Performance in 2017
As you’ve just heard from Sir Roger, 2017 was a good year for BAE Systems and results were consistent with our earnings expectations. And, having taken over as Chief Executive last July, I’m pleased to say that we made strong progress in delivering for our customers, securing new business and advancing our strategy – with a renewed focus and energy to drive performance where it counts.
Our 2017 Annual Report includes full details of our financial and operational performance and, as usual, this morning we have issued a trading update on 2018 performance to date, confirming our outlook for the year.
Looking first at 2017, sales increased compared to the previous year to £19.6 billion, largely due to currency translation.
Underlying earnings per share for the year increased to 43.5p, 8% higher than 2016 and in line with our guidance.
Our order backlog of £41.2 billion was unchanged over the year on a constant currency basis – and that’s before booking the Qatar contract – ensuring good visibility of future sales.
We delivered a strong cash performance, which reduced Net Debt to £752 million at year-end, ahead of expectations.
And, in November, we agreed funding valuations and deficit recovery plans for our UK pension schemes. Under the agreements, we have greater certainty over company contributions and the deficits are expected to be cleared progressively to 2026. There are no changes to the benefits accrued by members or to employee contributions paid, under the valuation agreements.
As a result, our balance sheet is strong and we continue to deliver value to our shareholders.
In total, shareholders received dividends of 21.8 pence per share for 2017, over 2% up on 2016 and the 14th consecutive year of dividend growth.
Moving on to operational highlights.
We saw a higher tempo of activity across many of our businesses in 2017.
In the UK, manufacturing got underway on Type 26 frigates in Scotland, we advanced production on the Dreadnought submarine programme, and ramped up F-35 production.
The US business continued the ramp to rate in combat vehicles and a number of Electronic Systems product lines.
In Saudi Arabia, we commenced Hawk aircraft final assembly in Kingdom as part of our ongoing industrialisation strategy.
In Applied Intelligence, lower growth assumptions led to a good will write down of £384m. The actions we took to introduce a new management team and restructure the business have started to take effect.
Advancing our strategy
It’s important to recognise that in a tough competitive market, we need to become stronger, smarter and sharper in order to win new business and grow.
To do that, we are driving renewed focus and energy in three strategic priority areas: operational excellence; improving our competitive edge; and advancing our technology base.
Aligned with those strategic priorities, we have streamlined our organisational structure and strengthened management in key areas. And we took difficult but necessary actions to reduce our workforce at a number of UK sites to better reflect current and future workload, maintain critical capabilities and help secure anticipated new orders.
Focusing on technology, we spent £1.6bn on R&D overall, increasing self-funded R&D by 15%, we expanded our partnerships with academia and appointed Nigel Whitehead into the new position of Chief Technology Officer.
We’ve started to see the benefits of these actions across the Group – in pursuing new business, in sharing best practice and in developing innovative new technologies.
Some of our exciting technologies are on display here today – I hope you will take the opportunity to talk to our people in the exhibition area about the cutting-edge work they are doing.
Looking at 2018, we have a large order backlog and strong franchises, with opportunities to further these positions in the coming months.
In the UK, defence and security remains a priority for the UK Government and we expect this to be re-affirmed in the ongoing Modernising Defence Programme. Additional awards on the UK submarine programmes are helping to further our contracted positions in the Maritime sector.
In the Air sector, discussions to finalise the financing conditions within the contract signed with Qatar in December 2017 are progressing.
In March, the UK Government signed a Memorandum of Intent with the Kingdom of Saudi Arabia to aim to finalise discussions for the purchase of 48 Typhoon aircraft. Negotiations relating to the principal terms of this agreement are progressing.
In the US, our business remains well aligned with customer priorities and growth areas. The 2018 budget and the President’s proposal for 2019 maintain positive momentum for the sector, providing greater near term certainty and support to our medium term planning assumptions.
Production is ramping up on a number of long term programmes in electronic systems, combat vehicles and weapons systems, and ship repair volumes are on plan to exceed 2017.
In Australia, we’ve secured the 10 year JORN upgrade contract. Whilst we weren’t down selected for Australia’s Land 400 Phase 2 programme, we expect a decision by the mid-year on the preferred tenderer for Australia’s nine-ship SEA 5000 Future Frigate programme.
In summary, the momentum achieved in 2017 has continued into 2018. We’ve re-affirmed our strategy and the new organisation structure is established.
Governments in our major markets continue to prioritise defence and security, with a strong demand for our capabilities.
We continue to expect underlying earnings per share to be in line with 2017 on an IFRS 15 basis.
We have a solid foundation for growth over the medium term, major new opportunities ahead and a sharper focus on the strategic priorities that will drive efficiency, innovation and performance across the Group to deliver shareholder value. Most of all, our success depends on our skilled and talented people, who provide critical capabilities and support to our customers for the vital work they do to protect security and prosperity in the nations we serve.
I’ll now hand back to the Chairman to commence the formal proceedings of today’s meeting.