Good morning, and thanks for joining our webcast on this busy morning for reporting. Operationally, the group continues to perform well, benefiting from good program performance on our large backlog of almost £40,000,000,000 Clearly, we faced some exchange rate headwind, but this is about translation, not transaction. We expect sales to be weighted towards second half as a result of a stronger second half performance from contracted deliveries. Margin performance was in general very good during the first half, the couple of legacy issues in our U. S.
Support Solutions business, which our new management team are on top of. Our order backlog of close to £40,000,000,000 remains very strong, even though it has reduced by some £400,000,000 as a result of exchange rate translation. There are some £1,300,000,000 of international orders where contractual paperwork is being finalized and £1,000,000,000 of sole source UK naval contracts, which are at an advanced stage of negotiations yet to be booked into this order backlog. Overall, we expect robust underlying performance across the group for the full year. However, as we set out at the results announcement in February, the one off benefit to earnings we enjoyed in the second half last year from the settlement of pricing on Salam Typhoon aircraft to Saudi Arabia will not be repeated this year.
As a result of the non recurring nature of this settlement, we expect earnings per share to decline by approximately 5% to 10% compared to 2013, excluding any impact from foreign exchange translation. In The U. S, the bipartisan budget approval in December 2013 is providing improved near term clarity and should enable some program priorities to be better addressed. Against this background, we have seen an improved level of procurement activity within our U. S.
Based electronic systems business and on some support programs. I'm also pleased to report that our U. S. Land business is on plan. We continue to bid for the armored multipurpose vehicle to replace the large fleet of U.
S. M113 vehicles. A major competitor recently withdrew from this competition and success in winning this large and valuable program would do much to secure our tracked vehicle industrial position in The U. S. For a number of years.
We expect a decision within the next twelve months on the first phase. Budget constraints and reduced activity are most apparent in our intelligence and security business, where we continue to have only short lead time contract visibility. The impact of the twenty thirteen underperformance in the Radford contract and commercial shipbuilding continued to depress margins in The U. S. Support Solutions business into the first half.
Jerry D'Amuro has hit the ground running and is on top of these Support Solutions issues. He has been quick to make his mark and has streamlined the organization reducing four sectors to three to bring new management oversight to the activities of the former Support Solutions businesses and reduce administrative overhead. We continue to make ground in our strategy for organic growth in commercial aircraft electronics. Boeing's recent selection of BA systems to supply the integrated digital flight control system on its next generation 777X program was a key win, securing an important role on this promising platform. Turning now to The UK.
Much of the group's UK business is concentrated on a small number of large programs where multi year contracts provide good visibility and a large order backlog. We continue to perform well on our major UK programs. We welcome the discipline that has enabled MOD to balance the defense plan. It has not been easy for either government or industry. Our military air business continues to benefit from both stable Typhoon production and our extensive support and upgrade business.
In the first half of this year, we have delivered four Salam Typhoon aircraft of an anticipated 12 deliveries this year. The phasing of Salam Typhoon aircraft deliveries and European tranche three aircraft results in higher second half sales. A progressive release of additional capabilities is planned for the already very advanced Typhoon aircraft. A high level of activity is underway to clear additional weapons and sensors onto the aircraft for the four partner nations and international customers. In addition, at the Farnborough Air Show earlier this month, the Prime Minister announced a £72,000,000 contract to further de risk eScan radar development for the RAF's Typhoon fleet.
This activity is part of the UK MOD's procurement process ahead of the award of a full scale development contract. BA Systems has an enviable position on the world's two preeminent combat aircraft programs. Our participation in the F-thirty five combat aircraft program continues to develop. 21 airframe subassemblies were delivered in the period and we are now starting a significant production ramp as the planned aircraft delivery rate accelerates. A second phase of highly successful flight trials of the Tiranus unmanned air system has been completed, demonstrating the aircraft's ability to fly in full stealth mode.
As a reminder, this is the most advanced aircraft developed in The UK by British companies led by BA Systems and we are considering next steps with the UK government. In addition, the UK government is also committed to joint UK French funding in this sector with the announcement during the Farmwood Air Show of £120,000,000 funding for feasibility work ahead of a potential demonstration. We are investing in the group's maritime businesses in The UK following agreement last year with the UK government on a surface ship strategy. As part of the investment phase for the Type 26 frigates, we have made a proposal for the design and manufacture of the ships. This activity along with the commitment to build three offshore patrol vessels and the restructuring agreement will provide long term clarity for complex warship manufacturer in The UK.
The Queen Elizabeth class aircraft carrier program is progressing well and the first vessel is structurally complete. The carrier was named in the formal ceremony by Her Majesty the Queen earlier this month and has subsequently been floated out of the dry dock in which the ship was assembled, allowing assembly of the second ship to get underway. In the submarines business, Artful, the third of the seven Astute class submarines was launched in May. Alongside build of Astute class boats, engineering work continues to accelerate on the successor program. In Saudi Arabia, the group continues to make good progress with the provision of capabilities that now support 38 Typhoon aircraft in service.
In addition to delivering a high end defense capability, we are committed to the continued development of Saudi Arabia's industrial base, in line with the Kingdom's stated national agenda. In June, we announced the reorganization of our portfolio of interest in a number of industrial companies in Saudi Arabia and an enhancement of an existing relationship with Riyadh Wings. This reorganization is expected to enhance the growth prospects of these businesses in Saudi Arabia and support skills and technology development in Kingdom with increasing local employment. In Australia, where BA Systems is the largest defense contractor, there is a government commitment to increase defense spending. We continue to perform well on the Canberra class landing helicopter dock program with the first of the two ships completed and expected to be delivered to the customer in the second half of the year.
We are discussing with the Australian government options needed to sustain industrial capabilities across the shipbuilding sector. It is important we resolve this key issue. Other international markets offer a range of opportunities. We now have initial funding for the large Korean F-sixteen upgrade program and see other military aircraft upgrade prospects. Our MBDA joint venture recently won a key contract for ASRAM, a precision air to air guided weapon with a new government in India.
Other prospects in India for M777 howitzers and the next batch of Hawks continue to be pursued in this new political environment. We are seeing significant renewed interest in the MBDA for ground based air defense systems from international markets and we have vibrant campaigns to address international opportunities for Typhoon aircraft and combat vehicles. In the area of cybersecurity and intelligence, our U. S.-based business continues to be impacted by delays in procurement awards and increases in the number of award protests. Much of the reduction has come from the Afghanistan withdrawal and the impact on our lower margin IT support activity.
The strategy to develop our U. S. Government mission support activities remains robust and we continue to address substantial bid prospects. As you may have seen, we have just completed a small bolt on technology acquisition with Signal Innovations Group, a provider of imaging technologies and analytics to The U. S.
Intelligence community. Although small in scale, this acquisition provides us with additional technology that has the potential to be exploited for commercial applications. Through the Applied Intelligence business, we continue to successfully develop our strategy for commercial cyber with good growth in the first half and contract wins across international markets. We achieved further strong order intake, growing the order backlog 25% in the first half. This success builds on our 60% growth in the order backlog last year.
We continue to invest in the business as we build our cyber skills base. For the second year running, over 40% of BA Systems graduate intake in The UK will join the Applied Intelligence business. In addition to the drive into cyber, we invest heavily in the skills and technologies we need to sustain and grow our wider business for the future. We focus company funded investment in the areas of both defense and commercial aircraft electronics, unmanned technologies and as I mentioned to build our commercial cyber business. We should remember that in defense work, we work with our customers to develop the skills and technologies to meet their requirements.
Customer funded R and D is an important component of our overall investment. Today, the overall percentage of both our own and customer funded R and D is approximately 6% of group sales. Group's capital allocation policy remains unchanged. We continue to supplement dividends with returns to shareholders through the share repurchase program announced last year. Detailed financials.
Pete?
Thanks, Ian, and good morning. As Ian mentioned, our results have been impacted by the stronger pound both in absolute terms against 2013 and against the assumptions made in our guidance. And I'll make that impact clear as I give the usual trading review and then move into the 2014 full year guidance. For reference, the U. S.
Dollar rate is averaging 1.67 so far this year compared to $1.54 last. So the headline numbers and compared to the 2013, sales have reduced by some £900,000,000 to £7,600,000,000 Around £400,000,000 of that reduction was due to exchange translation. The volume reductions in Land and Armaments were as expected and there was a significant second half bias in sales due to the contracted delivery schedules for Typhoon aircraft this year. Underlying EBITDA decreased by 7% or 4% at constant currency to eight zero two million pounds giving a return on sales of 10.5%. Underlying finance costs in the first half were slightly down at £89,000,000 Underlying earnings per share were marginally lower than in 2013 at 17.7p benefiting from the group share repurchase program and lower tax rate.
And there is a bridge chart showing the movement in EPS appended to the presentation posted on the web. There was an operating cash inflow in the first half of £287,000,000 benefiting from the sale and leaseback of our two residential compounds in Saudi Arabia. Net debt at June 30 was just under 1,200,000,000.0 Order backlog has reduced to £39,700,000,000 and £400,000,000 of that is due to exchange translation. And finally, the interim dividend has been increased to 8.2p per share, up 2% on the 2013 interim. In addition to the effect of exchange translation, there were a number of other impacts items impacting the balance sheet in the first half.
Tangible fixed assets reduced as the second of our Saudi residential compound sale and leaseback transactions completed in April. As anticipated, advances continue to be consumed on the Omani Typhoon and Hawk program, the European Typhoon contract and the Saudi Trainer program. The first of the two payments under the Salaam VOP settlement has been received. Costs incurred are being charged against a number of provisions created in previous years. The IAS 19 accounting pension deficit has increased over the six months to £3,700,000,000 and I'll cover that on the next slide.
And finally, net debt closed at £1,200,000,000 This slide shows the pension scheme assets, liabilities and deficit as accounted for under IAS 19. The value of the scheme assets has increased by £600,000,000 over the period to £22,100,000,000 Liabilities increased by £900,000,000 to £26,900,000,000 Real discount rates have reduced by a further 20 basis points in The U. K. And by 60 basis points in The U. S, mainly driven by bond yields.
So overall, a net £200,000,000 increase in the group's pretax accounting pension deficit. As you know, the pension accounting is not the important issue. It's the funding position that's more relevant. And 2014 is a significant year for triennial funding valuations with all nine of the group's U. K.
Schemes falling due. Discussions between the company and the trustees of those schemes are currently ongoing as to the underpinning assumptions behind the calculation of the liabilities and we expect those discussions and any subsequent revisions to deficit recovery plans to be completed by the year end. Moving on to cash. This slide sets out the movement from our net debt position of £699,000,000 at the beginning of the year. There was an operating business cash inflow of £287,000,000 Interest and tax payments were 141,000,020 thirteen's final dividend paid in June was £383,000,000 Under the three year share repurchase program of up to £1,000,000,000 we bought back 56,600,000.0 shares in the first half at a cost of £235,000,000 And since commencement of the program, we have bought back 108,200,000.0 shares at an average price including costs of £4.14 Exchange translation and all other movements totaled £11,000,000 We did repay $500,000,000 of long term borrowings in the period.
So we closed at June 30 with gross debt of 2,600,000,000.0 cash of £1,400,000,000 and net debt of £1,200,000,000 The cash flow performance of the five secondtors is shown here and I'll return to this when I get to the results of each of the sectors. But just to note, total cash outflow for pension deficit funding in the period was £163,000,000 The cash outflow at head office contains £148,000,000 of that. Moving now to the sectors. I'll cover the year to date performance here and then return to the full year outlooks a little later. And so to the first of those sectors Electronic Systems and the figures shown here are in U.
S. Dollars. The sector delivered sales of £1,850,000,000 almost identical to last year and in line with guidance. Sales in the commercial area of the business now stand at 22% and growth there is helping to offset the expected pressures on the defense side. The return on sales achieved at 12.9% was consistent with the 2013.
Cash conversion of EBITDA in the first half was ahead of last year's and we do expect an improved conversion level over the full year. Despite The U. S. Budget pressures, order backlog stands at $6,200,000,000 sustained since the start of the year on further F-thirty five LRIP awards. And this backlog does not include the currently protested award for enhanced night vision goggles.
The Cyber Intelligence sector comprises The U. S. Intelligence and Security business together with BA Systems Applied Intelligence. The numbers again here in dollars. In aggregate, sales reduced by 13% to $900,000,000 The U.
S. Business saw a further 22% decrease, driven largely by reduced budgets at the sector's two largest customers along with further reductions in analysis support on counter IED activity in Afghanistan. Growth in the Applied Intelligence business was at 7%. Despite the top line performance, margins have improved to 8.9%. Cash flow performance includes the capital cost of the replacement ERP system and stand up of a Malaysian operating center in the Applied Intelligence business.
Order backlog increased to $1,400,000,000 And despite the first half top line pressures, backlog in The U. S. Business grew by 8% on imagery analysis and cyber support awards. In the Applied Intelligence business, backlog grew by 25% and now stands above $05,000,000,000 for the first time. The U.
S. Platforms and Services sector aggregates the Land and Armaments and the Support Solutions businesses. As Ian mentioned, in a further cost reduction move, the Support Solutions business is being disaggregated across the other three U. S. Businesses.
For 2014, we will continue to provide transparency of the two businesses within the sector and we will advise of changes to be made to reporting structures for 2015. So I'll move straight on to the performance of the first of those two businesses, Land and Armaments. Sales in the first half reduced by 14% to $1,260,000,000 As per our guidance back in February, Bradley reset activity has almost halved, the medium mine protected vehicle production contract has completed and deliveries under USM777 lightweight howitzer contracts have largely traded out. Despite the expected top line reductions, the business has outperformed at the margin level, delivering a return on sales of 10.9% through strong program execution and cost reduction. Cash flow was significantly improved compared to last year with more than 100% profit conversion.
Order backlog is reduced in line with the sales traded. In the Support Solutions business, sales of $1,510,000,000 in the first half were in line with expectations with good volumes in naval ship repair activity. However, the return on sales in the period was at just 2.5%. In addition to the lower margins arising from last year's issues on the Radford contract, a further $20,000,000 of charge have had to be taken on commercial shipbuild programs. Order backlog reduced to $4,800,000,000 on the sales trading out under the five year U.
S. Navy multi ship, multi option ship repair contracts and ordnance programs. The recompete for the Hawaiian contract was successfully secured in the first half. In the Platforms and Services U. K.
Sector, sales were at $2,800,000,000 15% lower than in the 2013. This year Typhoon aircraft deliveries have a significant second half bias. Under the Saudi Arabian Salaam contract, there were four aircraft delivered in the first half with eight scheduled for the second half. And on the European program, there were eight aircraft deliveries in the first half with 22 scheduled for the second half as we transition to deliveries of tranche three standard. The return on sales of 13.8% seen in the 2014 has benefited from strong program execution and accelerated risk reduction on the European Typhoon production contract as the tranche two aircraft deliveries move towards completion.
As expected, the £200,000,000 of cash outflow in the period reflects the consumption of customer advances on the Omani Typhoon and Hawk program, the European Typhoon contract and the Saudi Training Aircraft program. Order backlog reduced to £20,400,000,000 primarily on the trading of Typhoon aircraft, Indian Hawks and Carrier. Stripping out the exchange translational impact of sterling against the euro and Australian dollar, sales in the international businesses for the first six months of £1,576,000,000 are unchanged from 2013. EBITDA was at £157,000,000 giving a consistent return on sales of 10%. There was an operating cash inflow of £541,000,000 which includes a net £349,000,000 from the sale and leaseback less initial rentals of the two Saudi residential compounds.
Whilst order backlog has reduced from last year end's high following the awards in 2013 of the five year support contracts and weapons package, orders totaling $1,300,000,000 are being finalized with the Saudi customer. For reference, there's a chart providing a summary of the trading performance of all five secondtors appended to the presentation posted on the web And that summary also contains the numbers of headquarters, which include a one off net benefit of 13 and million that arises from the reassessment of a long term liability, less a further charge taken on settlement of a U. S. Contract pricing dispute. This chart sets out our guidance for each of the sectors through to the end of the year.
And so firstly, Electronic Systems where guidance is unchanged. We continue to expect 2014 sales in dollar terms to be similar to those in 2013. More than 20% of the business is now in commercial markets where we are seeing continued good levels of growth helping to offset reductions on the defense side. On margins, we expect to see performance at the high end of our 12% to 14% guidance range. Next, Cyber and Intelligence.
And here we are revising sales guidance slightly downwards due to the continued pressures in The U. S. Business. In the Applied Intelligence business, we continue to expect double digit growth. And so for the sector in aggregate, we now expect sales in 2014 to be some 5% below those in 2013.
Despite The U. S. Top line pressures, we expect margins towards the higher end of the improved eight to 10% range. Moving to Platforms and Services U. S.
Whilst overall guidance as shown on the chart and in aggregate is unchanged, this is best considered in two parts. In Land and Armaments, we reconfirm previous guidance of the top line that is in the 2,250,000,000.00 to $2,400,000,000 range. And on margin level, we now expect full year delivery slightly ahead of the previous 9% guidance. In the Support Solutions business, we continue to expect 2014 sales to be only a little lower than in 2013. However, due to the further charges taken in the first half in Commercial Shipbuilding, we are reducing the margin guidance in the Support Solutions sector for this year.
On Platforms and Services U. K, here guidance for both sales and margin remain unchanged. And as I've mentioned earlier, due to the timing of Typhoon aircraft deliveries on both European and Saudi contracts, there is a significant bias to the second half. And following the benefit in 2013 of the Salaam price escalation catch up, margin in this sector is expected to return to within our usual ten percent to 12% range. And on the last of the sectors, Platforms and Services International, sales guidance is largely unchanged other than for the exchange translation impact from the Australian dollar and the euro.
That impact is projected at around £150,000,000 year over year. Last year's trading that arose from the Salaam price escalation and the high weapons volumes is expected to be largely matched this year by increased level of support to the Typhoon aircraft that are now in service. Margin guidance here is also unchanged. And to complete your twenty fourteen models, headquarters costs are expected to be significantly lower than in 2013 and that includes those first half one offs. Underlying finance costs are expected to be marginally higher.
The effective tax rate guidance for the full year is reduced to around 20% in line with the rate at the half year. And the final number is of course dependent upon the geographic mix of profits. With last year's nonrecurring benefit from the Salaam price escalation settlement and before the impacts of a stronger pound, we continue to expect the group's reported earnings per share to be some five percent to 10% lower than in 2013. Exchange translation, assuming average rate of $1.7 is expected to impact earnings by around 1p compared to previous guidance. This final chart highlights the cash utilization we expect in 2014.
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, we are not planning for any material capital expenditure above depreciation levels. We have completed the sale and leaseback transactions of both of our residential compounds in Saudi Arabia and those at the gross level have generated some £400,000,000 of proceeds. Within working capital, we expect to incur costs of around £300,000,000 against provisions created in previous years that are held in the balance sheet. The most volatile area remains the level of customer advances.
And as expected, the major advances we received in 2012 on the Saudi trainer aircraft contract and the Omani contract are being consumed. And you'll recall that under the terms of that Omani contract, no further cash will be received until deliveries commence in 2017. Advances are also being consumed on the European Typhoon contract. The final operating cash flow item is the year's pension deficit funding, will again be around £400,000,000 and that includes the accelerated funding arising from the share repurchase program. The non operating cash flow items are far more predictable.
Outflows for interest and tax are expected to total around £300,000,000 Dividend payments and a full year of the share buyback program should deliver a further £1,000,000,000 of cash returns to shareholders. And so overall and as per previous guidance, 2014 is expected to be a year of better operating business cash flow, but with an increase to net debt post those shareholder returns. In summary then, in the first half, we have seen some mixed performance in The U. S. Sectors, but that's been largely mitigated by good delivery in The U.
K. Business and the lower tax rate. For the full year, other than for exchange translation, we are reiterating the earnings per share guidance that we gave in February.
Ian? Thanks, Pete. So in summary, a good start to the year. The group is performing well and with some anticipated second half bias remains on track to deliver our plan for the full year in line with expectations. In addition, we continue to develop new business opportunities laying the foundation for future growth.
So what we'll now do is we'll take questions. I, as usual, have my colleagues here from the EC to answer the really difficult questions, but who's got the first question? Christian? Christian, you're out there?
Yes. We will now take a question from Christian Lachlan of Bernstein.
Great. Thank you. Good morning,
Good morning, Christian. Just
one question really and it's kind of in general. I'd just like to get some thoughts and views on your confidence on your ability to be able to continue to take costs out of the businesses going forward as you have done for the last few years. And in terms of how sustainable this is for, I guess, kind of the near and medium term? And then also two, do you see much variance between The U. S.
And The UK side of things?
You can always continue to drive efficiencies into the business. The heavy lifting that we had to do with the reduction in land volumes were largely through. But as you can see in The U. S, Gerry is full steam ahead. He's reduced the structure in the business, gone from four secondtors to three secondtors, take administrative overhead out.
In a number of our businesses, we're introducing new IT systems. So again, that will reduce the cost of the administrative costs that we have in there. You just got to keep on going. You can't stand still. We've got to stay ahead of this game.
But we're well aware of the volumes of this business. The benefit of having a £40,000,000,000 order book backlog is that you can anticipate what the operational gearing has to be and we've got to stay ahead of that game, which as you can see we are by the performance on the margins.
And as a corollary to that, I mean, happy are you with the positioning of your industrial base? I guess, just generally speaking, in The U. S. And The U. K.
In terms of rationalization of that industrial base and positioning for dealing with your existing order backlog and what you anticipate to come through in the next few years?
Well, we'll probably ask Jerry to comment on The U. S. Because as you can imagine coming in, he's taken a fairly deep dive due diligence on this. And I think it's fair to say in land, which has been the major change in industrial base, we're feeling pretty good about life at the moment. Jerry?
Thanks,
Ian. I would concur with that. We've spent quite a bit of time, as you know, working with senior leadership at DoD and within the Army in particular on the combat vehicle industrial base. That's one of our priorities this year. And in the portfolio to sustain that engineering base, and as you know, we're bidding not only the AMPV program, but several international programs that I think will provide real stability and backlog in that portfolio.
So in The UK, Nigel, do you think that with the UK government, which we described as stable, we have good visibility into the air and naval sectors?
I think we have exceptional view of the workload going forward, and in particular, as a result of the agreement reached last year with relation to the strategic future for shipbuilding in The U. K. To the sense of the question, there's a major rationalization program that, that agreement allows. We're on with that and making good progress. We'll take significant costs out of the cost base, not just in the ships area, but also in our military business over the coming years.
And equally, we're investing in our submarines area where we actually see growth in the headcount as the successor program grows to a point where we are able to fulfill our offering to the U. K. Government.
So does that give you confidence that we have good visibility going forward?
Yes. That's very helpful. Thanks for that color.
Thank Right. Harry? Harry Breach?
We will now take our next question from Harry Breach. Please go ahead.
Thank you. Hello Ian and Peter. Hello. How are you? Not too bad gents.
Thanks for making the time. A quick couple of questions. A very easy one for Peter to start with and then a couple of other ones. Peter, just quickly, you mentioned, I think, a €30,000,000 charge relating to a pricing dispute. I didn't hear that and the language around it.
Could you just remind me what you said there? Second thing, just turning over to order intake. There was a lot of comment, Ian, you made earlier on about the confidence in the items you're expecting to book in the second half. Can you give us a sense of book to bill for the year overall with the stronger second half of order intake you're expecting? And maybe just a sort of final thing with the interesting comment you made on The U.
S. Slide at the beginning of the presentation where you said procurement activity was improving in many areas in The U. S. I'm just wondering if you can give us a little bit more of a sense of where you see those improvements? And are they getting driven by a sort of return of confidence in the DoD that funding is going to be in place in the Congress in coming years and they can begin to plan again and some of the uncertainty is coming out?
Or what's driving that procurement activity improving if you can touch on that? Thank you.
Well, I'm glad they were very simple questions. Pete's simple, but mine seem to be quite difficult, Harry. I'll do the simple one
first, Harry. Yes, there's a net 13,000,000 so that's £13,000,000 benefit in the HQ numbers in the first half. There's two items in there. One, we've done a reassessment of a long term liability and the other one is there's a charge for settlement of a U. S.
Contract pricing dispute, but the net of the two is $130,000,013,000,000
Thank you.
Okay. So book to bill, Ali, the thing that drives us is that when we look into our forward sales, so if we take 15, as to what percentage of our sales today we have in our committed order book and so we're planning going forward. Generally, when we start the year, we're in the high 80s, 90% and that's what we started this year. And I have every confidence that we're going to be in that same position when we start next year. That's what drives this when we talk about visibility.
In terms of The U. S. Procurement, I mean, in the area perhaps I'll ask Jerry to comment on this, the area we've been particularly pleased about has been in our electronic systems business. As you know, we have about 5,000 individual programs. So I think it is clear that as the budgets started to come in place that they were then committing to these programs going forward.
And we have had a good year, good six months in electronic systems. Jerry, do you feel that in terms of the Pentagon and the planning, are now getting more forward thinking in terms of the programs?
I would agree. As a result of the bipartisan budget agreement, not only in the electronic systems area where I think we had a book to bill over one for the first half, but also importantly in the intelligence and security sector, we also had almost a 1.1 book to bill. And I think for the first time in eighteen months, we actually have positive build, increasing backlog and increasing sales half over half. So a positive trend. We've seen a lot of activity, particularly in the intelligence and security area in this quarter.
Now it's taking longer for those to mature, but we're once again back up to a rate of proposals that we haven't seen in a couple of years.
So if I can just clarify, Jerry, it's the confidence there is about the intelligence and security area. Would you can you give us any color on the other areas, land and support services and procurement terms in The U. S?
Well, I mentioned electronic systems and not included in the book to bill is a night vision award that we were one of the two awardees that's now under protest, but they also had a book to bill over one for the first half of the year. And in land and armaments, not only are we improving focused on margin improvement, but we've seen significant awards that solidify the industrial base. I mentioned two or three, a GCV bridging program that will assist our engineering base and two, on the amphib side that are maturing with Marine Corps as well as the major opportunity that Pete spoke about and I think Ian as well, the AMPV program and a couple of international programs. So we're starting to see a lot of proposal activity. It takes a little while for them to mature, but a definite positive trend.
Ian, sorry to hound you on
this
wickedly. On the book to bill, when we think about the second half, I think in the first half, your sterling order intake when you added up for the individual business segments came to about €5,500,000,000 Clearly some currency impact. Can you
give us a sense sort
of for the second half would you expect it to be sort of significantly larger than that given the indications you've given us about the orders you expect to receive?
We would expect it to be up. But you've got to remember, in our international business, in our U. S. Business, we're not waiting on any orders to probably deliver sales into 2015 of any great note because we've got massive visibility going forward. So we describe this as sometimes lumpy, but that's the nature of the business.
I don't know, about 75% of that order book, Pete, will be in The U. S. Business? Yes. The order backlog?
Yes. Harry, the whole sort of book to bill discussion in The U. S. When you contract on an annual basis, the book to bill ratio is a good one. When you look at our international businesses, if you look at our Saudi support business, for example, we get a five year contract.
The book to bill metric is just not relevant at all. So I think if you rather than look at the whole company, if you drill down and look at the sectors, that's probably the best approach.
That's a point, Pete.
Interesting point, Harry. So although we've got £40,000,000,000 of order book, you got to remember that about 75% of that covers 65% of the business. The other 35%, which is The U. S, we only get on an annual basis just like every other U. S.
Contractor.
Great. Thank you very much guys.
Celine?
Good morning. Thank you, Iain. Good morning,
are you, Celine?
Hi. A couple of questions, if I may. The first one would be on the margin and the profit recognizing the Platform and Services in The U. K. Business, which is probably fairly higher than what I expected at least.
So I'm just wondering what's the magnitude of this milestone or risk relief in that? And I guess then we shouldn't expect that to happen and to be recurrent in the second half? And the second question would be on your R and D comment, Iain, where I think you gave us the level that is being spent at the group level on R and D. And how do you see that trending forward, so over the next two to three years? And the final question is on the back of Harry, question on the backlog on your U.
S. Electronics comments. You said the backlog was up. Could I just ask what's the difference between the defense content and the commercial content on this backlog? And what are trends there?
As I suppose the commercial backlog must be up as well. Thank you very much.
Okay.
On the margin front in Platforms and Services U. K, you're right Salim. There's if you look at our full year guidance, we're saying the guidance is unchanged. There are three things really going on in that sector that give you that high margin. The first one is where we got the Typhoon tranche two aircraft sort of moving towards completion, we are seeing risk reduction.
And as that happens, you see the margins come up. In the second half, we move into tranche three aircraft deliveries. There were none in the first half. There are 12 in the second. And as we start on the new production run, obviously, we trade margin at a lower level.
So you've got that mix effect going on. And then the third element is on the Stoop program, which as you know is quite a low level margin program. There are more milestones that trigger sales in the second half than they were in the first. So those three sort of give you that high first half margin, but then as you move into full year guidance, the guidance stays unchanged. In terms of U.
S. Backlog in Electronic Systems, we don't book the commercial backlog. We only recognize the defense side. So that is pretty much all defense backlog. We only take commercial.
We sort of take in the orders and the sales and almost in the same period. So there's no impact there. The growth in the backlog is all on the defense side.
On The U. S. Business, the commercial avionics business is $600,000,000 of business out of the electronic systems business. You'd say and don't worry about the backlog in this business. We're on every GE engine.
We're on the seven thirty seven. We're on the seven seventy seven. We're developing our InteliCab. And this is an area of business that is going to grow for us. And that is as you know, the commercial sector is something which is growing at about 5% compound annual growth rate.
We'd be pretty disappointed if we didn't beat that growth rate.
On your other question around the R and D, as you mentioned 6%, that's been a consistent rate for the last three years, maybe four years. What varies is the mix between customer funding and self funding. And you'll have seen the announcement at the Fabryo show around customer funding of eScan. We've been funding some of that. So that will now move to customer funded.
So there's always going to be a mix within that overall 6%.
But we would see that that's a consistent rate that we can cover going forward. That's what we monitor to make sure that we're on the right programs. And between a combination of our customer funding, we're staying ahead of the technology curve.
And so you shouldn't see a rate a change in the mix between your contribution or the customer contribution going forward?
You may do, just depending on whether the stage of the program is. As Pete says, we've been developing on our nickel a lot of the eScan radar. It's now moved to a funded program. So the team the same team move off our funding onto that program. Will be the same in unmanned over the years, but then we'll be investing in other technologies going forward.
So that's why we focus on the 6% to make sure that we're keeping on refreshing the technology bank.
Okay. Thank you very much.
Okay. Thank you. Andrew?
Hello. I assume that's Andrew Gollum.
It is Andrew. Are the only Andrew on this list. Sorry, I should have given you the second name. Good Andrew. Good morning, Andrew.
It's definitely me. Anyway, good morning. I've got three questions. First one, forgive me for talking in old money, but Ethoca, You mentioned the strength of order intake. I think you said 25% in the period and 60% last year, yet the revenue growth was only about 7%.
I mean, can you just talk about the expected top line growth for that business? And does it accelerate sharply? And how does the business cope with that if it is commensurate with the order
Well, let's do that one. I mean, we would expect double digit growth. And as you say, it takes a little bit of time to ramp up. You can see we've taken 40% of the 400 grads into that business. We are ramping up lots of people into that business.
Okay. Thank you.
We opened up a new technology delivery center in Malaysia where we have now got over 100 people in there and plans to get up to 200 people. So we are investing. Pete mentioned that in his financial update. We are investing in this business to create the infrastructure. So we've got Kevin Taylor.
Do we have a problem recruiting into this business, Kevin?
No. As you highlighted, a large percentage of the BAE intake is in this area. Because it's a growing business, we attract the right kind of people. And just to add further clarity on the order book, we're taking in significant multiyear service contracts, so the sales will catch up in subsequent years. So no, we don't have any problems at all getting the right sort of talent, but we're vigilant with the levels of growth that we got, but we need the right training programs as well.
Okay, Andrew. So next question. Okay.
Yes. Secondly, a slightly broader question on the market. Just your views really, when we talked about the improved outlook and stability within or better more stability within The U. S. Environment.
Can you just talk about what you're thinking beyond 2015 in terms of risks and how that fits within your own planning background?
Yes. I mean, we're not expecting in terms of The U. S. That when you go past there, you're going to get anything other than the modest growth in terms of budgets. We're not expecting that you're going to go back to the Afghanistan type funding arrangements.
That's our planning assumptions. So we tend to focus on the areas of emphasis of the forces and the key programs. So we still think their desire to maintain a large fleet, which is capable of protection around the Pacific Rim is going to be key to them. F-thirty five programs, the Air Force has been pretty clear about what its key programs and its key technologies are. So that's why we think with having the two year budgets plus actually much more clarity on definition of what they want to focus on, that we think that we can we're in the right areas.
And as Jerry said, we're very pleased on the level of intelligent conversation that industry and the government are having on the land structure as well.
Okay then. And then finally, within the naval sector, I just wonder if you could help us think about on The U. K. Side, what the revenue outlook or profile will be through this? There's quite a lot of transition going on.
We've got the CVF completing. We've got the OP fee filler, if you like, and then Type 26, where there's a little bit more uncertainty. Maybe you answer within the context of what the new agreement with the U. K. Government means relative to what we were thinking about the Toba, which at the time was a fifteen year certainty type agreement, which has now appears to have changed.
No. The October still exists. And until the timing of the October turns into firm contracts, it's an obligation on both the U. K. Government and ourselves.
This is a sector that goes through the height of Carrier, which we all knew was a massive bubble, which we would then have to restructure. And the restructuring program that we and the U. K. Government are entertaining takes us through these OPVs, the three OPVs and then into the Type 26 program and it's our obligation under the TOBA to make sure that we've got industrial capability to make sure that The UK still has an ability to design, develop and manufacture complex warships. And that's what we're doing.
At the same time, you've got a growth in the submarines business as you go through Astute and on to Successor. So the naval sector is a very vibrant sector for us.
Okay then. And just switch to Australia then. You mentioned about the potential reduction in activity after the LHD contract. And I think you said it's important that an agreement is reached. By when?
What would be BAE's exposure as a restructure in that business?
This isn't a massive financial exposure for this. This is just the fact that we are in Australia the custodian of, again, the complex warship capability and we need to agree with the Australian government what they want to do. And there's been some particular developments on that. We'll perhaps ask Guy Griffith, who's responsible, Bill, just to cover in some detail.
Yes. So what is happening in Australia at the moment is that the ship build, naval ship building sector is very heavily loaded today. We're discharging the landing helicopter dock program, which will complete in 2015. There's an air warfare destroyer program being led by ASC, a state owned Australian submarine corporation. And whilst we are heavily loaded through to the middle of this decade, The Australian customer is saying that he has a massive recapitalization plan for his Navy commencing at the beginning of the next decade.
And the question we're asking really from an industrial strategy point of view is how collectively can we sustain the key shipbuilding capabilities we've built up between the completion of the current series of programs and the launch of the new programs. And I think the Australian government is very heavily focused on answering that question with us and is exploring a range of options, including potentially accelerating some procurement activity in order to at least contribute to bridging that gap.
Okay. That's very clear. Thank you. Okay.
Next question is from Ben, Ben Fiddler.
Yes, good morning. I had a few questions.
Be very disappointed if you didn't, Ben.
I aim to please. The first is just around the U. S. Support Solutions business. The additional charge you've taken on the commercial ship contract, I think, takes the cumulative charges to about $50,000,000 on these.
Does this now draw a line under it? Are pretty confident that you scoped the risk and provided for that risk? And can you remind me the size of the contracts that it actually refers to? Another question related to that same business, as you talked about you've reduced the margin outlook for Support Solutions. Previously, I think you'd guided to mid single digit.
I wondered what we should think of now. And how quickly does it take those margins to recover? The next question was just looking at Platforms and Services U. K. So you've got your 10% to 12% margin guidance range there more towards the top end by the sounds of things.
There's obviously a lot of moving pieces as we move forward beyond '20 14 tranche three Eurofighter that you mentioned which has lower margin recognition upfront. I guess Type 45 is running through. Just to understand really the margin trajectory and outlook for Platforms and Services U. K. As a number of moving pieces in that business particularly the shift to tranche three?
And there'd be one final one which is I hate asking questions on tax rates, so apologies, but it's just the sustainability of that 20% tax rate and whether it's also cash flow effective as well as P and L effective? Thank you.
They sound like mostly yours Pete, but the same doesn't it?
Yes. When you
in reversal and then we'll come back to Gerry on
to support. The tax rate, yes, we've taken the expected rate for this year down to 20%. Our guidance for next year when we get there would be we think 20% is sustainable. I think as you all know The U. K.
Is reducing its corporation tax rate by a further 1% commencing 04/01/2015. Then it has I think the lowest jointly with Turkey in the G20. So we think the 20% will be sustainable through 2015. On the Platform Services U. K, you asked the question about the 10% to 12% guidance.
I think as we've said in the past, we view that not just as an in year guidance, but as sort of an enduring range. It's always going to move within that 10% to 12% based on where you are on the cycle of production, whether you've got development contracts going through or production contracts going through. But we're comfortable with 10% to 12% range going forward as well not just for 2014. Working up the page. Support Solutions.
Yes, we did give guidance that we expected S2 to be around mid single digits. And what we're saying today is mid single digits minus the $20,000,000 charge.
So then, Jerry, what do we feel you've got your hands firmly around the throats of anybody involved in this program? I don't know about
the throats, but I think we have the program well bounded. We have four ships currently in production, one in the planning phase. One of those four ships that's in production should be delivered next month. And we think we have a very balanced plan going forward in terms of risk and opportunity. We've seen some metrics over the last few months that support that contention, positive trends in the build metrics.
We'll be working it aggressively and keeping an eye on it through the balance of the year, but we're comfortable with the forecast that we've made to complete the balance of ships.
Okay, Ben?
Thank you. Yes. Could you just remind me, if you're able to, unless it's commercially sensitive, what the scale of the contract is for all these ships
in terms of the value? I think
roughly what is left to ship out is about somewhere between US400 million to US500 million dollars
Yes. Thanks very much, guys.
Okay. Thanks. Think I'm not
sure if there's anybody else in
the queue. So do we have any other questions for us? Okay. Well, thanks very much everyone. I understand it's a busy day, so we won't take it a slight if you've come off the phone.
Thank you very much.
Thank