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Newsroom

Ian King's AGM 2014 speech

Ian King
Thank you Roger and good morning ladies and gentlemen. We have delivered a solid performance against a background of reduced government spending on defence in the UK and US.

A focus on costs and efficiency ensured we protected our margins across the majority of our business. Our full year results for 2013 also benefitted from the satisfactory conclusion of price escalation negotiations with the Kingdom of Saudi Arabia.

Sales in 2013 increased by 2% to £18.2 billion, underlying earnings increased by 3% to £1.9 billion and underlying earnings per share increased by 9% to 42p.
As you know, we have a well‐established track record of delivering attractive returns to our shareholders. That continued in 2013 with a 3% increase in the full year dividend to 20.1p per share, reflecting the Board’s confidence in our business. In total, during 2013 we returned £850 million of cash to our owners, including the share repurchase programme. This year, that figure is set to increase to around £1 billion.

We started 2014 with a very strong order backlog of some £43 billion, and we booked £9.3 billion of new international business last year. We have a robust, investment grade balance sheet – all of which is testament to the health of the business.

Our business in the UK is in good shape and the outlook remains stable. In November, we reached a significant milestone by agreeing with the government measures to restructure our naval ships business. In addition to a revised contract for the Queen Elizabeth Class Aircraft Carrier programme and a contract to build three offshore patrol vessels, we are consolidating our surface ship build activities in Scotland to match future demand more closely. We continue to invest in Portsmouth as the centre of our maritime services, naval equipment and combat systems business, but we will cease shipbuilding activities there later this year. In consultation with trades unions and employees, we are making good progress in minimising the number of compulsory redundancies related to this restructuring.
In the air sector, the first Typhoon tranche 3 aircraft flew during 2013 and we continue to deliver aircraft to our European partners and Saudi Arabia.

In our submarines business, we continue to work on the Astute Class programme and we recently announced a £300m investment in our facilities in preparation for the Successor programme which would involve a possible replacement of the Vanguard Class boats.
In the US, defence spending was impacted by sequestration, a lack of agreed budgets and even a government shutdown in 2013. The bipartisan budget agreement earlier this year indicates spending reductions much as we had anticipated and we have taken action to restructure our business to adjust to market conditions. Despite a generally good performance in difficult market conditions, we encountered some performance issues in the Support Services business, which we are working to resolve.

Not all of our business in the US is directly exposed to government budgets. Our commercial electronics business is continuing to grow and we are increasing our efforts on export opportunities. There is also clear support in the budgets for some key programmes, including the F‐35 Joint Strike Fighter in which we have a significant work share.
We continue to pursue a number of opportunities in international markets. In 2013, we signed a further £9.3 billion of new business including £6.4 billion of new contract awards from the Kingdom of Saudi Arabia.
To highlight one particular success, in December, the Republic of Korea finalised an agreement with the US Government for BAE Systems to perform upgrades and systems integration for more than 130 F‐16 aircraft. The opportunity is potentially worth around £800 million.

As we announced this morning, the business to date continues to trade in line with our expectations in 2014. In the US, the announced defence budget, while not yet finally agreed in granular detail, provides a more predictable outlook for our US business than we have seen in recent years. In the UK, our business continues to benefit from long‐term, stable contracts in the maritime and military air sectors.

In 2013 we enjoyed the one‐off benefit from the agreement with the Kingdom of Saudi Arabia on price escalation against previously delivered aircraft. As this event will not be repeated, it is inevitable that, on a comparative basis and given lower defence spending, earnings per share in 2014 are expected to be 5 to 10 per cent lower than last year, excluding currency exchange impacts. I would emphasise, however, that the underlying forward momentum of the business remains strong.

We have a consistent strategy to support our customers in safeguarding their vital interests; to inspire and develop our people to drive our success; and to continue to create value for you, our shareholders, by improving financial performance and our competitive positions.

We have a balanced business portfolio and are not dependent on any one geography, sector or programme. We have an equal weighting of products and services revenues and in recent years have demonstrated success at growing our order intake from non US and UK markets. We continue to pursue growth prospects, particularly in cyber intelligence in the commercial sector and in commercial electronics.

Innovation and technology development are essential for this business and we continue to invest in research and development. As one example of our inspired work, earlier this year, we were able to reveal previously classified footage of the successful flight trials of the Taranis remotely piloted air system. This marked a major milestone for British aviation and is another example of this company taking a leading role in innovation for the aerospace industry.

The intellectual property we generate is vital to our sustained success. The value it creates takes many forms including products, processes and know‐how. We take all possible measures to protect this value and last year we filed patent applications covering around 250 new inventions. At the end of 2013, BAE Systems had a total portfolio of patents and patent applications covering more than 2,000 inventions across the world.

And of course, our employees play a vital role in the success of the business. Their contribution is all the more important at a time when we are facing significant market pressures. I am proud of the way our people continue to rise to the challenges we face, demonstrating their commitment to meeting the needs of customers with increasingly cost-effective and innovative solutions.
Our activities bring wide economic and social benefits in the markets we serve.

We work together with local partners to design, develop, and manufacture products and services that increase defence sovereignty, sustain local economies and protect business, people and critical infrastructure.
Our economic impact is particularly significant in the UK. The majority of our UK employees are in highly skilled engineering and advanced manufacturing roles and our labour productivity is significantly higher than the national average. Our activities also have important multiplier effects and we spent approximately £3.6 billion with our suppliers in this country.


In the US too, we make a major contribution and in 2013, we employed 31,000 people and spent more than 4 billion dollars with over 19,000 suppliers.

Our investment in graduate recruitment and apprenticeships outstrips our own company requirements, to create a broader pool of skills and capabilities that benefit suppliers, smaller companies and the economy as a whole. In the UK alone, we will recruit 287 graduates and 568 apprentices this year, our highest ever annual intake.
In each of our principal markets, we work with education institutions to encourage young people to pursue careers in science, technology, engineering and mathematics to provide the next generation of skills.


We also support not‐for‐profit initiatives that support our customers, invest in education and skills projects and benefit the communities in which we work. Globally, BAE Systems and its employees contributed over £10 million in 2013 to these organisations.

In summary, BAE Systems remains at the forefront of technology and engineering innovation, delivering advanced defence, aerospace and security solutions.

We continue to deliver against our strategy, to maximise shareholder value from our well balanced portfolio and strong order backlog. We remain confident that we can continue to develop our order book, to provide a solid basis for growth over the medium term.

I’ll now hand back to the Chairman to commence the formal proceedings of today’s meeting.