Babcock International Group PLC (BAB) Earnings Call Transcript & Summary

So that's a 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 like 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 6 months from my perspective, actually, it's gone largely to plan or a bit better than planned. 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 that 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 society, on the environment and on the governance. I think that's great. Business development, some really interesting orders in the period, which will come to and particularly, I'll put 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 100%. And supply chain, we have strengthened our corporate supply chain capability, and we're 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're 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 4 points. The total restatement of H1 last year is GBP 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 GBP 760 million of a goodwill adjustment as at September 2020. Third, underlying operating profit for H1 last year was restated by GBP 26.8 million, of which GBP 21 million were one-offs and GBP 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 on second half profit because we haven't restated and that's the GBP 7 million box at the bottom of this slide. So the key financial headlines for the period are 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 on to in a moment. But the largest of these was the lower COVID impact compared to the prior period. As expected, operating cash flow and free cash flow 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 GBP 1.3 billion, including all leases or GBP 938 million on a pre-IFRS 16 basis, which is the start point for the covenant ratios. And on covenants, the gearing ratio is 2.8x at the period end. But it would have been 2.1x 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 was GBP 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, GBP 155 million variance was a result of the organic growth in all 4 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 GBP 21 million and GBP 7 million movements. So I'll cover just the last 3 variances here over towards the right-hand side. The COVID variance of GBP 25 million has the same caveat as to estimation and judgment 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 GBP 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, where the 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 GBP 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 GBP 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 largely 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 GBP 120 million of low or 0 margin program revenue which, as we've said before, we'd 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 contracts signed in H1. The 14% organic revenue growth reflects the ramp-up of infrastructure work and higher activity in submarine support. We had about GBP 60 million of infrastructure work in H1. On margin, FMSP is a 5-year contract and will 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 airports' 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 GBP 100 million of pass-through revenue in the H1 number and a further GBP 80 million of low or 0 margin revenue on programs. On to 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 cash flow. As we said at the year-end, cash flow 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 cash flow in the period, the main 2 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 GBP 75 million of reversal of the year-end creditor stretch that we disclosed last year as well as an increase in contract assets, mainly in Aviation. Below operating cash flow, the pension contributions included the first catch-up payment into the Rosyth scheme in the period and the interest and tax cash flows were as expected. I've also 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 cash flow to date was GBP 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 GBP 40 million of restructuring costs, which will go into exceptionals, as we said, and potentially the settlement of the Italian fine, which if it does happen, is estimated at GBP 20 million. Below free cash flow are the impacts of disposals. The Oil and Gas disposal was completed within the period and the net proceeds were GBP 8 million, but it took with it GBP 130 million of leases. And again, I've included some full year guidance on here repeating that there'd be no dividend paid in FY '22. And our near-term priority is to strengthen the balance sheet and get the gearing ratio below 2x. So to liquidity. This slide shows that we've ample liquidity in place over the medium term. In the period, we signed a new GBP 300 million 3-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 AirTanker proceeds, which should come in, in H2. So to finish, the outlook for FY '22 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 3 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 cash flow to be significantly negative for FY '22 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 cash flow generation of the group in the medium term. So with that, I'll now hand back to David for the progress update.

Thank you. So align the portfolio, the -- what we said a year ago was -- 6 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 GBP 400 million proceeds to also make the balance sheet in the safe place to get below 2x, 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, therefore, what the right risk profile of the group here 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 GBP 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 GBP 400 million -- the GBP 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 whatever. We're in a much better place to respond than with a less streamlined organization. Alongside that, we've implemented a number of new processes. The one I've picked out here is a 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 1 of 2 things. It's either something that you actively manage and drives how a 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 it just we're really driving in the way we bid and run programs is to make it something we proactively drive. People 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 through 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 working is 2 things: agility in terms of location where work is conducted and that doesn't just mean home, it can mean more than 1 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 means that it's easier for people, particularly without caring either for elderly people or for children, caring responsibilities is easier for them to commit to the company if we can be flexible. So 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 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 -- 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 so I won't touch on it here. Growth opportunities. We've got 3 up there. The Indonesia Type 31, the MOI with Ukraine and the mentor program in France. We can now add the down-select in Australia, 3 key non-U.K. order wins, the ship build, a total program, pilot training and HF comm. So across the gamut of what we do, all outside the U.K. 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 U.K. business. So they certainly start with, be curious, how might we beat a very strong incumbent. So how will we do it differently? What is -- why would -- how would we met the customer change? Be kind, that is not being 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 great, believe me bidding this at all was 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. And I would say John Howie, who sitting just there, who's chaired the group board review to -- has really driven through outcomes. Collaborate, but it's a given, given what I've just said. And then own and deliver. This is not just the lead in Australia, but in particular, the ownership of the delivery in the U.K. to support successful collaboration, persuading, convincing the Australian customer that the technology transfer that we committed will happen that will have full capability in country fast with hard evidence, not just words, was really compelling. So the principles, which we launched midway through this bid, undoubtedly, people started referencing them in the calls I were on. I was started referencing them and calling out bad behavior using them and can really help drive an international business. ESG, so the 3 of them, Net 0 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 0. 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. For example, in the 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. Social, I touched on that with the FAcT bid, but we are in a war for talent and our people care and not just the young people. The whole organization cares about how we are regarded. We're 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 U.K.'s 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 5 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 delivering social impact for business reasons. I've touched on agile working. The other thing we're starting to do is set ourselves some hard targets on R&D. So for example, 30% of senior managers to be female by 2025. We're currently at 21%. So that's a 50% increase. We've just appointed our first 2 female managing 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 is a woman, a female. I'm not allowed to use the word lady. I was doing so well. It's Donna. She's Donna. So we want to -- it's -- we want a balanced 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 aligned with the delayering, so that delayering in powers at the front, that's where best decisions are made. And things like a New Sustainable Procurement policy. I thought I'd touch on here the 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, we -- this currently sits in the Marine business. It's a very important and growing part of that business. And I've just picked out 3 different areas. So the MEWSIC program, this actually named Maritime Electronic Warfare Systems Integration Capability is a major win displacing a long-term incumbent in the U.K. providing electronic warfare for the Navy over an extended period. LE TacCIS, which is tactical comms in the U.K., 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 U.K. and New Zealand are now down-selected in Australia with major opportunities in the other 2 Five Eyes countries, Canada and the U.S.A. So a very significant capability taking microwave management from the electronic warfare through tactical comms and 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 U.K. 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 to point to people because there are roving mics. I think -- well, actually, why don't you just pick people who got their hands up. David, that gives you the power.

It's Rob Plant from Panmure. Can you add a [ U.S. Eye ] without a business there?

So almost certainly to do anything in comms in the U.S., you'd have to partner. So we're 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, are you thinking about potentially entering the U.S. [indiscernible]?

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're 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.

Joe Brent from Liberum. Can I ask 3 questions, maybe one at a time, if that's okay. Could I ask 3 questions [indiscernible] make it easier. The first one, on the sales proceeds, it seems to me you're pretty much at your target GBP 400 million. Would you consider at some stage raising that target to maybe GBP 500 million, given those other things you can potentially sell?

So what we said was we would -- we had a strategically led sales process, the first GBP 400 million proceeds of which would be used to pay down debt. Clearly, once you've done that and got the balance sheet to a safe place, you then have choices about how to use the remainder of the proceeds and if we 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 finished around the time of the year-end results anyway. So we all know what the perimeter of the group is then.

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 [indiscernible]?

A numbers question, David.

Yes. So very approximately 2/3 of our contracts have some form of inflation protection and that varies, obviously, because there are many of them. So some of them would be very well protected. Some of them have indices, escalators and a variety of that. So 2/3 of contracts where we buy, we generally try and fix the prices of supply chains. And so -- and often, we're back to back. So even when we take inflation risk of 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.

And then finally, in the first half, you've typically done a good job of recovering some of the overhead costs. Are you confident to be able to do that in the second half? And how and when will we know whether you can do that?

Sorry, again.

COVID or overhead.

COVID, okay.

So should I go or you go? You go.

I'll go first then you. So the only thing, as David said, H1 last year was with the bottom of the COVID cost issue or the worst part in that the lockdowns were the hardest and we were all learning how to cope. So the comparator 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 this 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 the -- just to remind you and everyone else, I think the 3 components of the COVID impact. There's the revenue impact from activity levels. So if something short or curtailed or slow 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 open. 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 3 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 3 things we think about.

It's Kean Marden from Jefferies. Could I firstly ask a few questions on the Nuclear infrastructure spend. Thanks for detailing the amount in the first half. It's quite lumpy. And obviously, much on to forecast that division, it's quite an important swing factor. Is it right given sort of your, sort of interactions with suppliers in Devonport 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 it's [ dock 10 ] and some of the other docs basically start to -- the work starts to ramp up at that GBP 60 million potentially gets bigger?

Yes. During the second half of the year, it probably will be at 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 GBP 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 -- what can actually physical -- how many people can you go on to a site, how much material can you get on to a site. So there are physical limitations in terms of how much civils we can actually do.

Does that suggest that the fiscal '23 may be flat year-on-year for [indiscernible]?

I think it's too early to say at the moment.

Okay. And then secondly, can you just provide us with an update on recent training in South Africa where, obviously, the COVID wave may have impacted your business again?

So to date, 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 looking at sort of the underlying sort of activity in the business, that 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 wondering so 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 6 silver medals no business or 2 golds and lots of business. And as we saw recently on the group decision to abandon their procurement and buy 3 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 falls against your side. So the pipeline is clearer. And now we need to make sure we win some gold medals.

Chris Bamberry, Peel Hunt. Could you please elaborate on some of the current opportunities in the pipeline across the 4 divisions, please? And secondly, could you give us the comparator numbers for the pass-through low-margin revenues in the first half of last year?

So, well, so in Marine, within the U.K., the FSS program remains an opportunity. However, it finally plays out because I just think there's so much work to do on that, that most [indiscernible] will do something. In international, we're 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. As I said, defense digital sits in there, and we've won the 3 programs that I put 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 was really nervous in the Civil Nuclear, but one would have thought that with new build at Hinkley with the SMR work that is being planned in the U.K. 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 U.K.'s only nationally-owned Civil Nuclear contractor to take advantage of that in the U.K. 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 U.K. 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 environment. So -- and that kind of puts aside the kind of incremental stuff that you get in the underlying support business. I think that's Mike, have you got anything you want to add on growth? Or do you want to do pass through?

No, I 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. It have been pretty flat both last year, first half and full year and first half of this year.

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 with the U.K. government effectively covers at least some of your downside risk?

So at the risk of crossing a confidentiality line, the program is funded by U.K. Export Finance. So the financial relationship is essentially with the U.K. government. The operational relationship is with the Ukrainian government. Do we have any online?

You can now move to the line.

The first question from the phone line comes from the line of Anvesh Agrawal from Morgan Stanley.

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 over time. Clearly, in the first half, the recovery was led by Frazer-Nash, which has now been disposed. So maybe if you can comment on what are your building blocks for Marine margin over 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 on 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've done it sooner. So we're on line with our plan, but you always want to go faster. But -- 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 GBP 400 million in a 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'd do it within 12 months of the full year, and we've signed them now and Frazer-Nash is completed. Then on margins in Marine building block, the obvious building blocks are, firstly, the operating model and their share of it, and we haven't split that out by sector, but you can take a guess at that. Secondly, we flagged there's GBP 120 million of low or 0 margin program revenue in that sector, which, over time, there's 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's the normal sort of productivity and continuous improvement that we would look to do every year over time. So they're the 3 obvious blocks.

There are no further questions on the phone lines. So 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 the full year. Thank you.