Good morning, everybody. As the results season starts to blend with the holiday season, we are absolutely delighted to see so many of you here this morning. As you know, our normal practice is to present the half-year results by webcast. As this is the first set of results that is going to be announced under Charles' leadership, we just felt it would be more appropriate to arrange a face-to-face meeting on this occasion. We're going to be returning to our traditional practice, obviously, in the future. Now, before handing over to Charles, I wanted to make just four points. First, the transition from chief operating officer to CEO has been seamless, and it is a reflection of the quality of the relationship established between Ian and Charles, and the depth of support from all levels of the organization that both received in this period of change.
The baton was passed cleanly and skillfully and is now in the firm grip of fresh hands. Second, the board is clear that Charles will lead a strategy of evolution, not revolution, building on the very sound foundations of his inheritance, but developing and improving and honing the competitive edge of the business through the application of a fresh perspective, new energy, and valuable international experience that he brings to the organization. Third, the meeting today is essentially about the results of the business during the last six months. In addition, I think Charles will give an insight into some of his views on the way forward. Undoubtedly, he will wish to add a little more color to these points later in the year. Finally, I remain very proud and privileged to chair this fine company and to work alongside such an excellent leadership team at board level.
In making the transition, I do believe we have balanced the injection of the fresh perspectives and the impeccable engineering credentials of Charles with the deep industry experience and the outstanding track record of both Peter and Jerry. I believe this will prove to be a winning combination. With that, I'll hand over to Charles for his debut for the results. Charles?
Thank you, Sir Roger, and good morning to you all. I will spend a few minutes giving an overview of my thoughts on the company's strategy, strengths, and the business environment, and outline the areas I want to focus on before handing over to Pete for the financial results. We shall then take questions. First of all, I'd like to say what an absolute privilege it is to lead this company, a world leader in engineering, advanced manufacturing, and technology. I've had a terrific 15 months and thoroughly enjoyed taking over the reins as CEO in recent weeks. It is clear to me that we have the right strategy to sustain and grow our business, continue to win new opportunities in international markets, and leverage our capabilities and technology. Our capital allocation policy underpins our strategy and remains unchanged.
Over the last year, I've had the opportunity to visit our operations around the world to see firsthand the depth and breadth of our capabilities and quality of our people, to engage with major and prospective customers, partners, suppliers, and investors, including many of you here in the room and joining via the webcast. This has enabled me to gain a deep understanding of the business, the challenges, and the opportunities ahead. Ian and the team did an excellent job against a challenging backdrop of defense spending declines, while at the same time leaving us well-positioned to benefit from rising demand for our capabilities. In short, we have a strong, well-run business with a robust order backlog, long-term positions on key programs, and a number of key competitive advantages. We have a broad geographic footprint and diversified market positions.
Importantly, our track record of successful partnerships in international markets to develop local industry, employment, and skills is now becoming a key requirement to do business in those markets. We have world-leading technologies in the fields of electronic warfare, autonomous systems, advanced manufacturing, robotics, and data analytics, and we continue to invest in R&D, often alongside our customers, to identify and develop emerging technologies. The speed of change in technology means that we must continually build on our technological advantage and attract and retain the right talent in order to stay competitive. While the medium-term outlook is good, it is also important to recognize that competition is intensifying across our markets, and that our customers continue to face pressure on budgets to address a broader range of threats, and in the face of relatively weak global economic growth.
In short, we are entering into a market that is more competitive and fast-moving, but with a greater opportunity for growth. We're in a position of strength today, but I am clear that to capture the opportunities and address the challenges ahead, we will need to maintain, and in some cases, intensify our focus on three key areas. Firstly, operational excellence. Our talented and dedicated workforce is delivering some of the world's most complex and challenging engineering programs to provide some of our customers' most sensitive and critical capabilities. We have a number of major programs underway, and we are ramping up production, so it's vital that we maintain our focus on operational excellence by delivering for our customers and exceeding quality and safety standards. There is simply no better way to highlight our skills and capabilities, and therefore, to win new business. Secondly, competitiveness.
Good progress has been made in making the organization more efficient over the last few years, and there are further opportunities. We are in a more competitive world, and need to intensify our focus on efficiency by continuing to take out cost. To that end, I've appointed a global head of procurement to drive this program. Additionally, we need to enhance collaboration across the enterprise to bring to bear the full range of capabilities and expertise in bidding for new business, addressing new markets, and implementing best practices across the group. Thirdly, technological innovation. We have a long heritage of developing and integrating cutting-edge technologies to create complex systems that give our customers a capability advantage. The accelerating pace of technological change is a disruptive force in many industries.
For me, it's a key driver of competitive advantage, and increasingly, the most critical determinant for our customers in awarding new business. As new technologies emerge from an ever broader range of sectors and markets, we are increasing our focus on identifying and investing in the most attractive prospects for our business. We will continue to expand our partnerships with academia, small and medium enterprises, startups, and other industries, and investing in R&D within the company and with our customers to stay a step or two ahead. To recap then, I've identified three themes, operational excellence, competitiveness, and technology, and you will see more focus on these as we execute our strategy in the months ahead. Moving on to the main matter in hand, the half-year results.
We delivered a solid performance in the first half, consistent with our expectations and guidance as governments in our major markets continue to prioritize defense and security with a strong demand for our capabilities. The company benefits from a large order book with established positions on long-term programs. Programs such as the F-35, Type 26, Armored Multi-Purpose Vehicle, or AMPV for short, and Dreadnought are all in the early stages, and the full value is not yet recorded in our order backlog. Importantly, we have a strong and sustainable split of platform electronics and support revenues over a broad geography. In the U.S., our position is well-positioned. The fiscal year 2017 budget and 2018 budget proposals support the medium-term planning assumptions for our U.S. businesses as we see the production ramp on a number of our long-term programs.
Our U.S. electronics business has strong franchise positions in the high technology areas of electronic warfare, electro-optics, and intelligence, surveillance, and reconnaissance. As the electronic warfare supplier on the F-35, we are increasing production and are well-positioned for the higher rates over the coming years. The AMPV, M109 self-propelled howitzer, and Bradley upgrade programs underpin our U.S.-based combat vehicle business, which is also experiencing domestic and international demand on amphibious programs. These long-term contracts, our strong franchise in tracked vehicles, and opportunities in international markets make the land business well-positioned for growth in the medium term. As you know, we're a leading supplier of ship repair services to the U.S. Navy, and we continue to adjust our workforce and facilities to meet evolving demand. Additional dry dock capacity at our San Diego shipyard became operational in February.
In the U.K., we expect defense and security will remain a priority for the new government. In the air domain, we continue to deliver Typhoon aircraft to the Royal Air Force, alongside airframe subassemblies to the European partner nations, while work progresses on the Kuwait Air Force subcontract. On the Saudi Arabia SALAM Typhoon program, the final four of 72 aircraft have been delivered. Under the Oman Typhoon program, we've now delivered the first two of 12 aircraft. The remaining deliveries are scheduled for the second half of 2017 and throughout 2018. Turning to Hawk. Deliveries to Saudi Arabia have progressed, with 18 of 22 aircraft now delivered under the contract signed in 2012, and manufacturing for the second batch of 22 is on schedule. Under this program, we will undertake the final assembly of the aircraft in the kingdom.
On the Omani Hawk program, the first 2 aircraft have been completed, and the remaining 6 deliveries are scheduled for the second half of 2017. Export activity continues to be supported by the U.K. government. Discussions with current and prospective operators of the Typhoon aircraft support our expectations for additional contract awards. However, there can be no certainty on the timing of these orders, and in any event, any new orders are unlikely to positively impact production delivery rates for at least 24 months. Under these circumstances, the balance of customer demand and production rates will be under constant review, with adjustments made as appropriate. We provide extensive support to our customers on Typhoon and Tornado. Typhoon's capabilities continue to be enhanced.
Work on the ongoing integration of Meteor, Storm Shadow, and Brimstone 2 missiles is progressing, and this furthers development towards the Royal Air Force Centurion standard, which will enable transition of a capability from Tornado to Typhoon as the U.K. Tornado fleet retires in 2019. U.K.-based production of the rear fuselage large assemblies for the F-35 is increasing, with most of the advanced manufacturing investment already in place to achieve the planned production volumes. In Maritime, submarine activity is increasing, with the Astute and Dreadnought class now both in production, and a major redevelopment of the Barrow site is underway to deliver the Dreadnought program. On Type 26, a GBP 3.7 billion production contract was signed in June for the first batch of 3 frigates, with a cut steel having taken place in July.
On the Queen Elizabeth-class aircraft carrier program, the first ship departed Rosyth for sea trials in June, and assembly of the second in class is well underway. Activity to prepare the support solution in advance of the arrival of HMS Queen Elizabeth at Portsmouth is continuing. Notwithstanding the good progress detailed in the Maritime business, there remains pressure on the Navy's near-term budgets, and we continue to work hard to deliver value for money for the customer. In Saudi Arabia, we're progressing current and potential new requirements as part of the longstanding agreements between the U.K. and the Kingdom. Support activities for the Royal Saudi Air Force continue to perform well, with high availability achieved for the Typhoon and Tornado. Our in-Kingdom industrial participation also continues apace and aligns with the Kingdom's 2030 Vision. In Australia, the business is underpinned by long-term support contracts.
Following the announcement in 2016 that we were one of 2 downselected on the Land 400 Phase 2 combat reconnaissance vehicle program, evaluation and testing is underway by the Commonwealth. On the Sea 5000 future frigate program, the funded risk reduction design study has been completed, and we continue to support the Commonwealth on its program activities. The MBDA joint venture has continued to win orders, and with its large order backlog, we expect sales growth in the medium term. The first M777 howitzers have arrived in India, where Mahindra will be our in-country partner, and are currently progressing through in-country testing. We have a longstanding relationship with Hindustan Aeronautics Limited, and an order for a third batch of Hawk aircraft remains under discussion. Moving on to our cyber and intelligence and security businesses. In the U.S. market, conditions for our intelligence and security business remains highly competitive.
We are focused on delivering on our key programs, managing the cost base, and maintaining a strong bid pipeline. BAE Systems Applied Intelligence saw double-digit sales growth in the period. Following a review of market priorities and our competitive position, we have made changes to the management team and sharpened our focus on a narrower portfolio of commercial cyber products and markets. At the same time, we're continuing to pursue cost reduction opportunities throughout the business. These will strengthen our foundation for future growth and reflect our long-term commitment to the success of this business. I'll now hand over to Pete to run through the financials. Over to you, Pete.
Thanks, Charles. Good morning, everybody. As usual, I'm going to step through the results for the half year. I'll move on to the 2017 full-year guidance. The results have seen some benefit from a stronger US dollar. The US dollar rate averaged 1.26 in the first half of this year. It was 1.43 in the comparator last year. The headline numbers compared to 2016's half year, sales increased by 4% on a constant currency basis to GBP 9.6 billion. As per last year, we continue to expect some second half bias in sales. I'll come back to that when I go through each of the sectors. Underlying EBITA of GBP 945 million, was 11% up on last year or 5% on a constant currency basis.
Underlying finance costs in the first half were at GBP 129 million, slightly higher on charges arising from our share of equity accounted investments. Underlying earnings per share were GBP 0.198. There is a bridge chart highlighting the major movements from the first half of last year attached to your presentation packs. There was an operating cash inflow in the first half of GBP 277 million. Net debt at June 30th stood at GBP 1.7 billion. I'll cover the cash position on subsequent charts. Order backlog has increased to GBP 42.3 billion. That's after around GBP 400 million of exchange translation headwind. Finally, the interim dividend has been increased to GBP 0.088 per share. That's up 2% on the 2016 interim. In addition to the impacts from exchange translation, there were a number of items impacting the balance sheet and, in particular, working capital in the first half.
As anticipated, residual advances are being consumed on the Omani and European Typhoon production contracts. Costs are being incurred against the provisions created in previous years as we close out the U.S. commercial ship build programs. As you'll recall, there was an operating cash flow benefit from accelerated receipts of some GBP 250 million received in December of last year. That has reversed as expected in the first half of this year. The IAS 19 accounting pension deficit at the half year is very little change from the 2016 closing position. It's at GBP 5.9 billion. I'm going to move straight to the pension deficit position on this next slide. The value of the scheme assets has increased since the start of the year to GBP 26.3 billion. That's after pensions paid out of around GBP 600 million. Liabilities have increased by GBP 200 million to GBP 32.7 billion.
Real discount rates since the year-end are unchanged in the U.K., but have fallen by 30 basis points in the U.S. The period's discount unwind and service cost, less the pensions paid, broadly net out. Overall, a small decrease of GBP 0.2 billion to the pre-tax accounting pension deficit in the first six months. As you know, the pension accounting is one thing, the funding position is much more relevant. The group's U.K. triennial funding review has commenced, and in conjunction with the scheme's trustees, we are currently in the process of agreeing the various technical provisions which form the basis of calculating the funding deficit. Once the deficit and the future investment strategy have been agreed, we will then enter into discussions as to the deficit funding agreements.
We aim to complete these by the end of the year, we have already engaged with the U.K. pensions regulator as we move through this process. Moving on to cash. This slide sets out the movement from our net debt position of GBP 1,542 million at the beginning of the year. There was an operating business cash inflow of GBP 277 million. Interest and tax payments were GBP 207 million. 2016's final dividend, paid in June, was GBP 404 million. All the other cash flow movements, including FX, totals GBP 135 million. We closed at June 30th with gross debt of GBP 4.1 billion, cash of GBP 2.4 billion, and net debt of GBP 1.7 billion. The cash flow performance of the five sectors is shown here, and I'll return to this when I cover the results for each of the sectors.
Just to note that the cash outflow for pension deficit funding in the period, and as reported through the head office numbers, was GBP 112 million. I'm going to move now on to the sectors. I'll cover the year-to-date performances here, and then return to the full-year outlook a little later. The first of those sectors is Electronic Systems, and the numbers here are in U.S. dollars. The sector sales of $2.17 billion are up 5% over last year, there is a second half weighting of deliveries of F-35 EW systems, APKWS product, and THAAD systems. The return on sales achieved of 14.9% was at the top end of our expectations.
Cash conversion of EBITDA in the first half year reflects a build-up of inventory ahead of the stronger second half sales and the timing of receivables, we do expect an improved conversion level over the full year. Order backlog stands at $6.6 billion, broadly unchanged since the start of the year. The cyber and intelligence sector comprises the U.S. intelligence and security business together with BAE Systems Applied Intelligence. The numbers here again in dollars. In aggregate, sales were almost unchanged on a constant currency basis at $1.16 billion. Sales in the U.S. business were down 6%. Take-up on a new intelligence community services contract is biased to the last quarter. Growth in the Applied Intelligence business was at 21%, benefiting from increases in all three divisions, but particularly in U.K. government services and international services. The aggregate margin for the sector was marginally improved at 3.8%.
However, the absolute first half loss at BAE Systems Applied Intelligence was £27 million, only slightly lower than last half year. As Charles described, we are in the process of refocusing both the product portfolio and market priorities in the commercial division. Whilst we would target the BAE Systems Applied Intelligence business to be close to an underlying break-even position by the year-end, we do anticipate a second half restructuring charge. Cash flow conversion continues to improve on reduced working capital requirements in the AI business, and order backlog reduced slightly to $2.9 billion. In the U.S. intel and security sector, order backlog reduced on trading out of certain longer-term classified contracts. In the platforms and services U.S. sector, sales were up $1.8 billion. There is a second half bias here for delivery of combat vehicles to Japan and Brazil, and low-rate initial production volumes on Paladin are also ramping up.
Margin performance for the first half year has improved to 7.6%. There has been just a $6 million incremental charge on the U.S. commercial shipbuilding contracts, with only the final ship now outstanding for customer acceptance. As expected, first half cash flow has been impacted by the utilization of the provisions created against the U.S. commercial ships programs and the inventory build ahead of the stronger second half sales. The investment on the new floating dry dock facility at San Diego is now completed, with the dock now in full operational service. Order backlog has increased to $6.1 billion, primarily on the award of the $542 million M777 howitzer contract for India. In the platforms and services U.K. sector, sales were up 7% at £3.9 billion. Deliveries on the Saudi Typhoon program have now completed, with the final four aircraft accepted in the first half.
The first two Omani Typhoons were delivered in June. F-35 is ramping up to plan. With regard to the return on sales, the first half margin in 2017 has been in line with full-year guidance. You'll recall that in the first half of 2016, we saw benefit on the Astute program from the pricing of Batch One and initial profit recognition on later boats. The £107 million of cash inflow in the period reflects the consumption of residual customer advances on Typhoon production contracts. Order backlog has increased to GBP 18.6 billion, primarily on the awards for Astute Boat 6 pricing and the initial three ships to be built on the Type 26 program. Sales in the international business for the first six months of £1.77 billion are almost unchanged from 2016.
Again, there is a material second half waiting due to MBDA weapon system deliveries and for high levels of Typhoon support in the Kingdom of Saudi Arabia. EBITA in the first half year was GBP 176 million, with margin broadly in line with full-year guidance. There was an operating cash inflow of £102 million. You'll recall that there was an acceleration of customer receipts at last year-end. Order backlog is at £12.9 billion, with further bookings against the five-year Saudi support contract being made in the first half year. For reference, there is a chart providing a summary of the trading performance of all five sectors and the numbers for HQ appended to the presentation posted on the web.
This penultimate chart sets out our guidance for each of the sectors through to the end of the year. This is the same chart as we presented back in February. Whilst we expect no changes to the group-level earnings guidance, some softening in the top line of, and an anticipated restructuring charge in the cyber intelligence sector are expected to be offset across the rest of the business. As we advised in February, our U.S. dollar planning rate for the year was at $1.25. We've now amended that to an average of $1.28 for the year. Maintain our previous guidance despite that headwind. As a sensitivity to earnings per share, the impact of a $0.10 movement is around GBP 0.01. In aggregate, we continue to expect the group's 2017 underlying earnings per share to be some 5%-10% higher than in 2016.
This final chart highlights the cash utilization we expect in 2017. The first column shows the position at the half year. The second column provides the full-year guidance. In respect of operating cash flow, firstly, we continue to expect capital expenditure to be above depreciation levels, reflecting investment in a number of areas, including capability insertion in our Saudi partner companies and expanded production facilities in our U.S. Electronic Systems and combat vehicles businesses. Provisions on the U.S. commercial ship build programs, as I mentioned earlier, are being utilized as we complete those contracts. Within working capital, the advances remaining on the European and Omani Typhoon production contracts are being consumed. The benefit from accelerated receipts seen in 2016 has reversed in the first half. The final operating cash flow item is the year's pension deficit funding, which we continue to expect to be around GBP 200 million.
Moving on to the non-operating cash flow items, outflows for interest and tax are expected to total around GBP 400 million. Dividend payments to shareholders will be around GBP 700 million. As previously guided, in 2017, we continue to expect a small reduction to our net debt. On that point, I'll turn it back to you, Charles.
Thank you, Pete. In summary, a solid first half of the year. We remain on track to deliver the full-year earnings and guidance. We have a strong platform for medium-term growth and a clear and consistent strategy to execute over the coming years. We are well-positioned to address the challenges and opportunities ahead. With the expected improvement in defense budget outlook in a number of our markets, the group is well-placed to continue to generate good returns for our shareholders. Thank you. Pete and I will now take your questions.
Lots of them. You want to direct the questions, Charles, as to who you want to take first?
Should we go by the front here?
Nick Cunningham, Agency Partners. You've obviously alluded quite clearly to the anticipated step down in Typhoon activity, and also Hawk, which is probably less high profile. I was wondering if you could just possibly put some dimensions around that, because it's obviously difficult to model that in our forecast from the outside. Thank you.
Well, we have a number of opportunities in the hopper, and we're confident of winning more Typhoon orders. As we said in the prepared statement, the actual timing of that is hard to predict and one that obviously we are not going to come out and say too much on. What we have recognized is the fact that, where we to win an order today, it still takes quite some time before you see that come through in the production line. We have to watch very carefully our production volumes and make sure that we try and manage through that on an ongoing basis.
Nick, just to help you with the modeling.
Thank you.
Production sales in the U.K. business in 2017 is about GBP 1.2 billion, there or thereabouts. We actually now have more support than we do production. It's a tipping point in 2017. If you look at final assembly acceptances, which obviously isn't wholly representative of how we trade the sales through that business, but we've got 20 going through in 2017, and that will move to 11 in 2018. I think that will maybe enough to get you modeling.
Worth adding the ramp-up of F-35 through that same period.
On Hawk, it's again, 18 aircraft this year, 12 next year. You know what the market price of a Hawk is, so that will give you some idea of the step down.
Thank you very much.
Maybe on this side.
Christian Laughlin from Bernstein. Thank you, and good morning. Two questions from me, please. The first question, for you, Charles, just personally, in terms of thinking about the next six to 12 months, what are the top two or three priorities on your plate in the business that you're really focused on or you will be really focused on going forward? Then secondly, just kind of coming back to the pension discussion and some of the notes in the press release, and Peter, some of the comments you made, in terms about the stage of the negotiations now and deciding on how to calculate what the deficit is, and then moving forward from there.
If you reflect back on previous triennial reviews with the trustees, how has this number, this calculated deficit for the purposes of negotiation, differed from the headline deficit number that we normally see reported in the accounts? Is it larger, smaller, or about the same? If you could just comment or elaborate a little bit more on that, I'd appreciate it.
I'll do the pension. You do my priorities.
Go on, then.
We've been fairly clear, I think, on my priorities going forward. We have a clear, consistent strategy, there are three areas that I think we want to push harder over and above. They're already within the strategy around operational excellence and execution and making sure we deliver on these big programs that we have. As I go around the business, almost goes without saying, but we have to keep saying it, and there are, I think, areas where we can improve on that. Working with the team just to make sure that we really are best in class across the board in that.
I think the appointment of a chief procurement officer across the group for the first time has opened our eyes to a number of additional savings that we can have, and efficiencies at the group level that we haven't really explored before. I really want to make sure that the group is working effectively at group level, and we're harvesting all of the opportunities we have and building on some of the already established strong collaborations that we have, the Land 400 being a great example, where our U.S. Inc. business working with Australia to develop really a world-class solution for our customer there. Then finally, on the technology piece, we've spoken a little about that already in the prepared statements, but this is an area where we have a lot of untapped potential.
We have some great technologies within the business, the thing now is how we raise those up. You'll already see that we are investing more of our own money in R&D, particularly in Electronic Systems in the U.S., being a great opportunity to put more of our R&D dollars to work. I think you'll see more of that in the future from me. Then on to pensions.
To pensions. Okay. The pension deficit, how is it different? There is an absolute difference between the way the accounting deficit is calculated and the way the funding deficit is calculated. The accounting deficit is all about the discount rate, the accounting deficit is based on AA corporate bond yields based over the term of the average life of pension, so sort of an 18-year bond, if there was such a thing, but an average period. On the funding, it's all about negotiating a discount rate based on what you expect to see from a return on assets. That can be a very, very different number.
I mentioned in the script just now that we're in that stage of negotiation with the trustees as to what discount, what rate we should be looking at, that needs to be aligned to the investment strategy we have as to how we close the deficit. As a sensitivity, 10 basis points is GBP 500 million on or off the deficit. The critical dependency for us as we go through the next few weeks and next two or three months is where we end up on that. Depending upon that, you could have a funding deficit less than the accounting deficit. It certainly wouldn't be more, but it should be less. That's where we were back in 2014. The accounting deficit does tend to be on the top side of it rather than on the lower end.
We have 15 months statutorily to get the triennial valuations done. That will take us through to June, July of next year. We're aiming to get it done by December, we're on track. As I mentioned, we're in discussions with the U.K. pensions regulator early. We've already had two sessions with the regulator. We want to take the regulator with us as we go through this process. Okay. Thank you.
From this side, maybe the lady there.
Céline Fornaro from UBS. Three questions, if I may. The first one would be regarding the U.S. platform business. We're now seeing a pickup in international orders going forward in that business. Also potentially, we've got some benefit from the newly appointed global head of procurement. How should we think about the margins of the U.S. land systems of BAE compared to a General Dynamics combat system of 12%? My second question for Pete, it's regarding the U.K. business, if there's been any one-offs or charges or benefits booked on the back of the deliveries of the last Typhoons for Saudis and the first ones for Oman, and how do we think about that in 2018, or if we should expect any in the second half?
My last question would be if you could just comment on the discussions at the moment in the U.S., given all the political turmoil that is going there, recent comments from the General Dynamics CEO about things being a little bit stuck at the Pentagon level. How do you see that in the order intake? Thank you.
On U.S. platform business, my view is that we're very well-positioned with respect to the programs that we have and recapitalization of the Army and indeed export opportunities. We mentioned already M109, Bradley upgrade, and the AMPV. We have with us here, Jerry, who of course, is the expert on that business, and I think it might be worth, Jerry, do you want to say a little word on that since you're here?
Good morning. First, let's look at the composition of our platforms and services business. It is not just combat platforms, when you compare, say, to a General Dynamics portfolio, it's not necessarily apples to apples. We have combat vehicles, we've got weapon systems, the energetics business, where we produce all the energetics for the U.S. forces in two plants, and as well, we have a weapon systems business. The mix is a little different. With the combat vehicles business in and of itself, we fully expect to be double-digit earners there as we move into production, both domestically and internationally. Quite confident about that. In terms of the support for those programs, we have four of the five vehicles in the Army brigade combat teams.
All are very well-funded, all are moving into production, including, shortly, the AMPV that was alluded to before, which is the replacement for the M113. Despite all of the noise, we'll say, in the political environment, we're staying focused on the programs that are funded, tracking the President's budget, very well funds those programs, and as you may know, each of the committees in Congress, well, three of the four committees that deal with the Armed Services, have increased over the President's budget. Those programs continue to be very well-funded. We expect them to perform well in the future. I don't know if that answers all of the U.S. questions. Thank you.
Céline, in terms of the margins in U.S. platforms, 7.3% last year, we're flagging and we continue to flag a range of 8%-9% for this year. As we get through those commercial ship build programs, which obviously we're trading through at zero margin, in fact, a small loss again in the first half, then you'd expect to see that margin percentage continue to move up, and you'd expect to see that in 2019. On the Typhoon margin point, there's been no significant swings in the first half. There was the last four aircraft, but we've already delivered 68 of that before that, there's no big swingers in terms of impacts. There's been no one-offs of any scale, there's been no significant restructuring charge or provision releases, it's, if you like, a normalized margin.
Maybe we'll take the question on the front row here, please.
Thank you. Tristan Sanson from Exane BNP Paribas. I have three questions. The first two are for Mr. Woodburn. I have a question on your ambition for the top line of the company. Without seeking for guidance here, can you tell us what would be your ambition for the organic growth rate for that company over time? Whether you want it to be at two, three, mid-single digit, higher?
I don't have a specific number other than that we want to do better than just grow at normal defense budget growth rates, which by targeting our investments, as we've done in the past, targeting investments in areas that we think will grow faster than overall defense budget increases. We'll maintain the same approach there.
Thank you. The second one is on the program risk management tools at BAE Systems, and the view that you have of these, compared to your previous experiences. Do you think anything can be done today to make control of execution even tighter than it is today? I have a third question, which is this time on the Eurofighter line. You said you have a 24 monthly time at least between new orders and new deliveries. I wonder whether you would consider at some point keeping capabilities and the line open without production, if you need absolutely to bridge a gap with deliveries to start, I don't know, starting 2021 or 2022, or will you always start first to try to extend the current backlog to make the transition?
I'll maybe handle the last one first, in the sense I think we've said already that we will continue to monitor the incoming orders when they arrive and the production volumes that we have, and we'll do that on an ongoing basis. I think that's really all we can say on that. I don't know, Pete?
Yeah. You have to remember, we've got the Kuwait subcontract for 28.
Yeah
That comes through [Mechanica]. This is not an issue of stopping a line and restarting. We have a build program ongoing.
I'm sorry. I was more referring to the final assembly line.
I give the same answer, that we are monitoring, and we will adjust as needed. In terms of project execution, that is obviously an area that I've had a lot to do with in my prior life. I've had a good look at what we have, and I think in some aspects, we are best in class, and I think there are some areas for improvement. I think there are a number of tools out there in the commercial environment for managing and driving project execution. I have to say, BAE is a big business with a broad portfolio, and even within the group, we have areas where we're absolutely world-class, and you wouldn't be surprised to know there's areas where we're not.
I think one of the things that we want to do is make sure that we work more effectively across the group and raise everybody to the top level. There's a question at the back there.
Yes. Good morning. It's David Perry from JPMorgan. I'm sorry because it may seem like I'm laboring a point, this issue about the growth, because you talk about the market environment and wanting to outgrow the market, it does feel, and correct me if I'm wrong, but from what you're saying, from what Peter's just said about the delivery rates, plus the fact that any new work would take at least 24 months to come through. That is much more a BAE-specific issue. On what you say, I can't see you having growth in 2018 or 2019 at a group level, correct me if you think that's wrong. That's the first point. The second point is just philosophically, Mr. Woodburn, how do you feel are sort of in the trade-off between margin and growth?
Do you think BAE needs to materially increase R&D, sacrifice some margin to try and stimulate growth? Thank you.
I think I'll go first, then you can jump in, Pete. With respect to Typhoon, I think we made some comments earlier that I think are worth reiterating, that we do as much today in support of Typhoon, support of that platform, as we do on production. That will continue to grow, in terms of what we're doing, in terms of adding additional capability to that aircraft. That will continue to grow. At the same time, we have this substantial ramp-up in F-35 activities. With respect to the military air business, whilst we know that the Typhoon, we have to manage through until we win more orders, and we are confident that we will win more orders, this is a relatively small part of the overall group activity. I don't think we should get too hung up on that.
I'd agree. We always get fixated about Typhoon and the sort of flagship program that it has been in the past. If you look at F-35 today, we have sales in excess of GBP 1 billion on the F-35 program, between what we do in the U.K. and what we do in the U.S. It isn't just about Typhoon. In terms of the R&D comment, we grew our own company-invested R&D by 35% in the first half of this year compared to the first half of last. This is not a company that's shy of investing when we need to invest.
Absolutely. I think, again, we've mentioned already, there are some real areas of fertile ground for R&D investments. We've mentioned E lectronic Systems being one, but there are a number of others in the business where I think, internal R&D dollars go an awfully long way.
Thanks for the clarification, if I ask the question, can you grow in 2018 and 2019? Is it a yes or a no, just in aggregate?
We will always look to grow our earnings per share, and that is what we're incentivized to do.
Top line?
Top line, if you've got a headwind on Typhoon, it's going to be difficult, but we've got growth in our U.S. businesses. We've got growth in our international businesses. This isn't just about Typhoon.
Okay. Thank you.
Morning. Charlotte Keyworth from Berenberg. Just sticking with the F-35 program for a moment. Obviously, that's going to be a big organic growth driver for you in the future. You mentioned that most of the capital investment was behind you for the projected ramp. Could you just give a few comments on your thoughts on the likelihood of a block buy actually surviving the budgetary process? If so, how you're positioned for potentially higher trajectory on deliveries in terms of resource requirements. Thanks.
I was just up at Samlesbury last week, seeing the latest additions to our capacity, and I think we are well-positioned to handle the projected volumes and indeed, what would come if we were in a block buy. We are basically ready to handle or close to ready to handle full production volumes.
We'll be at 80 this year, and we're going to 130 next year. The facilities are pretty much there. We opened an extension to existing facilities a little while ago. We're ready.
Yeah. Over on this side at the back there.
Thank you. Good morning. Can you talk a little bit about your growth profile? Sorry, it's Rami Myerson from Investec. I think if you look at the guidance for the full year, the growth profile for H2 suggests organic growth, which is probably a little bit slower than the constant currency growth that you reported in H1. Do you expect a slowdown, or is that being prudent? What's happening with the short-cycle businesses and the short-cycle orders in the U.K. and the U.S.? Is there a concern around that?
It's a real mix between the sectors. If you go back over the narrative, when you've got a bit of time, you'll see what I'm trying to highlight there. In the U.S. businesses, whilst we've seen growth in Electronic Systems, it is second-half weighted, so we'll see some more in the U.S. in the Electronic Systems business. We got programs, in particular for AAVs to Brazil and Japan, then ramp up in Paladin in the platforms business. In the U.K., it's slightly in reverse. We've got more sales in the first half than we will in the second, and that's really around timing of milestones on the submarines programs. In terms of short service, the short-term, short-cycle business, in the U.K., if you look at the sales coverage we have in our backlog, it's at 99%. The U.K. business is not really reliant upon short-cycle businesses.
In the U.S., we have a bit more, particularly in the intelligence and security business. We talked about one particular program, which is a classified program, where we expect to see ramp up in the last quarter.
Thanks. Second question on some of the programs which you haven't discussed in the scripts. What is Radford performing now? Is it up to performance that you expect or do you think there's still a upside to that particular facility? Also, on the aircraft programs there, T-X and FCAS, particularly given the news flow over the last week about the French and German potential fighter program, if you could talk about that as well, please.
Maybe I will do the latter first. Do you want to do Radford, or do you want me to do it?
Yeah, Radford is trading through. It is performing well. It was a program that we are basically trading through at zero margin for several years. We get into a repricing in 2017. Now, I am looking at Jerry, now. As we get into next year and we start trading on the new contract, we will be back to normalized margins on that program.
With respect to FCAS, UCAS, future programs, frankly, we think it is great that people are recognizing the need and talking about it. We think we have got a great industrial capability, proven track record of collaboration on these European program, Jaguar, Tornado, Typhoon. We think we have an awful lot to bring to the table. We are in conversations, as you know, with Dassault and the French government with respect to UCAS. Those continue, and we are looking forward to basically playing our role in this. Behind the one who just asked the question, sorry.
Yeah, next. He has been waving for a long time.
Yeah. No one knows who I am.
I have to say, you're sort of blanked by the light a little bit. I'll come to you in a sec.
That's the best way. Actually, I'm amused by this, because if we go on like this, we're going to turn you into Ian King by the full year results. Teach you to be helpful.
Slightly taller.
A dumb question. When we sign up Saudi for 20,000 more flying hours, what exactly are we saying that represents in terms of an increase?
I don't think it would be right for us to say what our flying hour charge-out rates are. That would be commercially sensitive. We have an availability contract, it is pay by the hour, effectively. More flying hours means more revenues. When I talked about increasing support revenues in the second half in Saudi Arabia, that is coming from the extra hours that we are flying.
Right. That's really unhelpful.
Yeah.
Can I just-
As always, Andy
scratch an itch? Did the number of Oman Hawks come down at some point in the last couple of years?
We've only started delivering this year for Oman.
Yeah. Was it eight, 10 or 12 originally? I can't remember the original announcement.
Oman is for eight. They will all be done this year.
Right. It was never for more?
No, not that I'm aware.
Another boring or tedious question. Type 26, did they push out the build period for the first one by about a year? Have they extended it?
Well, I'm not aware that we've actually extended it. It obviously took some time to get it all on contract. I think now it's to the original plan in terms of when the contract was signed and when you get the first build. Am I right in that?
Yeah. The program was stretched out. We cut steel. The cut steel ceremony was last week.
Last week. Yeah, I wasn't there.
We're underway. Yes, the design phase was stretched.
Right.
From here to the deliveries stays consistent with the original plan.
Okay, good. I gather that I'm going to get a sort of blank on Saudi, but I'll just give this a little go. At least we're getting off this kick of when's the order coming, which has just been so tedious for the last year or so. The big thing about Saudi, if you could even talk very generally about them taking a minority interest, getting ready to assemble Hawks, and what the stepping stones may have to be, or be put in place before this contract, I suppose, inevitably comes, I guess, is the way I'm looking at it. As long as we know it's out there, one could be more confident. Any general color you could give on the way your business is evolving in Saudi Arabia would be great, please.
Well, I'm not going to speculate on contract awards. You'd be surprised.
Oh.
However, we are gearing up for the in-kingdom final assembly of the Hawk line, and I think we're well progressed, to do that.
Yep. Other guys, is there anything you want to add?
I'm not going to give you a date either. The context in which we're doing this is all driven by Vision 2030, which you will have heard about. The plan from His Royal Highness Prince Mohammed bin Salman to basically diversify the economy in Saudi Arabia. In every negotiation now that is conducted, whether with us or with other defense suppliers or indeed government-funded programs in other industrial sectors, a key component of every negotiation, beyond price and the specification of the product, is what is the industrial contribution, the employment contribution, training and development, technology transfer contribution that goes with this order. It has become probably, and understandably, probably the most preeminent element of every negotiation. As part of the Hawk Batch Two contract, we did, as part of those negotiations, agree to establish a final assembly line for Hawk in Saudi Arabia.
I think it will be self-evident that having established that facility and built 22 Hawk aircraft through it will be a great shame if it wasn't then utilized for final assembly of other aircraft. I'll say no more than that.
Thank you, Guy. Let's get this question here.
Thanks so much. It's Rob Stallard from Vertical Research. First of all, maybe one for Jerry, actually, on ship maintenance. FY 2017 and the FY 2018 budget proposal, emphasizing readiness and whether you've seen a notable uptick in the ship maintenance activity and the backlog, on the back of that. Secondly, not for Jerry, on Applied Intelligence. Is this another example of defense contractors not doing a very good job looking after civil businesses? Why are you happy keeping this in the portfolio? Thank you.
The ship repair budgets, as you mentioned, and Modernization budgets are very healthy. We saw a slight uptick last year. We were about what, 10%, Pete, over plan? Up to about GBP 1.2 billion, I think, in revenue on that side, and we would expect to be there or slightly above this year. The counterbalance to that is the op tempo of the forces and the deployment. We tend to see some juggling of schedules that sometimes has a small one-quarter perturbation. Yeah, very well-supported, again, in the FY 2018 budgets as well, we're optimistic about that going forward. Does that answer your question? Good.
For Applied Intelligence, I certainly wouldn't say it's an example of a defense contractor that's not doing a good job in the civilian world simply because I think we can and will do much better with this business. I think there is an opportunity. Obviously, we work, and you have to remember, of our Applied Intelligence business, only around a third of it is the commercial work that we do. The rest we do for national governments. Our understanding of the threat matrix and what's happening, I think, really does position us well to be a great owner for this business going forward. We have to make sure that the portfolio is properly aligned, that we're running it effectively, and that we can drive this forward, that is exactly what we intend to do. Maybe a question right at the back, yellow tie.
Good morning. Charles Armitage. Batch 2 Hawk in Saudi, what are they for? I.e., do they need any more if they don't order any more Typhoons?
Remember, we provide training for all of their fleets, not just Typhoon as well. They do have a training demand for new pilots. We fundamentally and absolutely believe that they do need the additional Hawks, which is exactly why they've ordered them, and we're building them. Guy, do you want to-
The Royal Saudi Air Force has a projection of its trained pilot throughput that it would require to service its fleet. They've obviously made calculations in terms of their future force mix and their future aircraft volume requirements, and it's against that forecast that they have assessed the training pipeline that they need. If you translate that into the number of training aircraft that they require us to use to train their pilots, then there's a very clear demand for the extra 22 aircraft in batch 2. You're right, it does give you an indication, I think, as to their future frontline aircraft requirements as well.
Yep. Question there.
Gordon Hunting of Fiske. Reports that the Austrians find their Typhoons too expensive to operate and want to get rid of them, is it possible that the partnership will buy them back and pass them on to somebody else as aggressor aircraft? Secondly, is there a possibility of a contract from the European Typhoon operators to replace the current rather old-fashioned radar with a proper synthetic aperture one?
With respect to Typhoon, I think it's clear that this is a very cost-effective platform to maintain, and certainly if you talk to the Royal Air Force or the work we do to the Royal Saudi Air Force, I think that they are pleased with the progress we've made in being able to maintain this aircraft and drive down support contracts. In fact, that was what drove us to win the TyTAN contract for the RAF, which required signing up to substantial savings over through life support, which then get reinvested in the platform, make it more capable for exports. I think it's clear that this aircraft is a capable platform that can be maintained and supported in a very cost-effective way that stands up very well against alternative platforms. What was the second question?
The first one was Austrian Typhoons.
Yeah
Whether the consortium's going to buy them back. As a member of the consortium, we're not aware of any moves to buy them back.
No.
The other one was synthetic aperture radar.
Well-
Is there a possibility that that will be retrofitted to the Captor-E?
Yeah, without going into too much detail on current programs, you would not be surprised to know that we are, in fact, working on a range of radar upgrades. I think it's clear that a number of the European partner nations will be, over time, upgrading the radar in their aircraft to the latest E-scan type standards.
Is this a five-year hope or a two-year possibility?
It takes a little bit of time. There's a variety of programs ongoing, what gets picked by which nations and the time that you then see that, there's a lot that will depend on that. That's probably pretty much all I can say on that at this point. Any more questions? Nope. No more questions.
Thank you very much