do that. I think with 30,000 people, we can lead the way on the whole gamut of this agenda.
So I don't see being a defense company as anti-ESG. I see it as quite the reverse, and I think it's our job to make that case not to shy away from defense and ESG.
I think we are a key component of an ESG – of a global ESG strategy, not an enemy of it. And if I didn't believe that I wouldn't be here.
So defense digital, this currently sits in the Marine business. It's a very important and growing part of that business and I've just picked out three different areas.
So the music program these catching your named Maritime Electronic Warfare System Integrated Capability is a major win displacing a long-term incumbent in the UK providing electronic warfare for the Navy over an extended period. Early tactics which is tactical comms in the UK again.
It's an entry point into a program which has lots of growth potential, and then high frequency comms where we are a provider in the UK and New Zealand are now down selected in Australia with major opportunities in the other two, five eyes countries, Canada, and the USA. So a very significant capability taking microwave management for the electronic warfare through tactical comms into strategic comms where we play a critical role for governments, perhaps slightly underplayed by us in the past, but where we're seeing real and exciting growth.
So finally back to the first slide as always. My summary would be that we're on track.
As David said that we are managing quite volatile, external environments actually increasingly well where business development is going well, both in the UK and outside and on track for a successful turnaround in a volatile world. So with that, we'll take questions on anything.
I've got a point to people because there are roving mics, I think. Well actually, why don't you just pick people who've got their hands up, Debbie that gives you the power?
Q - Rob Plant
Thanks. It's Rob Plant from Panmure.
Can you add a USI without a business there?
So almost certainly to do anything in comms in the U.S. you'd have to partner.
So we are partnered with Lockheed Martin outside the States, for example. So these are typically collaborations.
So I can't imagine in comms we would be the prime, but we could certainly partner with people to bring through the technology we've got.
And more generally you thinking about actually entering the U.S. currently?
So we talked about that, I think at the full-year. So it's 50% of the addressable market, but for what we do, it's less addressable than if you are a product business.
So it's a big bet. And at the moment, there's plenty to go at in what we already have before we think about that big bet.
Thank you. Good morning.
Joe Brent from Liberum. Can I ask three questions?
Maybe one at a time if that's okay.
Could I ask three questions?
One at a time, yes, please.
It would be one at a time to make it easier. The first one on the sales proceeds, it seems to me you are pretty much at your target £400 million.
Would you consider at some stage raising that target maybe £500 million given there's other things you can potentially sell?
So what we said was we would – we had a strategically led sales process, the first £400 million proceeds of which would be used to pay down debt. Clearly, once you've done that and got the balance sheet of a safe place, you then have choices about how to use the remainder of the, the proceeds and therefore you don't kind of need to speculate on what that number might be.
So it doesn't have to just be debt pay down for the rest of the proceeds.
Yes. And as we've said before, we wouldn't trail future disposals for all sorts of reasons.
So we'll keep the market up to date at the appropriate time. As David said, we'll be – we'll be finished around the time of the year end results anyway.
So we'll know what the perimeter of the group is then.
Thank you. And the second question if I may on inflation, clearly it's a hot topic at the moment generally.
Others have given guidance on what percentage of contracts by number or value have inflation protection clauses. Could you give us a little bit more of the science around...
Oh that's a number of questions, David
Very approximately two-thirds of our contracts have some form of inflation protection. And that varies obviously, because there are many of them.
And so some of them would be very well protected. Some of them have indices escalators and a variety of that.
So two-thirds of contracts where we buy, we generally try and fix the prices off supply chains. And – so, and often we are back-to-back.
So even when we take inflation risk off the customer on the end contract, we would look to make sure that we are not absorbing that from the supply chain too. And then for the remainder of it, obviously we're a people business.
We need to manage the inflation such as it is as we do the rest of our cost base with efficiency and productivity.
Thank you. Then finally in the first half you've done a good job of recovering some of the overhead costs.
You confident being on to do that in the second half and how and when will we know whether you can do that?
Sorry, say that again.
COVID or overhead?
COVID overhead. Okay.
So, should I go or you go.
I'll go first and then you do.
So the only thing as David said, H1 last year was the bottom of the COVID cost issue. It or the worst part, in that the lockdowns were the hardest and we were all learning how to cope.
So that the comparative year-on-year is the most stark. H2 to H2 is more difficult to predict because in H2 not only have we started to all understand how we were going to live with us for this period, but also governments were funding quite a lot of that cost in H2 this year.
We don't know exactly what the risk is, and we don't know exactly how much governments will fund, which is why you create an uncertainty when you try and compare the two.
Yes. So just to remind you and everyone else, I think of three components of the COVID impact.
There's the revenue impact from activity levels, so if something's shut or curtailed or slowed down that drops through obviously to profit. Secondly, are the extra costs of keeping activities and sites open, whether they be testing or cleaning or equipment, or what have you in efficiency, et cetera, so costs incurred to keep sites over.
And thirdly is the recovery of those costs, which as we've said, historically in the early stages and until recently, obviously through the first half, largely but not entirely were recoverable. So all of those three things are what we need to think about going forward.
So when we said at the full year, we didn't expect a material boost in profits because of COVID. Obviously we can't predict the revenue, the activity levels.
So that's down to local countries conditions and new variants and what have you. The costs we kind of know how to keep these places open, but the recovery of costs is obviously not within our control.
So, and over time will governments around the world expect companies to pick those up more than they probably did a year-ago, possibly. So they're the three things we think about.
It's Kean Marden from Jefferies. Good morning.
Could I first ask a few questions on the nuclear infrastructure spend? Thank for detailing the amount in the first half.
It's quite lumpy and obviously when we're on a forecast that division it's quite an important swinging factor. Is it right given some of your sort of interactions with suppliers in Davenport over the last sort of few months where you've basically been, I think, looking for indications of people for the work that that revenue number may build up?
So I think its doc [indiscernible] or some of the other docs basically start to – the work starts to ramp up about 60 million potentially gets bigger?
So yes, during the second half of the year, it probably will be that level, or it could be higher depending on how things go. So you're right.
It does – it is a bit of a bubble on top of the rest of the business, which is why I called out the 60 million in the first half and of course that is higher than it was this time last year.
Yes. And there are – there is quite a lot planned, there are limitations in all the sites about how much work can actually physical and how many people can you get onto a site?
How much material can you get onto a site? So there are physical limitations in terms of how much civils we can actually do.
Does that suggest, therefore that the fiscal 2023 maybe flat year-on-year...
I think it's too early to – too early to say at the moment.
Okay. And then secondly can you just provide us with an update on recent trading in South Africa where obviously the COVID wave may have impacted your business again?
So today, South Africa has been open and going well and it has been open well since I've been here 12 months. So it was particularly acute in the first half of last year, the shutdowns, et cetera, so open and going well.
Okay. And then finally, I appreciate you don't disclose bid pipeline anymore.
It sort of feels with the additional bid activity cost that's going in and just linking sort of the underlying selective of the business actually your growth opportunity set is expanding. I'm just wondering if you can help us think about that or scale it in some way.
Does it feel like the opportunity is bigger than probably you thought 12 to 18 months ago?
So, I would say that the opportunity is clearer, whether it's bigger or not. I kind of was on the, I took this job was because I just kind of had this feeling it was big.
I think the opportunity is clearer. The nature of our businesses, you could end up with six silver medals in that business, or two gold and lots of business.
And as we saw recently on the Greek decision to buy to abandon their procurement and buy three French frigates there's a lot of geopolitical stuff in being a major prime contractor. Some of which falls in your favor and some of which against you.
So, I'd say the pipeline is clearer. And now we need to make sure we win some gold medals.
Good morning, Chris Bamberry, Peel Hunt. Could you please elaborate on some of the current opportunities in the pipeline across the of four divisions please?
And secondly, could you give us the comparator numbers for the pass through in low margin revenues in the first half of last year? Thanks.
So, in Marine within the UK, the FSS program remains an opportunity. However, it finally plays out, because I just think there's so much work to do on that.
Most major yards will do something. In international, we are in a number of competitions we've proved in Indonesia, we can win, which is good.
We now have to prove that isn't a one off. But there are significant opportunities.
I said, defense digital sits in there and we've won the three programs that I push up all recently. So, there's definitely – we're definitely very competitive in that world.
We probably at the moment need to make sure we don't over trade, deliver what we've got. In civil nuclear, we keep calling the bottom and then it goes down.
So, I'm always really nervous in civil nuclear, but one would have thought that with new build Hinkley, with the SMR work that is being planned in the UK and outside with the decommissioning work that needs to be done, that we ought to have found the bottom soon. So, I can always do a big strategic overlay on civil nuclear, and then I look at the numbers and there seems to be this disconnect.
But we are very well positioned as the UK's only nationally owned civil nuclear contractor to take advantage of that in the UK and then outside in places like Canada. In naval nuclear, obviously it's very, very early days in the G2G discussions on AUKUS, the Australian nuclear submarine program.
But you'd like to believe we have a role to play there. In aviation, we've proved in mentor that we can do pilot training outside the UK and clearly the FAcT program there in Canada is, which we've talked about before, is a major opportunity, very digital.
And then finally in land, I would say, we're in more of a reset mode, but there are opportunities in life after DSG and the broader support and environment. And that kind of puts aside the kind of incremental stuff that you get in the underlying support business.
I think that's my – have you got anything you want to add on growth or do you want to do pass through?
No, I’ll do pass through because it's quite easy. So, it's very similar.
So, the pass through levels, which are particularly in land are pretty flat and have been pretty flat both last year, first half and full year, and first half of this year.
Thank you very much.
Sash Tusa from Agency Partners. Just a quick question about Ukraine.
Could you just clarify, is your relationship direct with the government of Ukraine? Because clearly there's some risk as to whether that actually is there to be a client in the medium term?
Or is your relationship through a government-to-government relationship whether UK government effectively covers at least some of your downside risk?
So, the risk of crossing a confidentiality line, the program is funded by UK Export Finance. So, the financial relationship is essentially with the UK government.
The operational relationship is with the Ukrainian government. Do we have any online?
You can now move to the online.
Are you going to read them out or they going to come from the heavens?
They should come from the heavens.
Your first question from the phone line comes from the line of Anvesh Agrawal from Morgan Stanley. Please go ahead.
Hi, good morning. I got a couple of questions really.
First, on the Marine margin and picking sort of your comments earlier saying that you plan to improve them all time. Clearly in the first half, the recovery was the led by Frazer-Nash, which has now been disposed.
So maybe if you can comment on what are your building blocks for Marine margin, or what are the medium term that would be really great. And then just overall within this strategic plan, what has gone well and what has not gone so well so far?
I mean overall things seems to be in track, but where you would like the progress to be much faster?
Well, I'll do the second one first. So, I think whenever you make a change, as you build up things like the operating model change, whenever you finally implement it, you always ask yourself the question why you didn't do it the week before.
So, I guess on the operating model stuff, you always want to have done it sooner. And I've never done a change like it when I haven't felt, I wish I'd done it sooner.
So, we're online with our plan, but you always want to go faster. And I think what's gone well is the disposals program.
I think I was probably nervous that we'd have. I thought we'd do the deals for the £400 million in year.
I wasn't certain we'd have the cash. So, I think that's gone better.
What do you think on that?
It has because we said we do it within 12 months and the full year. And we've signed them now and Frazer-Nash is completed.
Then on margins in Marine building blocks, the obvious building blocks are firstly, the operating model, Nash share of it. And we haven't spit that out by sector, but you can take guess at that.
Secondly, we flagged there is $120 million of low or zero margin program revenue in that sector, which over time, there is no reason why that shouldn't be at normal margins. It will take time.
These things don't turn in months or quickly, but there's no reason why those programs shouldn't be at a good margin. And then thirdly, of course there is the normal sort of productivity and continuous improvement that we would look to do every year over time.
So, they are the three obvious blocks.
Okay. Thank you.
There are no further questions on the phone lines. I'll hand the call back over to your host.
Okay. Well, thank you all for your time.
And I'm sure we will be speaking before we stand up with full year. Thank you.