Good morning, everybody. And as the results season starts to blend with the holiday season, we are absolutely delighted to see so many of you here this morning. Now as you know, our normal practice is to present the half year results by webcast. But 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. But 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 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. But 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.
And 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 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 and 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 are 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 and 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. Now 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-thirty five Type 26, Armored Multipurpose 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 twenty seventeen 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-thirty five, 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 drydock capacity at our San Diego shipyard became operational in February.
In The UK, 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 Kuwaiti Air Force subcontract. On the Saudi Arabia Salam Typhoon program, the final four of 72 aircraft have been delivered. And under the Oman Typhoon program, we've now delivered the first two of 12 aircraft. The remaining deliveries are scheduled for the 2017 and throughout 2018.
Now 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 Oman Hawk program, the first two aircraft have been completed and the remaining six deliveries are scheduled for the 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 twenty four 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 two 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 fused large assemblies for the F-thirty five 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 3,700,000,000.0 production contract was signed in June for the first batch of three 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 are progressing current and potential new requirements as part of the long standing agreements between The United Kingdom 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 two down selected on the Land 400 Phase two combat reconnaissance vehicle program, evaluation and testing is underway by the Commonwealth. On the C5000 Future Fit 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 long standing relationship with Hindustan Aeronautics Limited, and an order for a third batch of Hawk aircraft remains under discussion. Now 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. 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 and then I'll move on to the 2017 full year guidance. The results have seen some benefit from a stronger U. S.
Dollar. For reference, the U. S. Dollar rate averaged $1.26 in the first half of this year and it was $1.43 in the comparator last year. So the headline numbers and compared to twenty sixteen's half year.
Sales increased by 4% on a constant currency basis to £9,600,000,000 And as per last year, we continue to expect some second half bias in sales, and I'll come back to that when I go through each of the sectors. Underlying EBITDA of $945,000,000 was 11% up on last year or 5% on a constant currency basis. Underlying finance costs in the first half were at £129,000,000 slightly higher on charges arising from our share of equity accounted investments. Underlying earnings per share were 19.8p, and there is a bridge chart highlighting the major movements from the first half of last year attached to presentation packs. There was an operating cash inflow in the first half of £277,000,000 and net debt at June 30 stood at £1,700,000,000 and I'll cover the cash position on subsequent charts.
Order backlog has increased to £42,300,000,000 and that's after around £400,000,000 of exchange translation headwind. And finally, the interim dividend has been increased to 8.8p 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 Armani and European Typhoon production contracts. Costs are being incurred against the provisions created in previous years as we close out The U.
S. Commercial shipbuild programs. And as you'll recall, there was an operating cash flow benefit from accelerated receipts of some £250,000,000 received in December, and 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 changed from the 2016 closing position and it's at $5,900,000,000 and I'm going to move straight to the pension deficit position on this next slide. So the value of the scheme assets has increased since the start of the year to £26,300,000,000 and that's after pensions paid out of around £600,000,000 Liabilities have increased by £200,000,000 to 32,700,000,000.0 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 periods discount unwind in service costs less the pensions paid broadly net out. So overall, a small decrease of $200,000,000 to the pretax accounting pension deficit in the first six months.
Now 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, and we have already engaged with The U. K. Pensions regulator as we move through this process.
Moving on to cash. And this slide sets out the movement from our net debt position of £1,542,000,000 at the beginning of the year. There was an operating business cash inflow of £277,000,000 interest and tax payments were $2.00 £7,000,000 twenty sixteen's final dividend paid in June was $4.00 £4,000,000 and all the other cash flow movements, including FX, totals £135,000,000 So we closed at June 30 with gross debt of £4,100,000,000 cash of 2,400,000,000.0 and net debt of £1,700,000,000 The cash flow performance of the five secondtors is shown here, and I'll return to this when I cover the results for each of the sectors. But just to note that the cash outflow for pension deficit funding in the period and as reported through the head office numbers was £112,000,000 So 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.
And the first of those sectors is Electronic Systems, and the numbers here are in U. S. Dollars. The sector sales of $2,170,000,000 are up five percent over last year, and there is a second half weighting of deliveries of F-thirty five 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 buildup of inventory ahead of the stronger second half sales and the timing of receivables, and we do expect an improved conversion level over the full year. Order backlog stands at $6,600,000,000 broadly unchanged since the start of the year. The Cyber and Intelligence sector comprises The U. S. Intelligence and security business together with BA Systems Applied Intelligence.
The numbers here again in dollars. In aggregate, sales were almost unchanged on a constant currency basis at $1,160,000,000 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 Applied Intelligence was £27,000,000 only slightly lower than last half year.
And as Charles described, we are in the process of refocusing both the product portfolio and market priorities in the Commercial division. And whilst we would target the Applied Intelligence business to be close to an underlying breakeven 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 2,900,000,000 In The U. S. Intel and Security sector, order backlog reduced on trading out a certain longer term classified contracts.
In the Platforms and Services U. S. Sector, sales were at $1,800,000,000 and 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% and has been just a $6,000,000 incremental charge on the 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 drydock facility at San Diego is now completed with the dock now in full operational service. Order backlog has increased to $6,100,000,000 primarily on the award of the $542,000,000 M777 Howitzer contract for India. In the Platforms and Services U.
K. Sector, sales were up 7% at £3,900,000,000 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 and F-thirty five is ramping up to plan. With regards to the return on sales, the first half margin in 2017 has been in line with full year guidance. And you'll recall that in the 2016, we saw benefit on the Astute program from the pricing of batch one and initial profit recognition on later boats.
The 107,000,000 of cash inflow in the period reflects the consumption of residual customer advances on Typhoon production contracts. Order backlog has increased to $18,600,000,000 primarily on the awards for Stute Boat six 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 £1,770,000,000 are almost unchanged from 2016. And again, there is a material second half waiting due to MBDA weapon system deliveries and for higher levels of Typhoon support in The Kingdom Of Saudi Arabia. EBITDA in the first half year was £176,000,000 with margin broadly in line with full year guidance.
There was an operating cash inflow of £102,000,000 and you'll recall that there was an acceleration of customer receipts at last year end. Order backlog is at £12,900,000,000 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, and this is the same chart as we presented back in February. And 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 and intelligence sector are expected to be offset across the rest of 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, but maintain our previous guidance despite that headwind. As a sensitivity to earnings per share, the impact of a $0.10 movement is around $01 So in aggregate, we continue to expect the group's 2017 underlying earnings per share to be some 5% to 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 and 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 shipbuild programs, as I mentioned earlier, are being utilized as we complete those contracts. And within working capital, the advances remaining on the European and Omani Typhoon production contracts are being consumed. This benefit from accelerated receipts seen in 2016 is reversed in the first half. And the final operating cash flow item is the year's pension deficit funding, which we continue to expect to be around £200,000,000 And moving on to the non operating cash flow items. Outflows for interest and tax are expected to total around £400,000,000 Dividend payments to shareholders will be around £700,000,000 And so as previously guided, in 2017, we continue to expect a small reduction to our net debt.
And on that point, I'll turn it back to you, Charles.
Thank you, Pete. So in summary, a solid first half of the year and 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. And 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.
Direct the questions, Charles, so you want to take first?
Or should we go about 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. Well,
I mean, we have a number of opportunities in the hopper, and we're confident of winning more Typhoon orders. But 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. But what we have recognized is the fact that were we to win an order today, it still takes quite some time before you see that come through in the production line. So 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. Mean, production sales in The U. K. Business in 2017 is about $1,200,000,000 there or thereabouts. We've 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. So I think that will maybe enough to get your modeling.
And worth adding the ramp up of F-thirty five through that same period.
On Hawk, it's again, 18 aircraft this year, 12 next year. You know what the market price of Hawk is, so that will give you some idea of the step down.
Thank you very much.
Christian
Lachlan from Bernstein. Thank you and good morning. Two questions for me, please. The first question for you, Charles, just personally, in terms of thinking about the next six to twelve 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? And 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 or smaller or about the same? If you could just comment or elaborate a little bit more on that, I'd appreciate it.
So I'll do the pension, you do my priorities. Mean, I think we've been fairly clear on, I think, my priorities going forward. I mean, we have a clear consistent strategy, but there are three areas that I think we want to push harder over and above. I mean, they're already within the strategy around operational excellence and execution and making sure we deliver on these big programs that we have. And it almost 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. So working with the team just to make sure that we really are best in class across the board in that. The other is around the competitiveness piece, which we've spoken about. And I think the appointment of a Chief Procurement Officer across the group for the first time has opened us opened our eyes to a number of additional savings that we can have in efficiencies at the group level that we haven't really explored before. So 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 four hundred being a great example where our U.
S. Ink business working with Australia to develop really a world class solution for our customer there. And then finally, on the technology piece, and we've spoken a little bit 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. And the thing now is how we raise those up.
You'll already see that we are investing more of our own money in R and D, particularly in electronic systems in The U. S. Being a great opportunity to put more R and D dollars to work. And I think you'll see more of that in the future from me. Then on
So pensions, okay. The pension deficit and how is it different? There is an absolute difference between the way the accounting deficit calculated and the way the funding deficit is calculated. The accounting deficit is all about the discount rate. And the accounting deficit is based on AA corporate bond yields based over the sort of term of the average life of pension, sort of an eighteen 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. So 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 and 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 £500,000,000 on or off the deficit. So 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. And that's where we were back in 2014. So the accounting deficit does tend to be on the top side of it rather than on the lower end. But we have fifteen months statutory to get the triennial valuations done.
That will take us through to June, July of next year. We're going to get it done by December and we're on track. And 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.
This side, maybe the lady there.
Celine Fornaro from UBS. Three questions, if I may. The first one would be regarding The U. S. Platform business.
So we're now seeing a pickup in international orders going forward in that business. And 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? And 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 at the Pentagon level? And so how do you see that in the order intake?
Thank you.
On U. S. Platform business, I mean, 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've mentioned already M109, Bradley upgrade and the AMPV. But we have with us here, Gerry, who, of course, is the expert on that business.
And I think it might be worth, Gerry, do you want to say a little word on that while 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. So 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. So 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, very well funded. All are moving into production including, shortly the AMPV that was alluded to before, which is the replacement for the M113. So 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. So 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 your U. S.
Questions.
Thank you.
Celine, in terms of the margins in U. S. Platforms, we're 7.3% last year. We're flagging and we continue to flag a range of eight to 9% for this year. And as we get through those commercial shipbuild programs, which obviously we're trading through at zero margin, fact, 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, I mean 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. So 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.
So it's, if you like, a normalized margin.
Maybe we'll take a question on the front row here, please.
You. Tristan Stanson from Exane BNP Paribas. I have three questions. The first two are from 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 picking our 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, and we'll maintain the same approach there.
And the second one is on the program risk management tools at the ASSM and the view that you have on 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? And I have a third question, which is this time on the Eurofighter line. You said you have a twenty four month lead 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 the 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 want to maybe handle the last one first in the sense that 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. Pete, have
to remember, we've got the Q80 subcontract for '28 build that comes through to Mechanica. So 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'll give the same answer that we monitoring and we will adjust as needed. In terms of project execution, I mean, that is obviously an area that I've had a lot to do within in my prior life. And I've had a good look at what we have. And I think in some aspects, we are best in class. 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. And I have to say, I mean, 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. And 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. 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, but this issue about the growth because you talk about the market environment and wanting to outgrow the market. But 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 twenty four months to come through, That is a much more BAE specific issue.
On what you say, I can't see you having growth in 2018 or 2019 at a group level, but 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 sort of in the trade off between margin and growth? Do you think BAE needs to materially increase R and D, sacrifice some margin to try and stimulate growth?
Well,
think I'll go first and 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. And 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. And then at the same time, we have this substantial ramp up in F-thirty five activities. So 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.
So I don't think we should get too hung up on that.
Yes, I'd agree. I mean we shouldn't we always get fixated about Typhoon and the sort of flagship program that it has been in the past. But if you look at F-thirty five today, we have sales in excess of £1,000,000,000 on the F-thirty five program between what we do in The U. K. And what we do in The U.
S. So it isn't just about Typhoon. And in terms of the R and D comment, I mean, we grew our own invested company invested R and D by 35% in the first half of this year compared to the first half of last. So this not a company that's shy of investing when we need to invest.
Absolutely. And I think, again, we've mentioned already there are some real areas of fertile ground for R and D investments. We've mentioned Electronic Systems being one, but there are a number of others in the business where I think R and D internal R and D dollars go an awfully long way.
So thanks for the clarification, but just 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 how we're incentivized to do. And 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.
Thank you.
Morning. Charlotte Keyworth from Berenberg. Just sticking with the F-thirty five program for a moment. Obviously, that's going to be a big organic growth driver for you in the future. You mentioned that you'd already 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? And if so, how you're positioned for potentially higher trajectory on deliveries in terms of resource requirements? Thanks.
I mean, I was just up in Salisbury 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're going to we'll be at 80 this year and we're going to 130 next year. So the facilities are pretty much there. We opened an extension to existing facilities a little while ago. We're ready.
Over on this side at the back there.
Thank you. Good morning. On can you talk a little bit about your growth profile sorry, it's Rami Myerson from Investec. The growth profile for H2, and I think if you look at the guidance for the full year, suggests organic growth, which is probably a little bit slower than the growth the constant currency growth that you reported in H1. Do you expect a slowdown?
Or is that being prudent? And what's happening with the short cycle businesses and short cycle orders in The U. K. And The U. S?
Is there a concern around that?
I mean the real sort of it's a real mix between the sectors. And 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've got programs in particular for AAVs, Brazil and Japan and the 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 submarine programs.
And in terms of short service 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%. So this is not 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. And we talked about one particular program, which is a classified program where we expect to see ramp up in the last quarter.
And second question on some of the programs which you haven't discussed in Scripps. And what is Radford performing now? Is it up to the performance that you expect or do you think there's still upside to that particular facility? And also on the aircraft programs, TX 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'll do the latter first. Do want you to do Radford or do we do it?
Yes, Radford. I mean, Radford is trading through. I mean, performing well. It was a program that we had we're basically trading through at zero margin for several years. We get into a repricing in 2017 now, I'm looking at Gerry now.
So as we get into next year and we start trading on the new contract, we'll be back to normalized margins on that program.
I mean with respect to FCAS, UCaaS, I mean future programs, frankly, we think it's great that people are recognizing the need and talking about it. And we think we've got a great industrial capability, proven track record of collaboration on these European program, Jaguar, Tornado, Typhoon. And we think we have an awful lot to bring to the We're in conversations, as you know, with Dassault and the French government with respect to UCaaS, those continue. And we're looking forward to basically playing our role in this. Behind the one who just asked the question, sorry.
Yes, next. He's been waving for a
no one knows who I am.
I have to say, you're sort of blank by the light a little bit, so I'll come to you in a second.
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. I'll 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 will be right for us to say what our flying hour charge out rates are. That will be commercially sensitive. But we do we have an availability contract, so it is pay by the hour effectively. So more flying hours means more revenues. And so 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. Can I just Did scratch an the number of Oman Hawks come down at some point in the last couple of years?
We've only started delivering this year
on Oman. Was it eight, ten or 12 originally? I can't remember the original announcement.
Oman is for eight, eight and they will all be done this year.
Right. And it was never for more? No. I'm aware. And then another boring 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. I mean, it obviously took some time to get it all on contract. But I think now it's to the original plan in terms of when the contract was signed and when you get the first build. Yes. Am I right in
mean the program was stretched out. So we cut steel the cut steel ceremony was last week. Last week. So underway. But yes, I mean the design phase was stretched.
Right. And then But from
here to the deliveries stays consistent with the original plan.
Okay, good. And then I mean, gather that I'm going to get a sort of blank on Saudi, but I'll just give this a little go. I mean, 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 kind of, I suppose, inevitably comes, I guess, is the way I'm looking at it. I mean as long as we kind of know it's out there, one could be more confident.
So 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. However, we are gearing up for the Ink Kingdom final assembly of the Hawk line, and I think we're well progressed to do that. Yes.
Other guys, anything you want to add?
I'm not going give you a date either, but the context in which we're doing this is all driven by Vision 2,030, which you will have heard about. The plan from His Royal Highness, Prince Mohammed bin Salman to basically diversify the economy in Saudi Arabia. And 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. And 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, 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 maybe one for Gerry actually on ship maintenance. FY 2017 and the FY twenty eighteen 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? And then secondly, not for Gerry, on Applied Intelligence.
Is this another example of defense contractors not doing a very good job looking after civil businesses? And 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 $1,200,000,000 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 up tempo of the forces and the deployment.
We tend to see some juggling of schedules that sometimes has a small one quarter perturbation. But yes, very well supported again in the FY 2018 budgets as well. So we're optimistic about that going forward. Does that answer your question?
Then for Applied Intelligence, I certainly wouldn't say it's an example of the defense contractors 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 onethree of it is the commercial work that we do. The rest we do for national governments. And 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.
But we have to make sure that the portfolio is properly aligned, that we're running it effectively and that we can drive this forward, and that is exactly what we intend to do. Maybe a question right at the back, yellow tie.
Morning. Charles Armitage. Batch two Hawk in Saudi, what are they for? I. E, do they need any more if they don't order any more Typhoons?
Well, remember, we provide training for all of their fleets, not just Typhoon as well. So I mean, they do have a training demand for new pilots. So we fundamentally and absolutely believe that they do need the additional Hawks, which is exactly why they've ordered and we're building them. I mean, Guy, do you want to?
So the Royal Saudi Air Force has a projection of its pilot 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 two. But you're right, it does give you an indication, I think, as to the future frontline aircraft requirements as well.
Yes, question there.
Gordon Hunting of Fisk. Re 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's aggressive aircraft? And 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, 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 and we've made in being able to maintain this aircraft and drive down support contracts. And in fact, that was what drove us to win the Titan 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. So 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, whether the consortium is going to buy them back. As a member of the consortium, we're not aware of any moves to
buy them back. Well, yes, without going into too much detail on current programs, I mean, you would not be surprised to know that we are, in fact, working on a range of radar upgrades. And I would I mean, I think it's clear that a number of the European partner nations will be, over time, upgrading the aircraft the radar in their aircraft to the latest eScan type standards.
Is this a five year event or a two year possibility?
I mean it takes a little bit of time to there's a variety of programs ongoing and quite what gets picked by which nations and the time that you then see that, there's a lot that will depend on that. And that's probably pretty much all I can say on that at this point.
Any more questions? No, no more questions. Thank you very much.