Well, we're going to break with a bit of tradition here. Normally, stand up at the podium and present. So we're going to present sitting down to get a bit more informality and that will hopefully will allow you to ask us lots questions as well. The other thing is normally our share price plummets as soon as we presented announced. So this year again, we're breaking with tradition.
I think it's probably about the first time since I've had the pleasure of doing these results. So hopefully that all goes well for the very tame questions that you're going to ask us after the presentation. So how we're going to handle it is I will provide you a brief overview of the business environment and then some of the key events over the past year. I'll then hand over to Pete to take you through the results in detail and the outlook for the group. And then this will leave plenty of time for questions.
The group has again demonstrated a robust performance with strong trading in a number of areas. We are seeing high quality performance execution across the business and in particular continued improvement in returns as some of our larger programs mature. We continue to demonstrate a highly disciplined approach to cost control. This includes taking bold decisions to address capacity where we see pressures. We are not sitting and waiting.
I believe this cost focused approach is making us more competitive and is one of the reasons we are demonstrating good success in winning new business. The Group's broad spread of geographic business is providing resilience at a time when some of our markets are constrained by economic pressures. U. S. Defense budgets have flattened and we expect them to decline as measures to address federal deficits are introduced.
In The UK, the defense market remains stable following the program changes outlined in 2010. In wider international markets, the group is seeing good growth in order intake. Our strategic response in this environment has been to international markets outside The U. S. And UK.
We have made excellent progress with order intake of £11,200,000,000 in those markets, up from £4,800,000,000 in 2011. We also generated a further £11,000,000,000 of orders from The U. S. And UK. The order backlog has risen by 3,300,000,000 an increase of 8% over the £42,000,000,000 order backlog.
The group's focus on cash generation is expected to further enhance shareholder returns. You will have seen that we have today announced a further share repurchase program. Our U. S. Businesses have felt the dual pressure of reduced activity in support of deployed operations and the start of measures to reduce U.
S. Federal budget deficits. Forecast, The U. S. Land vehicles business has seen significant year on year reductions.
The U. S. Elections have introduced some additional defense procurement uncertainty with the administration entering a period of a continuing resolution from the September 2012. This is expected to continue at least until the March. As anticipated, some modest impact on the volume of activity has been apparent from the continuing resolution to date.
In truth, we do not yet know what scale of defense cuts we are dealing with, but we base our plans conservatively and are continuing to address the cost base quickly. We will seek to mitigate any impacts as the situation becomes clearer. In land, setting aside the budget uncertainty, we have seen some supportive movements. Contracts to extend the reset of Bradley inventory of fighting vehicles into 2014 were helpful. In addition, we are in the proposal stage for low rate production of the Paladin PIM.
We continue to participate in the competitive demonstration phase of the next generation ground combat vehicle and we are the vehicle supplier to the Lockheed Martin lead bid in the joint light tactical vehicle competition. In support services, we have seen a number of positive developments. In July, we commenced management of the Radford Ammunition Plant under a ten year contract award. We were also recently awarded the multi year maintenance contract for a number of U. S.
Navy turboprop aircraft types. The U. S.-based electronic systems business recovered from the Johnson City flood. We have relocated the affected plant and were recognized for minimizing disruption to customers. We now have initial operating capability release on the APKWS guided rocket and the F-thirty five program continues to be a key platform for our avionics products.
We continue to see good growth in the commercial aircraft electronics business and good program performance has been achieved in support of the new CFM LEAP engine. In our Government Intelligence business, there are circa $2,900,000,000 of bids awaiting customer decisions. In The UK, the defense budget is expected to remain flat, but the recent balancing of equipment requirements and the forward budget has established a more stable planning environment. BA Systems has a large multi year order backlog in The UK and the combination of good execution and the maturity of these programs is contributing to good performance. In military deliveries have continued.
Air, Deliveries to the Royal Saudi Air Force are expected to resume as planned in May 2013. We continue to deliver assemblies for the F-thirty five program consistent with our planning assumptions. The group's UK Maritime business has experienced a high level of activity. The last of the six Type 45 destroyers completed sea trials. Good progress continues to be made on the carrier program with the delivery of major blocks underway and work also continues on the design of the Type 26 ships to replace The UK's Type 23 frigates from the end of this decade.
Type 26 production as we recognized under the fifteen year naval ships terms of business agreement will utilize a lower level of build capacity than the carrier program and discussions continue with the UK government to determine how best to sustain the capability to deliver complex warships in The UK. Good growth is anticipated in the submarines business on the back of the multi year astute program and the buildup of engineering workload on the successor program. We now have over 1,000 people working on the successor program. Outside of The U. S.
And UK, we continue to build on our positions in international markets. I'm pleased to report successes in 2012 have resulted in a substantial increase in order book, contributing to the first increase in the group's order backlog since 02/2009. In June, our Land Systems business received a boost with the £500,000,000 CV90 vehicle contract for Norway. Develop our business in India, local assembly of Hawk aircraft by Hindustan Aeronautics is maintained with negotiations for a third batch of aircraft expected to commence this year. The Indian government recently confirmed its intention to buy the first batch of the N777 artillery system under a U.
S. Foreign military sales program. In December, the £2,500,000,000 contract for 12 Typhoon, eight Hawk aircraft and associated training and support was signed in Oman. Significant new business for The UK boosting our order backlog and generating a large prepayment. Defence remains a high priority in The Kingdom Of Saudi Arabia and we have seen and we have been progressing a significant number of opportunities.
Following on from the budget approvals at the 2011, we were awarded a £1,600,000,000 contract in May for Hawk and Pilatus training aircraft. Also under the Saudi British Defence Corporation program, we received orders at the year end for five year support arrangements. Through the course of the year, the tornado sustainment program completed the aircraft modifications and substantial related equipment orders. We are now negotiating upgrades and additional weapons packages. The Salaam Typhoon program progresses well with the first 24 Typhoon aircraft now in service.
Deliveries are expected to resume this year following a contract amendment last year to enable UK final assembly on the balance of the 48 aircraft. There has also been a modification in the Salaam contract to enable Trongstri capabilities to be embodied in 24 of the contracted 72 aircraft. We have yet to reach agreement on the price escalation. Negotiations are underway and as I have said before, quantum not timing is what is driving us. We will do the right deal for our shareholders.
Discussions have commenced on the next phase of Salaam support following on from the original three year agreement that formed part of the arrangements for entry to service of the Typhoon aircraft. Deliveries under the current contract continue continue to 2017. We have seen and continue to see major activity in other markets. For example, we are building significant business with U. S.
Military aircraft upgrades such as the electronic warfare contract with Boeing for the Saudi F-15s. We have also won contracts to support overseas F-sixteen fleets and made a real breakthrough being down selected for the South Korean F-sixteen upgrade program. We continue to pursue the Bradley opportunity in Saudi Arabia. In The UAE, we have won a number of equipment contracts and are pursuing other opportunities including possibly significant Typhoon interest. The Malaysian prospect for Typhoon remains alive and well.
We have one vehicle contract in Sweden and an M777 artillery follow on contract in Australia. Building on our success in Norway with the CV90 contract, we are also offering the CV90 vehicle to Denmark and Canada. Before I hand over to Pete, I would like to touch briefly on strategy and last year's merger discussions. BA Systems is a well defined strategy, which is focused on our position as a premier global defense, aerospace and security company. In this context, it is worth noting that the merger discussions were at no time seen as a replacement for the group's established strategy, which would have continued to be progressed across aerospace and security entity.
The merger was always expected to be a complex transaction, not least due to multiple government national security considerations, but the prospect of compelling value enhancement and good strategic fit made the opportunity worthy of exploration. Despite much good progress, the discussions were terminated when it became apparent that not all government preferences could be reconciled and before any proposal could be taken to shareholders. The Group's ongoing strategy is to drive shareholder value through a combination of further improvements in financial performance and enhanced competitive positions across the business. The focus of the group includes growth in our cyber intelligence and security businesses, but the recent Vodafone announcement demonstrates a key milestone in developing sector, addressing growth opportunities in electronic systems, driving further value from the group's broad base of platforms and services positions and increased business in international markets outside of The UK and U. S.
Services activity now represents 50% of BA Systems sales, testament to the evolution of the group. Cash flow has been particularly strong in 2012. In addition to good cash flow from operations, the group has benefited from the funding on the higher international order intake. Some of this cash flow is required to fund future working capital, but BA Systems is a cash generative business with a strong balance sheet. We recognize the importance to shareholders of a clear capital allocation policy, consistent with sustaining a strong investment grade credit rating.
We continue to believe that currently repurchase of the company's own shares still represents a good investment and have today announced a three year repurchase program of up to a further £1,000,000,000 worth of shares, which Pete will detail shortly. The Group's business portfolio is currently appraised and we have disposed of three small businesses during the year for a combined consideration of just over £100,000,000 We continue to see bolt on acquisitions and enhanced routes to market, all which provide rapid access to technologies and capabilities. In November, we agreed the 60,000,000 acquisition of Marine Hydraulics International, a marine repair and conversion company. Large scale acquisitions have not been a feature of the group's recent strategy. In the period 2010 through 2012, we have returned over £2,800,000,000 to shareholders in dividends and share repurchases invested £800,000,000 in acquisitions and generated £500,000,000 from business disposals.
This is in addition to our pension funding commitments and the significant organic investments we make in research and technology, training and our operational capability. This is not a business taking short term measures. We continue to invest for the future. In summary, BA Systems continues to deliver a robust performance against an environment of budget constraints in many of its markets. The U.
S. Continues to be draped in uncertainty around sequestration and near term continuing resolution constraints. Clarity must emerge at some point, but we do expect the market to decline. The UK can be characterized as challenging, but stable. We are making significant progress in growing our international order book and have further opportunities to mitigate the challenges in The U.
S. And UK. Affordability is a key consideration for all our customers and the group has been successful in reducing costs over a sustained period. In this environment, we will continue to pursue cost reduction and efficiency measures with vigor. Pete?
Thanks, Ian. Good morning. As Ian's mentioned, the delay in securing a satisfactory settlement on price escalation to the Talam Typhoon contract has impacted the year's sales and earnings performance and I'll highlight this as I step through the performance of the sectors later in the presentation. I'm going to cover the 2012 results first and then move on to guidance for 2013. So firstly, the headline numbers and compared to 2011.
Sales declined by 7% or £1,300,000,000 to 17,800,000,000.0 Of this, 800,000,000.0 came from the expected land volume reductions and £400,000,000 for there being no contracted Typhoon aircraft deliveries on the Salaam program in 2012. Underlying EBITDA reduced by 6% to 1,895,000,000 giving a return on sales of 10.6%. Underlying finance costs in the year of $2.00 £4,000,000 were marginally higher than in 2011. Last year included a charge arising from early debt redemption relating to the disposal of the Regional Aircraft Asset Management business and costs in 2012 have included interest on the £400,000,000 debt refinancing that we completed in June and a higher level of net present value charges on long term liabilities. Underlying earnings per share excluding last year's R and D tax credit reduced by 2% to 38.9p.
There was exceptionally strong operating cash flow of £2,700,000,000 and as a result, we closed the year with net cash of £387,000,000 Order backlog increased by 8% to 42,400,000,000 the highest for the group since 02/2009. And the dividend for the year has been increased to 19.5p per share, up 4% on the 2011 dividend. At this level, the dividend is covered two times by underlying earnings per share remaining in line with the group's policy and despite the impact of the salam typhoon pricing delay. In addition to the effect of exchange translation where the U. S.
Dollar closed at $1.62 compared to the opening $1.55 there were a number of other items materially impacting the balance sheet in the year. Intangible fixed assets reduced mainly for amortization and the goodwill attaching to the Land and Armaments business disposals that we completed in the year. The reported value of investments held has reduced primarily on receipt of a four twenty four million pounds one off dividend from our MBDA joint venture. This was done under an arrangement between all three shareholders to permanently extract cash that we already held within our respective balance sheets. Within working capital, there were several significant movements.
Down payments increased from receipts on the Omani Typhoon and Hawk order that we received in December and from the Saudi training aircraft contract that we received in May. Payments accelerated from 2013 by the Saudi customer on the in the first half year on the tornado upgrade program and these receipts were more than outweighed by the advances we consumed in the year on the European Typhoon Tranche two program. In addition, there were costs incurred on the Oman offshore patrol vessel contract and on rationalization as provisions created in previous years were utilized. In aggregate, working capital was improved by some £900,000,000 The IAS 19 accounting pension deficit has increased to £4,600,000,000 and I'll cover that on the next slide. And as I said before, we closed with net cash of some £400,000,000 This slide shows the pension scheme assets, liabilities and deficit as accounted for under IAS 19.
The value of the scheme assets has increased over the year to £19,600,000,000 And in December, the group contributed a further £75,000,000 of property assets into its largest UK scheme. In aggregates across all the group's pension plans, equity investments now comprise 52% of scheme assets. Over the year, liabilities increased by £2,000,000,000 to £25,300,000,000 Real discount rates reduced by 30 basis points in The UK and by 90 basis points in The U. S. On lower bond yields.
And this has increased reported liabilities by some £1,700,000,000 The year's discount unwind in service cost less pensions paid accounts for the rest of that increase in liabilities. So the aggregate impact of those movements is an increase to the group's pre tax accounting pension deficit of £400,000,000 As you know, these mark to market movements have no bearing on our scheme funding. Revised funding agreements were reached in February 2012 with the trustees of the two largest U. K. Schemes.
And notwithstanding volatility in the accounting deficit, those funding agreements are sustained through 2014. Total deficit funding across all group schemes is around £400,000,000 per annum. As the group seeks to mitigate pension deficit volatility where it can, we have entered into an agreement earlier this week with Legal and General to transfer the longevity risk on some £2,700,000,000 of our pension liabilities to the insurance market and we continue to review other mitigation options available to us. Moving on to cash. This slide sets out the movement from our net debt of £1,400,000,000 at the beginning of the year.
The operating business cash flow was 2,692 million pounds Interest and tax payments were £262,000,000 Payment of twenty eleven's final and twenty twelve's interim dividend totaled £620,000,000 And net proceeds arising from disposals made was £96,000,000 including the three businesses. Exchange translation and all other movements totaled £80,000,000 closing net cash then of £387,000,000 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 to note, the total cash outflow for pension deficit funding made in 2012 was £432,000,000 and the cash outflow at head office contains £195,000,000 of that. This next chart shows the gross debt, cash and net debt of the group. At the start of the year, borrowings amounted to £3,200,000,000 with cash held of £1,800,000,000 giving the reported net debt of 1,400,000,000.0 total cash inflow for the year was £1,800,000,000 Holdings of short term commercial paper amounting to some £500,000,000 were repaid during the year.
New ten year term debt of £400,000,000 was put in place in June and that debt was secured at four oneeight percent to prudently pre finance debt maturing in 2014, which has a blended rate of 6.3%. Consequently, at the end of the year, total borrowings have reduced to £3,000,000,000 cash holdings have increased to £3,400,000,000 and net cash stood at £400,000,000 In addition to the £400,000,000 of debt repayment in 2014, there are some nearer term demands on that £3,400,000,000 of cash, which I'll return to later when I get to our 2013 guidance. We continue to manage the group's balance sheet conservatively to retain our investment grade credit rating and to ensure operating flexibility in dealing with Our approach to capital allocation is unchanged. We will meet our pension obligations and continue to pursue organic investment opportunities that meet our financial criteria. We plan to pay dividends in line with the group's policy of long term sustainable cover of around two times and return capital to shareholders when the balance sheet allows.
Value enhancing acquisitions will be considered when market conditions are right and where they deliver on the group strategy. And consistent with this approach, we have today announced a longer term three year share repurchase program of up to £1,000,000,000 Full implementation of this program is subject to satisfactory resolution of the Salaam Typhoon price escalation negotiations and we have commenced discussions with our U. K. Pension scheme trustees with regards to any associated acceleration of deficit funding. So I'll turn now to the sectors and I'll cover the in year performance here and then return to the 2013 outlooks a little later.
And so the first of those sectors Electronic Systems and the numbers here shown in U. S. Dollars. Slightly below previous guidance and with October's six month continuing resolution operating through the 2012, sales compared to 2011 decreased by 6% to £4,000,000,000 $4,000,000,000 The primary driver of this reduction was the completion of thermal weapon site deliveries made in support of operational tempo driven requirements. More than 15% of this sector is in the commercial markets and their sales grew by 10% to $670,000,000 The return on sales achieved at 14.2% was at the very top end of our forecast range and program execution remains strong with good risk retirement seen on that completing production contract.
The business also delivered in year benefit from continued cost reduction action. Cash conversion of EBITDA for the year was 72% and excluding pension deficit funding that conversion rate was 95%. Order backlog increased to 5,800,000,000 despite the delay in disruption to contract awards caused by the continuing resolution. And this follows the award of a long term contract to provide electronic warfare upgrades on the Saudi F-fifteen aircraft. The Cyber and Intelligence sector comprises The U.
S. Intelligence and security business together with BA Systems Detica. Numbers here again in U. S. Dollars.
In aggregate, sales for the year of $2,200,000,000 were almost unchanged over 2011. The U. S. Business saw a 1% decrease being impacted by the high level of competitive bids submitted awaiting award decisions during the continuing resolution period. Growth in the BA Systems Deteca business was just 1% as sales were constrained on a program in The Middle East where we needed to restructure contractual arrangements.
The margin achieved of 8.8% was within our guidance range and the margin level reflects the continued organic investment in the Detika business to support targeted future growth in commercial markets. Cash conversion of EBITDA was at 91%. Order backlog reduced to $1,600,000,000 and we had some $2,900,000,000 of competitive bids from our U. S. Intelligence and Security business awaiting award decisions.
The U. S. Platforms and Services sector aggregates the Land and Armaments and the Support Solutions businesses. The numbers here again in U. S.
Dollars. And we continue to provide transparency of the two businesses within this sector, so I'll move straight on to the performance of the first of those two businesses, Land and Armaments. As described at the interim results presentation, the comparative numbers for 2011 have been amended to reflect the transfer made at the beginning of the year of the Protection Systems line of business from Land and Armaments into Support Solutions. Sales of $4,200,000,000 declined by 20% on a like for like basis. As expected, sales reductions were on the FMTV program, which completed in 2011 and for lower volumes of Bradley, Cayman and MRAP activity.
The reported margin of 8.6% was in line with previous guidance and includes the charges taken in the first half year for the accelerated closure of the Newcastle site and for certain legal claims. With regards to cash flow, conversion of EBITDA pre pension deficit funding was at 83 percent as facilities investment under the ten year U. K. Munitions program continued through the year. Order backlog was almost unchanged at $8,300,000,000 and includes the important Norwegian CV90 contract win and Bradley funding awards through into 2014.
In the Support Solutions business, sales were just 2% down against last year's. New business, in particular from the Radford Munition plant, was offset by lower OpTempo driven volume. Margin of 8.8% was ahead of guidance benefiting from certain legal settlements that contributed 90 basis points. There was 100% cash flow conversion of EBITDA excluding pension deficit funding. Order backlog increased to $5,400,000,000 following awards for the Radford Munition plant and U.
S. Navy training aircraft maintenance contracts. In the Platforms and Services U. K. Sector, the year sales of £5,600,000,000 were lower than 2011 by 10%.
There being no contractual aircraft deliveries on the Salam Typhoon program in the year and from twenty eleven's completion of South African aircraft deliveries. Sales were below guidance for the delay in securing the Salam Typhoon price escalation settlement. As expected, the return on sales of 12.2% was at the top end of our forecast range, benefiting from the strong program execution and risk reduction seen in the first half year on the European Typhoon aircraft production and Type 45 destroyer contracts. Cash performance in the year reflects the down payments received on the new Saudi training aircraft and Oman contracts, less advances utilized on the European Typhoon Tranche two program and for the costs incurred on the Omani OPV contract and for rationalization. Those Saudi and Omani contract awards have driven up the order backlog to 21,200,000,000 Sales in the international sector of £4,100,000,000 and 9% higher on a like for like basis than in 2011.
The increase is primarily on weapons deliveries under the Saudi Tornado upgrade contract and on support for Typhoon aircraft now in service. However, this sector was also impacted by the delay in securing the Salaam Typhoon price escalation settlement. EBITDA of £417,000,000 generated a return on sales of 10.2% in the middle of our guidance range. Operating cash flow exceeded EBITDA benefiting from those receipts accelerated from 2013 by customer on the Saudi tornado upgrade program. Order backlog has increased to £9,300,000,000 following awards secured in December under the five year Saudi core support program.
For reference, there is a chart providing a summary performance of the five secondtors along with the numbers for HQ appended to your presentation packs. This penultimate chart seeks to give guidance as to how we see the performance of each sector developing from 2012 through into 2013 set against our previously stated U. S. Defense budget assumptions. Importantly, whilst this guidance does assume a continuing resolution through the first quarter, it does not seek to address the potential impact of sequestration or an equivalent scenario on our U.
S.-based sectors. Once we have clarity and as necessary, we will further update our guidance. So firstly, Electronic Systems. And overall, we expect sales in 2013 to be similar to those in 2012. The impact of the six month continuing resolution through to the March is to delay and defer new start programs.
And given the larger number of short term contracts in Electronic Systems, this sector has had and continues to have exposure to the effects of the CR. That said, some 15% of the business is in the commercial aerospace market where we expect continued good levels of growth. In aggregate, of twenty thirteen's projected sales, some 75% are in the 2012 closing order backlog. On margins, we'd expect the high level seen in 2012 to move slightly lower, but within our guidance range of 12% to 14%. Next, Cyber Intelligence.
And here we expect sales in 2013 to be marginally lower than in 2012. The U. S. Business, which is 80% of this sector, is expected to be some 5% lower. The business has a material contract for analysis support relating to counter IED activity in Afghanistan and the level of analysis support funding on that contract is expected to significantly ramp down in 2013.
Sales in the Deteca business are planned at a double digit level from the expected expansion in commercial markets and margins in 2013 are expected to be within an 8% to 9% range with ongoing organic investments planned for Deteca. Moving to Platforms and Services U. S. And whilst overall guidance is as shown on the chart, this is best considered in two parts. On Land and Armaments, we expect reported sales in 2013 to be around 10% below the 12% level.
6% is due to the full year effect of the business disposals made in 2012 and because The U. K. Vehicles and support line of business is being transferred to the Platforms and Services U. K. Sector as a further cost reduction action.
The remaining 4% largely relates to the 2012 completion of The U. S. Contract for Cayman vehicle upgrades. Some 85% of the sales guidance is currently within order backlog, a stronger position than the business had going into 2012. As for the margin level, we expect delivery around the 8% mark as further rationalization activity and charges are assumed in 2013.
We continue to review the landed armaments portfolio and further disposals in addition to the six made over the last two years are possible. Such further disposals are not reflected within the guidance given today. In the Support Solutions business, we anticipate 2013 sales to be marginally higher than in 2012 benefiting from the new business awards secured on the Radford Munition plant and naval training aircraft maintenance. Margins in this business will reduce to their underlying level after twenty twelve's legal settlements benefit. Turning to Platforms and Services U.
K. And in this the largest of our five secondtors, we expect sales in 2013 to increase by around 25% benefiting from both the anticipated resolution price escalation and the resumption of aircraft deliveries on the Salaam Typhoon contract where 10 aircraft are scheduled for delivery in 2013. Other than the Salaam price escalation, some 90% of the sales guidance is within the 2012 closing order backlog. Margins in the sector are expected to be similar to the level seen in 2012. And so last of the sectors Platforms and Services International and here we expect sales in 2013 to be marginally higher than last year's.
The deferred trading arising from the Salam price escalation and increased levels of support to the Typhoon aircraft now in service are likely to be partly offset by a reduction in the Australian primarily related to the landing helicopter dock build program. Other than for Salaam price escalation and receipt of the contract extension for ongoing typhoon support, some 85% of guidance is covered by order backlog. Margin should benefit from the catch up arising from the resolution of the Salam typhoon price escalation and we therefore expect it to be towards the top end of the 10% to 12% range. And to complete your 2013 models, headquarters costs are expected to be more than 10% lower than in 2012. Underlying finance costs should be marginally lower and the effective tax rate is expected to be within a 23% to 25% range, an improvement on previous guidance.
And the final number is of course dependent upon the geographic mix of profits. In aggregate and this is subject to the near term uncertainties relating to U. Budgets, modest growth in underlying earnings per share is anticipated for 2013. This excludes any benefit from the share repurchase program announced today. And in addition and assuming the satisfactory conclusion to Salon pricing negotiations this year, there will be a further increase of around 3p rolled over from 2012.
With the exceptional level of operating cash flow seen in 2012, I thought it would be helpful for this year to give you a final slide to highlight the cash utilization we expect in 2013. As you know, cash forecasting for this group can be a challenge given the digital nature of some of the items we deal with and we do transact around £35,000,000,000 of gross cash flows throughout the year. That said, this slide gives our current view. And I should make it clear, these numbers are before any share buybacks. So in respect of operating cash flow, firstly, we're not planning any material capital expenditure above depreciation levels.
Within working capital, we will utilize twenty twelve's accelerated receipts on the Saudi tornado upgrade program. We also expect to incur costs of around £400,000,000 against provisions created in previous years that are held in the balance sheet. The most volatile area is around the advances. Against the major advances we received in 2012 on the Saudi trainer aircraft contract and Omani contract, we will see a high level of utilization. Under the terms of the Imani contract, no further cash will be received until deliveries commence in 2017.
There will also be advances consumed on the European Typhoon production contract. The guidance here does anticipate cash inflows from the Salam price settlement and clearly those have yet to be negotiated. The final operating cash flow item in the year is the pension deficit funding, which remains as per previous guidance at around £400,000,000 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 So overall, 2013 will be a year of significant However, and notwithstanding this, the balance sheet does support the share buyback program that we've announced today. Ian?
Thanks, Pete. So if I summarize, we continue to demonstrate strong despite a challenging set of market dynamics. The business is delivering the strategy. We continue to develop the business with an equal balance of platforms and services activities and we are successfully establishing a path to growth in international markets. Clearly, The U.
S. Budget environment is unhelpful, but I would remind you that a full sequestration would reduce budgets by around 10% or perhaps 15% as an impact to investment accounts. BA Systems is one of the most geographically diverse defense companies and with The U. S. Comprising 40% of our business, this exposure reduces to circa 6% of the group.
We do not take such concerns lightly, but I believe this team has a good track record when addressing challenges. And importantly, as we navigate this current more constrained environment, we continue to deliver sustainable multi year value back to our shareholders. To
Christian Lachlan from Barclays.
Hi, Christian. Just a two
part question about EADS if I may. One, just wanted to hear your views or thoughts around recent commentary Tom Anders has made in the press around a persisting interest in a tie up at the group level, if you share those views and if you can if it is possible for you to even comment on any maybe on at what level ongoing discussions may persist? And then secondly, again with EADS, but specifically with Eurofighter, regardless of group level tie up or not, it seems to me that you'll be proceeding ahead with trying to optimize business capture or business development opportunities with the Eurofighter program. Could you go into a little bit more detail on what that really means in the near term in terms of restructuring the sales campaigns perhaps? And then on the profitability side, anything you're doing with Eurofighter in concert with EADS just to make the program overall more profitable?
Well, you sort of been asking the questions and then providing your own answers really. I mean, you're absolutely right. We have two very strong joint ventures with EADS, which exists already. One is MBDA and missiles, which is the second largest missile company in the world, sometimes the first, sometimes the second, but it's up there. And then we have the Eurofighter joint venture.
And what we're doing with Eurofighter and we talked about this before is clearly it was a structure which was optimized around European nations off take of aircraft. And as this market gets for us gets more driven around through life support and export markets, then we're restructuring that with our European partners to make sure that that's what it's structured to do and the cost and the efficiencies of that are required. And also the support of the governments and the commitment of the governments to continue to develop the capability of the platform is what our international customers will require as well. So there's a lot of activity going on in that respect and that's what our focus is with the ADS. It's not for me to comment what Tom said or not said.
I mean, companies move on. This is old. We were right as I said before to investigate it. We investigated it. The company is stronger today than it was before.
There's been no harm done to our business and we're getting on and as you can see successfully delivering our strategy.
Okay. That's fine. Thank you.
There's one just behind you and then there's one in the middle.
Thanks. Rob Stalla from RBC. First of all on military operations side, was wondering if you could give us an idea of how much revenues are tied directly, indirectly to military operations in 2012 and how much you're forecasting those to reduce in 2013? And then secondly on the sequester, if it was to kick in, much of that would actually affect your business this year or would it largely spill into next year? Thank you.
So the question on military operations that relates to operating Across the group, if you've got any idea of how much revenue is generated from those operations last I
mean, if you're looking through into 2013, the guidance incorporates all troop withdrawals that are currently anticipated. So anything any impact is already within that guidance.
Okay. I'll ask Linda to talk about the sequester. I mean, as I talked, we have no more distinct knowledge than anyone else. But who's got Andy? Andy's got it there Linda.
I wish there were good concise answers on sequestration. But excuse me, have
a
cold. We've said all along that given the shape of our portfolio and making some assumptions about how sequestration would impact the business in The U. S. That it would be somewhere in the 10% to 15% of sales we would expect across portfolio with the way it's currently envisioned. Without more clarity from our customers, it's almost impossible to predict exactly where it will be or how it will play out.
But given the situation right now and what we've done, we think it will be contained in that range and would flow through the performance of the organization. So right now we're just looking at different scenarios what could happen staying focused on taking out costs so we can keep our bottom line performance going strong and being ready to adapt to whatever the priorities are that emerge from the U. S. Government as this unfolds. And of course, it's very difficult to know when it will unfold.
It's a difficult environment. But overall, we think we have it bounded and that we understand how we will adapt given the scenario planning that we've done so far.
So all we can do is to keep out there. Linda spends a huge amount of her time at the White House, the Pentagon, all the team are as switched in as any other of our competitors. Spent time in The U. Two weeks ago, I was in the Pentagon with Aaron. That's all you can do.
There is the planning, the re planning, the carrying on doing what they're doing. We will address whatever we have to address. Thanks, Linda. Nick? Sitting in the middle, Dick, if you have the mic.
Yes. Give me the best view of the slides. Slightly disparate questions. First of all, on the timing of the buyback, I think you've put a conditionality on the Salaam repricing being done. But after that is it a sort of immediate onset and then spread evenly over the three years or will it tend to be episodic?
That's one question. Another financial one. Your colleagues at Lockheed Martin are looking forward to recovering about 6,500,000,000 of extra pension contributions that they've made as a result of FASCAS realignment. Does that have any impact on you? And finally, a bit of a follow-up on the sequestration and CR issue.
The judging from the power points that Army and Navy have put out, they're going to they're intending to virtually cancel all heavy duty sort of depot level maintenance in the second half of the fiscal. Does that mean that you could suffer a particularly nasty impact in ship repair in particular and maybe in land as well? Thank you.
Let's cover the first two and then I'll cover between us cover the third one.
In terms of buyback, Nick, I mean what we're saying is that full implementation of the buyback is subject to satisfactory resolution of the price escalation issue. So we will be starting the program today, okay? So we're waiting. We're off. In terms of the pension issue, I think as you know in The U.
S, if you put pension deficit funding in, you recover it over time through pricing. In The U. K, you don't. You only get your service cost back. About 20% of the group's pension deficit is in The U.
S. So to the extent we're funding deficit there, we will get that back through pricing.
In terms of your comment on particularly around naval and what we're getting out of the armed services, you will have seen yesterday that we did have to send some more notices to our people saying that there is the risk that based on the current allocation or their intent, because they don't have their budgets approved that that could infect 3,005 people, because we have to give sixty day notification to the people and that's what we would do.
Thank you.
What are you done with your microphone? It's too long.
Hi, there. Selene Fonerro, Bank of America Merrill Lynch. Two questions if I may please. The first one is just if you could tell us on the balance sheet how much you have of long term contracts, I mean including program prepayments? If you could just disclose this number was GBP 4,100,000,000.0 in 2011?
GBP 5,100,000,000.0.
Sorry?
GBP 5,100,000,000.0.
Okay. And the second question is regarding the cyber business. I think in 2011 the split was like fifty-fifty defense and commercial?
In Detica it was fifty-fifty, yes.
Okay. And if you could just comment on the Vodafone agreement. So you said it was a step change. So what should we think in terms of the split? And where do we think margin are going?
I think the target is to 12% to 14% range. So does Vodafone accelerate this?
No. I mean that is still our target. We always said that we're investing organically and that does continue through 2013. And we have Kevin Taylor here who is responsible supervisor for that business. Do you want to comment on the Vodafone activity Kevin and just sort of encapsulate what it's about and why we do view it as a major milestone going forward?
Yes. Am I on? The Vodafone agreement allows for us to supply cybersecurity services to all Vodafone's mobile business subscribers across the globe. The best way to characterize that is currently Vodafone 160,000,000 business subscribers. So the service that we're offering these new cybersecurity services through what they call the Mobile Threat Manager.
And really how successful that will be will depend on how many of those subscribers pick up that service going forward. And it's now being launched in spring. So we'll see exactly what that take up is in the coming year.
But it's a great step forward. It's something that we and Vodafone have been working on for a while and now the service has been launched. And you can see the sort of things that we've been investing on in that time frame.
And is there a minimum level of business conditional from Vodafone to guarantee to you or not?
No. So it depends on how many of those subscribers take up the service worldwide.
But we have an agreed price for a subscriber.
Just coming back to your point on advances just in case we didn't hear the response. Pounds 4,100,000,000.0 is where we started the year. We closed at £5,100,000,000 that's obviously been driven by the down payment we got on the Omani contract as well as the Saudi aircraft training program and the Norway CV90 contract.
Okay. Ben? And I think was there another one? Or did I just imagine a phantom hand going up someone? Yes.
Ben Fiddler from Deutsche. Probably three questions. Firstly, just another one on Detika. What was the impact of that? You talked about the sales constraint by this Middle East contract rejigging.
If we were to strip that out, what was the underlying growth in of Dedica? Good question. Peter will calculate it as we speak. It's about 10%. Okay.
The second one was the group what the restructuring charges were at the group level in these 2012 numbers and how we should think about that number for 2013. Maybe it's a slightly difficult one to answer for 2013 because you don't quite know what restructuring you're obviously going to have to do. But any sort of steer you could give us on that? And the third question on Saudi repricing. The delivery milestone for the next Eurofighter I believe is in May.
Would I be reading too much into thinking that that might be a reasonably useful watershed or have a contractual milestone to meet in the delivery, but it's not unhelpful. Was that okay, guys? On
the restructuring, Ben, the issue with the restructuring is you're asking a question about the gross cost or the net cost as you know some of these we get recovered back through pricing. The only material movement from 12% to 13% really is I mentioned in Land. We are anticipating we'll do another there's some more restructuring to be done and that's probably takes about 1% off the ROS.
I mean, it's important I mean, going back to your Saudi question, I mean, it's an important fact to recognize that we have a customer out there who absolutely likes the aircraft and has a squad ron of these aircraft in service and has real plans to introduce the other two squadrons into service. So this isn't a position where somebody believes they've got a substandard platform. I mean this is a pricing escalation and absolutely clear and minuteed and very much in the Minister of Finance minds that there is a settlement to be done. It is about the quantum, not the fact that there is an obligation.
Staying with Typhoon for a moment. What are the operational implications of this delay on the pricing agreement? Are you continuing to produce aircraft into inventory? How much is that going to build up to? Or are you sort of stopped or slowing down?
And then the second one on Typhoon, there was it's now some time back, but there was some discussion at one point of the European governments having interest in using export sales of typhoons to offset their commitments. Is that still something that's in the background or is that gone now?
If we answer the second part, I mean, no, it's not. I mean, the European nations do recognize that they meet their obligations to the totality of the scale of the program if we sell overseas. And so they're all very supportive and full on in terms of negotiating those issues with us. So we're getting full support in particular from the UK government is absolutely leaning forward on its commitment to selling this overseas. One of the important facts as we talked to, as I mentioned earlier, it is about keeping advancing the capability of the aircraft.
And so we do have a constant debate with the European nations about how they maintain their capability upgrades, so they match what we're offering into export markets, into international markets and there's really progressive debate on that going on. So they are all leaning forward and recognizing that they have to help us sell overseas in order to also protect their own interests of having a very sustainable aircraft going forward. So what was the first question? I forgot the
question was on the build. I mean, are continuing build. You remember one of the issues we had about where was final assembly going to take place? Was it going to be in country? Or was it going to be back in The U.
K? And there was a contract amendment reached, which would sort of move it. So there was a low, but yes we are now building assemblies.
Don't we ask Guy, don't you I mean because you're dealing with this customer day in day out. What's your view of the status of the relationship and how they feel about the program? Well, first of love aircraft.
It's characteristic that for the first squadron, is a training squadron in Saudi Arabia, we have no difficulty frankly achieving the flying hours because the pilots are desperately keen to get airborne and to practice and understand the capability of the aircraft. In terms of is it worth me just explaining where we are?
You can't now we got it. We'll never get them off.
So we did get into quite detailed negotiations in the latter half of twenty twelve in terms of the price escalation calculation. I think it's noteworthy that we're dealing here with a relatively small, but very capable customer negotiation team. And in parallel with the escalation discussions we were having, you'll have seen from the order intake that we were also negotiating a suite of other new contracts. And from the customers' point of view actually it's reasonably understandable that they were more interested in terms of prioritization in moving forward with those other contracts because they are delivering operational capability which is essential to the Air Force whereas the escalation negotiation they see really is just a financial adjustment to an existing contracted program. As we move into 2013, it is true that we are now negotiating as Ian said earlier, another suite of quite significant new operational commitments around tornado upgrades, weapon upgrades and the five year support arrangement for Typhoon.
But I think we really have got the customers focus both at the operational level and at the political level on finalizing these negotiations. And to that end, they've bolstered their own resources by bringing in external consultancy help to help them with aspects of the price readjustment. In the background of all that, the customer is busy talking to us about further enhancements to the Typhoon platform and what he wants to do with it in terms of weapons fit, in terms of sense of fit. And I think that's a very clear indication of his support for the product going forward.
Okay. One by the pillar.
Yes. It's only me.
I said the pillar.
Yes. I get on with the pillar. More than a bit sad for some people. Just trying to set up sequester is a thing we'll have to deal with. We're not being short term about the way we run the business.
Is it possible for someone to sort of just help us out a little bit about how we flex if sequester were to come in. Ship repair capability they were never going to cut, now they're going to cut it. So somehow we have to flex, but potentially come back maybe after three months or six months. And maybe in ship repair we have some flexibility. Land and armaments I'm not so sure.
I mean how would Tom not that Tom knows me from ADMA, how would Tom cope with that in his business if we had to kind of go down and then come back up as things normalize through the course of 2013 or 2014?
The issue with ship repair is one of these orders weren't with us because the way that they provide us the ships to go into the services. So it was, if you like, an immediacy of that. If you look at the order book that we have today in Land and Arms, what is it, 85% of this year's sales. So those are existing commitments we should committed. What do you say for electronic systems, Tom, which again remember 15% of that is in civil avionics where we have long term commitments?
I speak first and then let Tom answer that, because I think it's important to understand that if sequestration goes into effect as currently in law, the reductions are against unobligated funds. So that does not give the services the authority to cancel programs that are currently obligated. So the bulk of the initial impact will be in the operations and maintenance accounts. That's why you're seeing the direction coming out of the service talking about ship repair, about depot maintenance and those kinds of things. The current way it's envisioned is unbalanced if you will much more heavily in the operations and maintenance side of things as opposed to the procurement dollars.
So unless the law changes, it will be very difficult at least out of the gate until some revisions perhaps get introduced for a service to just slash a program. That's not the way the law reads. The law requires the customers to take an equal reduction out of every unobligated line item in their budget. So we don't expect at least in this first wave major procurement cancellations and things going away. What we do expect is things to slow down as they try and sort this out on the procurement side.
And the easy cuts which are in the O and M budgets are the ones that will happen first which is why you're seeing the data from the Army and the Navy and the Air Force right now that immediately hits the maintenance funds. But now So where do
we sit Tom? Because this is the issue as Linda says between do we have a huge number of new start programs in 2013 and yes or are we pretty strong on mature programs that are obligated already?
Was the question around Land and Armaments or around Electronic Systems?
Electronics primarily.
Well, you can try Saudi if you want, but
Land and Armaments, we've got a very strong order book going into 2013. So they're quite helpfully obligated Bradley through to 2014 during last year. So we've got a good workload going through.
Yes. I think it's also fair to point out that as you have followed over recent years, the size of the workforce in Land and Armaments has come down significantly already. Much of the attention there has been turned to doing one of three things. One, helping our customers get as much mileage as they can out of the equipment that they already have and that's through upgrades, overhauls and so forth. Secondly, we've positioned ourselves to go after to the extent these programs survive sequester or any of the budget cuts come after or in lieu of around ground combat vehicle, joint light tactical vehicle those programs.
We're well positioned there to the extent these new programs continue. And then thirdly, big emphasis internationally. You heard about CV90 in Norway. We're well poised also in Canada and in Denmark. And so the portfolio has been brought to a more resilient point here in recent years.
The team has worked very hard to get ahead of these reductions in demand and through cost reduction efforts over the years. To the point around the temporary nature of some of this, there are furlough is an option that we explore and we would employ if necessary. On the Electronic Systems side to Ian's point, we are there again we have a very broad and resilient portfolio. The extent to which new programs would be affected programs like NextGen Jammer for large new programs. Those are the ones that we're watching the most closely.
But we have very many existing programs in the portfolio that we think will stand the test of time.
So we do stress test this all the time, Sandy, specifically against that. We're just in this sort of aberration at the moment until whatever it turns out to be gets enacted in terms of an agreed set of budgets.
But I mean, being absolutely brutal about this then, I mean, working for an American bank now I understand how we flex.
Keep my eye on it every day, let me tell you.
I mean bluntly the impact on our cash in the context of a three year share repurchase program from sequester even it just doesn't really blow us off course because we're contracted and then there'll be ebbs and flows. I mean is that the right way to look at it or is
It's the right way to look at it. If you look at the exposure of the £1,000,000,000 and say it all happened, so the 6% of £1,000,000,000 and you look at the cash flows from profit that we get from that because we get very even cash flows from our business, you'd be talking in the range to 100,000,000 to £150,000,000 This does not blow away our ability to either support the dividend or support our balance sheet and the share repurchase.
And as you know, Ian's talking pretax, so of course the 100,000,000 would actually be less than that on a post tax basis from a cash flow perspective. And the other thing is probably just worth saying and really building on what Tom said around the land business. We guided 10% sales down for 2013. So that's around 3,800,000,000 Less than half of that business now is actually in U. S.
Vehicles. The rest is in U. K, Sweden, South Africa, naval armaments. So I think the as Tom said, this business has downsized significantly since the height of 2008 and 02/09 when we're in operational tempo driven mode. The sales for the vehicles business is less than $1,700,000,000
Thank you.
One in the back middle.
Good morning. Chris Dart from Investec. Two questions please. Firstly, obviously, of us have any idea how sequestration is going to play out. But maybe you can give us a view of how you're going to communicate, how you think it's going to impact your business once we start to get some detail, because obviously it's going to be kind of tricked through probably.
We won't know what they want to do on budgets. But how are you going to mention out to the market? Or we're to have to wait until the interims for your kind of first view of how you see it playing?
Well, once we have the information a bit like we did with the strategic defense review in The U. K, we will go out there and say what the impact of our business is once we have clarity, but it is going to take some time. So when you get the regional budget data to determine what the impact on our programs are, but we will get out there as soon as we can.
Yes. Chris, we'll do we do an RNS. We're not going to wait for interims or interim management, so we do an RNS once we've got clarity that we can guide you with.
Sure. And second question around the dividend obviously you provided the two times guide. The reality is obviously earnings have got quite a lot of volatility potentially over the next is that a hard and and fastball? Or should have your flexibility? Would you go below two for one or two years as long as trend?
I mean, the policy as we say around two times. So if the question was have you got wiggle room, we say around two times. But as I said today, even without getting to that escalation settlement, we're still at two times cover. And the earnings guidance we've just given you for next year is for an increase. Clearly, the buyback also helps earnings per share, which gives more headroom for dividend cover.
So I hope that answers the question.
With a £42,000,000,000 order book, we do have pretty good visibility going forward in majority of our business. Thanks. Okay. Do we have any other questions? Anyone phoning in?
Okay. Thank you very much everyone. Thank you.