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

Good morning, everyone, and welcome to the full year results for 31st March 2022. Thank you for dialing in. So I have to show you this disclaimer slide, which I'm sure you've already read. So what are we going to cover today? I'm just going to do a brief introduction, and then David will take you through the financial results, which I'm sure you're pleased to know are somewhat simpler than those which you had to present 12 months ago. I'll come back on and do something about the future and opportunities, and then David and I will take questions. So -- what I think you'll see through the numbers is that we've had really strong progress in the first year of the turnaround, and that's because we've delivered what we set out in the 5 goals, which was to simplify the portfolio, refocus on our chosen markets, and that's both geographic and subject matter to strengthen and improve the quality of the balance sheet, and that includes paying down some of the off-balance sheet type items, driving efficiencies through the implementation of the operating model through reducing spans and layers and investing in our process facilities, people and systems. This is particularly important because as we move into the growth phase and into new markets, we need a strong baseline to do that from. And that gives us the lower risk platform to win future business in new and exciting markets, creating the opportunity to drive profitable growth. How will that turn into numbers in '22? I'll now hand over to David to explain.

Thank you, David. Good morning, everyone. To summarize FY '22 before we go into detail, the key messages are the overall performance was in line with expectations. The balance sheet, which was a real concern for many a year ago is now much stronger. And we have unwound the majority of the window dressing that used to occur at period end that we talked about at last year's results. So let's start with the balance sheet and illustrate 2 of these key points. I've set out the trajectory of the balance sheet strengthening over the last 18 months here. The first block, you can see has net debt coming down by over GBP 600 million over this period, including lease liabilities. This is largely due to the disposal program and the gearing ratio, which peaked at 2.8x is now down at 1.8 at the year-end as predicted. The second block of data here shows the unwind in the window dressing. We said last year-end, this would take a couple of years to unwind fully. As you can see, we've unwound about GBP 240 million in FY '22. Ignoring the Southern European debt factoring, there's only GBP 45 million left, which will reverse in FY '23. The third block shows the pension balances. As the accounting standard for pensions is volatile and doesn't drive cash flow, I've put the estimated actuarial balance on here too. We've made significant deficit repair payments over the last year to bring this down to a more manageable level, which I'll come on to later. So in summary, we're in a much better place from a balance sheet resilience point of view than we were a year ago. On the disposals, there are 5 disposals that we have announced. And as we've said previously, the purpose of the disposal program was to focus the group on the core business. But obviously, the financial effect has been a substantial part of strengthening the balance sheet. All the detail on the slide here is public already. But just to bring it together in one place. Once the aviation disposal completes, we'll have generated a total of GBP 560 million of proceeds, and we'll have sold GBP 340 million of lease debt as well. The key financial headlines for FY '22 are set out here. Organic revenue growth was 5%, 3% was due to the recovery of activities curtailed in the prior year due to COVID and 2% was assisted by the ramp-up of 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 COVID recovery from the prior year. EPS was in line with expectations as the higher profit was offset by the 2 one-off items I've put on this slide. As expected, free cash flow was negative as a result of the unwinding of historic working capital strategies, the catch-up pension deficit repair payments, restructuring outflows and the Italian fine. Resulting net debt is GBP 969 million, including all leases or GBP 557 million on a pre-IFRS 16 basis, which is the start point for the covenant ratios. And on covenants, the gearing ratio is 1.8x. So to group revenue. If we skip over the foreign exchange effects and the revenue sold with the disposals, the main 2 reasons for the 5% organic increase are firstly COVID. To repeat what I've said before on COVID, we've estimated the pandemic impacts as best we can. Last year, the biggest revenue impact from COVID were the shutdowns in South Africa, the cessation of activities in civil training and lower flying hours in aviation. These activities have largely recovered in FY '22, hence, the revenue variance here. And secondly, the GBP 60 million variance on this slide, which is mainly driven by the ramp-up of programs in Marine and Nuclear, which we'll see in a moment. On profit, again, skipping over FX and disposals. I'll only cover the last 3 columns here. The COVID variance of GBP 39 million has the same caveat as to estimation and judgment as before. We estimated this to cover 3 things: one, activity level changes from site closures or staff absence, two, direct costs like testing and equipment purchases, and three, the indirect costs such as inefficiency. So this GBP 39 million is caused by the recovery of many of the impacted activity levels and also we've been able to recover many of the additional costs of keeping sites open and safe. So last year's profit hit from the pandemic effect is now largely recovered or sold with disposals. So we don't expect further variances from this in FY '23 unless the pandemic takes another term for the worse. The pension charge increase on this slide is an IAS 19 charge and so has no direct impact on the funding profile of the schemes. And the other trading variance of GBP 6 million is due to a number of items that I've set out on the slide. All of these we've previously indicated, except for the GBP 22 million program write-off in the period. This program is in the nuclear sector and is approaching its conclusion. So the resulting profit for the period is GBP 238 million, and the margin is 5.8%. So now we move on to the sectors with Marine first. Again, I'll pick out just the key points. The 4% organic revenue growth was largely due to the ramp-up of the Type 31 program and the Indonesian license fee as well as growth in the liquid gas business. In the year, there was approximately GBP 230 million of low or 0 margin program revenue, which, as we've previously said, we would aim to increase the margin on over time. The profit impacts, which I've set out on this slide, including the Indonesian frigate license resulted in a 7.8% margin for Marine. The main points to note for Nuclear are the contract backlog is significantly increased due to the FMSP contracts signed in H1. The 3% organic revenue growth is driven by the infrastructure projects in Deavenport in the period. We're expecting FY '23 infrastructure revenue of at least the same amount as FY '22. And the profit margin reduction is largely due to the GBP 22 million program write-off I mentioned earlier. Margin mix is also affected by the early stage revenues of FMSP and infrastructure work, which is at a slightly lower margin than the average. Moving to Land, which also includes South Africa. The key points here 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 contracts affected. Hence, the recovery this year as pretty much all businesses were open throughout. This bounce back was very favorable for revenue and profit. The resulting sector margin has increased to 5.8%, but note that the previously disclosed pass-through revenue of GBP 200 million per annum is now no longer recognized as revenue. but there remains a further GBP 150 million of low or 0 margin revenue on the 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 services that couldn't be recovered from customers. The flying hours have largely recovered this year, although some additional costs remain. Revenues also grew as we ramp up the H160 and mentor programs in France, and profit was assisted not only by the COVID recovery, but also operating model savings and hitting certain key program milestones. Sector margins are obviously very low at 2%, but at least are beginning to move in the right direction. So moving to the cash flow. As we said previously, cash flow was expected to be significantly negative this year as we unwind the working capital stretches, but at the same time, invest in both infrastructure and systems. Within operating cash flow, the 2 key points are, firstly, net CapEx was lower due to more aircraft disposals. And secondly, whilst overall working capital was as expected, we received about GBP 70 million of customer receipts earlier, which allowed us to accelerate the unwinding of creditor stretches that I mentioned earlier. Below operating cash flow, we accelerated GBP 23 million of pension deficit payments from FY '23 into FY '22, bringing the total for the year to GBP 152 million. Tax cash was an inflow of GBP 10 million as a result of settling several open years with the authorities. Regarding the exceptional items of GBP 50 million, GBP 35 million of this outflow was from restructuring and GBP 15 million was the settlement of the Italian fine. And I've put some guidance on this slide for FY '23. All of this is before the disposal of the Aviation business, which was signed earlier this month. Below free cash flow are the proceeds from the disposals and the acquisition of the remaining 50% of the NSM joint venture. Net cash proceeds in the period were around GBP 400 million, and additionally, leases disposed totaled GBP 137 million. On capital structure, we've set a medium-term gearing ratio target of between 1 and 2x to keep the balance sheet strong. Please note that the first half of FY '23 might exceed this as the remaining catch-up pension payments are made in H1. Completion of the European Aviation disposal is expected in FY '23 and should generate further cash proceeds of GBP 115 million and the divestment of GBP 200 million of leases. And so to finish, we set out the Board's outlook in the announcement on this slide, and I won't read it for [ better I'm ] I'll just emphasize 3 points. Firstly, our full year expectations for FY '23 are unchanged as we start the second year of the turnaround -- there's a range of outcomes, partly due to the macro uncertainties, including higher defense requirements on the positive, but also increasing inflation. Secondly, we expect the unwind of historic working capital stretches to be completed in FY '23. This will weigh on free cash flow, particularly in H1. And this point is also unchanged from previous announcements. And third, we are confident that we can significantly improve profitability and cash flow generation in the medium term. And with that, I'll now hand back to David.

Thank you, David. So I'll now spend a few minutes looking at the future and the opportunities we have in front of us. So if you look at our market dynamics, as David has just said, it's a mix of good and bad uncertainty. So compared with a year ago when we stood up geopolitical uncertainty in the Asia Pacific region where we are growing our presence with things like the Indonesia program, buying out the joint venture in NSM in Australia and so on. And in obviously in Eastern Europe, where we are quite active supporting the U.K.'s efforts. So lots of uncertainty and driving end-user demand. Significant budget pressures because although most countries are committing to increased budgets, what they want to do with it is even higher. So more for less. -- or even more for more. Defense requirements are shifting very dramatically. So if I look at what people are learning from what's going on, their needs are changing so they need more agile partners in the industry. And as David said, we have both supply chain and inflation issues. So very dynamic market, much more volatile than a year ago and a great opportunity for a company that can respond to that, driving customer requirements, which are all about high value for money, high flexibility, high utilization and ability to modernize existing platforms because new platforms take time and greater flexibility. So why is that good for Babcock because Babcock working world delivers great availability through our support capability, affordability because we have a support mindset when we build products like Type 31, they're very affordable. And we deliver capability through upgrade programs. So Babcock is really well positioned to deliver the needs of our end users as they exist today. As we look at how we've refocused the portfolio, if I consider the end markets, and I've mapped it onto the sectors below, in naval engineering support, we have really world-class high-value technical and engineering support capability. And we do that in a number of countries, obviously, U.K., but also Canada, Australia, South Africa, in adjacent markets and so on. And we support submarines, we support surface ships, we support key equipment. So it's a very strong business. We have major infrastructure in Devonport and Rosyth, which delivers that capability and we design, build, support both ships, equipment on ships and submarines. So it's a full, strong business operating in both the Marine sector and the Nuclear sector. In the critical services sector in defense and civil, we do something quite similar. It's about high value engineering in all of the sectors below very strong technical training, which is a big growth area for us and maintaining complex assets and bringing it all together. So one of the things I did this week, which was actually an honor was to go and visit our team that supports the London Fire Brigade. As you know, the London Fire Brigade did an outstanding job last year dealing with an unprecedented number of calls -- we both procure support in workshops and in the field, their entire fleet, specialist vehicles and main vehicles. Our team turned up or on-site, supported London Fire Brigade doing what they do so well. It's on us to go and congratulate our team and to work with that partner. That ability to work closely with a partner means you have an ability to develop the relationship and therefore, the business. We talked about this being a journey. Clearly, year 1, we've just been through is about stabilized, get a platform and starting to execute it. And we've done a lot on the execution. That will drive underlying growth as you start to execute better. You get incremental work on the programs you're already on. That then creates a platform to move into new business and more new markets, geographic and adjacent technical markets. And we're starting to see that happen. It won't happen exactly in that shape. Poland is a new market. So it's in the growth line while at the front end of the growth line. So it won't happen exactly in that shape. But broadly speaking, that's how we develop the business. So the result of our strategic actions on the next slide, I should pick out the middle of 3. The portfolio alignment is largely complete. There are a couple of small pieces which are immaterial from a financial point of view to finish. But other than the ones we've declared we've done. Clearly, there are other things we have market tested. But if you haven't heard an announcement because we've concluded that retention is in the best interest of shareholders and for the people who work in those businesses. Operating model, we implemented a strategy to address the number of layers in the company to connect the business up to have center-led support functions to help us achieve much greater governance and control. And then on explore growth, we've already started and changed the way we look at growth markets, particularly outside the U.K. to make sure we validate and address the right opportunities. So the middle 3, the people strategy. So Babcock is a people business. We employ 28,000 people. We're people led. So getting a group people strategy, which didn't exist a year ago, delivered so that we optimize at the group level, not at the subcomponent level is fundamental to delivering the value of this company for 3 reasons. The firstly is it enables us to get the right people into the right place with the right training. Secondly, it enables us to attract people because we can offer, we can offer the career path, which you can't, if you only recruit into a small area. And thirdly, it gives us a backbone to deliver an international growth strategy by taking transferring capability around the globe because in our business, capability transfers in people. So how do we address that? We've launched our principle and our purpose and principles. We've got a group talent management strategy focusing on the key skills in this business. We're starting to harmonize policies and procedures. So that will take some time because a number of them agreed with unions, a number of them are within statutory entities. So it's going to take structural time to work through, but we've got an aggressive plan to address that. And finally, we launched agile working, which is about flexibility of time and place. That's very important for us for 2 reasons. It makes us more attractive in steady state. But also, as David said, if there is a reimplementation of any restrictions for COVID or any other reason, we're now much better placed to be able to minimize the disruption from that. The operating model is critical, is really critical to our execution. We've touched on the GBP 22 million is off program write-off in Nuclear. That's an old-ish program that was difficult to estimate in the contract and balance sheet review. As a result of the operating model implementation and as a result of the center-led functions, we would not contract in the way that was contracted, we would not set it up in the way it was set up, and we would not have executed it in that way. So if we want to avoid things like that in the future, the implementation of the operating model for everything we book going forward is fundamental. So it's about not only embedding structures. It is the investment in controls and systems and processes David talked about. That is why the ultimate output will be to significantly increase profitability, improve cash flows and create a platform for growth. Finally, and by no means least, our E and S and G strategy, it's absolutely fundamental to derisk the future. It's important to win talent into the business. It's a key issue for nearly everyone who wants to join this company. And it's a key issue for our customers and our shareholders. So sustainability is really being built into how we look at contracts and contract terms now, including incidentally how we change existing contracts to, for example, move -- reduce vehicle moves to cut emissions social outreach is happening all the time to reduce the impact of our business in a negative way in locations and to improve the positive. We've laid out our route to net zero by 2040. And on Inclusion and Diversity. I think that's the thing I'm most proud of on this slide. So we typically -- our senior women, if we focus on Jennifer McElhinney, were typically in support functions. We now have senior women leading businesses and leading operational functions. So we've had massive change on our inclusion and role-modeling in the last 12 months. So growth drivers to deliver the affordability, availability and capability. So we have demonstrated that Arrowhead 140 and its derivatives are very cost competitive in the market, deliver great capability and flexibility and can be built very quickly. So if you want a new ship, you can get it fast with Arrowhead. Within submarines, there is class transition in the 3 countries we operate in today, Australia, Canada and the U.K. In the U.K., we will have more classes of submarine in service and preparing for service than we've -- we've had in the nuclear era. So that generates a lot of opportunity. And in places where we provide equipment on to submarines like Korea, there's significant growth opportunity. So submarine class transition and I know it is a big deal. And in Defense digital, we have made significant progress winning hyper-frequency comms programs in the U.K. being selected in Australia, winning electronic warfare program, the so-called music in the U.K. for the Naval arena. So that's going really well and has real potential. And in the critical service defense and civil market, the asset availability model is clearly changing. People going from input-based type measures to availability type measures. So we're paid not for what we do, but for what we deliver. And that -- once you're being paid on output, it's just a much stickier relationship because you're much closer to the customer and you understand the true dynamics of what it takes to deliver and the interdependencies between you and your customer. Military training is evolving rapidly with outsourcing in the countries which typically didn't. So our order wins in France, the FAcT program in Canada coming up for rebid is a good example of a very modern and progressive program that's being bid. And in the U.K., the way the new training programs will be bid shows a much greater integration of training capability, all stuff we're very good at. And then finally, in Civil Nuclear, as people look at the twin pressures of green energy and energy security, i.e., not relying on unreliable sources of carbon energy. We're seeing a renewed drive on civil nuclear in the U.K. in particular, but also elsewhere where we can operate, which is very exciting. So we are well positioned to take advantage of significant future opportunities off the strong base that we're building. So in summary, going back to my very opening slide, I think in order to deliver that growth, you have to deliver a strong platform, which is what these 5 bullets were designed to say. It's what we've done in the first 12 months. So without taking our eye off driving strong internal performance improvement, we're now in a position to start looking at driving increasingly profitable growth. And with that, David and I will take questions on anything, which Sam will moderate with his usual flare and skill.

Thank you, David and David, I'm Samuel MacGregor, and we'll be hosting analyst questions for this session. [Operator Instructions] The first question comes from the line of Robert Plant from Panmure.

A lot has happened in terms of international defense since you last spoke to us in December. Many countries are increasing their spending. Is that yet leading into inquiries from countries? Are you seeing that in terms of your pipeline?

So I would say that broadly speaking, yes, I think in the very short term, well, as the U.K. has said, for example, they have a shortfall in complex weapons. So I think it will be about complex weapons, which isn't us an availability and enhancement of existing platforms, which is us. So in the latter category, yes, people are, I think, still evaluating what their equipment demand will be as a result of the change. So -- but on the support side, definitely yes.

The next question comes from the line of Joe Brent at Liberum, Joe.

Three questions, if I may. Could you give us an indication of where you think your margins could get to the overall business in the medium term, given the reshaping of the portfolio and the operating model changes? And then secondly, can you give us an update on where we are with the export opportunities on Type 31 and the opportunities you see in liquid gas. And then finally, could you tell us if you think the disposal program is largely complete.

So I'll do the last one first. Assuming we complete the aerial emergency service one, yes, subject to, as I said, to a couple of small bits and pieces. In terms of the first one, David will comment in detail. I'll just say that I'm always very nervous of margin targets because if you have low risk, low or 0 capital employed business, you will take a lower margin than if it's higher risk higher capital employed. So therefore, depending on the mix at any given time, you can tie yourself in not sort of margin target. But I'll let David be any more precise than that if he wants to.

All right. Okay. So on margins, well, as David says, we're not going to put out a target because that can drive the wrong behavior. So we can, as we've said previously and continue to say progress margins from here in every sector and for the group overall. You saw that we took a step forward in the year and in 3 of the sectors as well. We can continue that as we get the full benefits of the operating model and we get better contracting, better commercial risk management and better delivery. There will be a continual improvement boost in all sectors. But I don't want to give a target because that would mean that we'd probably turn away some good stuff, which might be at lower margins. But as David says, lower risk and lower capital employed, which is high value add.

And in terms of exports, obviously, where we are in Poland is we're the preferred bidder. We have a small contract at the moment, which is the -- how do we set this program up. That's going really well. I was in Poland. 4 weeks ago with my opposite number. I think everyone is really pleased with progress on that. Indonesia is going well. As you saw, it's reflected in the Marine results. There are 2 or 3 other campaigns, which are running where we are waiting the output. I think what we've shown in these programs is major platform exports are always politically driven. And therefore, it's always much easier to sell in an area where the U.K. has strong bilateral relationships and particularly stronger than our competitors' bilateral relationships. So it's partly about the equipment and partly about the geopolitics. But the pipeline is looking pretty good, actually.

[Operator Instructions] The next question comes from the line of David Perry at JPMorgan. David.

Before I ask my question, I think Joe just cut off I think he wanted an answer on is liquid.

Sorry. Sorry, I forgot about that.

I think it's actually a great question given what's going on in the order book.

Yes. So I think at the moment, the order book is very strong. I think I'm right in saying as strong as it's been, and particularly through our Korean connections, we're seeing a very strong pipeline of new build liquid gas programs in line with the new build ship program. We don't see -- there's no evidence today that that's going to curtail. Sorry, Joe.

Yes, my questions, please, got three. The first one is with the stronger balance sheet and we may be better cash flows coming in the coming years, are you inclined to prefund the pension deficit just to get rid of those out-year payments is something some of your peers have been doing recently? Second question is we get asked a lot by investors about risk on Type 31. So can you just update us in terms of how the program is going? And the last one, please. is do you have any risk on the interest rates on your debt? Is there any risk there with the interest rates going off the piece.

Okay. Well, I'll do Type 31 and the other 2 sound very much like one from my colleague. So Type 31 is going well. Obviously, we had 3 big milestones in the year. The completion of the assembly hall, the steel cut and the [ kill lane ], it remains on schedule. It's obviously first of class. So we're prudent in how we take margin because until you've done your first integration in first of class, that's your really big milestone. But operationally, we are on schedule.

Okay. So if I pick up the other 2 on the strong balance sheet. So we obviously still have some of the window dressing to unwind in the first half of FY '23. So let's get that out of the way first. And then there are options for capital allocation and pension is one of them. But it's only one of them. You saw in the year we accelerated GBP 23 million out of GBP 23 million into '22 million. So we've already done a little bit of that on a small scale. But let's get the balance sheet in the right place first, but it is one of the options that we would consider in the future. And on interest rates, so we have on our 2 bonds, we will pay off the October bond this year, so that goes with the remaining 2 bonds, 1 in 26 and 1 in 27, we've got about GBP 250 million, which is exposed to variable interest rates. The rest is all fixed. We're not drawn on the RCF. So that's just the commitment fee. So that hopefully will give you an idea.

Thank you. The next question comes from the line of Charlotte Keyworth of Barclays. Charlotte?

I just had a couple of questions. One was just a follow-up on the Type 31 question. I just wondered, given that you're on schedule, what do you see as the greatest risk to that program? And when might we kind of see that coming through just in terms of timing? And then the second one was on inflation and the fact that you're a people business. I mean in terms of wages, are you looking at addressing the cost of living crisis, I mean some of your peers have been doing that. And then in terms of your contracts, I mean, do you have hyperinflation clauses or anything far that's worth commenting on.

Okay. I'll do the first 2. So the -- we've completed whole ship engineering, which is a big internal milestone on Type 31, a really big milestone on any first-of-class warship is the integration of the combat system, which is a pretty much a 24 issue. 23'24 issue. So that will be progressive because obviously, a combat system comprises multiple subsystems. So as each subsystem is integrated, you derisk, but it's not a straight line. You're really done when you're finished. But obviously, you gain confidence as you integrate each subsystem on people, well, I think we did a rather good job because we got out first. We had a session with our unions in the spring, and we proposed pulling forward the settlement. So we actually gave our Paris earlier. We proposed an we had a long discussion with really good discussion with the unions actually and the representatives of nonunion. It was a really good process. And agreed a flat rate up to a certain number and then 0 so that, therefore, a flat rate gives a higher percentage to the lower page you are. So that was what we decided. I actually think we got ahead of the curve to support the cost of living by giving the rise earlier. We also put in place a range of other support mechanisms, whether it was helping people restructure their personal debt, obviously, not through a company through an agency we signed up and various other things to use Babcock buying power, we have a number of schemes which haven't always been taken up that widely. So we've republicized those to help people get their cost of living down. So overall, I think we've been quite forward leaning in trying to do what we can do to make life easier, earlier for people.

And on the contracting, well, historically, we've had a mixture. I said at the half year, about 2/3 of the revenue have contracts with some sort of inflation protection, and that's all the way from one end of the spectrum kind of cost plus to the other end of the spectrum, agreed at fixed escalators, and there's obviously a mix of indexes and valves as well for high inflation in caps and collars. There's a whole mix within that. And about 1/3 of the revenue is fixed. So we've inherited that. So the answer is some, but it's mixed. One of the key ways we're managing this in the future is to improve our commercial risk management. So we take on risks that we can manage. And if we can't manage it, we don't take it on. The supply chain might be able to, in which case, we pass it through. But we won't do what has happened in a couple of times in the past where we take risk of the customer don't pass it through, and we're left with the risk that we can't manage. So a mixture is the rather unclear answer.

Thank you. The next question comes from the line of Allen Wells at Jefferies. Allen?

A couple for me. Just to follow up on a few things. You touched obviously around some of the lower margin contracts that are still kind of a bit of a drag in some divisions. Have you got any update on kind of visibility on some of the uplift here, I'm thinking about things like kind of DSG, et cetera, where there's clearly the potential to make the exit or change those contracts a little bit over time. So just timing an uplift there. Secondly, obviously, you talked a lot about kind of the dynamics of the market, the potential opportunity in the coming forward. How do we think about how quickly some of this is potentially coming into the pipeline. We're already starting to see that move into the kind of contract negotiation phases and getting visibility on that? Third question, just on the wage increases as well, obviously GBP 20 million of wages you suggest that this will largely be offset by efficiency benefits. This obviously comes on top of the previously announced management initiatives. On turnaround just wondering if you could provide some of the details around some of the additional actions that's going to be taken there.

Okay. Shall I do -- I'll do low margin and wages, if you go to the opportunities. Is that...

Sorry, I'll add the opportunity...

All right.

So the opportunities, so we are seeing a number of smaller ones coming through. Can you do this now can you -- on support or quick upgrades. So we're definitely seeing incremental work, for example, in DSG. There have been incremental things we have done, which will help overall with the low margin thing because, obviously, you try not to do the incremental orders at low margin. So we're seeing that in terms of large big reshaping, they're starting to be discussed. And in terms of equipment, people are starting to ask what you could do to pull things forward. So it's starting. I think my feeling is that when people return from the summer break, they will start fully living in the new reality. And some of these opening discussions will accelerate is my feeling.

And so just to add to that on the low margins, so DSG in Land, obviously has a few years left to run more than halfway through the contract. So whilst we can improve the current position, it's probably unlikely that in the years remaining, that's going to get back to our ideal margin in the initial contract. The Marine low-margin revenues, which we flagged at GBP 230 million, generally is on contracts with longer to run. So I think we have more opportunity to improve margins within the current contract rather than just what might come afterwards. And on the offset of the wages increase, there are a number of efficiencies that we flagged in the statement, one of them, which actually helps us with inflation. The other part of inflation is within the last year, we've set up a procurement and supply chain function as part of the operating model. So we never had the sort of central governance, control and risk management of the supply chain and how it's commercially managed. We do now. So not only will that help us with risk management, i.e., stopping the bleeding, it will also help us with better terms and better buying. So that's one area we've called out that will definitely help.

Thank you. And with no further questions, I'll hand back over to David Lockwood to conclude today's full year results presentation.

Okay. Well, so thank you for your insightful questions. I know it's been a busy couple of days for analysts. So thank you for taking the time to read it and to ask the questions. And we'll go away and get on with some profitable growth. Thank you.