Thank you very much, and good morning, everyone. Welcome to our half year results presentation. We have delivered a strong set of half year results, sustaining the operational momentum from the second half of twenty twenty. We delivered growth across all our key financial metrics, thanks to the outstanding efforts of our employees as we maintained a clear focus on employee safety and program delivery. We have maintained our agile response to the pandemic, adapting to the ever evolving environment to address and meet our customer requirements.
We are pleased with our operational performance, which underlines our confidence in the full year guidance for good underlying top line growth and margin expansion as well as our 3 year cash targets. We are well positioned for sustained growth from current program and franchise positions. And as we look further out, we are ramping up our investments in advanced technologies to deliver capabilities for our customers in the face of an evolving threat environment. Following the decisive action taken to accelerate our U. K.
Pension deficit payments in 2020. The committed investment in the business combined with good operational performance means we are driving enhanced cash generation. This enables us to announce a 5% increase in the interim dividend as well as initiating a new share buyback program of up to £500,000,000 This increase in shareholder returns reflects our confidence in the outlook and our ongoing focus on a balanced and efficient capital allocation policy of both investing in the business and increasing overall shareholder returns. Let's take a closer look at the operational details and our progress against our midterm goals. We presented this slide in February as we laid out our ambitions for the coming years.
I'm pleased to say that we are delivering against these aspirations, giving ever increasing confidence in the positive evolution of the business by delivering margin expansion and improved cash conversion, which should provide attractive returns for our shareholders. Covering some highlights from the first half. On operational performance, it's a great testament to the business that we can talk about an almost normal delivery given the environment we've been operating in over the last year or so. The air sector is growing as production moved towards full rate levels on F-thirty five rear fuselage assemblies, higher Typhoon production revenues and our Australian business continues to expand. Electronic Systems, whose sales are up 26% in the last 3 years, continued its remarkable growth trajectory, driven by the F-thirty five and F-fifteen electronic warfare production volumes alongside the integration of the acquisitions, which are performing well.
In maritime, we sustained the performance improvements seen last year. Manufacturing levels increased on Type 26 with the first three ships now in production and we launched the 5th Astute class submarine. In P and S, there is positive momentum, especially around combat vehicle deliveries, which have more than doubled compared to the first half of last year. Cyber and Intelligence had a standout first half with Applied Intelligence delivering a record first half profit, benefiting from heightened demand in the government sector together with the results of our restructuring efforts. As I outlined in May, increased investment in advanced technology and innovation is fundamental for the business, supporting operational performance, competitiveness, our sustainability objectives and our growth aspirations.
We are increasing R and D investment in line with our plans as laid out in that presentation. In addition to ongoing investments and partnerships through our Electronic Systems FastLab Business, Other highlights in the half include increasing investment in Tempest and today we announced the signing of the initial concept and assessment phase contract. In Australia, we committed to increased investment to support the government in the rapid development of a sovereign high speed weapons capability. And we announced our partnership on hydrogen fuel cell development in the U. S.
On competitiveness, We have a number of programs to achieve efficiency and simplification across the group, building on the lessons learned in the last year on working practices and cost savings. We are also bringing data analytics to bear across the group to benchmark and improve efficiency, as well as investment in new technology and production techniques to maintain our drive for operational performance and value for our customers. Moving to the portfolio. The U. S.
Acquisitions are performing ahead of expectations and we have started construction on the new facility for the GPS business to maintain delivery of market leading technology. We made a small tech bolt on enhancing our data and digital capabilities here in the UK and sold our stake in one of our KSA portfolio companies, AEC. As we continue to constructively evolve the portfolio for value creation, We sold the Filton and Broughton sites, generating a good cash result. On demand, We are seeing many countries in which we operate increase defense spending and therefore our geographic spread of markets and diverse capabilities is a real positive looking forward. Brad will provide more detail, but it's worth highlighting that order flow remains strong and in certain cases customers are contracting earlier than we had expected.
As outlined in our May presentation, We have closely aligned our U. S. Portfolio with customer priorities and the key focus areas outlined in the U. S. National defense strategy.
The recent budget proposal was in line with our expectations and supports our growth aspirations. The U. S. Business now represents around 45% of group sales, and we are prominent on many of the most important long term defense programs for the U. S.
Armed Forces. Our portfolio is diverse and has a breadth of customers and leading capabilities enabling us to demonstrate competitive advantage in many domains. In the UK, The publication of the Defense Command Paper was positive for the group with renewed commitments to our major long term programs in complex warship, submarine and combat aircraft design and build, allowing for long term investment in these key sovereign capabilities. There was also strong support for cyber. The opportunity pipeline is positive with domestic export and collaboration opportunities identified and we have capabilities to support our U.
K. Customer in its space ambitions. In Europe, as a number of nations increase their defense budgets to address the threat environment and move towards their 2% of GDP NATO commitments. We are well placed through our positions on the Eurofighter Typhoon, our shareholding in MBDA and our BAE Systems Hagelands Land Vehicles business in Sweden. We are pursuing a significant number of opportunities in addition to the sizable wins secured in the last year.
Our portfolio is well positioned to benefit from increased defense spending in Asia Pacific through our Australia business, which is already set to grow significantly from our contracted positions as well as through export opportunities to the region. Additionally, in our Middle East markets, our long standing relationships at government and company levels continued regional instability and the nature of our long term contracts mean we expect defense and security to remain a priority and we are progressing a number of opportunities with existing customers. Finally, our sustainability agenda aligns stakeholder priorities with the group's environmental, societal and governance risks and opportunities. Our sustainability objectives go hand in hand with improved performance, and we are increasing our ambitions in accelerating our progress. Let me share with you some of the highlights from the first half.
We are progressing our program to achieve our target of net zero greenhouse gas emissions across our operations by 2,030 and working towards a net zero value chain by 2,050 with assessments of the impacts associated with our operations and products as well as opportunities through future technologies and our supply chain. We have joined the Race to 0 campaign and we are assessing the potential impacts of climate risk as part of our commitment to TCFD reporting. We play a key role in the communities we operate in. By way of example here in the U. K.
As part of the government's flagship youth unemployment program Kickstart. This year, we are providing placements for young people seeking work, creating a potential pipeline into our apprenticeship and graduate programs. And in the U. S, We are supporting the Thurgood Marshall College Fund and Race Forward to support their efforts to advocate for historically underrepresented communities. This progress on our sustainability agenda has been reflected with an improvement in our CDP score and we have maintained our class leading AA rating with MSCI.
We will give a fuller update on our sustainability agenda at an investor event in October. I'll now hand over to Brad for the financials. Over to you, Brad.
Thanks, Charles. Good morning, everyone. I'll lead off with the financial headlines and then cover results at group level before moving to guidance and capital allocation. The strong set of results for the first half of the year is evident across all the key metrics, especially on a constant currency basis. I I would like to take this opportunity to thank our teams for the great work they continue to do.
Demand for our products and services remains buoyant. This is reflected in the double digit increase in orders. Our backlog is now £45,000,000,000 and provides a strong basis for continued top line growth. Sales improved by 5.7% on a constant currency basis, reflecting the continued operational momentum through the first half and strong contributions from our newly acquired businesses in the U. S.
Profit at the half year of $1,028,000,000 was 27% up over the last half year on a constant currency basis and a 10.2% EBIT margin is above pre COVID levels achieved at the half year in 2019. Our sharp focus on liquidity drove another strong free cash flow performance for the half, which came in at £461,000,000 This keeps us firmly on track to deliver both our in year and 3 year rolling cash targets. We are proposing an interim dividend of 9.9p up 5% and we are commencing a buyback of up to £500,000,000 reflecting the strong results and our confidence in prospects going forward. I'll speak more about the buyback in a moment. Detailed comparisons for the half year period are shown here.
For reference, the dollar rate averaged $1.39 compared to $1.26 last year. This 10% deterioration naturally has headwind effects on the reported numbers. I already touched on the first few rows, but I wanted to call out a few additional items here. As a reminder, we moved from EBITDA to EBIT as our profit measure this year as we feel EBIT is a more comprehensive measure of profit. Strong operational performance and continued recovery from the global pandemic resulted in the 25% improvement in underlying EPS, which is a 21.9p for the period.
The settlement of certain tax issues resulted in the release of tax provisions leading to a one off 2.9p gain, bringing reported EPS to 24.8p. The tax rate at the half year was 18% compared with 19% last year and excludes the above mentioned provision release. On pension, the group share of the accounting deficit improved significantly since the end of 2020 with the deficit falling 46% £2,400,000,000 driven by a combination of asset performance and higher discount rates. On technical provisions basis. The U.
K. Schemes are around 98% funded. And as a reminder, we completed all of our lump sum U. K. Deficit payments under the existing funding arrangements last year.
Moving Starting with orders where we booked £10,600,000,000 of new business, up 13% over the first half last year. The U. S. Order volumes delivered a 1.1 book to bill ratio. There were key orders on multiple electronic warfare programs and strong demand for our Precision Strike and C4ISR capabilities.
The Netherlands CV90 order led the way for platforms and services while notable orders were booked in ship repair and INS. In the air sector, the £2,700,000,000 of orders included the initial Tempest concept and assessment contract along with further awards on F-thirty five and continued good demand in Australia and MBDA. Our maritime business received contracts under the UK MOD's Future Maritime Support Program, ongoing dreadnought funding and our UK land business received the Slow down of work to the RBSL JV for the Challenger 3 main battle tank program. Applied intelligence contributed a further £368,000,000 Sales for the half at just over £10,000,000,000 were up 5.7% on a constant currency basis. The reported increase of 2% reflects the headwind from the stronger pound.
For ease of presentation, I will focus on the constant currency Comparisons going forward as these are a better reflection of performance. In Electronic Systems, growth was over 6% compared with half 120. Strong contributions from the acquisition were partially offset by the COVID impacted commercial avionics business. The sector has 2nd half sales waiting and remains on track to grow 10% to 12% at the full year. Platforms and Services business grew Combat vehicle volumes more than doubled compared with the same period last year, but U.
S. Ship repair and M777 sales to India reflect the impacts of COVID, which held back overall sector growth. Their sector grew by nearly 6% on F-thirty 5, typhoon support and upgrade And the continued ramp in production on the Qatar programs. Australia sales improved by over 20% led by the Hunter ramp up. Our maritime business grew by 10% as the 2020 half year was significantly impacted by COVID.
Activity on Dreadnought and Type 20 continues to climb, while elevated support services associated with the deployment of the U. K. Carrier Strike Group delivered further growth. Within Cyber and Intelligence, Applied Intelligence was stable as double digit growth in the government division was offset by the fact that Halfonetwenty included a contribution from the now disposed commercial businesses. Our U.
S. Intelligence and Security division was up by 1%. Group EBIT at $1,208,000,000 was up significantly on last year when activity was affected by the global pandemic. Return on sales at 10.2% was 170 basis points higher compared with the same period last year, but was also improved over half one twenty nineteen reflecting our progress on margin expansion. Electronic Systems delivered a return on sales of 15.6%, up 270 basis points on strong operational performance and good contributions from the acquisitions.
Platforms and services margins continue to be affected by the COVID impacts and operational challenges on ship repair. We expect the sector to deliver material margin expansion in the second half resulting in full year results in line with original guidance. The strong improvements in the air and maritime sectors reflect the emergence from the pandemic and good program execution. Air margins expanded by 140 basis points to reach 10.6%, while maritime improved by 180 basis points at 9%. Cyber and Intelligence margins expanded by 3 50 basis points led by a strong showing in Applied Intelligence, which benefited from high utilization in the government sector and cost base improvements.
And at headquarter level, improvements realized as ARISTANA returned to profitability. There are further sector details for you in the backup materials. Operating cash flow of £694,000,000 increased by £574,000,000 over the first half of twenty twenty. Electronic Systems and Air delivered higher conversion levels at the half year through good working capital management and program execution. Platforms and services had a modest outflow having benefited last year from customer related COVID actions.
The first half twenty twenty one cash flow P and S reflects a more normal cash within the sector. Within headquarters, the £346,000,000 improvement was driven by the sale of the Filson and Broadsen facilities and the absence of lump sum deficit pension contributions. The strong results for this half year underline our confidence in both our end year and 3 year cash guides. The movements in net debt are shown here starting with the opening balance of £2,700,000,000 The improved free cash flow of £461,000,000 and M and A disposal proceeds offset the dividends paid out to shareholders and minority interest holders to leave net debt broadly unchanged at the half year. Our guidance issued back in February assumed a rate of $1.35 Our results up to the half year have been reported at an average rate of $1.39 So while the pound is strengthened, we still expect group sales to grow between 3% 5%.
If these higher rates persist in line with half one averages, Sales would likely be at the lower end of this guidance range. However, on underlying EBIT and EPS, Given the strong operational performance to date, we expect to be able to deliver on the originally guided ranges, plus 3% to 5% on EPS and plus 6% to 8% for EBIT, even if half when average rates persist, meaning this is actually an improvement above original guidance. Similarly, on the cash targets, while the higher pound creates a headwind, we are confident that we could still deliver in excess of $1,000,000,000 free cash flow this year, even excluding the benefit of the facility sale mentioned earlier. We also expect to achieve our goal of generating in excess of £4,000,000,000 over the 3 year rolling period. Finally, I'll turn to capital allocation and the buyback program we announced this morning.
As you have seen, our business enjoys a healthy backlog. We are growing our top line. We are expanding margins and we are increasing our cash delivery. We continue to prioritize growing our business by investing in R and D as Charles has outlined. Thereafter, there are 3 potential uses for the resulting free cash flow.
First, we recognize the importance of the dividend and have announced another increase for this half year period in line with our stated policy to operate with sustainable cover of around 2 times earnings. 2nd, we will continue to look for opportunities to grow the business through value enhancing M and A. Our 2 acquisitions in the U. S. Last year are excellent examples of this.
3rd, as we said in February, we will also consider returning surplus cash to shareholders through buybacks when appropriate. To that end, I'm pleased to report that the Board has approved a new £500,000,000 program to be completed over the next 12 months, which will commence immediately. So in summary, a strong showing in the first half with guidance maintained on sales and improved for earnings for full year despite the currency headwinds and a healthy growing business focused on value creation for all stakeholders. I look forward to speaking to many of you in the coming weeks and I'll turn it
back over to you Charles. Thank you, Brad. So pulling everything together, While geopolitical and COVID uncertainties remain, the fundamentals of the business are strong. These half year results give firm indication of what this business can achieve and our overall direction of travel. Our large order backlog, contracted program positions and pipeline of opportunities, together with our focus on program execution, position us to grow our sales profitably and increased cash conversion in the coming years.
We are evolving this business to have an appropriate sustainability agenda embedded at its core with a constant focus on operational performance and value creation. As we have demonstrated, higher cash generation gives us increased strategic flexibility to focus on technology aligned with our customers' evolving priorities and enables us to deliver increased returns to shareholders. So all in all, another positive half, delivering on our commitments and aspirations. Thank you for listening. With that, we shall turn it over to questions.
Thank you. Our first question And comes from the line of Robert Stallard from Vertical Research. Your line is now open. Please ask your question. Thank you.
Thanks so much. Good morning.
Hi, Rob.
A couple of questions from me. First, I wanted to follow-up on Brad's comment there about capital allocation. It sounds effectively like M and A is, to some extent, the pacing item here. So if you have M and A, you won't be able to potentially do further buybacks. So can you comment about what the pipeline looks for M and A and your capacity for additional buybacks after this GBP 500,000,000 move here.
And then secondly, on Tempest, you mentioned you got that contract today, so good news there. But I was wondering if you could talk about whether You're still looking at adding additional partner countries to the team and whether we've passed the point of no return and potentially merging with the European FCAS program. Thank you.
Maybe I'll just do Tempest first and then hand over to you, Brad. I mean, on Tempest, There are conversations going on with other potential partners at the government level. I can't go into much more detail on that. And It's fair to say that we're not past the point of no return as it with regard to any particular partners at this point. There is still The window is open.
Probably for the next couple of years, the window is still open. And Brad,
Yes, Rob. So you kind of heard me go through the hierarchy of how we're thinking about capital allocation. Our first priority is to make sure We're growing the business with increases in R and D and you've seen us invest that in places where we get really strong returns. Electronic Systems is the dominant Recipient of our self funded R and D programs and CapEx as well. We did make sure that we're investing and modernizing our facilities that generate Better efficiencies as we work through programs of the future.
And so that those two investments are critical. Then we look at the dividend and you've seen us increase Dividend 5% for the interim period. Last year it was 17th year in a row increased dividend. So we Recognize the importance of that dividend. And then you get to the M and A point that you raised.
And certainly, We're very pleased with the acquisitions that we did last year. Those are actually above expectations. They're accretive to our margins, accretive to sales, accretive to cash. They're doing everything that they thought they would do and more. So we with the improvement in the pension deficit in particular and the cash growing cash profile of the business, We're looking at a very, I think, strong balance sheet.
We have plenty of capacity to do more M and A. And we do have a pipeline that looks quite And we will certainly explore that space when it makes sense and when we have value creating opportunities and we do see some of those. And then that leaves buybacks, which as you've seen is due today. We're quite pleased to be able to use that as part of the toolkit. And that's how we'll think of it going forward as well.
Okay. That's very helpful. Thank you.
Thank you. Our next question comes from the line of George Zhao from Bernstein. Your line is now open. Please ask your question. Thank you.
Hi, George.
Hi, George. Hi, George.
I guess first question, does the buyback announcement have any incremental on the funding requirements as you approach the triennial review next year. And second question would be, I guess there's been some press reports regarding the 100 class frigates potentially being delayed on the start of the construction. And could you just comment on the key issues You still need to resolve it. I guess what does that mean for the expected revenue ramp up for your Australia business? Thanks.
So on buyback, I'm going to hand over to you to do that Brad.
Yes. So George, there is a Contribution that we'll make into the deficit linked to the buyback. So it will be about 10% of the final buyback value that we'll put into the deficit. And that's something that we agreed with the trustees. And so that's what we'll do there.
And then on Hunter, I mean, like a lot of the big programs, there has been some COVID impact. But like all big programs, We trade profit at very low rates in the early parts of the program. So whilst there might be some ongoing looking at exactly what it means to milestones and so on and so forth. I'm not expecting it to be a significant financial effect associated with
Thank you.
Thank you. Next question comes from the line of Andrew Hanfley from Morgan Stanley. Your line is now open. Please ask your question. Thank you.
Hi, good morning and thanks. A couple on electronic systems, if I may. The indication that you've given for full year revenue of 10% to 12% is obviously somewhere ahead of 6% organic in the first half. Can you give a bit more detail on the opportunities you see there that make that full year target feasible? And how does that roll forward into 2022?
And secondly, still on Electronic Systems, I think the margin was a little way ahead of where people were expecting for the first half. That's obviously a very strong performance, particularly given the shift in profit methodology. Maybe a bit more detail on the key drivers of margin there.
So Andrew, we do have the benefit of Tom on this call, who's dialed in early from the U. S. So Tom, do you want to take those questions on ES?
Very happy to. Thank you, Charles, and thank you, Andrew, for the question. Electronic Systems, a bit of timing is what's driving the first and second half But also as we look at the effects on the commercial business, the commercial avionics business in particular, if you think about the first half of twenty twenty, Right. You had a full quarter of pre pandemic levels, and then obviously the pandemic affected in the Q2. Compare that to this year where we're just starting to see it come back here in the Q2.
Quite happy to see that Leisure travel in the U. S. Has been on the climb. And so comparing the 2 from a commercial standpoint drives The first half down a bit, we expect that to return in the second half. Combine that with some of the sort of traditional timing issues, yes, tends to be a second half biased business, and that drives the sales profile.
As the profit, we do we did See better than expected return of some of the aftermarket in the second or the Q2 of the first half here in 2021. Combine that with the margins from the acquisitions playing through here for the first time in full this half, that drives the better than expected margin performance. Thanks for the question.
Great. Really helpful. Thanks.
Thank you. The next question comes from the line of Charlotte Keywords from Barclays. Your line is now open. Please ask your question. Thank you.
Good morning Charles and Brad.
Thanks, Arlof.
Just a quick one for me. It's on guidance. I mean, you had a very strong half. And obviously, the dollar stays where it is, we've got a kind of 2% FX headwind. So given you've had strong first half operational performance despite COVID impact across all divisions.
I guess the question is whether you could actually do a little bit better than netting that off. I mean, are you being conservative by not raising full year guidance a little today. And I just also wondered what your baseline assumptions you're making in H2 for COVID are? Thank you.
I think Brad is going to pick that one up.
Yes, I think so. The second half of the year, we do see a progression In sales, and that's across all the sectors, we'll see probably double digit increases in sales H2 to H1. And on margin, broadly we should get a small pickup H2 margins as a group versus H1. There's some moving parts and there's some back weighting in self funded R and D in the second half of the year. And just some of the risk retirements in the first half compared to sort of growth coming in the second half from programs in there that are early stages, so traded at prudent margin.
So there's a lot of the sort of timing issues that are at play here, but we do see the second half of the year on the top line improving significantly, and we expect margins to improve a little bit from H1 levels.
That's great. Thank you.
Thank you, Charlotte.
Thank you. Next question comes from the line of Chris Hallum from Goldman Sachs. Your line is now open. Please ask your question. Thank you.
Yes, good morning, everybody. So two questions from me. First, on Type 26, maybe just a bit of housekeeping. Where are total global combat ship revenues expected to be this year across maritime and air. And where should we see that trending towards as both Canada and Australia ramp up?
And then given that we've seen Type 45 getting some extra content added recently, is there potential to see the UK customer up scoping Type 26 or pulling forward the entry into service? And then secondly, on tax, 18% this year, but obviously, the outlook is for higher rates both in the U. S. And in the U. K.
So can we just assume that we can weight those rates or the rate hikes by your sales exposure across those two geographies? Or are there any specific nuances that we should be aware of? And what group tax rate are you using for your medium term planning?
Brad, you want to do the tax first?
Yes, obviously a lot happening in the tax world these days. You can see in the UK, Obviously, there's a budget announced with the rate going up to 25% kicking in 2024, 2023 rather. And then you see the U. S, I think we can all expect An increase there. We're sort of modeling around 25% as a house assumption on U.
S. Tax rates. So So I think next year you're going to see an ETR in the low 20s. And I think you'll see it picking up as the UK rates kick in. So we're on a glide path to mid-20s.
I don't think we'll get there Next year or the year after that, but probably by 24, 25, it's logical to assume that we should get thereabouts.
And then on Type 26 and related Hunter activities across the group. It's about GBP 800,000,000 at the moment, and that is It grows slowly over time as those programs mature.
Okay. And any scope sorry, Charles, just to add on, any scope for that to be pulled forward? I think there was talk about bringing the Type 26 into service earlier. Does that impact Revenue recognition or trading at all on that?
I mean, I wouldn't say I mean, the potential to bring things in earlier, given some of the COVID challenges that we've had. It's quite a tough ask, but obviously, we'll look and see what we can do on that.
Okay. Thanks very much.
Thank you. The next question comes from the line of Jeremy Bragg from Warren, your line is now open. Please ask your question. Thank you.
Good morning, guys. A couple of questions for me, please. Firstly, A question on confidence in the margin recovery in the second half for P and S U. S, please. So one for Tom.
And then coming back to the question on capital allocation, please. I mean, is it fair to think that basically We can take your cumulative free cash flow target for the next 3 years, deduct the regular dividends, and that's effectively what you have to spend on M and A or more buybacks or am I being sort of far too optimistic here and missing something, please?
Very good. So let's hand
the first one over to Tom on the P and S margin recovery in the second half. Tom, can you pick that one up, please?
Thank you.
Thank you, Charles. Thank you, Jeremy. So if we look into the second half number of drivers here, first of all, really solid performance across the business. I have to say very pleased with the performance of the combat vehicles team. It's been subject to discussion now for a number of earnings calls.
They've demonstrated remarkable resilience over the past 12 months, continuing to accelerate ramp, doubling the number Vehicles off the line and they're coming down the learning curve steadily. And so as we see that The opportunities we come down that learning curve, despite the fact that COVID slowed the ramp down a bit, we see some good signs of margin expansion across the vehicle programs there. We expect that to continue and particularly as they convert to full rate production over time. Some of that unfortunately was offset by the ship repair performance that was mentioned in the upfront remarks. Ship Repair saw some of the highest case rates during the pandemic that's rippled through a few of our more challenging fixed price programs in the yards.
These are stabilizing. We expect the business to return to a traditionally steady performance in the coming months. And then finally, commercial, I mean, As we continue to experience a more accelerated upswing on in commercial air travel here, particularly domestically, We'll see those margins return in the second half as well. And then just the bias of first to second half sales, that volume will bring additional for profit with it. So I think that's it in summary, Jeremy.
Thank you.
Thank you.
Yes, Jeremy, I'll take your question on capital allocation. And yes, I mean, you obviously have the free cash we're generating. We have dividend that comes out of that. And then there's cash capacity for M and A, but Also, I think with our strong balance sheet and where our leverage ratios are, we're generating EBITDAs that are greater than our net debt today. So we have further capacity to bring debt to M and A if we wanted to.
So I think you can as you described it is about right, but actually I think We have more capacity than what you described if we wanted to do something bigger on M and A.
Just on the basis of the net the EBITDA is growing and Therefore, your net debt to EBITDA ratio is declining even on a constant debt basis. And can I follow on and ask Conceptually, how you think about these buybacks? I mean, do you have a I mean, in the past, you talked about the kind of dividend saved As being the methodology when you think about valuing your own stock. So could you sort of update on that? I mean, are you buying back at any price?
Or are you price Sensitive and if so, how do you think about it, please?
Yes, I mean, we'll obviously take into account A lot of factors when we look at future buyback decisions, the first being where are we in that hierarchy that I described earlier. And if there's enough cash left over and the situation is appropriate for us to do a buyback, it needs to be at the right price. So we'll certainly consider all those things. And as you've seen us do today, all those factors made sense.
Okay. Thank you. And just to clarify, it's your full intention to do €500,000,000 of buyback because you have Up to in the wording, that's just legal thing, right?
Yes. Our intention is to execute the program.
Brilliant. Thanks very much, guys. Thank you.
Thanks, Jeremy.
Thank you. Our next question comes From the line of Nick Cunningham from Agency Partners. Your line is now open. Please ask your question. Thank you.
Thank you. Good morning, everybody. Yes. Hello. Customer on the U.
S. Again, but looking slightly further out. You're obviously growing very well now, particularly in electronics and armor. The sort of received wisdom is that as you go into the outlay is flatten off, particularly capital. But your colleagues at Lockheed seem to be contradicting that earlier in the week, and they're saying that they now see a positive inflection, albeit it might take a few years, driven by sort of great power conflict and developing technology in the military 5 gs and so on.
And that would be really quite a key change to be looking at growth rather than flat to down. Do you share that optimism? Do you see it
Tom, do you want to pick that one up?
I will. Thank you, Charles. Thank you, Nick. Amit, it's very difficult to predict the future, as you know, but I do bear the view that We're at an inflection point as a sort of across the world in terms of the threat profile. It's something we haven't seen in some decades.
I think there's sentiment around the need to ensure there's an appropriate investment in order to to deter that threat. And so we I would share the view that there would be Some continued consideration for upward motion in the budget in the long run. I think here in the near term, we're continuing to expect relatively flat outlays. However, as we've worked And as I've said before, to align our portfolio more to the services priorities as they relate to the National Defense Strategy, I think that bodes well for us. Brad mentioned record backlogs in the business and we hope to see that play through And we'll see how the budgets come out when the full FIDAP is released next year.
Thank you. Just to follow-up on that, Do you see that inflection applying equally to the 2 really quite different pieces of your main business, I. E, the technology end in electronics and the platform side of armor.
I think that remains to be seen. I think the threat It's multifaceted. And as you think about the Russian threat into Europe, we've seen an uptick on the combat vehicle side. In fact, We've got some 1100 vehicles in backlog here in the U. S.
And another 400 in Europe lined up for either upgrades or new production out of the Hagglund's business there. You've seen the European countries Some additional investments in defense there, and so good opportunity. And then clearly on the technology side where we Done a lot to work our alignment with defense strategies in places like full spectrum EW, destroying all domain operations, Space, those are good areas of opportunity for growth in the future. So we like the portfolio and we like the signs.
Thank you.
Thank you, Tom.
Thank you. And the next Question comes from the line of Christophe Menard from Deutsche Bank. Your line is now open. Please ask your question. Thank you.
Yes. Good afternoon. I had two questions. The first one on P and S U. S.
And the current fiscal year 2022 discussions, are we seeing Tremendly better situation for the U. S. Army in terms of discussion or are we at the same stage as the one we Back in May, that's the first question. The second is on applied intelligence. We've seen a marked improvement in performance in H1 with the book to bill also improving quite remarkably and I guess profitability as well.
How sustainable is it? I mean, should we think of this as with a visibility of At least 4 years, in line with the 4 year spending plan in the UK. Is it something that we Could now assume as I wouldn't say given, but a much better or an improved profitability for this division.
I'll maybe just do the Applied Intelligence and then hand over to Tom, obviously, for the P and S discussion. So Applied Intelligence, we I actually believe that this is sustainable and possibly with more to come on that front. You'll have seen in the integrated review how cyber was a very common cross cutting theme. And obviously, that plays into one of the great strengths of our Applied Intelligence business. And we think, therefore, underpins continued both improvement, but also sustains those margins into the midterm.
For P and S, I'll hand over to Tom again. Do you want to pick that one up in 2022 discussions?
I will. Thank you, Charles. And so on the FY 2020 2 Bill has a few committees to get through here in the U. S. In the coming months.
But as we're reading the tea leaves, it looks Like the combat vehicle side of the portfolio will fare well and there have been puts and takes as there have been in many areas of the budget. But for example, on the amphibious combat vehicle side, we see an increase in the budget expectations there. AMPV as expected, reflecting the sort of flattened ramp during COVID and so good budget support there. And then the balance of the program is well supported. And so we think it bodes well for as FY 'twenty two plays out.
And So I'd say moderately better confidence than the last time we talked about in May. Thank you.
Thanks, Christophe.
Thank you. And the last question comes From the line of Andrew Gollan from Berenberg. Your line is now open. Please ask your question. Thank you.
Yes. Thank you. Hi, gents. A couple of questions, please. Firstly, for Charles.
During the And call just now, you talked about a strong pipeline of opportunities across everywhere, actually, U. K, Europe and Rest of World. So maybe could you just spend a couple of minutes Outlining the key big ones and potential timings there. Secondly, probably for Tom. On the F-thirty five, Again, you talked about hitting peak rates there.
A lot of you are indicating a delay in reaching their peak rates and quote, rebaselining. And that's down to COVID. It's down to negotiating the block buy and sustainment, all the complexities there. So Maybe you could just explain how BAE syncs with Lockheed Martin, please.
Very good, Andrew. So I mean, I think the point I was making was that our geographic spread and portfolio, I think, positions as well as I look forward. You've got a multiyear defense spending settlement, which was better than many people expected here in the UK. You've got Australia in a position of increasing their defense spending by 40% over the next 10 years, given the nature of the regional threats and sort of investments in post pandemic and jobs. And we're very well positioned in Australia.
And then We've also got the European opportunities. I mean, the pressure to reach the NATO commitments of 2%. That is now we are seeing that come through and some of the strength of the orders that we saw at the back end of last year and the first half of this year in terms of CV90s out of Hagelin's upgrade programs or new vehicles and then the Quadriga Typhoon order. And we think there will be more European orders for Typhoon, either additional typhoon is into Germany or potentially Spain, looking at that. And we're also bidding into Finland, as you know.
So that range of opportunities on top of what is already a very formidable business in the U. S. That we've already spoken a fair bit about on this call. So I'll maybe leave it there and just hand over to Tom to pick up on the F-thirty five as you Jester. So over to you, Tom.
Sure.
I mean, we are and we remain in lockstep with Lockheed Martin. I'll say that as part of their supply chain, I mean, it's traditional for them to kind of by ahead of need. We are expecting a peak sometime next year, but we also have the benefit of The Block IV upgrade will eventually play through and result in additional production that would add to our sort of original build and that work will be heading into retrofits Of existing aircraft, right? And so it won't be as much a function of aircraft coming off the line as it will be to go back and upgrade Technology in some of the many existing jets. And so between the 2, we still expect to experience Some continued growth in that area in the coming.
I hope that's helpful.
You said it. Thank you.
Very good. Thank you for the question, Andrew. I think that brings us to an end on the questions. I'm just confirming with the operator here.
Yes, there are no further questions. Please continue. Thank you.
Very good. Well, thank you all for joining. And I know I'll be talking to many of you. We all will be talking to many of you in the coming weeks as we get out on the virtual roadshow. Thank you all.