Okay. Good morning and welcome to our first half results. I will spend a few minutes on the group's business environment before handing over to Pete for the financial details. We will then take questions. BA Systems performed well in the first half, consistent with our expectations and guidance for the year.
Despite the economic and political uncertainty, governments in our major markets continue to prioritize national security with strong demand for our capabilities. In The U. S, we are seeing encouraging signs of a return to growth in defense budgets and improved prospects for our core franchise. In The U. K, the result of the EU referendum will lead to a period of uncertainty, but we do not anticipate any material near term trading impact on our business and we expect the SDSR to be implemented as planned.
We have, of course, seen significant foreign exchange volatility since the vote. It is worth noting that whilst we do not hedge the translation of earnings from our U. S. Business, we do hedge contract foreign currency exposures. The company benefits from a large order book with established positions on long term programs in The U.
S, UK, Saudi Arabia and Australia. Our good program execution is underpinned by the quality of our technology and engineering capability. We continue to drive innovation and invest in R and D in the appropriate areas of the business, both on a self funded basis and in conjunction with our customers. We have active programs to attract, train and retain the skills required to deliver our strategy. Overall, our first half performance supports the full year outlook.
So turning to our key markets. In The U. S, following the two year Bipartisan Budget Act signed last year, there are encouraging signs of a return to growth in defense budgets. In addition, we are seeing the ramp up of production on a number of the group's long term programs such as F-thirty five, AMPV, M109 and F-fifteen electronic warfare. Our limited trading disruption is expected if a short term continuing resolution is implemented from the first of October twenty sixteen.
BA Systems U. S. Electronics business is performing well with strong program execution and good order intake, enhancing our positions in the high technology areas of electronic warfare, electro optics and intelligence surveillance and reconnaissance. Growth continues in commercial electronics. In The U.
S. Ship repair business, we continue to adjust our workforce to meet evolving demand. Additional contracts received in the 2016 have largely mitigated anticipated workforce reductions and in future years, the San Diego operations are expected to benefit from enhanced specific deployments, mitigating the reduction in activity in the East Coast facilities. The additional dry dock capacity in San Diego is on track for completion over the 2017. The U.
S. Commercial shipbuilding contracts remain challenging, but of the contracted ships, only three now remain for delivery and customer acceptance. The U. S. Business has not contracted for any more commercial shipbuild.
The U. S. Land business delivered good order intake in the period. On the back of contract awards on amphibious vehicles to Japan, BVS-ten to Austria, CV90 upgrades for Sweden and in July, the Weapon Systems business was awarded a contract for Gun Systems for the Royal Navy Type 26 frigates. The group's U.
S.-based combat vehicles business is underpinned by the armored multipurpose vehicle and M109 self propelled Howitzer contracts. These long term contracts, our strong franchise in tracked vehicles and opportunities in international markets position the business for a return to growth in the medium term. Our UK based businesses continue to perform well, benefiting from good program execution and stability in customer requirements. In the air domain, the contract announced to supply 28 Typhoon aircraft for the Q80 Air Force underpinned the medium term production planning assumptions announced last year. We have received long lead funding from Leonardo on the program.
Typhoon aircraft deliveries to the Royal Air Force and Royal Saudi Air Force continued alongside air frame subassembly deliveries to European partner nations. Export activity continues to be supported by the UK government and although there can be no certainty as to the timing of orders, discussions with current and prospective operators of the Typhoon aircraft support the group's expectations for additional contract awards. Typhoon's capabilities continue to expand, particularly on the eScan radar and also with Meteor Storm Shadow and Brimstone weapons integration moving into flight test during 2016. BA Systems provides extensive support to its customers on Typhoon and Tornado aircraft. A ten year arrangement with an expected value of £2,100,000,000 to support The U.
K. Typhoon flight was announced in July. This builds on the form of Typhoon availability support activity that we delivered to the RAF over the last seven years. The first five HAWK aircraft for Saudi Arabia were delivered in the period with 39 to follow. The group continues to participate in the Indian HAWK program with the supply of assemblies and long term HAWK support contracts in The UK were announced in the period.
UK based production of rear fuselage assemblies for the F-thirty five aircraft is increasing with much of investment already in place to achieve the anticipated higher production volumes. The unmanned air systems activity benefited from the announcement by The UK and French governments of a new €2,000,000,000 project to build an unmanned combat air systems demonstrator following on from a successful joint feasibility study. In the maritime domain, the Queen Elizabeth class aircraft carrier program progresses well. Preparations for sea trials in 2017 are on plan and activities to support entry into service is increasing in momentum. On Tight '26, an extension to the demonstration phase was received and discussions with the UK Ministry of Defense to define the overall build program are maturing.
On Astute, the first three boats are now in operational service with the remaining four boats in build. Activity is increasing on the successor submarine program and major redevelopment of the Barrow site is underway. The UK government's commitment to the successor program was recently endorsed by parliament. Moving to our other markets and starting with Saudi. The Royal Saudi Air Force is achieving high utilization and aircraft availability across its Typhoon and Tornado fleets, operating under demanding conditions.
In the fiftieth year of our presence in Saudi Arabia, BA Systems is progressing current and potential new requirements as part of the long standing arrangements between the UK government and the Kingdom. The current five year Saudi Defense Corporation program is due to complete at the 2016. Discussions are well advanced between BA Systems, the U. K. Government and the Saudi Arabian customer on the next five year contract.
In Australia, the business is stable. Rationalization of the Williamstown shipbuilding facility and cost reduction actions taken across the wider business in 2015 are largely complete and support the streamlined business model. Moving forward, the business is underpinned by ongoing sustainment activities. As the MBDA joint venture wins significant order intake on air, land and naval platforms and building off its already large order book, good growth is expected over the medium term. In India, delivery of the second batch of Howell assembled Hawk aircraft continues and negotiations are also underway to agree a third batch.
Negotiations are advancing on the potential sale of M777 howitzers, including local arrangements for assembly, integration and testing. Both programs support the Indian government's Make in India policy. Turning to cyber. Our U. S.-based intelligence and security business performed solidly in the period.
While market conditions remain highly competitive, the performance improvements seen in 2015 have been maintained. Applied Intelligence saw strong order intake and sales growth in the period across all three business streams, but it is from the commercial space that we see the greatest potential. Investment continued in engineering capabilities and product development along with a new business defense marketing campaign to increase brand awareness. Sales growth is expected to continue as cybersecurity becomes an increasingly important part of government security and a core element of stewardship for commercial enterprises. Pete?
Thanks, Ian, and good morning. As usual, I'll step through the results for the half year and then move to the twenty sixteen full year guidance. So the results have seen some benefit from a stronger U. S. Dollar.
For reference, the U. S. Dollar rate averaged 1.43 pounds in the first half this year compared to 1.52 pounds last half year. So the headline numbers and compared to the 2015, sales increased by some £200,000,000 to £8,700,000,000 mainly due to exchange translation. We continue to expect some second half bias in sales this year, in particular for the scheduling of aircraft and related equipment deliveries into The Kingdom Of Saudi Arabia.
Underlying EBITA of £849,000,000 was 6% up on last year or 3% on a constant currency basis. Underlying finance costs in the first half were higher at £120,000,000 largely for the cost of carry of the 1,500,000,000 bond financing that we put in place in December. Underlying earnings per share were at 17.4p, and there is a bridge chart highlighting the major movements from the 2015 attached to the presentation posted on the web. There was an operating cash outflow in the first half of £20,000,000 and net debt at June 30 stood at just over £2,000,000,000 and I'll cover the cash position on subsequent charts. Order backlog has reduced to £36,300,000,000 as long term contracts, primarily in The U.
K. Trade through. And finally, the interim dividend has been increased to 8.6p per share, up 2% on the 2015 interim. In addition to the impacts from exchange translation, there are a number of items impacting the balance sheet and, in particular, working capital in the first half year. As anticipated, advances continue to be consumed on the Omani Typhoon and Hawk program, the European Typhoon contract and the Saudi training aircraft contract.
Costs are being incurred against provisions created in previous years, including The U. S. Commercial shipbuild program. The IAS 19 accounting pension deficit has grown over the six months to £6,100,000,000 and that pension deficit increase also pushes up the deferred tax asset. And I'll move straight to the pension deficit position on the next slide.
The value of the scheme assets has increased since the start of the year to £23,800,000,000 and that's after pension benefits paid out of more than £500,000,000 Liabilities have increased by £3,500,000,000 to £30,400,000,000 Real discount rates since the year end have fallen by 50 basis points in The U. K. And by 80 basis points in The U. S, driven by the lower bond yields, slightly offset by lower projected inflation. The periods discount unwind and pensions paid broadly net out.
Exchange translation of The U. S. Schemes has increased the deficit by 100,000,000 So overall, a net £1,600,000,000 increase in the pretax accounting pension deficit. As you know, the key the pension accounting is one thing, the funding position is more relevant. The group's next U.
K. Triennial funding review is planned to commence in April 2017. And in conjunction with the scheme trustees, we will be looking at various options with a focus on the longer term view. Moving on to cash. This slide sets out the movement from our net debt position of £1,422,000,000 at the beginning of the year.
There was an operating business cash outflow of £20,000,000 Interest and tax payments were 169,000,000 twenty fifteen's final dividend paid in June was £397,000,000 All the other cash flow movements totaled £28,000,000 And so we closed at June 30 with gross debt of £4,200,000,000 cash of 2,200,000,000.0 and net debt of £2,000,000,000 £350,000,000 will be repaid in October in respect to a pre financed long term maturing bond. The cash flow performance of the five secondtors is also shown here, and I'll return to this when I cover the results of each of the sectors. But just to note, the total cash outflow for pension deficit funding in the period was £148,000,000 and the cash outflow at head office contains £126,000,000 of that. So moving now to the sectors. I'll cover the year to date performance here and return to the full year outlooks a little later.
And the first of those sectors, Electronic Systems, and the figures here shown in U. S. Dollars. The sector recorded sales of $2,100,000,000 2% down on last year due to some second half weighting of deliveries under contracts for common missile warning and electronic warfare systems. Sales in the commercial areas of the business now stand at 26, having seen growth in the first half of 15%, primarily in hybrid drive systems.
The return on sales achieved of 14.5% was in line with expectations. Cash conversion of EBITDA in the first half year reflects a buildup of inventory ahead of stronger second half sales, and we do expect a much improved conversion level over the full year. Order backlog stands at $6,300,000,000 broadly unchanged since the start of the year on a like for like basis. The Cyber and Intelligence sector comprises the U. S.
Intelligence and Security business, together with BA Systems Applied Intelligence, and the numbers again here in U. S. Dollars. In aggregate and in line with guidance, sales were up 5% at $1,190,000,000 Sales in The U. S.
Business were up 4%, whilst growth in the Applied Intelligence business was 16%, benefiting from increases in all three divisions: U. K. Government Services, International Services and Commercial. Margins of 2.2% reflect the accelerated engineering, product development costs and sales team buildup at Applied Intelligence as well as the recent brand awareness advertising campaign in support of our future growth expectations. We have expensed all of these costs through the P and L.
We expect a significant second half bias on margin performance in Applied Intelligence. Cash flow conversion improved on reduced working capital requirements in Applied Intelligence. Order backlog reduced to $3,000,000,000 The Applied Intelligence business backlog grew by 13% for some longer term contract awards in The U. K. Division.
And in The U. S. Intel and Security sector, order backlog reduced on the trading out of certain long term contracts. In the Platforms and Services U. S.
Sector and again in line with our guidance back in February, sales of $1,840,000,000 in the first half were lower by 9%. That reduction comes from the expected reductions in the naval ship repair business as The U. S. Fleet continues its pivot to the Pacific, and that's been partially offset by increased deliveries on the CV90 Norway program. Margin performance for the first half year is at 6.7% and is stated after further charges of $49,000,000 on the commercial shipbuilding contracts.
A $16,000,000 charge was taken in the 2015. As of today, five of the eight ships have now been delivered off contract. Of the remaining three, one will go this year and the other two will be completed in 2017. Cash flow is being impacted by the utilization of the provisions created against The U. S.
Commercial ships program and for customer advances on the CV90 Norway contract, along with continued investment on the new floating dry dock to be located in San Diego. Order backlog has increased marginally to $5,900,000,000 primarily on the international awards that we've had from amphibious vehicles to Japan, BVS10s to Austria and CV90 upgrades for Sweden. In the Platforms and Services U. K. Sector, sales were at £3,700,000,000 up 3% compared to the 2015.
This year, on the Saudi program, there were four Typhoon aircraft deliveries in the first half and there are seven scheduled for the second half. With regards to the return on sales, you'll recall that in the 2015, there was a dilutive impact from trading with the radar and DAS equipment, and that was around 50 basis points. In the 2016, we've seen benefit on the Astute program from pricing of batch one and profit recognition on the later boats. As expected, the £154,000,000 of cash outflow in the period reflects consumption of customer advances on the Omani Typhoon and Hawk program, the European Typhoon contract and the Saudi training aircraft contract. Order backlog reduced to £16,300,000,000 primarily on the trading of Typhoon Aircraft, Carrier and Astute.
Sales in the international business for the first six months of 1,700,000,000 are 7% higher than in 2015, and that's on the increased levels of support in The Kingdom Of Saudi Arabia. EBITA was £158,000,000 with higher margin weapon system deliveries from the MBDA joint venture weighted to the second half year. There was an operating cash inflow of £178,000,000 consistent with the period's profit generation. Order backlog is at £10,100,000,000 pending the anticipated renewal of the five year Saudi support contract, as mentioned by Iain earlier. And for reference, there's a chart providing a summary of the trading performance of all five sectors and the numbers for eight Q appended to the presentation on the web.
This penultimate chart sets out our guidance for each of the sectors through to the end of the year, and it's the same as we presented back in February. We currently expect no material changes to our guidance. As we advised in February, our U. S. Dollar planning rate for the year was at $1.45 And given the ongoing uncertainty and to keep things simple, the chart reflects no change to that.
However, as a sensitivity to earnings per share, the impact of a €0.10 move is around 0.8p. This final chart highlights the cash utilization we expect in 2016. 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 the new floating drydock facility in our U.
S. Ship repair business and for capability insertion into our Saudi partner companies. Within working capital, the most volatile area remains the level of customer advances. Against the advances we received in 2012 on the Saudi trainer aircraft, we will see a final year of utilization. The majority of the advances remaining on the European Typhoon production contract will also be consumed.
And under the terms of the 2012 Omani contract, there will be increased cash flow in 2017 as deliveries commence. The final operating cash flow item in the year is the pension deficit funding, which will again be close to £300,000,000 Moving on to the non operating items. Outflows for interest and tax are expected to total around £400,000,000 and dividend payments to shareholders will be around £700,000,000 So in 2016, we continue to expect an increase in net debt. As a reminder of our narrative guidance for 2017, we expect to see a year of stronger operating cash flow as the previous five year cycle of customer advance payments and their subsequent utilization draws to a close. And on that point, I'll turn it back to Iain.
Thanks, Pete. So in summary, BA Systems closed twenty fifteen with good momentum across the group. That good performance has continued into 2016, underpinned by our robust strategy, large order book, good program execution and a well balanced portfolio. With the expected improvement in defense budget outlook in a number of our markets, the group is well placed to continue to generate attractive returns for shareholders. Thank you.
So we'll now take your questions.
We have our first question from Rami Meyerson from Investec.
Two questions from me. One on potential orders in H2 that you've mentioned, but just to clarify. So the largest one is probably Saudi. And do you expect large contracts for the TAF 26 and successor program to come into H2? Or will that be a 2017 issue?
And are there any other large orders do you expect for the remainder of the year? And the second question is on working capital because at H1, you're probably at the top of your guidance. And wouldn't we expect the profile of deliveries to drive an improvement or a smaller cash outflow than you've guided to for the remainder of the year?
So let's I will answer the one about order book and then Pete on the working capital. Do want to reverse that, Pete?
I'm happy with the original decision here.
So on successor, there will be a few a further release of funding in the second half of the year in keeping with the plans that we've agreed with the MOD. You've got to remember this program will be released in tranches, so this isn't there's a big sticker number against this, so we'll release this in tranches leading up to that, but there will be funding release going through. On Type 26, there will not be major funding release in the second half year. The next funding release will be around the manufacturing contract. We have the demonstration and the development phase largely funded, so that would not be a major release.
We talked about in the commentary about the 10 the next five year support contract in Saudi. Some of that will go into the orders in the second half. But the order book there is covered to the end of the year on that. And in terms of where I think you're leading in terms of are we expecting to see any sort of typhoon major orders. As you know, at the end of last year, we derisked the timing of these orders by reducing the manufacturing so that we had consistency of build rates.
So we were bidding these consistence against a hotline. And so our assumptions in this phase is that there will not be major orders on that in this year. Although, we have not yet got the full order for Q8 in the order book yet. So the majority of that will come through in the second half.
On the second question, Remy, around the working capital. You'll have seen from the cash guidance slide where we show what we've had cash outflow in the first half and then the full year guidance, you can see that the majority of the cash outflows that we expected already occurred in the first half. So I think your point is right. We would expect to see an improvement in the second half. In respect of the pension deficit funding, which is also on the chart, that's largely biased to the second half, and that's because the funding we do is not just for The UK scheme, it's also The U.
S. The U. S. Payments are all made in the second half.
And just going back to order, just to remind the fact, close to 50% of this business is in services. So we get a continuum of orders through all of our cycles in every month. So this is not something where this group stands or falls by one big digital order. The great strength is our scale across all the domains that we operate in through both development phase, manufacturing and the through life where compared to our peers, have a much stronger position.
Thanks. And just to clarify, the Saudi support order, will that come in stages or will it be one large order?
It generally comes in stages. I mean they clearly will release the bits which impact providing the continued support into next year, the manpower on those, and then you get the other bits come in stages.
I think if you went back to 2012, Rami, when we had the last order, that came in stages.
We'll take our from David Perry, JPMorgan. Please go ahead. Your line is open.
Yes. Good morning, gents. Just got one question for you. And I know it's one you can't give a definitive answer on. It's for you, Peter.
But just if the pension deficit stabilizes at the current level, do you have any feel for what the annual cash payments might be from 2018 onwards, the 300,000,000 or so you're putting in now, what that might rise to? Thank you.
We've got the triennial valuations coming up in April 2017. So trying to predict an outcome now is pretty difficult. But if you look into sort of put a sensitivity on it, of that £300,000,000 you referred to, pounds 200,000,000 of that is U. K. So it's not the full 300,000,000 which is UK, it's the 200,000,000 We've got a long way to go.
We've got discussions to that won't start with the trustees until next year. So we can't predict an outcome at this point.
But I think, David, relative to the cash flow projections that we've given for the following year where we don't have the advanced payments, you can see that even if that went up, it's not going to destroy our ability to pay dividends and run the business.
Okay. Thank you.
Thank you. We'll take our next question from Finbar Sheehy from Bernstein Research. Please go ahead. Your line is open.
Good morning. Wanted to ask you a little bit about the F-thirty five as you ramp up production on that. As you get production going up, should presumably be seeing your opportunities increase to get costs down. And I'm wondering how your relationship is with the prime on that. Do you have to pass through cost savings to them periodically as you would with a government customer?
How does that work?
Our pricing is in exactly the same basis as Lockheed's pricing. We price each LRIP and then we'll price the long range the full rate production as well. And so basically, because you're doing it in a twelve to an eighteen month cycle, the savings that you've achieved in the next batch become the first batch become the baseline for the next batch. But we make decent margins on this business today.
Great. Thanks.
We'll take our next question from Nick Cunningham from Agency Partners. Please go ahead. Your line is open.
Thanks very much, gentlemen. I'm sorry, I apologize for the technical one, but your colleagues at Rolls Royce have raised the spectrum of IFRS 15 this morning. And Boeing and Northrop in The U. S. Have both commented on that having quite a significant effect in defense.
And I think it's about having to shift from a unit basis of accounting to a cost basis of accounting and will vary contract by contract. I was wondering if you have a view yet on your contract portfolio and how it might affect revenue and profit reporting for BAE?
I
guess this one is for me, Ian.
Can have a go
if you want me.
Prefer you do that.
Yes, okay.
Good question, Nick. I mean, it's not just that. It's also the combining of accounting sorry, combining of contracting, which we don't do. We've done an initial assessment. We don't think there's going to be any material change to us.
There'll be some small change, but nothing material. We got this question back in February. We've done follow-up, and we're still confident there's no material change.
That's a relief. It's one company we won't have to completely revise our models for then.
Glad to help.
We'll take our next question from Ben Fiddler from Deutsche Bank.
Yes, good morning. Had a couple of Firstly, the guidance overall hasn't been changed, particularly for Platforms and Services U. S, no change to that guidance despite the emergence of a shipbuilding charge that certainly I wasn't expecting to be of this scale and presumably neither were you and you originally gave the guidance for that division. So just wondered on the behind the scenes, what's actually going better in that business and that it looks like something is? And is that an indication of a higher future sustainable underlying margin that we have for that division for 2017 and beyond once, hopefully, the shipbuild charges come to an end?
The second question was just to share with us the reasons for your confidence on what should be a very substantial second half margin improvement in the Cyber division as to what gives you the confidence that you can and will deliver that? Thank you.
Let's take the last one and then because Gerry is with us and then he can cover the business, the P and S business. On the cyber, and this is in particular relative to our Applied Intelligence business, we, as you know, have been developing a new set of product sets, new routes to market. I mean the confidence is that we are now we have now launched those products and they are now in the market. So we're just in that period between having invested all the money in developing the product sets and the routes to market and then the brand awareness came to rolling those out through the marketplace. And the level of confidence is gained by the attractiveness of those products and the interest that we have in those products.
And this is going to be one off timing between whether you get the sales in one month or another month because a lot of these are license sales. But in terms of do we believe they're the right products for the market and a number of the analysts, These are technical analysts who sort of comment on them and believe that they are. So that's where we get the confidence that what we've done is the right thing. But the precise timing of when you get these particular license sales will be what they'll be. But do we have confidence that we're spending the money in the right areas?
As you know, we expense anything, none of this sits on the balance sheet. So that's why you see a major impact on results. But if you look at the core business we got with the government, it's growing. You look at the core business we have internationally, it's growing. You look at our core commercial business, it's growing.
It's now just the traction of these product sets in the market. So we feel good about the strategy.
Ben, a couple of comments for me before Gerry stands up. Just one on Ian's point about we expense all these costs. We talked about accelerated product development, engineering costs, routes to market, the branding campaign. We expensed £96,000,000 in the first half year. So we're not sat there with anything on the balance sheet and clearly that has a drag on margin.
In respect of The U. S. Performance at P and S, you're right, pounds 49,000,000 of charges, not what we had in our guidance. But what we are seeing in our Combat Vehicles business is some great sort of program execution, particularly on the Paladin program and AMPV. And those margins have outperformed against, again, what we'd expected at the start of the year.
So whilst we haven't fully covered off the £49,000,000 charge, those two programs have gone a long way to it.
So generally, I guess the question, how do you feel about the franchises that we have in P and S across what we do for the government in ship repair and then the land business?
Yes. I would just reinforce what Pete said. Not only did we have strong performance in combat vehicles, but also in our weapon systems business and our ship repair business, we're seeing consistent execution, predictable performance that allowed us to overcome the provision. And as we look forward, I think rightfully so, I think you can expect a higher level of earnings out of that business on a consistent basis, particularly as we come out of 2017 and trade out of the shipbuilding commercial shipbuilding contracts and just one or two other ones that we have presently in the defense portfolio will be turning to profitability in 2017 and 2018. So yes, I think you can expect stronger margins going forward.
And how do you feel about sort of M777 into India now?
I feel good. It's been approved by their acquisition council. And so we are proceeding through the milestones, a pace that would put us on a potential for award at the end of the year. We're working in parallel with the U. S.
Government on the FMS proposal that we have going forward. So we're reasonably optimistic that, that is moving along and could come before the 2016. Thanks, Harry. So
Jerry, am I wrong in my math to think that the combination of nonrecurive costs on shipbuild and presumably, over time, some reduction in the revenues on these commercial shipbuilds, which is small but nonetheless at no profit, means that we should be looking at a 10% type of margin for your business midterm.
Yes, I think that's realistic. I think it's a double digit business, and that's really our target and our commitment to Ian and the Board that we're going to get there sooner rather than later.
Thanks very much.
Thanks very much, Shelley.
Thank you. We'll now take our next question from Oliver Brochet from Credit Suisse. Please go ahead. Your line is open.
Yes. Good morning, gentlemen. I will go for three of them, if I may, please. The first one is looking at the exports from The U. S.
Could you tell us how much of revenues you do in electronic systems that goes in FMS contracts through OEMs like Lockheed, Boeing? That's the first one. Second, on the submarine successor program, if there is a structure that is similar to CVF arrangement that is set up, what would be the impact in terms of risk and contingencies for BAE? And third, on the five year Saudi contract, on the new one, how would you qualify the margin that you are negotiating versus the one of the previous five years, please?
Okay. I'll ask well, I can answer all of them, actually. So in terms of the five year support contract, it's similar margins to what we've negotiated in previous years. There will not be a change in margin. In terms of the successor program, there will not be a change in the risk profile.
This is going to be a target cost incentivized program. All we're recognizing on successor are there are three parties to this program, the government themselves and some of their furnished equipment, Rolls Royce and BA Systems. So it's not a vehicle for sharing risk with industry. It's a vehicle for managing this program to schedule and to cost. On exports from The U.
S, the two big FMS activity is we obviously sell through Boeing on F-15s. The big contract we have today is in Saudi for the F-fifteen upgrades, And there are a number of other programs that they're bidding, as you know. And then through Lockheed, it's F-35s.
Olivier, I can quantify that. That's way less than 5% of the ES turnover.
Thank you very much.
We'll take our next question from Charlotte Keyworth from Berenberg Bank.
Just a very quick one on the S-thirty five for me. Look, you'd announced on its earnings call last week that it had been self funding locks nine and ten on the program to maintain continuity in the supplier base as it's waiting for the release of appropriated funds from the DoD. I know it's an issue that they think will be resolved quite quickly, but they did also say it was an unsustainable position for them with the cash outflows it's producing. Do you have any concern over kind of payments and sort of continuity on the program on that basis if things do drag on into later in the year?
No, we are fully funded on our programs. We do not fund it on that basis.
Thank you.
You. As there are no further questions at this time, I would like to hand the call back to Mr. Ian King.
Okay. Well, thank you very much, everyone, and have a good balance of the summer.