Good morning, everyone, 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. 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. 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 are going to hear is a business operating in a difficult environment, but 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. 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 billion of savings over the 10-year reduction period targeted by the Budget Control Act.
We have assumed reductions over this period will be greater than those declared. Our current plans are based on a $600 billion reduction. This does not address the extreme impact that would result under sequestration, if you put our U.S. activities in context, they represent some 40% of group turnover. After allowing for protected areas of spend, even an 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 Land, we are on the right programs.
The Joint Light Tactical Vehicle and Ground Combat Vehicle remain funded in the demonstration phases. 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, 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. electronic 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 GBP 2 billion of bids in the pipeline, and with the focus of our activity on supporting key missions rather than consulting and outsourced manpower, our business remains robust. We are also seeing some benefit from more activity in the government security sector in the U.K. In addition to the U.K. secure government work, BAE 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 BAE Systems Detica as we accelerate our plans to address these new growth markets, including addressing commercial cyber opportunities in the U.S. Turning to U.K. defense. We have good stability and have seen no material program changes since the Strategic Defence 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 programme. More recently, the U.K. government confirmation that the defense budget plan was now in balance with the equipment plan was very good news. The business in the U.K. 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 U.K. was well up in the period and total GBP 4 billion compared to GBP 4.8 billion for the whole of 2011. Indeed, we have seen the first increase in the group's order backlog since 2009.
Contributing to the first half increase was the training aircraft and equipment contract for Saudi and the GBP 500 million CV90 vehicle contract for Norway. The latter secures the outlook for the Swedish business, and we have other good CV90 prospects. The GBP 1.6 billion 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 a U.S. foreign military sale of M777 artillery. Order intake in India in the first six months was over GBP 300 million, a good start towards my target of GBP 1 billion 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. In summary, not all plain sailing, as you would expect in this financial climate and with the uncertainty in the U.S.
The business is progressing to plan, driven by our focus on cost and efficiency, strong performance from our stable U.K. business, and with some exciting opportunities materializing in international markets, not least being a vibrant outlook in Saudi Arabia. Thank you. Pete.
Thanks, Ian, good morning. I will give a trading update as usual, then move on to the 2012 full-year guidance. Firstly, in headline terms compared to the first half of 2011, as expected, sales declined by 10% to GBP 8.3 billion, primarily for the volume reduction in Land & Armaments and for contracted scheduling of Typhoon aircraft on the SALAM program. Despite the sales decline, underlying EBITA decreased by just 3% to GBP 939 million, underlying earnings per share increased to GBP 0.188. There was good operating cash flow of GBP 742 million, net debt was reduced to GBP 1.23 billion. Order backlog increased to GBP 40 billion, despite an adverse exchange translation impact of GBP 400 million. As Ian mentioned, this is the first time backlog has grown since 2009. Finally, the interim dividend has been increased to GBP 0.078 per share, up 4% on the 2011 interim.
The 2012 first half figures have been affected to some extent by exchange rates, acquisitions made in 2011, some small disposals from the Land & Armaments business. The average U.S. dollar exchange rate for the reporting period is $1.58 compared to $1.62 for the first half of 2011. 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 GBP 1 billion, of which half came from the expected land volume reductions. The impact of there being no Typhoon deliveries this year on the SALAM program amounted to a further GBP 200 million. Underlying EBITA of GBP 939 million gave an improved return on sales of 11.3%. Underlying finance costs were GBP 91 million, a reduction of GBP 13 million 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 GBP 39 million in the half relates to the two Land & Armaments business disposals completed in July. The effective tax rate for the period was 27% compared to 26% in the first half of 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, as anticipated, advances were consumed on the European Typhoon Tranche 2 program. Provisions created in previous years were utilized for costs incurred on the Oman Offshore Patrol Vessel contract and for rationalization.
Significant down payments were received on the new Saudi training aircraft contract, in June, GBP 480 million of advanced payments were received from the Saudi customer on the Tornado upgrade program. In the aggregate, working capital was improved by circa GBP 100 million. The IAS 19 accounting pension deficit increased to GBP 4.7 billion, I'll cover that on the next slide, the deferred tax asset has increased on that higher pension deficit. Net debt was reduced to GBP 1.2 billion, 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 GBP 18.6 billion. Liabilities increased by GBP 1.2 billion to GBP 24.5 billion.
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. This has increased liabilities by some GBP 1 billion. 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 pretax accounting pension deficit of around GBP 500 million. 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 this year with the trustees of the two largest U.K. schemes. Notwithstanding volatility in the accounting deficit, these funding agreements are sustained through 2014. Total deficit funding across all group schemes is around GBP 400 million per annum over that period.
Cash flow from operating activities totaled GBP 940 million. After net capital expenditure of GBP 189 million, dividends received of GBP 16 million, and pension contributions of GBP 25 million made into the trust mechanism, the operating business cash flow in the first half year totaled GBP 742 million. The cash flow performance of the five sectors is shown here, I'll return to this when I cover the results of each of the sectors. Just one point to note, the total cash outflow for pension deficit funding in the first half year was GBP 236 million. The cash outflow at head office contains GBP 170 million of that. This slide sets out the movement in net debt since the beginning of the year. We started with GBP 1,439,000,000. The operating business cash flow was GBP 742 million. Interest in tax payments totaled GBP 124 million. 2011's final dividend, which was paid in June, was GBP 367 million.
Proceeds from the business disposal completed in the first half year were GBP 18 million. 90 million has been received since from the two Land & Armaments business disposals completed in July. Exchange translation and all other movements totaled GBP 60 million, closing net debt of GBP 1.23 billion. This next chart shows the gross debt, cash, and net debt of the group. At the start of the year, borrowings amounted to GBP 3.2 billion, with cash held at GBP 1.8 billion, giving a reported net debt of GBP 1.4 billion. The total cash inflow for the six months was GBP 200 million. New 10-year term debt of GBP 400 million was put in place in June. That debt was secured at 4.18% and prudently prefinances debt maturing in 2014, which has a blended rate of 6.3%. Holdings of low-cost, short-term commercial paper were reduced by around GBP 300 million.
Therefore, at the 30th of June, total borrowings have increased to GBP 3.3 billion, cash holdings have increased to GBP 2.1 billion, and net debt was reduced to GBP 1.2 billion. In addition to the GBP 400 million of prefinancing of 2014 debt, there are a number of short-term demands on that GBP 2.1 billion 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 GBP 200 million. The interim dividend is payable on the 30th of November. Of the advances that we received in June on the Tornado upgrade program, some GBP 300 million 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 2 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's strategy. Turning now to the sectors. I'll cover the year-to-date performance here and then return to the full-year outlook a little later. To the first of those sectors, Electronic Systems. The figures shown here are in US dollars. Sales compared to 2011 decreased by 6% to $1.9 billion, primarily due to the completion of deliveries of thermal weapon sights as operational tempo-driven activity reduces.
Within this sector, sales in the commercial avionics business grew by 12%. The $100 million 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. We would expect an improved conversion level in the second half. The order backlog of $5.6 billion was unchanged from the start of the year. The Cyber & Intelligence sector comprises the U.S. intelligence and security business together with BAE Systems Detica. The numbers here are again shown in US dollars. In aggregate sales of $1.1 billion, increased by 7% over 2011.
Growth in the BAE Systems Detica 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 Detica 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 $1.6 billion 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. Cyber & Intelligence business awaiting award decisions. The U.S. Platforms & Services sector aggregates the Land & 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. 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 & Armaments into Support Solutions. That transfer was made to better position that line of business to address readiness and sustainment opportunities for soldier protection equipments, vehicle seating, and armor systems and aviation seating. First addressing Land & 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, Caiman, 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 $8.7 billion 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 $5.6 billion following the award for the Radford Army Munition Plant. In the Platforms and Services UK sector, sales of GBP 2.7 billion reduced compared to 2011 by 13%, there being no aircraft deliveries on the Salam Typhoon programme 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 costs incurred of rationalization and on the Oman OPV program. This has been partly offset by down payments received following the GBP 1.6 billion contract award for supply of training aircraft to the Royal Saudi Air Force. That contract has helped to increase order backlog to GBP 19.5 billion.
Sales in the international business for the first six months of GBP 1.6 billion are 10% lower than in 2011. 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 programme has deferred trading until the current negotiations are satisfactorily concluded. We remain optimistic that these will be completed within the year. EBITDA was GBP 161 million. The return on 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 budget approved in December on the Saudi Typhoon and core support program. For reference, there is a summary chart providing trading performance for the five sectors along with numbers for HQ appended to the presentation posted on the web. This final chart seeks to provide updated guidance for each of the sectors through to the end of this year. As you'll see, whilst we are light on sales overall, the bottom line is unchanged. We are reconfirming previous earnings guidance for the group in the aggregate. Firstly, Electronic Systems. In the expectation of a continuing resolution operating throughout the final quarter of 2012, sales volumes are now likely to be marginally below those for 2011, albeit with a different mix.
Some 15% of the businesses in the commercial avionics market where we are seeing good levels of growth. Deliveries in respect of the sales lost in 2011 from the Johnson City flood have been rescheduled with customers and should be recovered in the second half of the year. On the defense side of the business, we are seeing the 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%-14%, building on the first half performance. Next, Cyber & 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 have a stable year as competitive program awards are taking longer to be placed than expected. Growth in the Detica business remains forecast at a 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%-9.5% guidance range, reflecting our continued investment in Detica to support future growth in commercial markets.
Moving to Platforms & Services U.S. Whilst the overall guidance is as shown on the chart, this is best considered in two parts. On Land & Armaments, we are adjusting the previous GBP 5 billion guidance to reflect the various business disposals announced. Those businesses contributed sales of around GBP 250 million in 2011. Also to reflect the transfer of the GBP 300 million protection systems line of business into Support Solutions. For 2012, the sales for Land & Armaments are now expected around GBP 4.3 billion.
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. As a result, we would now expect margins closer 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. 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. 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 2012 to be broadly similar to last year's. In line with the contract amendment now received to complete final assembly of the Salam Typhoon in the U.K., aircraft deliveries will recommence in 2013. The second half bias this year arises from the deferred trading from the Salam 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. To the last of the sectors, Platforms and Services International.
With a Saudi customer focused on order placements for amendments, upgrades, and new requirements, rather than on their 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 with the increased level of weapon deliveries under the Tornado upgrade program. 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 GBP 400 million bond issue.
The effective tax rate is still expected to be within the 26%-28% range, with the final number dependent upon the geographic mix of profits. In aggregate, strong program execution and cost reduction actions have offset the top-line headwinds seen in parts of the business. For the group as a whole, modest growth in underlying earnings per share continues to be anticipated. This assumes a satisfactory conclusion to the Salam price escalation negotiations in 2012 and excludes the 2011 benefit of the research and development tax settlement. As to cash, 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 Salam program. Thank you. Ian.
Okay. Thank you, Pete. We will now take questions.
Thank you. If any participant on the phone would like to ask a question, please press the star followed by the one on your telephone. If you wish to cancel this request, please press the star followed by the two. Thank you. Our first question comes from Christian Laughlin from Barclays. Please go ahead with your question.
Hi. Good morning, gentlemen. Thank you for taking my questions. Just a couple of 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 think FMTV came in and MRAP were largely factored in, but I know sales were even weaker than that. Over and above those items mentioned, could you provide some commentary on what else is behind that? 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 U.K., in U.K. support in Land and Armaments. It's not the U.S. support business, it's the U.K. support, as the U.K. has been revising what its force structure for the land is going to be going forward. 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.
I'll just add to that. Just to be clear, because I'm sure we're going 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 GBP 5 billion. 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 GBP 200 million of sales this year, and we've had the GBP 300 million transfer in respect to the protection systems business from Land into Support Solutions. On a like-to-like basis, we're saying 5 is 4.5, and the guidance here we're now saying is 4.3. To Ian's point, we're seeing some weakness in U.K. support activity, and there's one particular program, MMPV, where we're seeing some sales moving out of 2012 into 2013. It's 4.3 against 4.5.
On our franchise positions in the U.S., particularly on Bradley, the activity's been pretty strong. 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 notice yesterday that we had finalized the contract with the U.S. government for another $645 million on the Bradley program. The Bradley franchise remains funded and very strong and moving forward.
Okay. Thank you, Linda.
On the second question, which was around that 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 spit out those first-half sales of GBP 2 billion, about GBP 1 billion 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 GBP 400 million. We've got the Sweden and South Africa, which are largely export-driven models, would contribute another GBP 300 million. We have the naval guns business in there as well, and we have the remaining first-half GBP 100 million from the individual protection systems business.
If you're looking for how much more can this business reduce, if you're just focusing on the U.S. piece, it's GBP 1 billion of vehicles business in the first half, roughly GBP 2 billion over a full year. This is not at the level that we saw back in 2009 when this business was sort of around GBP 8 billion, which is why we've taken so much cost out of the business.
Okay. Does that answer your questions?
It does. 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 timelines shifting drastically to the right as 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. They're fairly extended programs, it takes a while for the budgets to ramp up. 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 Stallard from Royal Bank of Canada. Please go ahead with your question.
Robert.
Hi. How's it going?
Not too bad. Yourself?
Good, thank you.
Yeah.
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 troop pull down in Afghanistan, what sort of exposure have you got left to operational activities overseas, and where do you see that going?
We'll perhaps ask Tom Arseneault, who's on the phone, to answer, but I'll just lead him in while he thinks of his answer. We have very little left on operational tempo in our profile. There's a little bit in our cyber, but even that is quite small. This was for counter-IED type work, but in terms of our Electronic Systems, it really was these thermal weapon sights. Tom, would you just give a comment on that and how you see progresses going on your fast lanes?
Yes, I'd be very happy to comment on that, Ian. Good morning.
Morning.
Hi. We have, for some time, been following the downturn in op tempo, and that has had its effect on the parts of our business related to exposure-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. There's very little additional exposure that we see. We had also some exposure through 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, electronic warfare has been an area of growing emphasis, and one in which we are well-positioned, with a legacy dating back some 50, 60 years.
That has been a change in focus, as well as continued emphasis on persistent surveillance. The ISR sector continues to enjoy much attention. 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 it, [FAWL]
Okay. Thank you, Tom. Robert, does that cover your question?
Yeah, thanks for that. Secondly, a quick one for Peter, if I may, on the guidance. You've cut your sales guidance in 4 of the 5 divisions, but your margin guidance overall seems to be fairly similar to what it was 6 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?
Yeah, I think your summary is a good one. We are guiding down slightly on sales. If you look at those margins, with top end on Electronic Systems, Cyber and Intelligence will be slightly lower, as will the Land, but not that much. In the U.K., we'll be right at the very top end, and international also at the higher end. You sort of get to a bottom line, earnings before interest and tax, which is unchanged in terms of guidance. Sales slightly down, margins higher.
The business operationally is performing well on all its programs.
Yeah. Okay, thanks very much.
We're winning good new business. Okay. Next question.
Thanks. Our next question comes from Celine Fornaro from Bank of America Merrill Lynch. Please go ahead with your question.
Good morning, everyone. Good morning, sir. Just had a clarification and then a couple of questions. Just a clarification on the UK Platforms and Services. Just about the first half. You mentioned that, I think you said there was a timing benefit thought in the first half versus the second half, did you say that that was a kind of increased guidance for the full year? Just a clarification there.
Yeah.
Questions after that. On sequestration. It seems as if, would you say you are being more cautious now compared to FY 2011 results? I think we've seen more caution coming into what some companies have been saying. I just wondered if you had, in your eyes, increased your caution there. Final question, just on the Cyber business. It looked like a sort of 8% underlying margin. You mentioned the increased investment for Detica. Just wondering how you think progress on 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. Let's do it in reverse order. We'll do the sequestration and Cyber. Peter can clarify the others. On Cyber, the investment is going in because we are seeing growth in excess of what our previous plans were. We are investing particularly heavily into getting into the commercial markets. In Detica this year, government activity has been pretty buoyant, probably off the back of quite a bit of activity around the Olympics, as you would might imagine, but that is sustaining going forward. 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, whereas as you know, we're very strong in government activity through our intelligence and security business there. We now are going to focus on the U.S. commercial.
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. Just remember, we've always said that in our planning assumptions, we were always working on the basis of a $600 billion reduction as opposed to the $487 billion declared by Secretary Panetta. We've not changed our planning assumption. How are all the moving parts going in all this then, Linda?
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. We factored into our plans a bit more reduction than the original Budget Control Act reduction, and that continues in our baseline plan today. 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. 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 United States Department of Labor, we've heard from the Office of Management and Budget, and in testimony before United States Congress that whatever happens, even if 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. 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. When you talk to people around Washington, I 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.
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 to cover those two points?
Yeah, there's a couple other points. In terms of the margins on the Cyber & Intelligence business, our U.S. business continues to operate at high single-digit margins. We see no reason why that can't be sustained. On the Detica business, where we are putting a lot of organic growth, when we bought Detica and then ETI A/S and Norkom, those businesses were all operating in the sort of 12%-14% range. 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 there. 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 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 got it in the first. The full year outlook, where our guidance range is 10 to 12, we are now steering to the very top end of that range.
Thank you.
It might just be worth putting a bit of color. On the European Typhoon Tranche 2 and the Type 45 program, those programs in total are about GBP 10 billion. 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 smoothed profit profile. We trade margin when we retire risk, so we are likely to see this sort of lumpiness. On GBP 10 billion worth of contracts, this is not unsurprising.
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 on these very high-performing programs. Thanks very much, guys.
Okay. Thank you.
Next question.
Thank you. Our next question comes from Nick Cunningham from Agency Partners. Please go ahead with your question.
I have this mental picture of you with your hand in the air here, Nick. I look into you in the audience.
Thank you. After too many years of doing this.
Same for me.
Sort of perhaps coming a bit from experience, you worry when you make lazy assumptions, if you like, I've tended to assume that once SDSR is done in the U.K., the U.K.'s sort of done and dusted, and it's all okay going forward. Indeed for you, that seems to be turning out that way, but the Tier 2 and 3 players are beginning to complain about the new process in Whitehall, particularly the whiteboard process or, if 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 U.K. 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?
Your observation is quite right, that we always said very early on in this process of the SDSR and their planning process, that we, BAE Systems, would get extreme visibility from this process because of the major programs that we were working on, that the government needed to be careful that they didn't introduce processes and structures which then compromised the SMEs and the Tier 2 and the Tier 3 players because they would not have the same visibility that we had. 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 got through the SDSR. You shouldn't be worried about anything about that.
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 that two carriers will be operational. That has provided further clarity. With relation to further programs beyond the things that have been confirmed today, 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. Certainly signs are positive.
Peter, what order book cover do we have? Maybe give Nick a bit more confidence there.
Just to give you some confidence, Nick, excluding the impact 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, the subs, and Type 45, give us two-thirds of the sales in this business. To Nigel's point, we're not looking for a lot of new awards to meet the guidance that we're giving here.
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?
Sure.
Which is on the TOBA. I believe HMG is struggling a bit to find enough revenue to meet its TOBA promises. 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 the TOBA. One, there was an underlying core program of work. We have much more clarity now the Type 26 Program is defined. The carrier program is getting defined than we had before. We're putting those planning assumptions in the mix. We then had to hit our cost reduction targets. We made an affordable set of industrial capabilities relative to the program. We're ahead of our plans. We had to agree with them a set of industrial capabilities which supported those future plans. That's the bit that we're now working on to define what it is that the TOBA should protect going forward. All of those are in the mix. That's what we're working on.
Getting the defined program and a balanced budget and a balanced set of programs was a key enabler to that. We were always going to be where we are. We've met our requirements. The government's meeting its requirements.
Thank you. Our next question comes from David Perry from Goldman Sachs. Please go ahead with your question.
Yeah. Good morning, gents.
Morning, David.
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, just to confirm, you are assuming you sign the 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.
Does that have an impact on EBITA?
Yes.
Yes.
Okay. 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 GBP 150. Okay, I might be wrong, but I think it's in that region. You've given us guidance of a 12% margin for the full year in U.K., Platforms and Services U.K., where I think you take that profit. You're implying a 9% margin in H2, and it looks like just under half of that is the Salam price escalation. Am I barking up the wrong tree, but it seems to me that the core U.K. business would have a 5% margin in the H2 without the Salam, or am I thinking on the wrong lines here?
Yeah, you're thinking along the wrong lines, David.
Well, okay.
It's prejudicial to commercial negotiations to discuss pricing and margin on this contract at this point. 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-year guidance then?
That's why we've made the statement that we have in the full-year guidance.
Sorry, which is what?
The guidance is supported by closing the escalation agreements with the Saudis.
Am I right that EBIT, if you sign it, is taken in the U.K. business, or is it taken in the international business?
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 more by-
David, we're not going to go into the details of our commercial arrangements on this program.
It's just that we have an incredibly volatile margin progression in Platforms and Services UK. I was just trying to figure it out. Okay. My second question relates to that. Can you just tell me what are the risks? Are you quite confident that the pricing escalation contract will be signed, or what are the risks that it wouldn't happen?
We are confident that we will close this out in the second half. Perhaps ask Guy Griffiths here 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. 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 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. I am personally confident we will reach a settlement by the end of the year.
The point that Guy refers to is that, you remember at the end of last year, the King approved GBP 16.5 billion of budget associated with this Program, of which what we've resolved so far this year is we've resolved the training aircraft, as we say, turning that from a budget to a contract and an effective contract within six months, sorting out these unbudgeted items relative to the original Salam Program. Now we have to focus on the long-term support and other upgrades on the Program. There are big budget agreements. We have to focus on the next batch of Typhoons and the support of the existing batch of Typhoons. There's an unprecedented volume of activity. 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 Fidler from Deutsche Bank. Please go ahead with your question.
Morning, guys.
Morning, Ben.
A few questions, if I could, as per usual, I'm afraid.
We'd be disappointed if there weren't, Ben.
I'll try and make it three. Thanks for the comments from Guy just over the progress on the repricing of the Eurofighter. I 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 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 on that by the year-end? 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. 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? Can you just help me understand what you expect for the full-year restructuring costs? Thank you.
Okay. While Peter thinks about the last two, we will ask Guy to stand up again, then I will ask Alan Garwood to talk about Oman.
Right. I think as far as the Saudi activity is concerned, beyond the price escalation negotiations that we have just talked about, there are probably other three big components of order intake that we would anticipate before the end of this year. The first is really linked to 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 are negotiating at the moment a 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 would expect to go to contract in the same period.
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 would 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 Qaboos of Oman and Prime Minister David Cameron, where both governments committed to getting the Typhoon deal done this year. Over the last few weeks, culminating in the Farnborough Airshow, we've had extensive meetings with the Omani Minister of Defense and the Chief of the Air Force, and we have an agreed negotiating timescale, which will start this month. Pretty much as Guy said in Saudi, the Omanis are working through the holy month of Ramadan, and we're seeing a very high level of activity. We're confident we can get it done this year.
Okay. Thanks, Alan. Ben, on the cash flow.
Yeah. The second-half cash flow, our normal model of can we turn our EBITDA into cash. The headwinds we've got is around the pension, where we've got another GBP 200 million of deficit funding to go through. I mentioned about GBP 480 million that we got on the Tornado program. We'll burn about GBP 300 million of that in the second half. We continue to utilize Oman and rationalization costs in terms of spending the cash and charging the cost against the provisions. We will continue to utilize advances on the European Typhoon program. Most of that profit that we turn into cash is being matched by those outflows. In terms of the upsides, clearly, the outcome of the Salam escalation negotiations will be a determinant factor. We've got to get through the pricing, make sure that's satisfactory.
Once we've got through the pricing, we've then got to negotiate how that pricing gets funded. Will it be over the life of the program? Will it be on aircraft? Will it be a lump sum, the rest spread? That will be a second negotiation. 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'll move into the first half of next year. In terms of restructuring charges, I haven't got the 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.
Just coming back, thanks, Pete, on the moving pieces in cash flow. My brain isn't big enough to 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 even if it's a range, just to help with understanding.
If you look at what we delivered at the half year, in our guidance, we say that operating cash flow will be better than last year's. We delivered GBP 742 million of operating cash flow in the first half of this year, and it was GBP 634 million in the whole of last year. It really, to your point, is going to come down to second-half performance. If you work on the basis that the EBITDA turning to cash flow is pretty much offset by those items I outlined just now, if you take the tax interest and dividend payments we'd have in the second half year, which are about half a billion, if we get the Salam cash in, the net debt we have today will be broadly the same. Does that answer your question?
Thank you very much.
Yep.
I'm glad you followed that, Ben. I was struggling a bit there for myself.
It's a fine exercise.
Yes. Okay. Next questions.
Thank you. Our next question comes from Charles Armitage from UBS. Please go ahead with your question.
Hi there.
Hi, Charles.
Actually, hi. Actually, it was pretty much what Ben's question was, and I didn't have enough time to press star two. I apologize. It has already been answered.
Okay. Thank you, Charles.
We like those questions, Charles.
Thank you. Our next question comes from Zafar Khan from Societe Generale. Please go ahead with your question.
Thank you very much. Good morning, gentlemen.
Morning.
I've got three fairly brief ones for Pete.
A philosophical one for you, Ian, if I may.
Oh, dear.
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. 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? If you do agree with that, 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? That's the one for you, Ian, if you could please just ponder that. The brief ones were really just on the It was really a follow-on from David's question on the margin in the Platforms and Services UK.
I understand this year will be higher end of the range because obviously of the risk retirement that you're enjoying on these programs. 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. Just in terms of what is the more sustainable margin in the Platforms and Services UK. I wanted to talk about the overseas contracts that you're bidding for. Just want to think about the margins prices there, because Finmec keep warning about the very severe price pressures on overseas bids, and I just want to know what your experience is on that. The third one was really on the Land and Systems. There's been quite a big contraction in sales there, and that does look structural to me.
If I remember correctly, you did take a write-down on these assets in 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 should I do my three? I'll constraint to mine.
Go on, I'll do mine first. I think in terms of where we are relative to our valuation, for me, it is about three things. One is the order book and generating the international orders and the maintaining of our franchise positions, because since 2009, we've not had an increase in the order book. We've been talking about these international prospects and these maturing of both our home markets and our other markets. 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 non-U.K., non-U.S. order intake of GBP 4.3 billion compared to GBP 4.8 billion for the full year.
If you listen to what Guy was saying and Alan were 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. Until that, in these current climates, until you deliver some of that, I don't think you're going to be attributed the value that your business is worth. 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, 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. The final bit is this the bottom on land? Where is land? I think, as we say, we're getting to the end of this cycle, and we might be talking about some variances, but they're small variances. We are, I can assure you, we are protecting our franchise positions, which will secure our business for the future and our international business. 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.
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. That's what we're committed as a team to doing.
Coming back to your specifics, Zaf, on U.K. margins, our guidance range is 10%-12%. It is probably not just an in-year guidance. It's more sustainable. 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 a 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. At the top end is where we are now. On a sustaining basis, I think our range of 10%-12% holds. On the overseas bid margins, was there any particular bid that you're referring to, or is it just generally?
I'll pass that.
It was 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, in 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. What Finmeccanica 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, and just wondering if perhaps you should be taking another write-down on that.
We do our goodwill impairment reviews every year. Once we go through our five-year planning cycle, we do that in the second half. To your point, yes, we did take, I think it was about GBP 1.6 billion back in 2009, which is really around the Armor Holdings 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. With the businesses, again, back to the point I made earlier, with the businesses sort of around the GBP 4 billion, GBP 4.5 billion, of which only half is actually in the land vehicle sector, the downside is probably limited. 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.
Thank you very much for all of that. That's very helpful.
Thanks, Zaf.
Thank you, Zaf. Our final question comes from Jeremy Bragg from Citi. Please go ahead with your question.
Morning, guys.
Morning, Jeremy.
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 finish the negotiations of the Salam deal? I.e., the kind of GBP 500 was the number that I was thinking about.
Yes, confirmed.
Thank you.
Yeah.
Very easy.
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. Thanks very much. Have a good day.