Okay. Good morning, and thank you for joining us on this webcast of our first half results. The Executive Committee, as usual, is either here in person or in the phone to support Pete and I. So what I will do is I will shortly ask Pete to describe the Group's first half financial performance and full year outlook and then we will take questions. But first, I would like to provide a brief overview of our markets and how we are managing our business through these challenging times.
What you're going to hear is a business operating in a difficult environment for taking the actions necessary to reduce costs, protect and grow margins and generate good cash flow. Despite top line headwind in some parts of the business, we have through these actions further improved the Group's return on sales and we remain committed to our earnings guidance for the year. The Group continues to demonstrate sustained earnings performance and is successfully winning new business in international markets generating order intake that will underpin future sales. To characterize The U. S, we have the uncertainty of how the administration will handle the deficit reduction going forward.
And with defense representing around half of the discretionary spend in The U. S, the defense budget is under the spotlight. Nobody has real visibility as to how this will unfold. Secretary Panetta has however identified £487,000,000,000 of savings over the ten year reduction period targeted by the Budgetary Control Act. We have assumed reductions over this period will be greater than those declared and our current plans are based on a $600,000,000,000 reduction.
This does not address the extreme impact that would result under sequestration, but if you put our U. S. Activities in context, they represent some 40% of group turnover. After allowing for protected areas of spend even on across the board 15% reduction would be just a mid single digit impact to the group's top line. We will take the necessary and appropriate mitigation actions as we have demonstrated in the past.
I will now describe The U. S. Trading environment. Our Support Solutions business is progressing well. We have good visibility in activities such as naval sustainment and we are seeing both new business wins such as our Radford facilities contract and a good pipeline of future opportunities.
In Lands, we are on the right programs. The Joint Light Tactical Vehicle and Ground Combat Vehicle remain funded demonstration phases and we are also moving forward on a number of international prospects. There is also a good awareness of our position as a provider of key industrial capability. We anticipate structurally smaller land forces going forward and although we believe we may be nearing the low point in land activity in The U. S, if necessary we will undertake additional rationalization to ensure we stay ahead of any further weakening in volume.
We have also announced some disposals as we refine our land portfolio. The U. S. Electronics sector continues to be encouraging. Despite pressures, the defense electronics procurement environment has benefited from budget stability in 2012 with no continuing resolution at the start of this year as there was in 2011.
In addition, we continue to see good sustained support in the growth fast lanes such as electronic warfare systems and persistent surveillance. We continue to see good growth in commercial electronics and the team have done a great job reestablishing facilities and recovering post the Johnson City flood. In cyber and intelligence, we are currently seeing lower growth in U. S. Government cyber and intelligence spend with some $2,000,000,000 of bids in the pipeline and with the focus of our activity on supporting key missions rather consulting and outsource manpower, our business remains robust.
We are also seeing some benefit from more activity in the government security sector in The UK. In addition to The UK's secure government work, BA Systems Detica is leading our drive into commercial cyber markets and other secure government markets outside The U. S. We have recently formed three regional hubs and are making significant organic investment in BA Systems Detica as we accelerate our plans to address these new growth markets, including addressing our commercial cyber opportunities in The U. S.
Turning to UK defense, we have good stability and have seen no material program changes since the strategic defense and security review. We have a good backlog in military air, a commitment to enable surface ships plan and visibility through to the 2030s in our submarines business with significant activity well underway on the successor deterrent program. More recently, the UK government confirmation that the defense budget plan was now in balance with the equipment plan was very good news. The business in The UK is performing strongly, the result of improved visibility, good program execution and swift management action to address cost and improve efficiency. Following extensive cost reduction actions over the last three years, further rationalization is continuing this year.
I am determined that this group both in The U. S. And The U. K. Will remain agile and focused in its drive to remain competitive.
Decisions of this nature are not taken lightly, but are essential to maintain a sustainable business. We are sustaining and will continue to sustain our franchise positions, which deliver the intellectual property that drives our success in international markets. We are delivering well on our plans in international markets with several significant wins and good progress on a number of other prospects. Order intake in markets outside The U. S.
And UK was well up in the period and totaled GBP4.1 billion compared to GBP4.8 billion for the whole of 2011. Indeed, have seen the first increase in the group's order backlog since 02/2009. Contributing to the first half increase was the training aircraft and equipment contract for Saudi and the GBP500 million CV90 vehicle contract for Norway. The latter secures the outlook for the Swedish business and we have other good CV90 prospects. The £1,600,000,000 training package for Saudi was not just a large win.
It was achieved ahead of plan having moved from agreed budget in December to cash prepayment and contract effectivity in less than six months. A major achievement in any market and a good indicator as to the pace of activity with this important customer. We are working on a number of additional streams of business in Saudi including support for tornado and typhoon, weapons packages and the anticipated conclusion later this year of an agreement on Salam price escalation. Salam Typhoon aircraft are now in build for a resumption of deliveries next year. Elsewhere, we also see good progress.
We are working towards a contract for 12 new build Typhoons in Oman. Prospects in India are moving closer with Indian government approval to proceed with the U. S. Foreign military sale of M777 artillery. Order intake in India in the first six months was over £300,000,000 a good start towards my target of £1,000,000,000 across 2012 and 2013.
We continue to see additional business supporting the manufacture and operation of the Hawk trainer program in India. We are currently bidding for a further 20 Hawk aircraft and the expansion of their training bases. So in summary, not all planes sailing as you would expect in this financial climate and with the uncertainty in The U. S. However, the business is progressing to plan driven by our focus on cost and efficiency, strong performance from our stable UK business and with some exciting opportunities materializing in international markets, not least being a vibrant outlook in Saudi Arabia.
Thank you. Pete?
Thanks, Ian, and good morning. I will give a trading update as usual and then move on to the 2012 full year guidance. So firstly, in headline terms and compared to the 2011, as expected sales declined by 10% to 8,300,000,000 primarily for the volume reduction in Land and Armaments and for contracted scheduling of Typhoon aircraft on the Salaam program. Despite the sales decline, underlying EBITDA decreased by just 3% to £939,000,000 and underlying earnings per share increased to 18.8p. There was good operating cash flow of £742,000,000 and net debt was reduced to £1,230,000,000 Order backlog increased to £40,000,000,000 despite an adverse exchange translation impact of £400,000,000 And as Ian mentioned, this is the first time backlog has grown since 02/2009.
And finally, the interim dividend has been increased to 7.8p per share, up 4% on the 2011 interim. The twenty twelve first half figures have been affected to some extent by exchange rates, acquisitions made in 2011 and some small disposals from the Land and Armaments business. The average U. S. Dollar exchange rate for the reporting period is $1.58 compared to $1.62 for the 2011.
And appended to the presentation posted on the web are the adjustments made to produce like for like comparisons. Like for like sales reduced by 11% or 1,000,000,000 of which half came from the expected land volume reductions. The impact of there being no Typhoon deliveries this year on the Salaam program amounted to a further £200,000,000 Underlying EBITDA of £939,000,000 gave an improved return on sales of 11.3%. Underlying finance costs were 91,000,000 a reduction of £13,000,000 over 2011. Last year included a charge in respect of early redemption of debt relating to the disposal of the Regional Aircraft Asset Management business.
The goodwill impairment charge taken of £39,000,000 in the half relates to the two land and armaments business disposals completed in July. The effective tax rate for the period was 27% compared to 26% in the 2011. There were a limited number of items impacting the balance sheet in the period. Intangible fixed assets reduced mainly for the amortization and impairment charges taken. Within working capital and as anticipated, advances were consumed on the European Typhoon Tranche two program.
Provisions created in previous years were utilized for costs incurred on the Oman offshore patrol vessel contract and for rationalization. However, significant down payments were received on the new Saudi training aircraft contract and in June, $480,000,000 of advance payments were received from the Saudi customer on the tornado upgrade program. So in the aggregate, working capital was improved by circa £100,000,000 The IAS 19 accounting pension deficit increased to £4,700,000,000 and I'll cover that on the next slide and the deferred tax asset has increased on that higher pension deficit. Net debt was reduced to £1,200,000,000 and all other movements were mainly due to foreign exchange rate translation. 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 18,600,000,000 Liabilities increased by £1,200,000,000 to £24,500,000,000 Real discount rates have reduced by a further 20 basis points in The U. K. And by 60 basis points in The U. S. Since the start of this year on lower bond yields.
And this has increased liabilities by some £1,000,000,000 The usual six months of discount unwind, net of pensions actually paid, accounts for the rest of that increase in liabilities. The aggregate impact of these movements is an increase to the group's tax pretax accounting pension deficit of around £500,000,000 As you'll know, these mark to market movements have no bearing on our scheme funding. As outlined at the prelims, revised funding agreements were reached in February with the trustees of the two largest U. K. Schemes.
And notwithstanding volatility in accounting deficit, these funding agreements are sustained through 2014. Total deficit funding across all group schemes is around £400,000,000 per annum over that period. Cash flow from operating activities totaled £940,000,000 After net capital expenditure of £189,000,000 dividends received of £16,000,000 and pension contributions of £25,000,000 made into the trust mechanism, the operating business cash flow in the first half year totaled $742,000,000 The cash flow performance of the five sectors is shown here, and I'll return to this when I cover the results of each of the sectors. But just one point to note, the total cash outflow for pension deficit funding in the first half year was £236,000,000 The cash outflow at head office contains £170,000,000 of that. This slide sets out the movement in net debt since the beginning of the year.
We started with £1,439,000,000 The operating business cash flow was £742,000,000 Interest and tax payments totaled £124,000,000 And 20 eleven's final dividend, which was paid in June, was $367,000,000 Proceeds from the business disposal completed in the first half year were £18,000,000 and £90,000,000 has been received since from the two land and armaments business disposals completed in July. Exchange translation and all other movements totaled £60,000,000 closing net debt then of £1,230,000,000 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 The total cash inflow for the six months was £200,000,000 New ten year term debt of £400,000,000 was put in place in June and that debt was secured at 4.18% and prudently pre finances debt maturing in 2014, which has a blended rate of 6.3%. Holdings of low cost short term commercial paper were reduced by around £300,000,000 And therefore, at the June 30, total borrowings have increased to £3,300,000,000 cash holdings have increased to £2,100,000,000 and net debt was reduced to £1,200,000,000 In addition to the £400,000,000 of pre financing of 2014 debt, there are a number of short term demands on that £2,100,000,000 of cash.
Much of the remaining commercial paper will be redeemed in the short term. Pension deficit funding in the second half year will be close to £200,000,000 The interim dividend is payable on the November 30 And of the advances that we received in June on the tornado upgrade program, some $300,000,000 is expected to be utilized in the second half of the year. 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 working capital volatility. As a reminder, our approach to capital allocation is that 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.
Investment in value enhancing acquisitions will be considered when market conditions are right and where they deliver on the group strategy. Turning now to the sectors, and I'll cover the year to date performance here and then return to the full year outlook a little later. So to the first of those sectors, Electronic Systems and the figures shown here are in U. S. Dollars.
Sales compared to 2011 decreased by 6% to $1,900,000,000 primarily due to the completion of deliveries of thermal weapon sites as operational tempo driven activity reduces. Within this sector, sales in the commercial avionics business grew by 12%. The $100,000,000 of sales that was deferred from 2011 due to the Johnson City flooding is expected to be recovered in the second half of the year. The return on sales achieved at 13.9% was at the top end of our forecast range, benefiting from good program execution and continued cost reduction actions. Cash conversion of EBITDA in the first half year was similar to last year's and we would expect an improved conversion level in the second half.
The order backlog of $5,600,000,000 was unchanged from the start of the year. The Cyber Intelligence sector comprises The U. S. Intelligence and security business together with Beasys and Adetika. The numbers here are again shown in U.
S. Dollars. In aggregate, sales of $1,100,000,000 increased by 7% over 2011. Growth in the BA SystemsDetika business was 13% and The U. S.
Business, it was 6%. The margin achieved at the half year of 7.6% was after increased levels of organic investment in the Deteca business in support of targeted future growth in commercial and international markets. Cash flow in the first half of last year included the settlement received under the terminated Raytheon E Borders contract. Order backlog at one point six billion dollars was marginally lower than at the start of the year, and we have a significant number and value 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 business and the support solutions business. The numbers here again shown in U.
S. Dollars. We continue to provide transparency of the two businesses within this sector. So, this slide shows the performance of those two businesses. You should note here that the comparative numbers for 2011 have been amended to reflect the transfer made at the beginning of this year of the Protection Systems line of business from Land and Armaments into Support Solutions.
Our transfer was made to better position that line of business to address readiness and sustainment opportunities for Soldier Protection Equipment, Vehicle Seating and Armor Systems and Aviation Seating. So first addressing Land and Armaments. Sales declined by 29% or 26% on a like for like business taking into account the impact of business disposals made and foreign exchange. As we 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 8.5% includes accelerated rationalization charges in respect of the Newcastle site and for certain legal claims.
Margin excluding those charges would have been at 9.4%. With regards to cash flow, investment in The U. K. Munitions facilities continue through this year and cash performance will be second half biased due to the timing of funding on The U. K.
Munitions contract. Order backlog increased to $8,700,000,000 and includes the important Norwegian CV90 contract award. In the Support Solutions business, sales were 2% higher and margin of 8.2% was marginally better than last year's level. Order backlog there increased to $5,600,000,000 following the award for the Radford Army munition plant. In the Platforms and Services U.
K. Sector, sales of £2,700,000,000 reduced compared to 2011 by 13%. There being no aircraft deliveries on the Salam Typhoon program in 2012, completion in 2011 of the South African aircraft deliveries and timing of milestone achievements on the Astute contract. The return on sales of 15.8% has benefited from very strong program execution, particularly on European Typhoon production and on the Type 45 contract as ships successfully enter into service. Some of that performance does relate to earlier than anticipated risk reduction, giving a timing benefit to the first half year from the second half and some which will improve the full year outlook.
As expected, cash performance in the period reflects the utilization of customer advances on the European Typhoon program. And in addition, provisions are being utilized for cost incurred of rationalization and on the Oman OPV program. This has been partly offset by down payments received following the £1,600,000,000 contract award for supply of training aircraft to the Royal Saudi Air Force. And that contract has helped to increase order backlog to £19,500,000,000 Sales in the International business for the first six months of £1,600,000,000 up 10% lower than in 2011 and that reduction is primarily on the Saudi core tornado support program where spares and repairs activity has been pushed back to later in the year. 2012 performance is heavily weighted to the second half as deliveries under the tornado upgrade and core support programs ramp up significantly.
Formalization of price escalation on the Salam Typhoon program has deferred trading until the current negotiations are satisfactory concluded and we remain optimistic that these will be completed within the year. EBITDA was £161,000,000 and the return of sales of 10.2% is in line with guidance. Operating cash flow was very strong and benefited from those accelerated advances on the tornado upgrade program. Order backlog has fallen marginally pending receipt of significant contracts following the budgets approved in December on the Saudi Typhoon and core support program. For reference, there is a chart, a summary chart providing trading performance for the five secondtors along with numbers for HQ appended to the presentation posted on the web.
So this final chart seeks to provide updated guidance for each of the sectors through to the end of this year. And as you'll see, whilst we are light on sales overall, the bottom line is unchanged and we are reconfirming previous earnings guidance for the group in the aggregate. So firstly, Electronic Systems, in the expectation of a continuing resolution operating throughout the 2012, sales volumes are now likely to be marginally below those for 2011, albeit with a different mix. Some 15% of the business is in the commercial avionics market where we are seeing good levels of growth. Deliveries in respect to the sales lost in 2011 from the Johnson City flood have been rescheduled with customers, so should be recovered in the second half of the year.
And on the defense side of the business, we are seeing expected sales reduction from completion of operational tempo driven activity. On margins, we would now expect to be at the higher end of guidance, the range there 12% to 14%, building on the first half performance. Next, Cyber and Intelligence. Sales growth for the year is also now marginally below previous guidance. The U.
S. Business, which is some 80% of the sector, is now expected to a stable year as competitive program awards are taking longer to be placed than expected. Growth in the Deteca business remains forecasted at double digit level, supported by continued expansion into commercial markets. Margins in 2012 are expected to be at the lower end of our 8.5% to 9.5% guidance range, reflecting our continued investment in Detica to support future growth in commercial markets. Moving to Platforms and Services U.
S, whilst the overall guidance is as shown on the chart, this is best considered in two parts. On Land and Armaments, we are adjusting the previous $5,000,000,000 guidance to reflect the various business disposals announced and those businesses contributed sales of around $250,000,000 in 2011 and also to reflect the transfer of the $300,000,000 protection systems line of business into support solutions. For 2012, the sales for Land and Armaments are now expected around $4,300,000,000 On a like for like basis, this is just below our previous guidance, reflecting a lower level of U. K. Support activity and delivery timing on the medium mine protected vehicle contract.
We have accelerated some rationalization from 2013 into this year and as a result, we would now expect margins close to a 9% rather than 10% level. Both the award and timing of key programs such as JLTV will determine the viability of the tactical wheeled vehicle facilities and we will take further rationalization action if needed. In the Support Solutions business, we continue to anticipate 2012 sales to be around the 2011 level with only limited downside from the probable continuing resolution. As expected, customer scheduled activity in naval shipyards is lower this year, but that is being compensated for by new business, including from the Radford Munition Plant award. Margins in the Support Solutions business for the full year are expected to be close to those delivered at the half year.
Turning next to Platforms and Services UK. We continue to expect sales in '12 to be broadly similar to last year's. In line with the contract amendment now received to complete final assembly of the Salaam Typhoon in The UK, aircraft deliveries will recommence in 2013. The second half bias this year arises from the deferred trading from the Salaam price escalation and milestones to be traded on the Astute program as the second boat moves into sea trials. Building on the strong program execution delivered in the first half year, margins for this sector should now be at the very top end of our guidance range.
And to the last of the sectors, Platforms and Services International, with the Saudi customer focused on order placements for amendments, upgrades and new requirements rather than the shorter term operational budgets, some sales previously expected in 2012 will now be pushed out to 2013. Albeit lower than previous guidance, sales will still show good growth around the 15% mark. The second half bias in the year arises from the high level of support to the Typhoon aircraft now in service and increased level of weapon deliveries under the tornado upgrade program. Our margins here are expected to be at the higher end of our guidance range. To complete the 2012 model, headquarters costs are expected to be broadly similar.
Finance costs should be lower following the early debt redemption charge taken in 2011, partly offset by the seven months cost of carry of June's GBP400 million bond issue. The effective tax rate is still expected to be within the 26% to 28% range with the final number dependent upon the geographic mix of profits. So, in aggregate, strong program execution and cost reduction actions have offset the top line headwinds seen in parts of the business. And for the group as a whole, modest growth in underlying earnings per share continues to be anticipated. This assumes a satisfactory conclusion to the Salaam price escalation negotiations in 2012 and excludes the 2011 benefit of the research and development tax settlement.
As to cash and recognizing the first half performance, a higher level of operating business cash inflow is planned in 2012 compared with 2011, including the anticipated benefit of the cash payment related to the Salarm program. Thank you. Liam? Okay.
Thank you, Pete. We will now take questions.
Thank you. You. Our first question comes from Christian Loughlin from Barclays. Please go ahead with your question.
Hi, good morning gentlemen. Thank you for taking my questions. Just a couple brief ones. One, going to Land and Armaments, could you provide some additional color on what exactly was behind the sales decline that we saw this year? I mean, I think FMTV came in and MRAP were largely factored in, but I know sales were even weaker than that.
So over and above those items mentioned, could you provide some commentary on what else is behind that? And then sequestration aside, when do you see the trough in the sales growth profile in this business?
Okay. Well, we'll take it in two parts. I'll ask Peter to answer the second question. On the first question, what we have seen in reduced demand is largely in The UK and UK support in Land and Armaments. It's not The U.
S. Support business, it's The UK support as The UK has been revising what its full structure for the land is going to be going forward. So we have seen some reduced volumes there, which is why as we say, we're taking the action to accelerate some rationalization from 2013 into 2012.
Just to add to that, I mean, to be clear, because I'm sure we're to get the question in a while, the outlook for the year in terms of the perception on further weakness, just to be clear, we were at £5,000,000,000 If you take out the impact of the disposals we made in the first half and just announced in July, they would have contributed about £200,000,000 of sales this year. And we've had the £300,000,000 transfer from in respect to the Protection Systems business from Land into Support Solutions. So on a like for like basis, we're saying five is 4.5 and the guidance here we're now saying is 4.3. And to Ian's point, we're seeing some weakness in UK support activity and there's one particular program MMPV where we're some sales moving out of 12 into 2013. So it's 4.3 against 4.4.
So on our franchise positions in The U. S, particularly on Bradley, the activity has been pretty strong. And I think maybe just ask Linda to comment. I think we recently sort of signed up for the next phase of the Bradley program, haven't we?
Yes. We just got done yesterday that we had finalized the contract with the U. S. Government for another six forty five million dollars on the Bradley program, excuse me. So the Bradley franchise remains funded and very strong and moving forward.
Okay. Thank you, Linda.
On the second question, which was around the sort of when do the sales bottom out, it's probably just worth what is in land, because I think there's the perception that this is all around U. S. Vehicles. If you split out those first half sales of £2,000,000,000 about £1,000,000,000 is on tracked and wheeled vehicles in The U. S.
What you've also got is the volume going through in The U. K. On the munitions contract on support, which is about $400,000,000 We've got the Sweden and South Africa, are largely export driven models, which contribute another £300,000,000 We have the naval guns business in there as well and we have the protection systems sorry, the remaining first half $100,000,000 from the individual protection systems business. So if you're looking for how much more can this business reduce, if you're just focusing on The U. S.
Piece, it's $1,000,000,000 of vehicles business in the first half, roughly $2,000,000,000 over a full year. So this is not at the level that we saw back in 2009 when this business was sort of around $8,000,000,000 which is why we've taken so much cost out of the business.
Okay. Does that answer your questions?
It does. And if I could just conclude with one more additional question. Just in general, what is your view on the survivability of major U. S. Army land programs such as GCV and JLTV in the medium term and the risk of funding timeline shifting drastically to the right they do to survive this next round of budget scrutiny intact?
Well, all we have in our plans going forward are the demonstration phases at this timeframe. I mean, they're fairly extended programs and so it takes a while for budgets to ramp up. I mean, you could argue that if they're going to maintain their heavy brigade capability, they are going to have to do something continuing on the likes of the Bradley franchise, which is why we've been very careful to make sure that we're sustaining the industrial capability to support that franchise.
Okay. Great. Thank you very much.
Okay. Next question.
Thank you. Our next question comes from Robert Stellard from Royal Bank of Canada. Please go ahead with your question.
Hi, Robert.
Good morning. How's it going?
Not too bad. Yourself?
Good. Thank
you. Ian, I thought
we'd kick off on a comment you made about Electronic Systems. There have been some impact in this division from lower op tempo presumably in The U. S. Looking forward, as we anticipate true pull down in Afghanistan, what sort of exposure have you got left to operational activity there overseas and where do you see that going?
We will perhaps ask Tom Arsenault who is on the phone to answer, but I'll just lead him in while he thinks of his answer. I mean, we had very little left on operational tempo in our profile. There's a little bit in our cyber, but even that is quite small. For this was for counter IED type work. But in terms of our electronic systems, really was these thermal weapon sites.
Tom, would you just give a comment on that and how you see progress is going on your fast lanes?
Yes. I'd be very happy to comment on that Ian. Good morning.
Good morning.
Hi. We have for some time been following the downturn in off tempo and has had its effect on parts of our business related to soldier oriented electronics things like thermal weapon sights and other handheld electro optical devices. We have pretty much reached the end of production on those programs at this point in time. So there's very little additional exposure that we see. We had also some exposure to electronics provided for vehicle applications.
And so that has come down as well. In the meantime, much of our attention has shifted to electronic warfare. You can imagine that with the change in focus on the part of the U. S. Department of Defense toward an Asia Pacific more sophisticated threat, warfare has been an area growing emphasis and one in which we are well positioned with legacy dating back some fifty, sixty years.
And so that has been a change in focus as well as continued emphasis on persistent surveillance where the ISR sector continues to enjoy much attention. And so I think it's safe to say that the op tempo related decline has come to an end and now we're shifting our focus in these two areas of as we call pathway.
Okay. Thank you, Tom. Robert, does that cover your question?
Yes. Thanks for that. And secondly, a quick one for Pete if I may on the guidance. You cut your sales guidance in four of the five divisions, but your margin guidance overall seems to be fairly similar to what it was six months ago. Is it fair to say that you're now expecting perhaps margins to be towards the top end of the range to still arrive at this modest growth in EPS?
Yes. I think your summary is a good one. We are guiding down slightly on sales. But if you look at those margins with top end on electronic systems, Cyber and Intel will be slightly lower as will the land, not that much. But then in The U.
K, we'll be right at the very top end and international also at the higher end. So you sort of get to a bottom line sort of earnings before interest and tax, which unchanged in terms of guidance. So sales slightly down, margins higher.
So the business operationally is performing well on all its programs.
Yeah. Okay. Thanks very much.
And we're winning good new business. Okay. Next question.
Thank you. Our next question comes from Carl Walton from Bank of America Merrill Lynch. Please go ahead with your question.
Good morning, everyone. I just had a clarification and then a couple of questions. Just a clarification on The UK platforms and services. Mean just about the same lift from the first half. You mentioned that I think you said there was a timing benefit in the first half versus the second half.
But just to be clear, did you say that that was kind of increased guidance for the full year? So just a clarification there. And then questions after that. First on sequestration, it seems as if would you I mean, you say you are being more cautious now compared to FY twenty eleven results? I think we've seen more caution coming into what some companies have been saying.
So I just wondered if you had in your eyes increased your caution there. And then final question just on the cyber business. It looked like a sort of 8% underlying margin. I mean you mentioned the increased investment for Detka. But just wondering how you think progress on to the midterm guidance for that business, how you think that's evolving at the same pace you thought or does that look a bit slower?
Thanks for that.
Okay. Well, let's do it in reverse order. We'll do the securitization and cyber and then Peter can clarify the others. I mean, on cyber, I mean, the investment is going in because we are seeing growth in excess of what our previous plans were. And so we are investing particularly heavily into getting into the commercial markets.
In Deteca this year, government activity has been pretty buoyant, probably off the back of quite a bit of activity around the Olympics as you might imagine, but that is sustaining going forward. So our government franchise is strong and we're very excited about the prospects that we have getting into the commercial areas, in particular driving into The U. S. Commercial area. You know, we're very strong in government activity through our intelligence and security business there, but we now are going to focus on The U.
S. Commercial. So we're more excited, which is why we're spending the organic investment. Linda, do you want to sort of because sequestration is a moving piece. I mean just remember, we've always said that in our planning assumptions, we were always working on the basis of a $600,000,000,000 reduction as opposed to the $487,000,000,000 declared by Secretary Panetta.
So we've not changed our planning assumption. But so how are all the moving parts going in all this then Linda?
Well you did summarize our planning assumptions quite well. We decided about a year ago that it was prudent to be conservative in what we were assuming with regard to future budget cuts. So we factored into our plans a bit more reduction than the original Budget Control Act reduction and that continues in our baseline plan today. So I don't know that I would characterize it as being more conservative. We were conservative last year and that has continued.
Trying to figure out exactly what's going to happen with sequestration is a bit of anyone's guess. But in the last week, some information has emerged that I would say reinforces many of the assumptions that we've made. We've heard from the Department of Labor. We've heard from the Office of Management and Budget and in testimony before Congress that whatever sequestration happens as currently required by law, the likelihood of the way it gets implemented will be to some degree more gradual than perhaps we expected. So I think the prudence and the assumptions we've made so far are consistent with what we may very well see even if sequestration goes into effect.
And when you talk to people around Washington, don't think anyone expects sequestration in its current form to actually happen. There is an expectation that some further cuts will happen as part of some kind of an agreement going forward whether it happens before the election in the lame duck congress or after the new congress gets into session after the first of the year. So it's my view that we are prudent and no reason at this point in time to change our assumptions.
Okay. Thank you, Linda. Peter, do you want cover the Yes,
couple of other points. In terms of the margins on Cyber and Intel business, our U. S. Business continues to operate at high single digit margins. We see no reason why that can't be sustained.
And on the Detica business where we are putting a lot of organic growth, when we bought Detica and then ETI and NORCOM, those businesses were all operating in the sort of 12% to 14% range. So over time, to your question about where should the medium term outlook for those businesses be, we should be able to get those businesses back What's key at the moment is to invest for the top line and we'll do that through this year and also through next year. The question the clarification question around Eurofighter and Type 45, yes, you're right. There is a mix in there. Some of the risk retirement on those two programs we've achieved earlier.
So whereas we would have expected to deliver some of it in the second half, we've it in the first. And the full year outlook where our guidance range is 10% to 12%, we are now steering the very top end of that range. Mean, it might just be worth a bit of color. On the European Typhoon Tranche II and the Type 45 program, those programs in total are about £10,000,000,000 So when we trade margin on those programs as we retire risk, we are always going to get some lumpiness. We're not going to get a nice smooth profit profile.
We trade margin when retire risk. So we are likely to see this sort of lumpiness. But on £10,000,000,000 of the contracts, this not unsurprising.
And if you think about the cost reduction and efficiencies that we've been driving through the business for the last three years, you're now starting to see the benefits coming through in these very high performing programs.
Thanks very much guys.
Okay. Thank you. Next question.
Our next question comes from Nick Cunningham from Agency Partners. Please go ahead with your question.
Have this mental picture of you with your hand in the area, Nick. I'm looking for you in the audience. Thank you.
Too many years of doing it. Same for me. I'm sort of perhaps coming from a bit from experience. You worry when you make kind of lazy assumptions if you like. And I've tended to assume that once FTSR is done in The UK, The UK sort of done and dusted and it's all okay going forward.
And indeed for you, that seems to be turning out that way. But the Tier two and three players are beginning to complain about the new process in Whitehall, particularly the whiteboard process, you like, the non core definition of some of the programs. Are you okay because everything you do is inside that core ring fence and is therefore now well funded? Or do you have some exposures? Are there any bits of BAE in The UK that we need to worry about, say in the form of support for example, that could be adversely affected over the next couple of years by a cash squeeze?
I think we always I mean your observation is quite right that we always said very early on in this process of the SCSR and their planning process that we BA systems would get extreme visibility from this process because of the major programs that we were working on. But the government needed to be careful that it didn't introduce processes and structures, which then compromised the SMEs and the Tier two and the Tier three players, because they would not have the same visibility that we had. So you're right to say that we have been consistent with the visibility that we've got and consistent with the approach that we've taken and the results that we've got through the SDSR. So you shouldn't be worried about anything about that. But perhaps to just ask Nigel Whitehead to just comment on what is it that we're still waiting on decisions or where we're working with the government on?
Thanks, Ian. Hello, Nick. Yes, the SDSR provided a great degree of certainty and indeed the comments that were made by the Secretary of State when he announced the balanced budget have also provided further certainty in particular around the Type 26 program, the successor program, further confirmation of Astute and with the variant choice of the JSF aircraft for The U. K. Confirmation that they anticipate the two carriers will be operational.
So that has provided further clarity. With relation to further programs beyond the things that have been confirmed today, then the political statements around the commitment to further development of Typhoon have been welcomed. And equally the announcement within the last few days of the early stages of a joint demonstration program across the Anglo French relationship again very positive. It's not clear to me exactly how much budget has already been assigned for that and I wouldn't expect them to tell me in any detail at this stage, but certainly signs are positive.
Peter, so what order book cover do we have? Maybe give Nick a bit more confidence Just to give
you some confidence, Nick. I mean, excluding of or the effect of Salam escalation, then this year we've got clearly with only six months left, you'd expect this number. We've got 97% coverage of sales in the order book. And if you look to next year, it's in excess of 90%. Our five largest programs Typhoon, Carrier, JSF, Subs and Type 45 gives two thirds of the sales in this business.
So to Nigel's point, we're not looking for a lot of new awards to meet the guidance that we're giving here.
And the types of discussions that we're having on the future contracts, I would say is business as usual. We would always be having those conversations about next phases of unmanned technologies or areas like that.
Could I just follow-up on one point of detail, which is on the TOBA? I believe HMG is struggling a bit to find enough revenue to meet its TOBA promises. How does it a, do you think they'll find something to fill that gap? Or b, if they don't, how does it then work?
Well, there's three things that have to happen in October. One, there was an underlying core program of work and we have much more clarity now the Type 26 program is defined and the carrier program is getting defined than we had before and we're putting those planning assumptions in the mix. We then had to hit our cost reduction targets, so it made an affordable set of industrial capabilities relative to the program and we're ahead of our plans. And then we had to agree with them a set of industrial capabilities, which supported those future plans. And that's what the bit that we're now working on to define what it is that Vetoba should protect going forward.
And all of those are in the mix and that's what we're working on. But getting the defined program and a balanced budget and a balanced set of programs was a key enabler to that. So we were always going to be where we are. We've met our requirements and the government is meeting its requirements.
Thank you. Our next question comes from David Perry from Goldman Sachs. Please go ahead with your question.
Yes. Good morning, gents.
Good morning,
I've got a few questions. They're all kind of related to the same thing. The first one is this, in your full year guidance, you are assuming just to confirm, you are assuming you signed the Al Salam agreement for the second batch of Eurofighter, is that right? No. You're not assuming that?
No. We are assuming that we close out the escalation pricing on the first batch of Typhoon aircraft for Salam.
And does that have an impact on EBITA?
Yes. Yes.
Okay. Now if you can just bear with my train of thought here. If we look at the EBITA that you didn't get last year because you didn't conclude that and we assume it comes this year, I would guess it's about 150,000,000 Okay, I might be wrong, but I think it's in that region. Now you've given us guidance of a 12% margin for the full year in U. K, Programs and Services U.
K, where I think you take that profit. So you're implying a 9% margin in H2. And it looks like just under half of that is the Alsalam price escalation. Am I barking up the wrong tree, but it seems to me that the core UK business would have a 5% margin in the H2 without the Alcillap or am I thinking on the wrong lines here?
Yes, you're thinking along the wrong lines, David. Mean, we are not going to it's prejudicial to commercial negotiations to discuss pricing and margin on this contract at this point. So we've given our guidance that is subject to delivery of the escalation on the first batch, but we're not going to get into pricing and margin discussions.
Would it be fair to say that signing that deal is material to your full year guidance or not material to your full
That's why we've made the statement that we have in the full year guidance.
Sorry, which is what?
Which is the guidance is supported by closing the escalation agreements with the Saudis.
Am I right that that EBIT if you sign it is taken in The U. K. Business or is it taken in the
international It's taken in both businesses. The contribution is split between the manufacturing content that goes in from The U. K. Business and then the balance which gets supported as the prime contract through the Kingdom Of Saudi Arabia.
Is it broadly equal or is it not by
David, we're not going to go into the details of our commercial arrangements on this program.
No, it's just that we have an incredibly volatile margin progression in programs and services UK. Was just trying to figure it out. Okay. My second question relates to that is, can you just tell me what are the risks? Are you quite confident that the pricing escalation contract will be signed?
Or is it what are the risks that it wouldn't happen?
We are confident that we will close this out in the second half or perhaps I'll ask Guy Griffith here is just to talk about the progress that we've made without going into the detail of the commercial settlement, Guy.
Right. We've always emphasized that the important thing was to do the right deal rather than a quick deal. That having been said, the pace of discussions during the first half on the escalation negotiation has really ramped up. And there is a real sense of determination I think both on our part and the customer's part to get this behind us before the end of this year, so that we can actually concentrate on more strategic sort of operational issues which are of importance to the Royal Saudi Air Force. An indication I think of the ramp up of activity is that we're now into the holy month of Ramadan in Saudi Arabia.
Normally that would be a period where actually things slow down. I can tell you that the pace of activity is being sustained on this negotiation and the other contract award negotiations that Ian referred to as we go through that month. So I am personally confident we will reach a settlement by the end of the year.
I think you just the point that Guy refers to is that you remember at the end of last year, the King approved $16,500,000,000 of budgets associated with this program, of which what we've resolved so far this year is we've resolved the training aircraft as you say, turning that from a budget to a contract and effective contract within six months, sorting out these unbudgeted items relative to the original Salam program. And now we have to focus on the support, the long term support and other upgrades on the program. So there are big budgets agreements. Then we have to sort of focus on the next batch of typhoons and the support of the existing batch of typhoons. So there's an unprecedented volume of activity.
And as Guy said, people are working very hard through this process. The relationship is very strong and proactive.
All right. Thank you for that.
Thank you.
Thank you. Our next question comes from Ben Fiddler from Deutsche Bank. Please go ahead with your question.
Yes, morning.
Good morning, Ben. A
few questions if I could, as per usual I'm afraid.
We'd be disappointed if there weren't Ben.
Well, I'll try and make it through. Thanks for the comments from Guy just over the progress on the repricing. I wondered if you could of the Eurofighter, wondered if you could also just share with us your expected timeline for some of the other orders that you potentially see coming this year, particularly Oman, the confidence level that, that actually gets done and signed and delivered by the year end? And also this quite sizable Saudi support for the tornado, the extension of that, how confident you are that we reach conclusion of that by the year end? That's the first question.
The second one on cash flow. Pete, thanks for taking us through the scale of outflows that you see in the second half. I wondered if you could also help us just understand some of the good news on the other side, if there is any, of any potential inflows that you see helping the cash in the second half and where we should think of year end net debt potentially coming out at? And the final question was just on restructuring costs. What was the overall level of restructuring costs that you took in the first half?
How did that compare year on year? And can you just help me understand what you expect for the full year restructuring costs? Thank you.
Okay. Well, Peter thinks about the last two. We'll ask Guy to stand up again and then I'll ask Alan Galwood to talk about Oman.
Right. I think as far as the Saudi activity is concerned, beyond the price escalation negotiations that we just talked about, there are probably other three sort of big components of order intake that we would anticipate before the end of this year. The first is really linked to the aircraft, the training aircraft contract that we secured in the first half. There is then a package of work which relates to the training services that we would supply to the Saudi Air Force utilizing those aircraft. We're negotiating them under five year deal for the provision of those services and we would expect that to go to contract in the second half.
Secondly, there then is a series of weapons procurements for both Tornado and Typhoon, which we'd expect to go to contract in the same period. And then thirdly, on the Salam program, we are negotiating at the moment an extension of the existing three year support arrangement for those aircraft. And again, we'd expect that to come to contract in the second half.
Okay. Alan, Oman?
Thanks. Well, I think we've had two significant milestones recently. We had the meeting between His Majesty Sultan Caboose of Oman and Prime Minister David Cameron where both governments committed to getting the Typhoon deal done this year. And over the last few weeks culminating in the Faram Rare Show, we've had extensive meetings with the Omani Minister of Defense and the Chief of the Air Force. We have an agreed negotiating time scale, which will start this month.
And pretty much as Guy said in Saudi, the Oman is working through the Holy Month of Ramadan and we're seeing very high level of activity. So we're confident we can get it done this year.
Okay. Thanks, Alan. Ben on the cash flow.
The second half cash flow, our normal model of can we turn our EBITDA into cash and the headwinds we've got is around the pension, we've got another £200,000,000 of deficit funding to go through. I mentioned that £480,000,000 we got on the tornado program will burn about 300,000,000 of that in the second half. We continue to utilize Oman and rationalization costs in terms of using spending the cash and charging the cost against the provisions. And we will continue to utilize advances on the European Typhoon program. So most of that profit return to cash is being matched by those outflows.
In terms of the upsides, clearly the outcome of the Salaam escalation negotiations will be a determinant factor. We've got to get through the pricing, make sure that's satisfactory. Once we've through the pricing, we then got to negotiate how that pricing gets funded. Would it be over the life of the program? Would it be on aircraft?
Will it be a lump sum, the rest spread? That will be a second negotiation. And then the final determinant will be around the Oman Typhoon program and the timing of that award as to any down payment that we will get with that program. If we get it secured this year, we'll get the down payment this year. If not, it will move into the first half of next year.
In terms of restructuring charges, I haven't got the first half second first half comparative numbers like for like, but the only real difference is on land where as I mentioned, we've accelerated charges in respect of the Newcastle site. Other than that, it's a pretty steady level.
And just coming back thanks, Pete, on the moving pieces of cash flow. My brain isn't big enough to kind of compute all of these issues. At the end of the day, what sort of range of net debt outcomes do you see for the full year? Are you able to comment on where that could be? I know it depends on a number of different scenarios, but just if it's a range, just help us understand it.
Well, you look at what we've delivered at the half year, in our guidance we say that operating cash flow will be better than last year's. We delivered £742,000,000 of operating cash flow in the first half of this year and it was £634,000,000 in the whole of last year. So really to your point is going to come down to second half performance. If you work on the basis of our the EBITDA turning to cash flow is pretty much offset by those items I outlined just now. Then if you take the tax interest and dividend payments we have in the second half year, which is about £05,000,000,000 If we get the Salaam cash in, then the net debt we have today will be broadly the same.
Does that answer your question?
Thank you very much.
Yes. Okay. Well, I'm glad you followed that Ben. I was struggling a bit there myself. Okay.
Questions.
Thank you. Our next question comes from Charles Armageddon from UBS. Please go ahead with your question.
Hi. Hi, Actually, it was
pretty much what Ben's question was and I
don't have enough time to press star two, so I apologize, already been answered.
Okay. Thank you, Charles.
We like those questions, Thank
you. Our next question comes from Zafar Khan from Societe Generale. Please go ahead with your question.
Thank you very much. Good morning, Good morning, Zafar. I've got three really brief ones for Pete and then a philosophical one for you Ian if I may.
You better give me mine first so I can think about it.
Okay. Well, the question I was going to put to you was really just to discuss the BAE valuation compared with your international peer group. And the question I wanted to ask you is one, do you believe that you're substantially undervalued against the peer group as some of us do believe? And if you do agree with that, then what do you think are the reasons for that undervaluation in your view? And how do you think you may be able to close that valuation gap in time?
So that's one for you, Ian. If you could please just ponder that. And the brief ones were really just on the it was really a follow on from David's question on the margin in The U. K. Platforms and services.
I understand this year will be higher end of the range because obviously of the risk retirement that you're enjoying on these programs. But what is the kind of longer term level that we should be thinking about? Because you're not going to get this risk retirement every year. It's lumpy. So just in terms of what is the most sustainable margin in the Land and Systems U.
K. Sorry, Platforms and Services U. K. And then I wanted to talk about the overseas contracts that you're bidding for. Just want to think about the margin prices there because FINMAK keep warning about the very severe price pressures on overseas bids.
And I just want to know what your experience is on that. And then the third one is really on the Land and Systems. There's been quite a big contraction in sales and that does look structural to me. Now if I remember correctly, you did take a write down on these assets 2010, if I remember correctly. I'm just wondering, is there another write down due on these businesses?
Do you want to do yours first or I should do mine I'll just turn to mine.
Go on, I'll do mine first. I mean, I think in terms of where we are relative to our valuations, for me it's about three things. One is the order book and generating the international orders and the maintaining of our franchise positions, because since 02/2009, we've not had an increase in the order book. And we've been talking about these international prospects and these maturing of both our home markets and our other markets. And what we're coming up to is that period in 2012 and 2013 where these are going to turn into absolute firm business.
As you will have seen in the first six months, the Internet or the non U. K, non U. S. Order intake of £4,300,000,000 compared to £4,800,000,000 for the full year. If you listen to what Guy was saying and Alan was talking about Oman and the continued prospects in Saudi, you can see that there's going to be a step change in our order intake and our order book through that process.
And until that in these current climates until you deliver some of that, I don't think you're going to be attributed to the value that your business is worth. And so for us that's why we're focusing on that metric. I think there was also a bit before where when we didn't have a sectorial analysis down to the different dynamic businesses, there was a bit of you're obfuscating the facts and so we've given that analysis. That obviously gives different challenges because it gives you warts and all movements. We're now taking you through and you will see that the strengths of those businesses will come through even in these difficult climates.
And then the final bit is, is this the bottom on land? Where is land? And I think as we say and we're getting to the end of the cycle that we might be talking about some variances, but they're small variances. And we are and I can assure you, we are protecting our franchise positions, which will secure our business for the future and our international business. So I think it's the whole mix of those things.
How long will it take? I don't know. I suspect until people get through the other side of sequestration and what does that mean on budgets. But it's not impacting our desire and our will to continue to deliver our strategy and do the right thing for our business and our shareholders and that's what we are committed as a team to doing.
Coming back to your specifics, Zaf, on The U. K. Margins, our guidance range is 10% to 12%. It's probably not just an in year guidance, it's more sustainable. And really it comes down to the cycle where you are in development programs versus production programs.
On development programs, we take less risk and therefore you're likely to see lower margins. If you're in development cycle, you'd be at the bottom of that range. If you're in the production cycle and maturely through the risk profile on those programs, then we'll be at the top end. And at the top end is where we are now. But on a sustaining basis, I think our range of 10% to 12% holds.
On the overseas bid margins, was there any particular bid that you're referring to? Is it just generally?
Just a general I'll make a comment. We do not take overseas bids as loss leaders. They are all generating normal margins for our business. If you remember that where we're succeeding in pricing Typhoon in Oman and The Kingdom Of Saudi Arabia, These are sort of government to government arrangements and the U. K.
Government underwrites the relative sort of pricing structures of these relative to what they would pay. So what Fin Mechanic is saying, I don't know. It's up to them what they're saying, but I can assure you in overseas markets we are bidding as we have always bid into those markets and we'll make more normalized profits relative to our government, The U. K. And U.
S. Government business.
Your final question was around land and the charges. And I guess you're looking at the level of goodwill.
That's what I'm looking at. I'm just wondering if perhaps you should be taking another write down on that.
Yes. I mean we do our goodwill impairment reviews every year once we go through our five year planning cycle. We do that in the second half. And to your point, yes, we did take about $1,600,000,000 back in 02/2009, which is really around the Armour business in respect of the FMTV contract and on the products business. We still have a fair amount of headroom in terms of those goodwill impairment tests we take.
Sequestration, where that may take us, we'll have to take a look at to what our long term assumptions are. But with the businesses, again, back to the point I made earlier, with the businesses sort of around the $4,000,000,004,500,000,000 which only half is actually in the land vehicle sector, then the downside is probably limited. So if you went through all our goodwill, where's the area of weakness, you're right, it's probably in land. But where we are today, we don't believe we need to take another charge.
Okay. Well, thank you very much for all of that. That's very helpful.
Okay. Thanks, Nav.
Thank you, Alf. And our final question comes from Jeremy Bragg from Citi. Please go ahead with your question.
Good morning, guys.
Good morning, Jeremy. Good morning.
I've got a pretty basic one, please. You had a fair slug of cash coming in, in the International division in the first half. Can you just confirm that, that's separate to and distinct from the cash that will come in when you negotiate or when you finish the negotiations of the Salam deal, I. E, the kind of 500,000,000 was the number that I was thinking about?
Yes, confirmed.
Thank you. We have no further questions on the phone at this time. I'd like to hand the floor back to Ian King.
Okay. Thank you, everyone. Thanks for coming into the call. Hope it worked for you and that we managed to get through all the questions. So thanks very much.
Have a good day.