Okay. Good morning, everyone, and thank you for joining us on this webcast. I will provide a brief overview of our performance across our markets. Pete will then describe the group's first half financial performance. We will then take questions.
The Executive Committee is also available to support us. With Salam Typhoon price escalation discussions still ongoing, these results reflect our expectation of a significant bias in the group's trading for the second half of the year. We continue to work to agree a satisfactory conclusion. I believe we have made good progress in recent months clearing many of the obstacles to completion and our confidence in the process supports our prior expectations for performance across the year as a whole. As I've said before, the right settlement is a key driver, not timing.
Relationships in The Kingdom are progressive with good order intake achieved in the first six months. With these orders and other successes across the group, we have sustained our group order backlog following the significant uplift achieved last year. We have received $4,800,000,000 of orders outside The UK, U. S. In the first six months, a continued sign of the momentum in international activity.
Although uncertainty continues to overhang the defense and security sector in The U. S, the group's U. S.-based businesses have delivered a first half performance much in line with plan. The underlying budget position is complex with a continuing resolution, again in operation from earlier in the year to which the sequester has been applied since March. Flexibility has been introduced in certain funding lines to enable some key operation and maintenance activity to be sustained.
This flexibility has enabled one area of concern from early in the year to be mitigated. The U. S. Navy had in February announced possible changes to a number of ship availability contracts. As a consequence, we issued Preliminary Worn Act notices related to the possible layoff of nearly 3,600 employees in The U.
S. Ship repair business. With the reconfirmation of funding, those notices were subsequently withdrawn. Some continuing funding issues have resulted in a small number of WARN Act notices again being issued. Limited impact on our U.
S. Business has been apparent so far. However, unless an overriding agreement is reached, expect the full impact of the sequester to be progressively felt as the obligated funding lines are consumed over the coming months. It is important to scale the impact of sequestration in the context of the overall. I said before, sequestration is in essence a cut of circa 10% to the defense budget, which may equate to circa 15% in the funding lines that would take the hit after allowing for protected areas of spend.
The U. S. Accounted for 41% of the group sales in 02/2002. So we look at a downside scenario of circa 6% of the group's top line. We expect and have guided for The U.
S. To be a lower proportion of group sales this year. Also in excess of $1,000,000,000 of that U. S. Share is in commercial markets such as electronics, ship build and ship repair.
We do not yet know where U. S. Defense cuts will ultimately fall, but we do plan for a reduction in spend. We base our plans on conservative assumptions and have demonstrated our ability to adapt rapidly to change. We will continue to be agile and proactive to reduce our cost base as required.
Sequestration does not represent a below the waterline impact for BA systems. The outlook for UK defense procurement remains stable following the government spending review announcement in June. We do not anticipate material changes to contracted programs, but we'll continue to work with our UK customer to help address affordability issues and deliver value. Much of the group's UK business is concentrated on a small number of large programs where multi year contracts provide good visibility as evidenced by the group's large UK order backlog. In the maritime sector, the Queen Elizabeth class carriers are progressing well.
All major blocks are now joined for the first ship. Surface ship workload is set to reduce from the peak of the carrier program and discussions with the MOD continue to determine future capacity requirements. In submarines, early engineering activity on the successor program is increasing alongside multi year build of the Astute class boats. In the air sector, we are seeing the sales benefit of Typhoon and Hawk exports and are well prepared for the anticipated start of the ramp up in the F-thirty five program. Typhoon production against existing orders is running at 30 aircraft per year until the 2018.
This is an exciting time in international markets. First half activity in Saudi Arabia has been focused on booking a large tornado guided weapons contract and the follow on multi year typhoon support arrangements. There are also good reasons for optimism that we can conclude price escalation soon. Firstly, our counterparty has confirmed that all outstanding queries have been addressed and that they require no further information. Secondly, in recent months, the Typhoon support agreement has been viewed as a priority by our customer.
With this now addressed, we expect to see more rapid progress. Thirdly, there is no significant engagement regarding a second batch of aircraft completing the pricing for the first 72 aircraft is distinctly helpful for both parties in this regard. In addition, we are now working with the customer to define a further development of the Tornado with a cockpit upgrade and are bidding on the next phase of capability expansion on the aircraft. In addition to this high level of activity in Saudi, there are several combat aircraft requirements emerging. BA Systems has the fortunate position to benefit from both Typhoon and the F-thirty five program as it gathers pace.
In The UAE, Typhoon is emerging as a serious prospect, not in our plan, but a game changing prospect for which the aircraft is ideally suited and where we are working with the U. K. Government to generate a truly joined up U. K. Proposal.
Other prospects include Malaysia for Typhoon and South Korea and the competition including both F-thirty five and Typhoon. In the land sector, we are working on bids including CV90 based proposals for competitions in Denmark, Canada and Poland. In India, we continue to progress contracts on M777 and further Hawk trainer requirements. We see a resurgence of Hawk opportunities as air forces integrate the latest generation of combat aircraft such as Typhoon and F-thirty five. We will not win everything, but we have not seen such an opportunity rich landscape for some years.
In cyber and intelligence services, we are seeing further good growth in commercial markets. We continue to invest to support commercial cyber opportunities building on our already strong offering in the financial services sector and the provision of cyber protection for critical national infrastructure and corporate networks. We are also pursuing exciting opportunities with telecom companies, including the partnership with Vodafone on their mobile threat manager solution. In the government cyber services sector, our position we believe is resilient with a high concentration of mission specific support for the intelligence community. We remain well placed to win emergent new business in this high priority area.
Pete?
Thanks, Ian, and good morning. I'll give a trading review as usual and then I'll move on to the 2013 full year guidance. So the headline numbers and compared to the 2012. Sales increased marginally to £8,400,000,000 with the expected volume reductions in land and armaments being more than offset by the resumption of Typhoon aircraft deliveries on the Salaam program. Underlying EBITDA decreased by 6% to £865,000,000 and there was no profit recognition on those Salaam Typhoon aircraft.
Underlying finance costs in the first half are slightly higher than in 2012, reflecting the interest on the £400,000,000 debt refinancing that we completed in June. Underlying earnings per share decreased by 4% to 17.8p. And I would note here that the underlying EPS last year has been restated for the IAS 2019 accounting change that we referenced in May's IMS and that change gives a reduction of 0.2p at the half year and 0.4p for the whole of 2012. As expected, following exceptionally strong operating cash flow in the second half of last year, there was an £815,000,000 outflow in the 2013. Net debt at June 30 was just under £1,200,000,000 Order backlog increased to £43,100,000,000 benefiting from exchange translation and was sustained on a like for like basis.
Finally, the interim dividend has been increased to 8p per share, up 3% on the 2012 interim. In addition to the effect of foreign exchange translation, where the U. S. Dollar closed at 1.52 compared to the opening 1.62, there were a number of specific items within working capital impacting the balance sheet in the period. As anticipated, advances are being consumed on the Omani Typhoon and Hawk program, the European Typhoon contract and the Saudi Training Aircraft program.
Twenty twelve's accelerated receipts on the Saudi Tornado upgrade contract are also being utilized and costs incurred on the Oman Offshore Patrol Vessel program and on rationalization are being charged against the provisions that we created in previous years. The £131,000,000 Trinidad And Tobago termination settlement was paid in the period. The IAS nineteen accounting pension deficit has decreased to £4,300,000,000 and I'll cover that on the next slide and the deferred tax asset reduces on that lower pension deficit. Net debt stood at £1,200,000,000 and I'll get to that when I turn to the cash flow slides. So this slide shows the pension scheme assets, liabilities and deficit as accounted for under IAS twenty nineteen.
The value of the scheme assets has increased over the period to £20,500,000,000 Liabilities increased by £700,000,000 to £26,000,000,000 Real discount rates have reduced by further 30 basis points in The UK as long term inflation expectations have increased by more than bond rates. In The U. S. Where pension liabilities are not subject to inflation increases, it is only the bond yields that impact the discount rate and these have increased by 80 basis points. So, aggregate, these rate movements have increased reported liabilities by around 300,000,000 The six months of discount unwind and the period service cost net of pensions paid account for the rest of that increase in liabilities.
So, in total, the impact of these movements is a reduction to the group's pretax accounting pension deficit of around 300,000,000 As you know, these mark to market movements have no bearing on our scheme funding. The funding agreements reached in February with the trustees of the two largest UK schemes are sustained through 2014. In addition to circa £400,000,000 per year of deficit funding across all our group schemes, we have now reached agreement with the trustees as to the accelerated deficit funding arising from the group share repurchase program. Pounds $340,000,000 will be paid over the life of the program. Moving on to cash.
This slide sets out the movement from the net cash position of £387,000,000 at the beginning of the year. The operating business cash outflow was £815,000,000 Interest and tax payments were £175,000,000.20 twelve's final dividend that we paid in June was £380,000,000 And since February's announcement of the three year share repurchase program of up to £1,000,000,000 we have bought back 23,900,000.0 shares at an average price including costs of $3.81 pence. Exchange translation and all other movements totaled 119,000,000 so closing net debt of $1,192,000,000 pounds The cash flow performance of the five secondtors is shown here and I'll return to this when I cover the results of each of the sectors. But just one point to note, the total cash outflow for pension deficit funding in the period was £192,000,000 of which 161,000,000 is reported here within the head office. This next chart shows the gross debt, cash and net debt of the group.
At the start of the year, borrowings amounted to £3,000,000,000 with cash held of £3,400,000,000 giving a reported net cash of £400,000,000 The total cash outflow in the first six months was £1,500,000,000 Translation of our U. S. Dollar debt gives a £100,000,000 increase in the reported sterling figures. There were no term debt movements in the period. And as I mentioned at the February presentation, the group's next term debt maturities fall in June and November of next year.
That £400,000,000 was pre financed last year. So at the June 30, total borrowings are at £3,100,000,000 Cash holdings have reduced to £1,900,000,000 giving a reported net debt of £1,200,000,000 I'll come back to our 2013 cash guidance a little later. So I'll turn now to the sectors and I'll cover year to date performance here and return to the full year outlooks a little later. And the first of these sectors Electronic Systems, the the numbers here in U. S.
Dollars. Despite the ongoing U. S. Budget uncertainties and some related program delays and disruptions, the sector delivered sales of $1,840,000,000 only 1% down compared to the 2012. Sales in the commercial areas of the business grew by 10% helping to offset some of the pressures on the defense side.
Return on sales achieved at 13.1% was in the middle of our guidance range. Cash conversion of EBITDA in the first half year was at only 47% and we would therefore expect an improved conversion level over the full year. The order backlog of $5,700,000,000 was only marginally down from the start of the year. The Cyber and Intelligence sector comprises The U. S.
Intelligence and Security business together with BACES and Adetika. The numbers here again in dollars. In aggregate, sales reduced by some 10% to just over $1,000,000,000 The U. S. Business saw a 14% decrease, driven largely by reduced volumes in the IT services business.
There was also a lower level of analysis support on counter IED activity in Afghanistan. Growth in BA Systems Dettica was 9%. The margin achieved at the half year of 8.1% includes continued organic investment in the Detica business in support of targeted future growth in commercial and international markets. Cash flow performance was good with conversion in excess of profit in the first half. Order backlog reduced to $1,400,000,000 U.
S. Budget uncertainties continue to cause delay in award decisions of competitive bids. And at the end of the period, we had some $2,100,000,000 of table bids, of which almost half were overdue against decision time scales. The U. S.
Platforms and services sector aggregates the land and armaments and the support solutions businesses. Numbers here again in U. S. Dollars and we continue to provide transparency of the two businesses within this sector and I'll move straight on to the performance of the first of those two businesses, Land and Armaments. Whilst reported sales declined by 19%, that reduction on a like for like basis was 9%.
This takes into account exchange translation, the impact of last year's business disposals and the transfer of The U. K. Vehicles and support business into the platforms and services U. K. Sector.
As expected, the sales reduction was largely from completion of contracts for MRAP vehicle upgrades. The reported margin of 9.5% benefits from ongoing cost reduction actions and good program execution. Charges for further planned rationalization activity will fall into the second half of the year. With regards to cash flow, performance will be second half biased due to the usual timing of funding on The U. K.
Munitions contract. In addition, on the GCV program is back end loaded. Order backlog reduced to $6,900,000,000 $300,000,000 of that reduction is due to exchange translation. And we do plan for the M777 Indian award in the second half. In the Support Solutions business and despite the budget uncertainty seen earlier in the year in the naval ship repair activity, sales were 3% higher.
The business benefited from new business awards secured last year on the Radford munition plant and naval training aircraft maintenance. Return on sales in the period of 8% was very similar to last year's level. The cash flow performance in the first half was impacted by timing of receipts in both the ship repair business and on the Radford munitions facility and we therefore expect a stronger conversion over the full year. Order backlog reduced in the $4,900,000,000 on the trading out under the long term ship repair contracts. In the Platforms and Services U.
K. Sector, sales of £3,200,000,000 increased by 18% on a like for like basis compared to 2012. Salaam Typhoon aircraft deliveries were resumed with four acceptances in the period. In addition, there was a higher level of deliveries under the Indian Hawk contract. The return on sales of 15.8% seen in the 2012 benefited from the strong program execution and risk reduction on the European Typhoon production and Type 45 destroyer contracts.
There was also good margin performance in the first half of this year at 12% despite there being no profit recognition on the four Salaam Typhoon aircraft deliveries. As expected, the £400,000,000 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. In addition, provisions are being utilized against costs incurred on rationalization and on the Oman OPV program. The Trinidad And Tobago termination settlement is included within this sector's cash flow. Order backlog reduced to £20,400,000,000 on the trading of European and Saudi Typhoon aircraft and Indian Hawks.
Sales in International business for the first six months of £1,650,000,000 a 5% higher than in 2012 and the increase is primarily on the high levels of support to Typhoon aircraft that are now in service. EBITDA was £165,000,000 and the return on sales in the first half of 10% is broadly consistent with last year and in line with guidance. There was an operating cash outflow of £221,000,000 as twenty twelve's accelerated receipts on the Saudi Tornado upgrade program were utilized and in Australia where advances were consumed on the landing helicopter dock program. Order backlog has increased to £11,900,000,000 following awards for the five year Typhoon follow on support contract and further weapons package in Saudi, together with the renewal of the Australian Hawk support program. For reference, there is a chart providing a summary of the trading performance of the five secondtors appended to the presentation posted on the web and that summary also contains the numbers for HQ and those numbers include a £32,000,000 charge taken in the first half in respect of a contract pricing dispute.
This chart seeks to provide updated guidance for each of the sectors through to the end of the year. Importantly, this guidance has been revised to reflect both The U. S. Budgetary pressures we have seen to date and our best view of the impacts of sequestration through 2013. We also assume a continuing resolution operating from the October 1 through the final quarter.
So firstly, Electronic Systems and sales volumes in dollar terms are now likely to be marginally below those for '12 albeit with a different mix. Some 20% of the sector sales are in commercial markets where we are seeing good levels of growth. On the defense side of the business, we anticipate a sales reduction of around 5%. On margins, we continue to expect the high level seen in twelve to move lower, but to be within our guidance range of 12% to 14%. On Cyber Intelligence, we expect sales to be some 5% lower than in 2012.
The U. S. Business, which is around 75% of the sector, is expected to be around 10% below last year's level on the lower level of IT service volumes and as the contract for counter IED analysis support ramps down. Growth in the Detica business remains forecast at a double digit level supported by expansion into commercial markets. We continue to expect margins in 2013 within our eight to 9% guidance range with ongoing investment in Detika to support organic growth.
Moving to Platforms and Services U. S. And whilst the overall guidance is as shown on the chart, this is best taken in two parts. Firstly, on Land and Armaments. We are seeing a stretching out of programs by The U.
S. Customer and some limited project cancellations. And we have therefore revised the full year sales guidance from a $3,750,000,000 level towards $3,600,000,000 As to margins, we continue to expect delivery around the 8% mark with further rationalization activity and charges assumed in the second half. In the Sport Solutions business, we anticipate 2,000 sales to be around the same level as 2012. Downward pressure from U.
S. Budgets is being compensated for by new business at Radford from the naval training aircraft maintenance contract and from commercial shipbuild activity. On margin, guidance is unchanged in the Sport Solutions business. Levels for the full year are expected to be similar to those delivered at the half. Turning to Platforms and Services UK, this is the group's largest sector and we expect sales in 2013 to increase by around 25%.
We expect second half bias both from the deferred trading of Salam price escalation and there being six more Typhoon aircraft deliveries on the Salaam program. Including the expected benefit from the catch up on resolution of the Salaam price escalation, we expect margins for the sector to be slightly higher than the levels seen in 2012 and above our normal guidance range. And on the last of the sectors Platforms and Services International, we continue to expect sales in 2013 to be marginally higher than last year. Deferred trading arising from Salaam price escalation and increased levels of support to the Typhoon aircraft now in service are expected to be partly offset by a reduction in the Australian business as the landing helicopter dock build program ramps down. Margin should benefit from the catch up arising from resolution of Salaam price escalation in respect of the element that relates to the initial support contract and is therefore expected to be towards the higher end of our 10% to 12% guidance range.
To complete the twenty thirteen models, despite the charge taken in the first half year, we now expect headquarters cost to be broadly similar to those in 12. Underlying finance cost should be marginally lower. The effective tax rate remains expected within the 23% to 25% range with the final number dependent upon the geographic mix of profits. In aggregate and including both the benefit from the share repurchase program and the downside arising from reduction to U. S.
Defense budgets, double digit growth in underlying earnings per share is anticipated for 2013. This outlook assumes the satisfactory conclusion to the Salaam pricing negotiations this year. With the exceptional level of operating cash flow seen in 2012, I thought it would again be helpful to give you a final slide to highlight the cash utilization we expect in 2013. The first column shows the position at the half year. The second column provides the full year guidance, which is unchanged other than for the share repurchase program.
So firstly, the operating cash flow. We are not planning for any material capital expenditure above depreciation levels. Within working capital, we are utilizing twenty twelve's accelerated receipts on Saudi tornado upgrade contract. We also expect to incur costs of around £400,000,000 against provisions created in previous years held in the balance sheet. The most volatile area remains the level of customer advances.
As expected, the major advances we received in 2012 on the Saudi trainer aircraft contract and Omani contract are being consumed. 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 production contract. The guidance here does anticipate cash inflows from a Salon price escalation settlement and clearly those have yet to be negotiated. The final operating cash flow item is the year's pension deficit funding, which will be around £500,000,000 and that now includes the accelerated funding arising from the share repurchase program.
The non operating cash flow items are far more predictable and outflows for interest, tax and dividends are expected to total around £1,000,000,000 And we would expect the share buyback program to cost close to £300,000,000 in the year. So overall, and as per previous guidance, 2013 will be a year of significant cash utilization.
Thank you. Ian? Thanks, Pete.
So to summarize, this is a challenging environment, but we continue to take the necessary actions to reduce costs for the benefit of both our customers and our shareholders, and we have a clear top level investor proposition. We plan for The U. S. To be down but manageable. We expect The UK to remain stable.
We see growth from international markets supported by good backlog and burgeoning opportunities. In addition, we see increasing cyber opportunities, particularly in the civil area. The group has a well established portfolio with a fifty-fifty split between services and products. We will reinvest the cash we generate to sustain and grow the business and we look to provide good returns to shareholders with attractive dividends supplemented by share repurchases. For the longer term, we expect our well established broad geographic reach and strong product and services positions will provide platform for future growth.
We will now take questions. No questions.
Bank of Canada. Please go ahead.
Yes, thank you.
Thank you.
Maybe just initially a quick one on the repurchase program. It's possible that what was spent in H1 was maybe below some expectations. I was wondering if you could talk about what sort of challenges you might be facing in the repurchase and where volumes are in the market and how we can expect the pace of that to change throughout the rest of the year?
Pete, thanks a Yes, One for
that's fine. We announced the buyback program in February. We said £1,000,000,000 program subject to resolution of Salam price escalation and that will be over three years. I think we're pretty close to £100,000,000 since we launched it in mid February. So we are pacing it in line with the original three years that we outlined.
We've done 24,000,000 shares pretty much at June 30. We were in the market at the July. We're back in the market today, so we're still active on the program.
Okay. And then maybe just a quick follow-up on the sequester. You mentioned that you see it being progressively the impact being progressive throughout the year. Is that pretty much consistent across all of The U. S.
Defense business? Or are there areas where you think are going to be most affected and other areas that you think might be less affected? Thank you.
Linda, why don't you got a microphone?
Do you want me
to offer?
No, no. It's pretty consistent across the industry. Each customer is behaving a little bit different than the others. Some are being more cautious. Some are moving forward with a certain expectation.
But by and large, it's consistent across the market as a whole. And I think you'll see that with all the other U. S. Companies in the way they're reflecting their expectations for the
balance of the year. It was very pleasing to see with the sort of quarterly results coming out from The U. Peers that it was very in line with our expectations and you can see the performance in the six months, performance has been robust.
Great. Thank you very much.
Come on, we won't know what to do with the rest of the day if there's no more questions.
Thank you. Your question comes from Mr. Ben Fiddler from Deutsche Bank. Please go ahead. Yes.
Good morning,
I'm glad we could rely on you, Ben. Well done.
Well, to tell me, I'm allowed to ask more than
the usual three then. Yes.
I shouldn't have opened that up, did I?
Yes. I'll limit myself to 17 if I could. But no, probably two or three if I could. Firstly, your guidance for the full year for Platforms and Services UK in terms of the margin, I mean, you going to be very significantly ahead of the 12% level? You delivered 12% in the first half with no catch up payment on Saudi and recognizing no margin on four Typhoon deliveries.
In the second half, you've clearly got a catch up payment coming. You get a lot more and you've got the profit recognition on all 10 typhoons. So I mean, it should be significantly ahead of the 12% level or is something else moving on the other side to help offset that? Maybe I'll cut do you want to give you the other questions or do want to
answer that? I'll take your questions one at a time because they're quite detailed questions, Ben. Pete, should we work that way?
Yes. On the margin, Ben, you'll have seen the guidance where we now talk sort of where we've talked about 10 to 12%. You'll have seen the word plus appear on the slide. So clearly, we are signposting we're to be above 12%. There is back ending in the second half of sales also on Astute and successor programs.
Clearly the margin levels on those programs are less than they are on the Typhoon production. So yes, you're right, will be through the 12 when we get the VOP resolution completed. But I think 10% to 12%, 12% plus, I think you can take that as a positive.
Okay. Thank you. The next question I had was just around an update on some of the export contract pipeline. If you can share with us your level of optimism, enthusiasm regarding UAE, where we're at on potential timing for that? Remind me where we're now at in terms of scale of that.
I believe the scale of the contract has expanded somewhat. And also on any Saudi follow on orders for Typhoon where we may be at with the customer on timing for that and also timing for this tornado upgrade, what we could think of there?
Well, let's ask we've got Alan Garwood with us. So I'm always interested what Alan says on these things as well.
I'm interested to find out myself actually. I think the two principal bits of activity we've got at the moment are firstly, Malaysia, where there's an emerging MRCA requirement. There may or may not be a full competition probably sometime next year. And we're working hard with the British government to offer Typhoon there together with training package. UAE has still a long way to go.
We're enthusiastic. We've a lot of people working on quite a complex bid. The bid is due to be tendered in about four weeks' time And we'll then have to see where the British government and The U. A. Authorities want to take things.
How many aircraft is it, Alex?
It's going to be around 60 Typhoon, but it's going to be a government to government deal and therefore the pace of negotiations will be set by the two governments. But we are very firmly supporting them and it's going to take an awful lot of activity over the last quarter of the year if we're to get it where we want it to be. And that's probably all I should say at this moment.
But we are making good positive progress and we have the full support of the UK government. I mean, they are going above and beyond in terms of the resource and the energy they're putting behind it. So we're very pleased with the progress on it.
We're very pleased with the progress and we could not ask for more from the Prime Minister and HMG in general.
Guy, why don't you cover the Saudi requirement?
Okay. So the 72 aircraft that are under order at the moment for Saudi are intended to populate three squadrons, one training squadron and two operational squadrons. The Saudi's operational requirement for Typhoon always was for a minimum of five squadrons. And they are now as Ian indicated in his comments speaking with us around further procurement activity to meet that full operational requirement. Two more squadrons would imply 48 aircraft.
You won't be surprised that we're seeking to influence the customer actually to buy another suite of 72.
Sort of when does the current 72 when do the current 72 finish in terms of deliveries? The deliveries finish at the
2017. And the intention would be for any follow on order to continue in terms of production continuity. And in order to safeguard supply chain continuity, we'd be looking really at an order within 2014 in order to secure that.
So that's what's driving the timescale spend because what we want to do is to sustain the production rate at 30 per year. That's the optimum rate that we've got going through the facilities at the moment.
And similarly on The UAE contract, would that dovetail in with that sort of 2018 timeframe, would it as well?
Absolutely.
Okay. Thank you.
Thank you. Your next question comes from Mr. Charles Armitage from UBS. Please go ahead.
Good morning. A simple one from a confused. I just want to make sure that I've got my sums right. But if I take all the changes you've made
and compare
it to the previous guidance, I pretty much end up where I started off.
Have I done that right?
That's a pretty good summary, Charles. I mean, if you take our guidance and clearly we go we do I've done the step through sector by sector, if you take it in around, The U. S. Business we're basically saying is around 5% down overall, but we're holding up on the margins. So you've got a sort of 5% volume impact.
Our U. S. Business is about $12,000,000,000 so you can work that for yourself. In The UK, we're holding the guidance at the sales level unchanged, but we are flagging that the margin will stronger. Guidance for the international business unchanged.
We have got that contract pricing dispute charge in the HQ. If you take all of that in the round, you end up with what we're saying of double digit growth against last year. Last year was 38.5p. So you can get to the number fairly straightforward. But you're right, it does get you pretty much back to where you started from.
So sorry for that long journey.
Thank you.
Thank you. Your next question comes from Mr. David Perry from JPMorgan. Please proceed with your question.
Yes. Good morning. Can you hear
me okay? The questions have all been very echoey.
Can you hear me? No, we can hear you, David.
Yes. Sorry, I've got just three very niggly ones, if I may, for Peter and then just one on the UAE tender, please. Peter, my three quick ones are, can you just give me the self funded R and D in H1? Secondly, the pension finance charge,
I know you
excluded from EPS. I think the notes that you provided today say $98,000,000 in H1. Would it be right just to double that for the full year? And secondly sorry, thirdly, the HQ EBITA number, which I think you restated to minus 124, which I think was originally 80, is there anything exceptional in that? Or is that a sort of run rate going forward, please?
Okay. I'll take those in order. The self funded R and D is about the same level as last year. The key point I think which is what you're getting to is the step down that we saw from 2011 to 2012. We had about £150,000,000 self funded in 2012.
We would expect that rate to be significantly higher in 2013. On the pension finance charges, yes, your assumption is right. You can double the first half number. That will get you there or thereabouts. And in terms of
the HQ
cost, the issue there is around the £32,000,000 charge that we've taken in the first half year on the contract pricing dispute. So if you strip that out, you see that the headquarter cost would actually be significantly down.
Sorry, I lost you there. So because on your Slide 21, I think you show HQ EBITDA is minus 124,000,000 for 2012. But I think they're restated for IAS19 because the original number you reported, I thought was 85,000,000
Yes. So that's the IAS19 change, David, for the on the accounting. So this is we were previously taking some pension admin and the levy costs within interest, not in underlying. There's no economic impact, but they've now moved into HQ costs. That's where we're reporting them.
So is 120,000,000 the new run rate for the HQ line?
120,000,000 will be the comparable number. If you look at what we've been reported this year, in the first half of twenty thirteen, that includes £32,000,000 for the contract pricing dispute.
Okay. So it's 150,000,000 this year, but 120,000,000 going forward? Yes. Yes. Okay.
Thank you. And then sorry, my one on The UAE. Can I just check, is this a sole source tender that you're involved in? Or is it competitive? Sole source.
Thank you.
Thank you. Your next question comes from Nick Cunningham from Agency Partners.
Please go ahead. Yes. Thanks. Good morning, guys. Follow-up on The U.
S. The U. S. Defense contractors have been reporting sort of surprisingly strong Q1, Q2. And they're attributing that to orders being brought forward by buyers in DoD who are worried about potential sequestration at that point in time.
So I think there is some concern there that second half will be weaker as a result. Is that built into your expectations? Or is there some risk there? And then when we into 2014, you pointed out that the outlays in 2013 have been protected to some degree by previous budget authorities. Does that mean though that even if the FY 2014 budget gets passed quite quickly that the 2014 would still end up being down for you?
And again, is that sort of built into general expectations? Thank you.
Let's start with the first one on some customers have accelerated orders into the first half of the year. We've seen that in certain customer bases, the Navy has been able to move things around and accelerate some programs make awards. Other customers like our intelligence customers have been far more cautious and moving more slowly and you see that in the way our results have come out. We do believe the second half of the year will undergo more pressure than the first half of the year as the funds from prior years that had been obligated and unobligated play out. As the year goes on it becomes more and more difficult for customers to find bits of money and other accounts that can be allocated to make up for the shortfall.
Going into 2014 is difficult right now to forecast. If a budget is passed, we have far more certainty and we'll have far more clarity around what to expect. At the moment, it's pretty much anyone's guess whether the budget will get passed. Largely the expectation is we will have a continuing resolution for the balance of the year. And with the current progress or lack thereof in Congress, it's really a difficult environment to predict.
So hard to tell and we're trying to make our best guesses as we can.
Nick, if I could just add to that.
Clearly, the decision appears to be to hit O and M budgets rather than procurement. Does that mean that it's essentially ship repair that's the part of BAE that we should worry about most?
Actually ship repair has well at the beginning of the year we expected it to be hit far more than it has been. We've actually taken the Navy's plans into account as we forecast going forward. And right now while there is certainly some pressure, it does not appear to be nearly as bad as we had anticipated. And we need to remember that Support Solutions is far more than just ship repair. In fact just yesterday, we won a contract for the support and maintenance for future IBCM missiles.
So the business mix may change, but as we buy fewer and fewer new products, the requirement to support and sustain the ones we have will be an enduring requirement.
We're very happy with our Support Solutions business and probably in chip repair, we've more visibility from that customer those customers than we got from any others actually.
Thank you. Nick, just to sort of directly answer your first question about the 2013 guidance, yes, are putting in our best estimate of how we based on what we've seen to date from the impacts in The U. S. Plus what we believe is yet to come. And we are assuming sort of a higher level than we saw in the first half.
So it's in the guidance.
We just got to remind ourselves, we have about $1,000,000,000 of our activity in The U. S. In commercial sectors.
Thanks very much.
Thank you. Your next question comes from Edward Facy from Asperger Santo. Please go ahead.
Hello. Just one left for me, which is on the amount of sort of one off catch up from the Saudi stuff that's included in this year's guidance. So I'm trying to think of what's the sort of baseline number for me to kind of base my 2014 earnings forecast. And I know you're not talking about guiding for 2014 yet. But I think previously you said there was sort of zero three pounds of carried over Saudi stuff that would get recognized as a one off, kind of a one off when you sign the pricing agreement.
So would I be right in thinking I take this year's underlying EPS guidance and subtract the zero three pounds from that, then that gives me the right sort of baseline to think about for 2014? Is 3p still the right amount?
That's all. Ed, let me I'll try and answer that in a slightly different way. I mean, clearly things have moved on since the 2012. We've now delivered a further 10 aircraft, so sorry another four, we'll have delivered another six in the second half. So by the end of the year we'll be around 34 aircraft.
That's equivalent in terms of turnover of about £2,500,000,000 So if you think of the margin that we trade on that of around 10% to 12%, that gives you the reliance we got in terms of the forecast of getting the VOP resolution done in this period. And then to answer your question on 2014, on the basis that we get the resolution in 2013, then there will be, I think, a further 12 aircraft next year and then we'll be trading those through at around the 10% to 12% mark.
Okay. That helps. Thanks.
Okay.
The next question comes from Spercy Morris from Jefferies. Please go ahead.
Good morning, everyone. You should have quit when you were ahead. Just out of curiosity, given the increase in activity in Saudi Arabia as we put more and more aircraft in, how are we going about the wider context of that contract in terms of recruiting people and training people and facilities and countries? Just a little bit of background on that might be helpful.
Sounds like one for Guy.
Okay. Well, from a over the last three years from a base of zero in terms of typhoon support infrastructure at the principal base where they're currently operating from which is Taif on the West Coast, we now have about 500 of our own people and we've trained about an equivalent number of Saudi Air Force personnel to support the operation of the aircraft. Progressively as fleet builds up, part of our task is to ensure that the mix of the workforce that supports the aircraft is increasingly. So at the same time, we're bringing through our training programs and training infrastructure, Saudi recruits into the workforce and producing trained technicians and by the way trained pilots as part of that process. As the as future squadrons come online, the Saudi Air Force has determined its basing priorities for those.
And we would envisage in the case of some of those that there will be infrastructure requirements over the course of the coming three to five years, which again should be reflected in contracting activity for us.
I mean interestingly, base commander at Taif who introduced Typhoon into service is now the commander of the Royal Saudi Air Force.
I'm sure he admires the Rafale enormously.
From a long distance.
So
is it well, I hope so. Is it reasonable then just to look at the number of employees in Saudi Arabia, which you disclosed in the annual report and to use the trend in the employee numbers as a rough proxy for what's happening to the support activity?
It's probably a good indicator, isn't Yes. It
I mean, it's an indicator when they go into service. You got to remember, that there's an awful lot of facilities and supply chain activity and logistics activity that goes on before that. As we provide as near close to an availability service inside as we do A lot of our activity is in the engineering and supply chain management as well, which is not necessarily driven by manpower.
Okay. And then, I mean, a fairly idiot like question for Pete. What would have to happen now for higher discount rates or whatever to finally have a more positive impact on The UK? I mean, think we get a little bit excited about short term discount rates going up. I mean perhaps Pete could give us a flavor of what would actually have to happen?
Yes. You're talking about pensions, Sandy, yes? Yes, please. Yes, okay. I mean, the pension discount rates we use are those which are aligned with the duration of our pension liability.
So these are sort of fifteen, sixteen, seventeen, eighteen year rates. The inflation is driven by the difference between index linked gilts and non index linked over that period. The bond rates we use in the accounting are AA corporates over that same sort of period. So what you've got to look at is both of those two movements over the sort of sixteen to eighteen year timeframe, not what you're seeing on the sort of market rates today. Does that help?
Well, it does.
And 10 basis points is roundabout £400,000,000 of our accounting deficit.
Yes. And I mean, we can still assume that QE is just depressing this rate.
Yes, I'm with you, Sandy. You have to believe that over time that the discount rates will get back up to a normal level, whether that's over five, ten years, whatever it may be. But the cash flows from these pension schemes are decades of cash flows. Are the schemes that we have in The UK are not net payers for another decade yet. So this is a long, long game.
Lovely. Thanks very much. Thank you.
There are no further questions at this time, sir.
Okay. Well, I don't think there's any more questions. So thank you very much. Thanks for joining the webcast.