05 May 2010 | Ref. 003
The BAE Systems Plc Annual General Meeting Wednesday 5 May 2010
Thank you Dick.
2009 was another year of strong financial and operational performance, - a reflection of the ongoing strategic progress your company has made over recent years.
The year was characterised by good programme execution and strong cash flows across all our businesses.
To summarise the financial results:
- Sales at £22.4bn, were up 21%;
- Underlying EBITA was £2.2bn, up 17%; which delivered underlying Earnings Per Share of 40.7p, up 9.7%.
- Cash generated from operations was £2.2bn, up 10.5%
- and we ended the year with a very strong balance sheet with net cash of over £400m.
At the end of 2009, the forward order book was a record £46.9bn, providing a good basis for delivering sustainable growth in value to you, our shareholders.
The balance sheet is in a strong position and was the primary reason for the company implementing a £500 million share buy back programme. We have a balanced use of capital, addressing business investment, acquisitions, pension funding obligations and cash distribution to shareholders.
A brief word on our pension deficit. During the past year, we've succeeded in improving our pension position by restructuring our pension benefits in the US. More generally, the challenging economic conditions, and in particular the volatility in global equity markets in 2009, have inevitably affected the Group's pension schemes. We have agreed pension deficit plans with the UK regulator and we continue to review our pension scheme funding on a regular basis with the Trustees of the schemes.
I would now like to turn to the Group's strategy.
We have refreshed our vision to be 'the premier global defence, security and aerospace company', and our mission is 'to deliver sustainable growth in shareholder value through our commitment to Total Performance for all our customers'.
We want to be recognised as a company committed to developing a culture of Total Performance, focusing not just on what we do, but how we do it. Total Performance is about every aspect of the way we do business; Customer Focus, Financial Performance, Programme Execution and Responsible Behaviour, and is underpinned by our values - trusted, innovative and bold.
We remain firmly committed to becoming recognised as a leader in responsible business conduct. Our Code of Conduct launched at the beginning of last year, encapsulates the principles and standards of business conduct we expect of employees, and represents an unequivocal public statement of what we stand for, and how we do business. Regular and continuous training forms a key part of our ongoing commitment to responsible behaviour.
The safety of our employees and those using our products is critical to our business.
In the workplace, our goal is to ensure consistent safety management across our sites and operations, and to drive performance to a level comparable with the best performing global companies by the end of 2011.We are making strong progress to achievement of this goal.
I do however want to talk about the tragic loss of Nimrod XV230 over Afghanistan in 2006.
We deeply regret the loss of life in this accident.
We have taken action on the findings of the 2007 Board of Inquiry report, and have studied closely the Haddon Cave report published in October last year.
In December we engaged Dr. Chris Elliott, a leading Safety Systems Engineer, to help us review our approach to product safety across all our UK activities.
We are continuing to work closely with the Ministry of Defence, to ensure that any lessons to be drawn from the Haddon Cave report are learned, and acted upon, to help make aircraft for the RAF as safe as practicable.
We have spent much of 2009 reviewing and updating many of our policies and procedures to address the 23 recommendations in the Woolf Committee's report. In January 2010, this culminated in the launch of a revised Operational Framework.
The Operational Framework is the company's central system of governance and provides the structure to ensure we are rigorous in applying high standards of business conduct across all aspects of our operations.
Our Group Strategic Framework defines the strategic actions of the Group for 2010. This year we have increased emphasis on efficiency and cost improvements across the business.
I will now explain the six individual actions in some detail.
1. Starting with our Electronics, Intelligence & Support (EI&S) business. EI&S designs and develops high technology solutions for a wide range of military and commercial applications. At the core of this business lies a strong leadership position in electronic warfare and protection systems. EI&S also has an excellent, proven track record of identifying and exploiting emerging technologies. A good example is Power Management which is now a significant line of business. We are the market leader in hybrid electric drive buses for the US and we are rolling out this technology to other regions such as London, Oxford and Manchester here in the UK. We continue to see good prospects for growth.
2. Turning to implementing our global land systems strategy. As this business adjusts to lower volumes in the US and UK, and the consequence of losing the FMTV and FRES competitions, we are acting to adjust our cost base accordingly. Our objective is to enhance returns for this business.
3. The third action relates to establishing a sustainable and profitable business in the UK. Here a lot has already been achieved and despite the difficult underlying economic environment, we continue to develop the business.
In the air sector, the Typhoon Tranche 3 contract signed in 2009 secures work for a number of years and also provides a solid platform for exports. The F-35 JSF programme continues and will become one of our largest programmes. For some years we have been building on our partnered approach in supporting the UK's air sector and we have secured further large long term contracts during 2009 increasing the scope of this area.
We have also now extended this method of contracting with the naval Sector on the Type 45 destroyer which entered service within the Royal Navy last year. In surface ships our 15-year Terms of Business Agreement is key both to the long term sustainability of the shipyards, and to Naval engineering. We now have the two Carriers under contract - and in build. And we are contracted for the assessment phase on the Type 26 combat ship.
In Submarines we saw the first of class Astute boat commence sea trials and are well advanced on boats two to four. We have also secured follow-on contracts for boat five and six, and are engaged on studies for the Successor Submarine programme.
4. The fourth action concerns our plans to grow our home markets in the Kingdom of Saudi Arabia, Australia and India.
Saudi Arabia is the third largest of our home markets and the Government-to-Government programme to modernise the armed forces, creates a framework for future business. The Typhoon programme is now well underway with 8 aircraft delivered in 2009 and a rapid introduction to service achieved. The initial support arrangements are also under contract.
Australia is still, a relatively small business but the market is expected to provide good growth. The Australian government has reiterated their commitment to the published Defence White Paper which identifies 3% real annual growth over the medium term. BAE Systems is the largest defence contractor in Australia with over 6,000 employees.
India is our newest home market and we see significant growth opportunities in India where there has been renewed commitment to recapitalise the armed forces and the budget allocated to fund it. Our organisation in India is now up and running.
5. We are also continuing to place significant emphasis on our global initiatives. I have already talked about our plans to increase the global scope of our Land activities.
Readiness and Sustainment or Through-life support has long been a core strength and differentiator for our Company and accounts for 40% of our sales.
This market is characterised by long term partnered support and service contracts and is delivered through strong working relationships with our customers. This can often result in further work for the company such as platform development or upgrades. As our customers' budgets come under increasing pressure, Readiness & Sustainment is a good potential area of growth.
Security is a key element of our growth strategy as we look to capture increasing customer budget, and focus on information-based intelligence and cyber threats. These are areas that are identified as some of the highest government priorities and we expect both our existing US and UK businesses to develop rapidly in this current environment. Additionally we see significant opportunities to generate security solutions in our other markets.
Unmanned air systems - is key, not for the scale of the business opportunity, but as the framework for rapid prototyping, and in a number of high technology systems and sensors. We are making good progress across several existing programmes.
6. The last of the six areas of focus is the development of our global markets. Export sales represented 9% of sales in 2009 and we see substantial opportunities for future export sales. Overseas sales, are also increasingly being recognised as important by governments in our home markets.
I would also like to update you about the defence spending outlook in the US and the UK, two of our biggest home markets.
In the US, our planning assumption is that budgets will be flat to moderately up. The recently released 2011 budgets included 3.4% growth. This is at the upper end of our planning assumptions and in particular provides opportunities for our electronics and readiness and sustainment activities. Further opportunities exist for cyber security. In summary, the shape of the defence and Cyber priorities should play to our strengths.
Here in the UK we expect a longer wait before we see real clarity. The Strategic Defence Review is not expected until some months after tomorrow's general election. Our approach in this environment, is to focus on what we have in hand, that is the firmly contracted order book.
We are, however very aware of the difficulties facing government departments. BAE Systems has an important role to play in this. Good cost and schedule performance provides the customer with a better forecasting base. We have also done a significant amount of programme re-profiling to improve affordability.
To conclude, we have announced this morning that we continue to deliver against our plan and to deliver value to our shareholders. The strategy we have been pursuing is one that aspires to long term sustainable performance.
BAE Systems is a resilient business, well positioned to weather the pressures in the global markets.
We continue to drive efficiencies across all our businesses and see growth from our existing order book. We have strong positions in both the growth markets of Readiness and Sustainment and Security and continue to see growth in our JSF and Typhoon programmes.
Thank you. I will now hand back to Dick.
