Okay. Good morning, everyone, thank you for joining us on this webcast. I will provide a brief overview of our performance across our markets. Pete will describe the group's first half financial performance. We will take questions. The executive committee is also available to support us. With Al 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, our confidence in the process supports our prior expectations for performance across the year as a whole. As I have said before, the right settlement is the 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 GBP 4.8 billion of orders outside the U.K./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 WARN 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 With the reconfirmation of funding, those notices were subsequently withdrawn.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. Unless an overriding agreement is reached, we 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've 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 2002, we look at a downside scenario of circa 6% at the group's top line. We expect and have guided for the U.S. to be a lower proportion of group sales this year. In excess of GBP 1 billion of that U.S. share is in commercial markets such as electronics, shipbuilding, ship repair. We do not yet know where U.S. defense cuts will ultimately fall, 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 BAE Systems. The outlook for U.K. defense procurement remains stable following the government spending review announcement in June. We do not anticipate material changes to contracted programs, but will continue to work with our U.K. customer to help address affordability issues and deliver value. Much of the group's U.K. business is concentrated on a small number of large programs, where multi-year contracts provide good visibility, as evidenced by the group's large U.K. 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, 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-35 program. Typhoon production against existing orders is running at 30 aircraft per year until the first quarter of 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 now 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. BAE Systems has the fortunate position to benefit from both Typhoon and the F-35 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 in a competition including both F-35 and Typhoon. In the land sector, we are working on bids including CV90, base 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-35. We will not win everything, but we have not seen such an opportunity-rich landscape for some years. In Cyber & 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 Vodafone Business Mobile Security. 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 emerging new business in this high-priority area. Pete.
Thanks, Ian, and good morning. I'll give a trading review as usual. Then I'll move on to the 2013 full year guidance. The headline numbers when compared to the first half of 2012, sales increased marginally to GBP 8.4 billion, with the expected volume reductions in Land & Armaments being more than offset by the resumption of Typhoon aircraft deliveries on the Al Salam program. Underlying EBITA decreased by 6% to GBP 865 million, and there was no profit recognition on those Al Salam Typhoon aircraft. Underlying finance costs in the first half are slightly higher than in 2012, reflecting the interest on the GBP 400 million debt refinancing that we completed in June of last year. Underlying earnings per share decreased by 4% to GBP 0.178.
I would note here that the underlying EPS last year has been restated for the IAS 19 accounting change that we referenced in May's IMS, and that change gives a reduction of GBP 0.002 at the half year and GBP 0.004 for the whole of 2012. As expected, following the exceptionally strong operating cash flow in the second half of last year, there was a GBP 815 million outflow in the first half of 2013. Net debt at June 30th was just under GBP 1.2 billion. Order backlog increased to GBP 43.1 billion, benefiting from exchange translation, and was sustained on a like-for-like basis. Finally, the interim dividend has been increased to GBP 0.08 per share, up 3% on the 2012 interim.
In addition to the effect of a foreign exchange translation, where the US dollar closed at 152 compared to the opening 162, 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. 2012'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 GBP 131 million Trinidad & Tobago termination settlement was paid in the period. The IAS 19 accounting pension deficit has decreased to GBP 4.3 billion, and I'll cover that on the next slide, and the deferred tax asset reduces on that lower pension deficit.
Net debts sit at GBP 1.2 billion, I'll get to that when I turn to the cash flow slides. This slide shows the pension scheme assets, liabilities, and deficit as accounted for under IAS 19. The value of the scheme assets has increased over the period to GBP 20.5 billion. Liabilities increased by GBP 0.7 billion to GBP 26 billion. Real discount rates have reduced by a further 30 basis points in the U.K. 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. In aggregate, these rate movements have increased reported liabilities by around GBP 300 million.
The six months of discount unwind and the period service cost, net of pensions paid, account for the rest of that increase in liabilities. In total, the impact of these movements is a reduction to the group's pre-tax accounting pension deficit of around GBP 0.3 billion. As you know, these mark-to-market movements have no bearing on our scheme funding. The funding agreements reached in February last year with the trustees of the two largest U.K. schemes are sustained through 2014. In addition to circa GBP 400 million 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's share repurchase program. GBP 340 million 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 GBP 387 million at the beginning of the year. The operating business cash outflow was GBP 815 million. Interest and tax payments were GBP 175 million. 2012's final dividend that we paid in June was GBP 380 million. Since February's announcement of the three-year share repurchase program of up to GBP 1 billion, we have bought back 23.9 million shares at an average price, including costs, of GBP 3.81. Exchange translation and all other movements total GBP 119 million, closing net debt of GBP 1,192,000,000. The cash flow performance of the five sectors is shown here, I'll return to this when I cover the results of each of the sectors. Just one point to note, the total cash outflow for pension deficit funding in the period was GBP 192 million, of which GBP 161 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 GBP 3 billion, with cash held of GBP 3.4 billion, giving a reported net cash of GBP 0.4 billion. The total cash outflow in the first six months was GBP 1.5 billion. Translation of our U.S. dollar debt gives a GBP 0.1 billion increase in the reported sterling figures. There were no term debt movements in the period, as I mentioned at the February presentation, the group's next term debt maturities fall in June and November of next year. That GBP 400 million was pre-financed last year. At the 30th of June, total borrowings are at GBP 3.1 billion. Cash holdings have reduced to GBP 1.9 billion, giving a reported net debt of GBP 1.2. I'll come back to our 2013 cash guidance a little later. I'll turn now to the sectors.
I'll cover year-to-date performance here and return to the full-year outlooks a little later. The first of these sectors, Electronic Systems, the numbers here in US dollars. Despite the ongoing U.S. budget uncertainties and some related program delays and disruptions, the sector delivered sales of $1.84 billion, only 1% down compared to the first half of 2012. Sales in the commercial areas of the business grew by 10%, helping to offset some of the pressures on the defense side. The return on sales achieved of 13.1% was in the middle of our guidance range. Cash conversion of EBITDA in the first half year was at only 47%, we would therefore expect an improved conversion level over the full year. The order backlog of $5.7 billion was only marginally down from the start of the year.
The Cyber & Intelligence sector comprises the U.S. intelligence and security business together with BAE Systems Detica. The numbers here again in dollars. In aggregate, sales reduced by some 10% to just over $1 billion. 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 BAE Systems Detica 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 $1.4 billion. U.S. budget uncertainties continue to cause delay in award decisions of competitive bids.
At the end of the period, we had some $2.1 billion of tabled bids, of which almost half were overdue against decision timescales. The U.S. Platforms & Services sector aggregates the Land & Armaments and the Support Solutions businesses. Numbers here again in US dollars, we continue to provide transparency of the two businesses within this sector. I'll move straight on to the performance of the first of those two businesses, Land & 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 & Services (UK) 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, funding on the GCV program is back-end loaded. Order backlog reduced to $6.9 billion, GBP 0.3 billion of that reduction is due to exchange translation. We do plan for the M777 engine award in the second half. In the Support Solutions business, despite the budget uncertainty seen earlier in the year in the naval ship repair activity, sales were 3% higher. The business benefited from the new business awards secured last year on the Radford Army Ammunition Plant and naval training aircraft maintenance.
Return on sales in the period at 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. We therefore expect a stronger conversion over the full year. Order backlog reduced to $4.9 billion on the trading outs under the long-term ship repair contracts. In the Platforms & Services (UK) sector, sales of GBP 3.2 billion increased by 18% on a like-for-like basis compared to 2012. Al Salam Typhoon aircraft deliveries were resumed with four acceptances in the period. In addition, there was a high level of deliveries under the Indian Hawk contract. The return on sales of 15.8% seen in the first half of 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 Al Salam Typhoon aircraft deliveries. As expected, the GBP 0.4 billion 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 GBP 20.4 billion on the trading of European and Saudi Typhoon aircraft and Indian Hawks. Sales in the international business for the first six months are GBP 1.65 billion, are 5% higher than in 2012. The increase is primarily on the high levels of support to Typhoon aircraft that are now in service.
EBITDA was GBP 165 million. 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 GBP 221 million as 2012's accelerated receipts on the Saudi Tornado upgrade program were utilized, in Australia, where advances were consumed on the Landing Helicopter Dock program. Order backlog has increased to GBP 11.9 billion, 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 sectors appended to the presentation posted on the web. That summary also contains the numbers for HQ. Those numbers include a GBP 32 million 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 impact of sequestration through 2013. We also assume a continuing resolution operating from the 1st of October through the final quarter. Firstly, Electronic Systems sales volumes in dollar terms are now likely to be marginally below those for 2012, albeit with a different mix. Some 20% of this sector's 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 2012 to move lower, but to be within our guidance range of 12%-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 8%-9% guidance range, with ongoing investment in Detica to support organic growth. Moving to Platforms & Services U.S., whilst the overall guidance is as shown on the chart, this is best taken in two parts.
Firstly, on Land & Armaments, we are seeing a stretching out of programs by the U.S. customer and some limited project cancellations. We have therefore revised the full-year sales guidance from a $3.75 billion level towards $3.6 billion. 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 Support Solutions business, we anticipate 2013 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 ship build activity. On margin, guidance is unchanged in the Support Solutions business. Levels for the full year are expected to be similar to those delivered at the half.
Turning to Platforms & Services (UK), this is the group's largest sector. We expect sales in 2013 to increase by around 25%. We expect second half bias, both from the deferred trading of Al Salam price escalation and there being six more Eurofighter Typhoon aircraft deliveries on the Al Salam program. Including the expected benefit from the catch-up on resolution of the Al Salam price escalation, we expect margins for this sector to be slightly higher than the level seen in 2012 and above our normal guidance range. On the last of the sector's Platforms & Services International, we continue to expect sales in 2013 to be marginally higher than last year.
Deferred trading arising from Al Salam price escalation and increased levels of support to the Eurofighter 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 Al Salam 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%-12% guidance range. To complete the 2013 models, despite the charge taken in the first half year, we now expect headquarters costs to be broadly similar to those in 2012. Underlying finance costs should be marginally lower. Effective tax rate remains expected within a 23%-25% range, with the final number dependent upon the geographic mix of profits.
In aggregate, 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 Al Salam 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. Firstly, the operating cash flow. We are not planning for any material capital expenditure above depreciation levels. Within working capital, we are utilizing 2012's accelerated receipts on the Saudi Tornado upgrade contract.
We also expect to incur costs of around GBP 400 million 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 Eurofighter Typhoon production contract. The guidance here does anticipate cash inflows from an Al Salam price escalation settlement. Clearly, those have yet to be negotiated. The final operating cash flow item is the year's pension deficit funding, which will be around GBP 500 million, and that now includes the accelerated funding arising from the share repurchase program.
The non-operating cash flow items are far more predictable. Outflows for interest, tax, and dividends are expected to total around GBP 1 billion. We would expect the share buyback program to cost close to GBP 300 million in the year. Overall, as per previous guidance, 2013 will be a year of significant cash utilization. Thank you, Ian.
Thank you, Pete. To summarize, this is a challenging environment. We continue to take the necessary actions to reduce costs for the benefit of both our customers and our shareholders. We have a clear top-level investor proposition. We plan for the U.S. to be down but manageable. We expect the U.K. 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 50/50 split between services and products. We will reinvest the cash we generate to sustain and grow the business. 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 a good platform for future growth.
We will now take questions. No questions.
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, sounds like one for you.
Yeah. That's fine. We announced the buyback program in February. We said a billion-pound program subject to resolution of Salam price escalation, and that will be over three years. I think we're pretty close to GBP 100 million since we launched it in mid-February. We are pacing it in line with the original three years that we outlined. We've done 24 million shares pretty much at 30th of June. We were in the market at the beginning of July. We're back in the market today, we're still active on the program.
Okay. Then maybe just a quick follow-up on the sequester. You mentioned that you see 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, you got a microphone?
Do you want me up?
No, no. You're going to be fine.
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. 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.S. peers that it was very in line with our expectations. You can see with the performance in the six months, our 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 Fidler, Deutsche Bank. Please go ahead.
Yes. Morning, guys.
Oh, I'm glad we could rely on you, Ben. Well done.
Well, does that mean I'm allowed to ask more than the usual three then?
Yeah, well. Yeah, I shouldn't have opened that up, should I?
Ian, I limit myself to 17 if I could. No, probably two or three if I could. Firstly, your guidance for the full year for Platforms & Services (UK), in terms of the margin, aren't 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, and you've got the profit recognition on all 10 Typhoons. You should be significantly ahead of the 12% level, or is something else moving on the other side to help offset that? Do you want me to give you the other questions, or do you want to answer that one first?
Let's take your questions one at a time because they're quite detailed questions, Ben. Pete, should we work that one?
On the margin, Ben, you'll have seen the guidance where we've talked about 10%-12%. You'll have seen the word plus appear on the slide. Clearly, we are signposting we're going to be above 12. There is some back-ending in the second half of sales also on the Astute and Successor programme. Clearly, the margin levels on those programs are less than they are on the Typhoon production. Yes, you're right, we will be through the 12 when we get the VoP resolution completed. I think 10%-12%, 12% plus, I think you can take that as a positive.
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. 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. 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. We're working hard with the British Government to offer Typhoon there together with a training package. UAE is still a long way to go. We're enthusiastic. We've got a lot of people working on quite a complex bid. The bid is due to be tendered in about four weeks' time, we'll then have to see where the British Government and the UAE authorities want to take things.
How many aircraft is it, Alan?
It's going to be around 60 Typhoon, it's going to be a government-to-government deal, therefore, the pace of negotiations will be set by the two governments. We are very firmly supporting them, 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. I think that's probably all I should say at this moment.
We are making good, positive progress, and we have the full support of the UK Government. They are going above and beyond in terms of the resource and the energy they are putting behind it.
Absolutely.
We're very pleased with progress on it.
We're very pleased with progress, and we could not ask for more from the Prime Minister and HMG in general.
Okay. Guy, why don't you cover the Saudi requirement?
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 Saudis' operational requirement for Typhoon always was for a minimum of five squadrons. 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.
When do the current 72 finish in terms of deliveries?
The deliveries finish at the end of 2017. The intention would be for any follow-on order to continue in terms of production continuity. In order to safeguard supply chain continuity, we'd be looking really at an order within 2014 in order to secure that.
That's what's driving the timescales, Ben, 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.
Similarly, on the UAE contract, that would dovetail in with that sort of 2018 timeframe, would it as well?
Absolutely.
Okay. Thank you.
Thank you. Our next question comes from Mr. Charles Armitage from UBS. Please go ahead.
Good morning.
Morning.
A simple one from a confused. I just want to make sure that I've got my sums right, that if I take all the changes you've made-
Sounds like one for me, Charles.
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. If you take our guidance, clearly, I've done the steps through sector by sector, if you're taking it around, the U.S. business, we're basically saying, is around 5% down overall, we're holding up on the margin. You've got a sort of 5% volume impact. Our U.S. business is about $12 billion, you can work that for yourself. In the U.K., we're holding the guidance at the sales level unchanged, we are flagging that the margin will be stronger. Guidance for the international business unchanged. We have got that contract pricing dispute charge in 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 GBP 0.385.
You can get to the number fairly straightforward. You're right, it does get you pretty much back to where you started from. Sorry for that long journey.
Thank you.
Thank you. The next question comes from Mr. David Perry from J.P. Morgan. Please state your question.
Yeah, good morning. Can you hear me okay? The questions have all been very echoey. Can you hear me?
We can hear you, David.
Great. 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&D in H1? Secondly, the pension finance charge. I know you exclude it from EPS. I think the notes that you provided today say GBP 98 million in H1. Would it be right just to double that for the full year? Thirdly, the HQ EBITA number, which I think you restated to minus GBP 124. I think it was originally GBP 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&D is about the same level of 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've had about GBP 150 million 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 thereabout. In terms of the HQ cost, the issue there is around the GBP 32 million charge that we took in the first half year on the contract pricing dispute. If you strip that out, you'd see that the headquarter cost would actually be significantly down.
Sorry, I lost you there. Because on your slide 21, I think you show HQ EBITA as minus GBP 124 for 2012, but I think they're restated for IAS 19-
Yeah
The original number you reported, I thought was GBP 85.
That's the IAS 19 change, David, on the accounting. This is where we were previously taking some pension admin and the PPF levy costs within interest, not in underlying. There's no economic impact, they've now moved into HQ costs. That's where we're reporting them.
Is GBP 120 the new run rate for the HQ line?
GBP 120 will be the comparable number. If you look at what we've then reported this year in the first half of 2013, that includes GBP 32 million for the contract pricing dispute.
Okay. It's GBP 150 this year, but GBP 120 going forward.
Yep.
Yes.
Okay, thank you. 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.
Okay. Thank you.
Thank you. Your next question comes from Nick Cunningham from Agency Partners. Please go ahead.
Yeah. 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. 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? When we look 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 2014 would still end up being down for you? Is that sort of built into your general expectations? Thank you.
Well, 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 in 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. With the current progress or lack thereof in Congress, it's really a difficult environment to predict. Hard to tell, and we're trying to make our best guesses as we can.
Nick, if I could just answer that.
Clearly the decision appears to be to hit O&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. 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. Right now, while there is certainly some pressure, it does not appear to be nearly as bad as we had anticipated. 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 ICBM missiles. 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.
Yeah, we're very happy with our Support Solutions business, probably in ship repair, we've got more visibility from 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, then yes, we are putting in our best estimate 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 a higher level than we saw in the first half. It's in the guidance.
We just got to remind ourselves, we have about $1 billion of our activity in the U.S. in commercial sectors.
Thanks very much.
Thank you. Next question comes from Edward Stacey from Espirito Santo. Please go ahead.
Hello, just one last from 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, as I'm trying to think of what's the sort of baseline number for me to base my 2014 earnings forecast on. I know you're not talking about guiding for 2014 yet. I think previously, you'd said there was sort of GBP 0.03 of carried over Saudi stuff that would get recognized as a one-off, kind of a one-off when you sign the pricing agreement. Would I be right in thinking I take this year's underlying EPS guidance and subtract the GBP 0.03 from that, then that gives me the right sort of baseline to think about for 2014? Is GBP 0.03 still the right amount? That's all.
Ed, I'll try and answer that in a slightly different way. Clearly things have moved on since the end of 2012. We've now delivered a further 10 aircraft, sorry, another four. We'll deliver another six in the second half. By the end of the year, we're around 34 aircraft. That's equivalent in terms of turnover of about two and a half billion pounds. If you think of the margin that we trade on that of around 10%-12%, that gives you the reliance we got in terms of the forecast of getting the resolution done, in this period. To answer your question on 2014, on the basis that we get the resolution in 2013, there will be, I think, a further 12 aircraft next year, and then we'd be trading those through at around the 10%-12% mark.
Okay, yeah. That helps. Thanks.
Okay.
The next question comes from Sandy Morris from Jefferies. Please go ahead.
Morning, everyone. You should have quit when you were ahead. Just out of idle 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.
Right. Okay. Well, 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 the fleet builds up, part of our task is to ensure that the mix of the workforce that supports the aircraft is increasingly Saudized. 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 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.
Interestingly, the 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.
Well, I hope so. Is it reasonable then just to look at the number of employees in Saudi Arabia, which you disclose 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 as good an indicator as any, actually. Yeah.
It's an indicator when they go into service.
Yeah.
You got to remember, Sandy, that there's an awful lot of facilities and supply chain activity and logistics activity that goes on before that, and as we provide as close to an availability service in Saudi as we do into the U.K., a lot of our activity is in that engineering and supply chain management as well, which is not necessarily driven by manpower.
Okay. Then, 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 U.K.? I think we get a little bit excited about short-term discount rates going up. Perhaps, Pete, you just give us a flavor of what would actually have to happen.
On the pension.
You're talking about the pensions, Sandy, yeah?
Yes, please.
Yeah. Okay. The pension discount rates we use are those which are aligned with the duration of our pension liability. These are sort of 15, 16, 17, 18-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. What you've got to look at is both of those two movements over the sort of 16 to 18-year timeframe, not what you're seeing on the sort of market rates today. Does that help?
Well, it does.
10 basis points is round about GBP 400 million of our accounting deficit.
Yeah. We can still assume that QE is just depressing this rate.
Yeah. I'm certain. 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 5, 10 years, whatever it may be. The cash flows from these pension schemes are decades of cash flows. The schemes that we have in the U.K. are not net payers for another decade yet. 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. Thank you very much. Thanks for joining the webcast.