All right. Should we all get started?
We've hit the appointed hour. We've got this big clock up there keeping me in order. Right. Well, thank you for coming. I'm sure you will have all seen the results announcement this morning.
I'm going to kick off and then hand over to Pete to take you through the detail and the outlook. The results we announced today contain a number of elements that were not planned at the beginning of the year. We handled the slowing demand in land, disruption from flooding, the Amano PV contract, the ground combat vehicle and Radford award protests and the deferred trading on Salam. We've been agile and adjusted to mitigate these events and what should become apparent as Pete takes you through the detail is that the underlying business remains strong. Underpinning that solid core has been a combination of good execution and aggressive cost reduction to maintain returns for shareholders in the face of those headwinds.
We are operating in a difficult and rapidly changing business environment. These market pressures have been apparent for some time and the group strategy has developed accordingly. We have moved quickly to take actions necessary to sustain the bottom line in the near term and establish a platform for which growth can be pursued. Affordability has become the priority for our customers. We have cut costs aggressively to both address reducing demand in some activities and to secure competitive advantage.
Cost reduction and efficiency actions have been underway since 02/2009. We are staying ahead of the volume reductions. This activity will continue. We can still do more. We don't take these decisions lightly.
They are difficult, but essential if we are going to sustain the business. At the same time, we continue to develop our already substantial position in the services sectors of our markets, invest in the faster growth streams of business, including cyber, commercial avionics and high priority defense electronics, sustain our core industrial capabilities through the strong positions on key programs and address growth in selected international markets. Cost reduction funds our ability to continue developing the strategy and maintains our competitive edge. We have been successful in growing a position as one of the major providers of capability and services in the cyber and security markets. Having established a strong position in the government and intelligence related sectors of these markets, we are now seeing the benefits of our more recent drive to expand in the fast growing commercial and financial services markets.
We are well positioned on a number of key platform programs such as the Typhoon and F-thirty five combat aircraft, submarines, naval ships and armored vehicles. These programs form a large core of business with good multi year order visibility. These programs generate substantial services and support business. Our services offering is one of the differentiating strengths of this group. Through the provision of military and technical services, we continue to deliver enhanced capabilities, while reducing costs for our customers across the air, land and maritime domains.
The partnership relationship between the company and the armed forces continues to strengthen. We have been active in supporting U. S. And U. K.
Operations in Iraq and Afghanistan. And more recently, our products and people made a significant contribution in the success of UK operations over Libya. In The U. S, delays in approving defense budgets result in the business operating under continuing resolution restrictions for seven months of 2011. Our business remained resilient through this with only a modest amount of trading disruption as a consequence.
The 2012 budget has now been passed with the base budget at the same level as 2011 and a similar level of spend on the investment accounts. The January announcement by the President and Secretary Panetta describing the future strategic direction for U. S. Defense and security And the recent DoD defense budget were in line with our planning assumptions. The near term budgetary issues have had some impact on the business and there remains significant uncertainty as to U.
S. Federal budgets over coming years, but we plan on conservative assumptions. We have already made decisions on likely spending trends and will respond with agility as the facts become clearer. We will not be a victim of the process and we'll stay ahead of the game. In The UK, budget constraints remain.
But following the strategic defense and security review in October 2010, there is now greater program stability and better alignment of government funding with defense program commitments. The SDSR impact on the group following the program changes has been to reduce annual sales by some £500,000,000 Actions taken to mitigate the impact of these changes are well underway, including workforce reductions and facility rationalization. Contract settlement agreements have been concluded. There is also more that can be done to drive efficiency. These opportunities reside not just here within industry, but also in the enhanced contribution that industry can make through the delivery of cost effective support and capability to the armed forces and the security agencies.
We continue to work with our U. K. Customer to help identify further efficiency improvements. We are seeing major opportunities mature in our international markets. With order intake in 2011 of £4,800,000,000 from our markets outside The U.
S. And U. K, we are seeing the benefits of our strategy to develop the business across a broad international base. This international footprint provides resilience for the business at a time when defense spending is under pressure in The U. K.
And U. S. In India, we are seeing a steady flow of business from the large Hawk program with Hindustan Aeronautics. In 2011, we booked a further £124,000,000 in Hawk related business and with other new business order intake from India totaled £170,000,000 We are also bidding on the large future inventory combat vehicle program through our joint venture with Mahindra Mahindra and continue to progress the potential sale of M777 artillery. We also benefit from the Mirage 2,000 update in India.
Our share of the weapons order is valued at £300,000,000 On the recent announcement in India, which played Rafale as the lowest price compliant bid against Typhoon, we should all recognize that this is just a step in the process and not as yet a contract. We will continue to support the Indian customer and the evaluation process. In Brazil, the contract for the three OPVs was great news and paves the way for further opportunities to be explored for the Brazilian Navy. In Australia, we continue to build on our position as the leading provider of equipment and support to the Australian Armed Forces, working with the Commonwealth government to deliver against a clearly laid out multiyear defense and security plan. The potential sale of Typhoons to Oman continues to make good progress.
A formal request for proposals has now been received. This is expected to lead to business valued in excess of £2,000,000,000 with opportunity for further HAWK business on top. Interest in Typhoon is high. In addition to Oman, we have discussions underway in Malaysia, Qatar and The UAE. We also anticipate requirements in Saudi will extend beyond the existing order.
Defense spending remains a high priority in The Kingdom Of Saudi Arabia and we continue to deliver a broad range of capabilities to their armed forces. Our announcement at the start of the year identified the streams of work underway, including the changes to the Salaam program. The proposed changes relate to final assembly of the last 48 of the 72 Typhoon aircraft, the creation of a maintenance and upgrade facility in The Kingdom Of Saudi Arabia, initial provisioning for subsequent insertion of Trongshri capability in respect of the last 24 aircraft and finalization of price escalation. On the COWAF program, budgets have been established for the next five years of support. This budget provides for an upgrade of the training environment including new Hawk aircraft, significant new business.
As we reported, good progress on these discussions has been made in the weeks before year end with budgets now improved in Kingdom on all items other than price escalation. To scale this, we have already booked £1,200,000,000 of orders following approval of the budgets in Saudi. Negotiations will continue in 2012 on the price escalation. And as we said last year, the correct settlement is key, not the timing of the settlement. In summary, this is a difficult operating environment, but the focus on cost efficiency and program execution together with our international footprint and strong positions in priority segments of the defense, aerospace and security markets are contributing to our sustained performance.
We have a resilient platform for future growth, but in a rapidly changing environment agility at all levels of the group is becoming ever more important, whether it be responding quickly to meet urgent operational requirements or to address changes in markets. We will continue to keep our strategy under review and we'll move to adjust our portfolio of businesses where it is in the interest of shareholders. Growth in shareholder value remains the unambiguous objective. Our position on capital allocation is clear. Despite the challenging trading environment, we have returned €2,200,000,000 to shareholders over the last two years as well as maintained the development of the business.
I am particularly pleased with the integration and performance of the acquisitions completed in the year. I'll now turn over to Pete to take you through the 2011 results and outlook for 2012. We will then take your questions. Pete?
Thanks, Ian, and good morning. Today is the first time we've reported under our new segmental structure and you'll recall that we made these changes for three primary reasons: to better align to the group's strategic direction of Electronic Systems Platforms and Services to give disclosure on how our Cyber and Intelligence assets are performing and to improve external alignment of reported performance to the management of the operations. And I'm sure you'll find today's increased disclosure helpful. There are several material items that affect the numbers and I'll highlight those as I go through the relevant sectors. And I'm going to cover the 2011 results first and then move on to guidance for 2012.
So firstly, the headline numbers and compared to 2010. Sales declined by 14% to £19,200,000,000 primarily from the volume reductions in Land and Armaments, the impact of the SDSR on The U. K. Business and delay in securing some of the contract changes to the Saudi Typhoon program. Underlying EBITA reduced by 7% to £2,025,000,000 Underlying earnings per share of 45.6p included 5.9p arising from the previously announced U.
K. R and D tax settlement. Excluding that benefit, underlying EPS was almost unchanged. Operating cash flow totaled £634,000,000 and net debt closed at £1,439,000,000 Finally, the dividend for the year has been increased to 18.8p per share, up 7.4% on twenty ten. And at this level, the dividend is covered 2.1 times by underlying EPS excluding the R and D tax benefit.
The 2011 results and their comparison to 2010 have been affected by both M and A and exchange rates. The acquisitions announced towards the 2010 were all completed in the 2011. In addition, following the disposal of the Regional Aircraft Asset Management business, the results of Regional Aircraft are now reported as a discontinued operation and prior year numbers restated accordingly. The average U. S.
Dollar exchange rate for the year was 1.6 compared to 1.55 in 2010. We have appended to the presentation PACS adjustments made to produce like for like comparisons. Like for like sales reduced by 15% or 3,200,000,000 of which £2,200,000,000 came from the volume reductions in the Land business. The underlying EBITDA of £2.25 gave a return on sales of 10.6%. Underlying finance costs of £199,000,000 were £8,000,000 higher than in 2010 and this included a charge of £28,000,000 for the costs arising from the early debt redemption related to the Regional Aircraft disposal and most of that cost would have been borne in 2012 and 2013.
There was a goodwill impairment charge taken of £94,000,000 and that relates to the surface ships and land businesses. The underlying tax rate of 26% was 2% lower than previous guidance and this excludes the benefit arising from the U. K. R and D settlement. A number of items have impacted the balance sheet in the year.
Firstly, the acquisitions made have increased intangible assets secondly, the Regional Aircraft asset disposal has reduced the tangible fixed assets thirdly, working capital has increased for the consumption of advances on the Salaam and European Typhoon Tranche two programs, utilization of provisions and for the delay in the expected cash receipts pending completion of the changes to the Salaam contract. The reported pension deficit has increased by £1,100,000,000 and I'll get to the pension position on the next two slides. Deferred tax assets have increased on the higher pension deficit. Financial assets and liabilities at the beginning of the year contained the carrying value of our holding in Saab, which we sold in the first half. And finally, net debt increased to just over £1,400,000,000 This slide shows the pension scheme assets, liabilities and deficit as accounted for under IAS 19.
The value of the scheme assets has increased over the year to £18,100,000,000 In aggregate, across all the group's pension plans, equity investments now comprise 51% of scheme assets. Over the year, liabilities have increased by £2,000,000,000 The year's discount unwind accounts for £1,100,000,000 of this increase and a further £300,000,000 arises from changes in assumptions, primarily relating to mortality increases. Real discount rates reduced by the net of lower bond yields and lower inflation assumptions and this accounts for the rest of that increase. The net impact of all these movements then is an increase to the group's accounting pension deficit of £1,100,000,000 So that's the accounting at December 31. I'll now turn to the funding valuations, which determine our cash contribution levels and the positions we've now reached on the two largest U.
K. Schemes, the 2,000 plan and main scheme, plus two of the smaller U. K. Schemes. The chart shows the new funding deficit on those four schemes and a comparison to the position we expected in 2,008 when the last deficit recovery plans were agreed.
Whilst the funding deficit has increased only slightly to some £3,000,000,000 it is £1,100,000,000 higher than would have been expected three years ago due primarily to the lower discount rates and the resulting increase in liabilities. The company and the scheme's trustees have now reached agreement as to these funding deficits, the sustainment of the remaining fifteen year deficit recovery period and the revised funding profiles. And The U. K. Pensions regulator has been briefed and we await final acceptance of those agreements.
Of the incremental £1,100,000,000 of funding required, some 130,000,000 was paid in 2011, around £200,000,000 will be paid over the next five years and the remainder, some £800,000,000 is scheduled over the subsequent ten years. Total annual deficit funding across all group schemes will be some £400,000,000 in 2012. The agreement reached on the sustainment of our multiyear deficit recovery period and the new schedules for deficit clearance are an equitable outcome. The group's U. K.
Defined benefit schemes are all being closed to new entrants. Turning to cash flow. Cash flow from operating activities totaled £951,000,000 and this number is stated after pension deficit funding of £375,000,000 After net capital expenditure of $268,000,000 dividends received of £88,000,000 and further pension contributions of £137,000,000 made into the trust mechanism, the operating business cash flow totaled £634,000,000 The cash flow performance of the five secondtors is shown here, but I'll return to this when I cover the results of each of the sectors. So just one point to note here, the all up total for pension deficit funding made in 2011 was £512,000,000 The cash flow at head office you see here contains £266,000,000 of that number. This next slide sets out the movement in net debt through the year.
We started the year with debt of $242,000,000 Interest, tax and dividends amounted to £1,039,000,000 The £500,000,000 share buyback program announced with the interim results was completed in December. We acquired 184,000,000 shares or 5.4% of the issued capital at an average price of £2.73 per share. The acquisitions completed in the first half year net of the proceeds received on disposals including our Saab Holding and the Regional Aircraft transaction amounted to £256,000,000 Exchange translation and all other movements totaled £27,000,000 closing net debt then of 1,439,000,000.000 This next chart shows the gross debt, cash and net debt of the group. At the start of the year, borrowings amounted to £3,000,000,000 with cash held of £2,800,000,000 giving the reported net debt of 200,000,000.0 The total cash outflow for the year was £1,200,000,000 Within the year, we repaid debt financing of £1,000,000,000 The blended rate of that debt was 5.5%. New term debt of £800,000,000 was put in place in October and that debt was in three tranches over five, ten and thirty years at a blended rate of 4.75.
Holdings of low cost short term commercial paper were increased by £400,000,000 And therefore, at the end of the year, total borrowings had increased to £3,200,000,000 Cash holdings have been reduced to £1,800,000,000 And net debt, therefore, was £1,400,000,000 We expect much of the commercial paper to be redeemed in the short term. Pension deficit funding will be some £200,000,000 in the 2012. And the final dividend for 2011 of £400,000,000 is payable on the May 1. 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. The cash dependency from the Salaam contract amendments is a prime example of such volatility.
Our approach to capital allocation is that we will meet our pension obligations, continue to pursue organic investment opportunities that meet 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's strategy. The combination of share buybacks and dividend payments in 2010 and 2011 has been £2,200,000,000 or around 20% of current market capitalization. So turning now to the sectors, And I'm going to cover the in year performance here and then return to the 2012 outlooks 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 2010 decreased by 7% or 10% on a like for like basis to $4,200,000,000 primarily due to the completed F-twenty '2 and Ayturkham production contracts, the rescheduled F-thirty five program and the Johnson City flooding, which resulted in sales of some $100,000,000 being deferred into 2012. The return on sales achieved at 14.6% was marginally above the very top end of our forecast range.
Program execution was strong with good risk retirement seeing on us completing production contracts. The business also delivered in year benefit from continued cost reduction action. Order backlog increased marginally to $5,600,000,000 despite some delays and disruption in contract awards caused by the continuing resolution, which operated throughout the 2011. Cash conversion of EBITA for the year was 69%. Excluding pension deficit funding, that conversion rate was 80% and that was impacted slightly by the timing of insurance receipts following the Johnson City flood.
The Cyber and Intelligence sector comprises the U. S. Intelligence and Security Solutions business together with Detika. The numbers here again are shown in U. S.
Dollars. In aggregate, sales of $2,200,000,000 increased by 21% over 2010. Of this growth, 17% came from the acquisitions of L1, ETI and NORCOM. Each of those acquisitions has been accretive to earnings in the year and are on track to meet the performance underpinning their acquisition cases. The margin achieved of 9.7% was after both the integration costs of the business acquisitions made and organic investment as we position Detika to have less reliance on government consulting business and towards growth in commercial markets.
Cash conversion of EBITDA for the year was at 90%. Order backlog increased to $1,700,000,000 primarily on the backlog acquired with the acquisition of L1. The U. S. Platforms and Services sector aggregates the Land and Armaments and the Support Solutions businesses.
The numbers here are again shown in U. S. Dollars. And as promised, we want to give appropriate transparency as to the respective performance of the two businesses within this sector. So this slide then shows the performance of those two businesses.
Firstly, addressing Land and Armaments. Sales declined by 38% to 5,700,000,000 some 5% short of the guidance that we gave at the interim results presentation. There was the expected reduction arising from the completing FMTV contract and lower level of Bradley reset activity. Most of the shortfall to guidance arose from the delayed start of the ground combat vehicle program following the award protest and the deferred customer funding for Cayman upgrade activity. Both of those programs are now underway.
In addition, there was some small impact from business disposals made in the year. Margin at 9.3% was also below guidance. We self funded the cost of the GCV team during the three months of award protest. And as a result of the delayed contract placements for GCV and Cayman upgrades, there was a short term under recovery of overheads. Cash conversion of operating profit was at 84% as investment in The U.
K. Munitions facilities continued through the year. In the Support Solutions business, sales increased as expected by 5%, including the benefit from last year's Atlantic Marine acquisition. Margin of 8.4% was at the high end of our forecast range and cash conversion was at 91%. Order backlog increased to $5,200,000,000 primarily for the three multi ship, multi option five year awards received in the first half year.
The $850,000,000 award for the Radford Army munition plant was finally confirmed in January and is therefore yet to be included within this reported order backlog. In the Platforms and Services U. K. Sector, sales of £6,300,000,000 reduced compared to 2010 by 4% and was similarly below our last guidance due to the delay in securing certain of the contract amendments on the Salaam Typhoon program. The 2011 return on sales of 10.5% included three material items: the £125,000,000 benefit from the higher level of rationalization cost recovery agreed in June with the U.
K. MOD the first half charge of 160,000,000 taken on the Oman offshore patrol vessel contract and a £60,000,000 benefit from the increase in carrying value of the ex Trinidad And Tobago ships to recognize their value under the resale contract to the Brazilian Navy. As forecast, there was only a small cash inflow in the year as customer advances were consumed on Typhoon and cash expended on the Oman OPV program. The 2011 performance of the International business has been materially impacted by the delay in securing the contract amendments to the Salaam program and particularly the formalization of price escalation, where applicable trading has been deferred until ongoing negotiations have been concluded. As a result, the year sales of £3,800,000,000 are 12% lower than in 2010.
The absolute year over year reduction is primarily on the maturing tornado upgrade and core support programs and the completed tactical vehicle program. However, EBITDA of £449,000,000 is unchanged from the prior year as strong performance and risk reduction was delivered on both the Tornado upgrade and core support programs. In the absence of the cash payments we had expected from the Salaam contract amendments, there has been significant cash utilization on that program. Order book has reduced pending receipt of contracts against the budgets approved in December on the Saudi core program and the Typhoon programs. Now for reference, there is a chart providing a summary of the trading performance of the five secondtors along with the numbers for HQ, which are little changed from last year and that's appended in the presentation packs.
Given the number of moving parts within the year's results compared to twenty ten's, we've provided this chart to bridge between the two years at the earnings per share level. Starting at the left of the chart is last year's earnings per share of 39.8p. From that, the two red boxes represent the impacts of the lower land volume and the year over year charges taken on the Oman and Trinidad And Tobago ship contracts. The next three green boxes show The U. K.
Rationalization cost recovery benefit, the write up of the ex Trinidad And Tobago ships and then all other operational improvements. Then there is the impact of exchange translation and increases from the year's lower tax rate and reduced share base following the twenty ten and 2011 buyback programs. So earnings per share then of 39.7p plus the R and D tax settlement giving a total for the year of 45.6p. What I'll move on to now is the outlook for 2012, which I'll do by sector before giving an overall guidance for the group. And with this new sector reporting structure in place, this final chart seeks to give better granularity as to how we see each sector's performance developing from 2011 through into 2012 within the context of The U.
S. And U. K. Market conditions that Iain referred to earlier. And given the uncertainties in the market, we feel it appropriate this year to give this additional disclosure.
So firstly, Electronic Systems. Overall, we expect sales volumes in 2012 to be broadly similar to 2011, albeit with a different mix. Some 15% of this business is in the commercial aerospace and hybrid drive markets where we expect good levels of growth. And the majority of the sales lost in 2011 from the Johnson City flooding should also be recovered. On the defense side, we anticipate a small reduction as operational tempo driven activity completes.
On margins, we would expect the high level seen in 2011 to return to within our guidance range of 12% to 14%. Next, Cyber and Intelligence. And here we continue to plan for growth at around the mid single digit mark. And whilst The U. S.
Business, which was some 80% of this sector in 2011, is expected to have a lower growth rate, the Detika business is planned at a double digit level, supported by its continued expansion into the commercial markets. Margins in '12 are expected to be within our 8.5% to 9.5% range with further organic investment planned for Detika and the acquired ETI and NORCOM businesses. Moving to Platforms and Services for The U. S. The overall guidance is as shown on the chart.
That is with a further reduction in sales, but an improvement in margin levels. And the guidance for this sector is best addressed in two parts. On Land and Armaments, we now see sales at the $5,000,000,000 level rather than the previous $6,000,000,000 guidance. Whilst we've seen recent positive customer commitments to land programs, we do see land as being the largest bill payer under The U. S.
Defense cuts with uncertain levels of force reductions clearly impacting the business. On specific programs such as GCV, the Joint Light Tactical Vehicle and Cayman upgrades, we have already seen delayed and reduced levels of funding being committed by the customer and we expect that to continue. In giving this further downward revision, we are seeking to provide a top line floor. And to that end and excluding the more short term Individual Protection Systems business, some 88% of this sales guidance is currently within our order backlog, therefore giving a limited worst case downside. Of the remaining 12%, half is from sole source procurements, the remainder to be won competitively.
As to the margin level, we target delivery close to the 10% mark, both the award and timing of key programs such as JLTV, ability of the tactical wheeled vehicle facilities. In the Support Solutions business, we anticipate 2012 sales to be around the 2011 level. Customer scheduled activity in the naval shipyard is lower in 2012, but we expect this to be compensated for by new business elsewhere, including from the Radford Munition Plant award. And margins in the Support Solutions business are expected to be very slightly lower than in 2011. Turning to Platforms and Services U.
K. We expect sales in 2012 to be broadly similar to last year's. Under the Salaam Typhoon contract, there are now no aircraft deliveries scheduled until 2013, following completion in 2011 of the last six of the 24 aircraft that were diverted from The U. K. Build program.
In the absence of any large events as we saw in 2011 and despite a slightly higher pension service costs arising from those lower discount rates, margins in this sector should be maintained within our 10 to 12% guidance range. And the last of the sectors, Platforms and Services International. Here we expect sales to show significant growth well in excess of 25%. Firstly, for the deferred trading arising from the Salaam price escalation on which as Ian said, we would expect to conclude negotiations this year. Secondly, for the high levels of support to the Typhoon aircraft now in service in Saudi and finally, for weapon deliveries under the Tornado upgrade program.
Timing of those Salaam price escalation negotiations will determine the shape of the first halfsecond half split. And margins are expected to be around the 10% level in this sector. To complete the twenty twelve models, headquarters costs are expected to be broadly similar. Finance costs will be lower following the early debt redemption charge that we took in 2011. And the effective tax rate is now expected to be within a 26% to 28% range.
Now this is a little higher than the rate in 2011, but below our previous guidance of 30%. So in aggregate, whilst little sales growth can be expected in the current market conditions, modest growth in underlying earnings per share is anticipated, assuming a satisfactory conclusion to the Salaam negotiations in 2012 and excluding the benefit of the 2011 research and development tax settlement. As to cash, a higher level of operating business cash inflow is planned in 2012 with the anticipated benefit of the cash payment related to the Salaam program. With that, we'll turn it over to questions.
Okay. Thanks Pete. Questions? One at the front there and then there's one in the middle there.
Thanks very much. It's Nick Cunningham from Agency Partners. A couple of questions following the FY twenty thirteen budget that we saw published earlier this week. First one on Land Systems. I think probably if you're $5,000,000,000 or so for $12,000,000,000 maybe about 2,000,000,000 or so would be actually land platforms as such programs of record.
Looking in the detail of the FY 2013 budget, there's a worryingly little money for a lot of those programs. So do you think that if your $5,000,000,000 is a floor, does that still contain some further downside for those big platforms if you like your Bradleys and so on? And then second question, F-thirty five has been pushed off to the right. What's your picture now of the shape of F-thirty five ramp up? Was that already contained in your previous guidance?
And sort of where do you see it really inflecting and becoming a really meaningful program in volume terms for you?
Okay. Well, we'll answer this in three parts. One, we'll ask Bob to cover land, but while he thinks of well he's going to respond to your question. On F-thirty five, yes, we had anticipated that that level of reduction and that the level of manufacturing would be consistent for the next few years. Let's just ask Nigel to talk about when do we see it sort of ramping up in the latest plans?
The plan we have essentially shows approximately 35 aircraft per year for the next forty five years. Okay,
Bob. FY 2013. And then we'll just ask Peter after that just to talk about because our $5,000,000,000 isn't just vehicles in The U. S. So let's get Peter after that just to talk about the shape of the overall sales.
Yes. Think when we look at
2013 budget, we didn't really
see anything that was a surprise or a hard right turn. So we feel very comfortable right now that what's in that budget is as Ian said consistent with our planning assumptions going forward. So there is although you won't see all of it shredded out specifically, there is still Bradley reset activity that will continue going forward. The other things that are important is if you look at the PIM program will continue and you'll also see a number of smaller programs attached to build vehicles. So we feel good about where we are in The U.
S. Pieces of it. And as well and you'll also see there is a number of other opportunities in that $5,000,000,000 to Ian's point that aren't necessarily in The U. S. Of that $5,000,000,000 There is an awful lot of good solid international opportunities while they continue to mature in the marketplace.
So at this juncture, we feel very good about where we are in 2013 and comfortable with what the budget assumptions we saw coming out in 2013.
Why don't we just go through what's in the 5,000,000,000 Yeah.
Nick, I mean there is the sort of view £5,000,000,000 this not just about U. S. Vehicle program. If you break the land business down into its constituent parts, The U. K.
Is just over $1,000,000,000 of that $5,000,000,000 and that's supported by the long term munitions contract and the seven seventy seven gun contracts we have. In Sweden, there's about $05,000,000,000 In South Africa, there's $05,000,000,000 We have a naval guns business in The U. S. As well, which is another $05,000,000,000 So where you then at is sort of about that's half of the business. So the other half we have what's called an individual protection systems business.
This is everything from sort of individual soldiers body armor. That's another £05,000,000,000 So the core Land Vehicles program business is $2,000,000,000 out of that 5,000,000,000 So just to put it in perspective.
Okay. There was one yes and then another one in the middle.
Ed Stacy from Espirito Santo. Two questions. Firstly on Typhoon exports. I think there's two customers now for Rafale who are still in the position of having selected Rafale but not wrapped it up. So The UAE, could you comment on whether that one is still sort of a live negotiation?
And then whether there's a risk with that one and with India that you end up with the pricing becoming an issue where it's really eroding margins for you if you have to keep sort of chasing contracts where they've already gone to someone else and you're sort of playing catch up in that sense? And then second one on the ship repair business, the outlook being flat for this year just whether that was surprising compared to what you'd previously expected for the business whether there's anything that's developed not as you'd expected in ship repair?
Alan, do you want to talk about Yeah.
UAE, we're very much in play. The UAE government have announced that they were not satisfied with the offer they had from Rafale Typhoon in. We are experiencing incredibly high level activity between HMG, the Royal Air Force and the UAE authorities. I was there last week and we are planning a campaign now that will go forward over the next few months with big encouragement from Sheikh Mohammed bin Zayed and the people in charge in UAE. So all to play for there.
We're also very much in play in Oman as you saw on the slide with His Majesty the Sultan confirming that we are to proceed with negotiations. I was there last week as well. We are replying in the next three weeks to their RFP and I'd expect negotiations to start almost immediately afterwards on the contract that as Ian said we expect to generate over £2,000,000,000 order this year. And then we're also in Playing Qatar Malaysia, which is slightly longer term. Malaysia is actually evaluating the aircraft this week in The U.
K. So there's a lot to go for an awful lot of aircraft orders there at the moment. And I think we're in a pretty good position.
In terms of your comment on margins, we are not going to chase the margins down on this business and we don't see that that's going to be the game that is played. I mean, we've said for a long time, if you look at our international business, you should assume the margins are going to be the same as we get on our government business. And then ship repair, no there's nothing that we've seen in ship repair that concerns us. We've won all of our recompetes in the year. I think we've 100%, didn't we Linda?
So no, it's programming just of when the customer releases the ships to us.
Hi. Good morning. Celine Fornaro, Merrill Lynch. Hi. I just wanted to ask you flagged at the H1 results that we now should look at the order book as a key KPI for the group.
So I just wanted to have a quick view on the underlying decline of the order book as the report seems to be down 7% and how we should think about that in 2012? Second one is more for Pete maybe on the Land Systems. So margins are 9.5% this year. Is it something that we should expect for next year as well or we go back to the normal trend around the 10%? And my third question is about Saudi.
When you look at all these articles regarding the Indian typhoon price that could come down, how do they really think about it?
Pete take the first two and then we'll ask Guy who runs our Saudi business to comment about the reaction.
First question Saleem was around the order book. I think what I actually said at the interims was we were focusing on order backlog in The U. S. Businesses to give a better sort of enduring view of those businesses. But specifically, yes, you're right the backlog the order book in aggregate for the group has declined.
The order book is lumpy. It does depend upon timing of some of the major contracts. To give you an example, if you look at Typhoon France two for example, you get a big contract and then you trade that over a number of years. So we're always going to see spiky order book. But the real focus that we're trying to bring out in the interims was around the backlog in The U.
S. Businesses, which is positive in all three of The U. S. Related sectors.
And doesn't include the Radford win at this stage?
Not yet. No. In terms of Land Systems and the margin, there was two issues that impacted the margin. Were at 9.3% for the year. In the second half because of the GCV protest, we actually self funded the GCV team.
That cost us sort of 20 basis points on the margin. And then because of the delay in both the Cayman upgrade work not being placed until the start of 2012 and not getting the GCV funding then that was another 40 basis points where we basically took a short term under recovery of overheads. So we still for twenty twelve, we're still looking at a 10% target.
And both of those contracts are now up and running. Guy?
In terms of any impact of the Indian announcement on Saudi pricing for Typhoon, the Typhoon supply into Saudi is conducted under a government to government arrangement, which provides an obligation on the U. K. Government to provide assurance to the Saudi government that the prices we're charging are fair and reasonable by reference to established benchmarks for the supply of equivalent aircraft to the U. K. RAF.
And those mechanisms are robust. They're robustly applied and will continue to apply. And the Saudis have indicated that they are content to see the pricing done on the basis of that mechanism. More broadly in terms of any impact of the Indian announcement on the Saudi government's commitment to the platform then I think it's important to note that in the Royal Decree that Ian referred to published further budgets for the Salam program, which is Royal Highness King Abdullah signed just before the end of last year. That provided for some significant budget releases about £1,500,000,000 on top of the existing program commitment for a series of enhancements to the program some of which Ian mentioned in terms of final assembly of the last 48 aircraft conversion of the last 24 to a tranche three standard and for the establishment of a scheduled maintenance and upgrade facility in The Kingdom.
Those are all being negotiated at the moment. The budget is also provided for a series of further enhancements including weapons fit on the program. The strategic significance I think of that role decree and the budget releases is that it signals very firmly the commitment of Saudi Arabia to establishing Typhoon at the very heart of the Royal Saudi Air Force's force mix. And it's for that reason and the very real commitment we're seeing on the part of the Saudis to continue to develop and enhance the platform that gives us confidence as Ian said that there will be a further order downstream for additional aircraft Typhoon aircraft to meet the Saudi's operational requirements. So in summary, I don't see anything in the Indian decision that diminishes Saudi commitment to the Typhoon platform.
Ben? Are you going to get two microphones there Ben? You could have been in stereo. It's twice as bad. Yeah.
Ben Fiddler from Deutsche. A couple of questions. Firstly, just on capital allocation. It seems that your commentary is consistent with sort of your previous commitment to continuing buybacks. I wondered if you could help us understand what and if might be the catalysts for you as a management team to reach a point where you feel you might want to press the go button on thinking about further buybacks?
First question.
The next question is just around cyber. A couple of sub questions within that if I could. Firstly, was the actual organic growth in the commercial side of the business that we saw in 2011? And secondly, how much longer will this investment phase continue in some of the Dettigra and NORCOM businesses? Because it sounds like that's sort of continuing a bit more than I thought in 2012 as far as the margin is concerned.
Is that over in 2012?
No, because we will come up with the next phase of driving for the organic growth in the segment. I mean, is the organic growth in the commercial sector?
In terms of the let's call it the legacy Detka business, we had 37% growth in the commercial part of Detka this year.
So the growth has been more aggressive than we expected it to be. Our ability to get into that sector has been faster probably put it a bit in different way. And we have a number of initiatives going on. So we're not going to stop in terms of the investment that we need to put in to grow into that sector. So it won't be over in 2012.
I'd also add to that Ben. The shape of the Deteca business now is it was seventy-thirty sort of government commercial. We're now approaching fifty-fifty. So the focus on commercial is much higher than it's ever been. So coming back to the capital allocation question.
In terms of capital allocation, clearly we set out the priorities. The first one is to meet the legal obligations we have on pension then it's organic growth long term sustainable cover of two times for dividend buybacks when the dividend allow and then M and A subject to meeting the criteria and being in line with strategy. In terms of the buyback, you've seen how much cash we have. It's 1,800,000,000 We've got 800,000,000.0 sorry £1,000,000,000 of that earmarked in the next three months. And clearly there is a cash dependency around the getting this price escalation sorted on the Salaam contract.
So in terms of when would we revisit a a view on what the balance sheet looks like in terms of cash availability that's the trigger.
And just one follow-up. The earnings guidance obviously excludes anything further on buybacks?
Correct. Yes. Absolutely. Absolutely. Okay.
One in the middle.
Thank you. Yeah. Rupinavig, Morgan Stanley. Two questions please. Ian one perhaps for you on India.
Can you just clarify what exactly is the status? Because we've heard from the Rafale team saying they've effectively won. So they're in sole negotiations now. So under what mechanism do you get let back in just so we can be sure on this? And then a question perhaps for Linda on The U.
S. Side. Are you fully expecting the FY twenty thirteen budget to go into a continuing resolution? And is that is your guidance based upon that planning assumption? And then kind of a follow-up on that in terms of sequestra.
What's your view on that? Because it seems that that's one area of the budget cuts that are being effectively put to one side given the election coming up.
Thank you. We've only got thirty five minutes left. On Linda. Why don't we while you're
And Erin you can help me if I get myself in trouble here. This is a presidential election year. So not a whole lot is going to happen in Congress between now and November. I think it's quite likely that we will have a continuing resolution for a short period of time at the end of this year until the results of the election are known. And then we'll see if lame duck Congress can actually get something done.
It happened in the past, but it's not a real high probability. So we'll have some uncertainty that will play out through the election and into the first of next year and that's what we have expected. That's the way we've planned the business. We've tried to be conservative in our assumptions recognizing that this is just one of those years that happen every four years in The U. S.
And things get a bit confused. With regard to sequestration, the general view in Washington is that it is not going to happen as currently envisioned. The Pentagon is not planning for it and Congress is trying desperately to find a way to make it go away. And so we do not have a plan that takes into account another $500 to $600,000,000,000 worth of cuts beyond the cuts that have already been announced. And our customers are not doing any such planning either.
So the general view is it's not going to happen. If by some reason it does happen, Secretary Panetta has said he thinks it will be so short lived that it will never actually get implemented. So that's the basis upon which we're moving forward now and it's consistent pretty much with the rest of the industry.
Okay. Right. I'm going to let Guy answer the on India, because the last time I gave a public response to this, I got myself into a bit of hot water. So he can get himself into hot water this time.
Right. The way the process works is that having been nominated as L1, we would expect now customer to engage in negotiations with that party. The procedures allow at any time during those negotiations for the Indian customer then to seek to engage with the L2, which is us. And it won't surprise you that in order that we're ready for any such engagement, we're working very closely now with our German Casidian partners who are leading this bid and with the four governments, the four European partner nation governments in the Typhoon program to look at options by which we can improve our offer without in any way slashing margins. So that if and when the day comes when the Indian customer decides he's got to a point where he does want to engage the L2 we have something interesting to say to him.
Well, that's very politically correct. That is as the process runs. And there are enough examples in the procurement where the L2 has actually ended up with the contract.
Hi, Iain. Hello, Joe.
Nice job.
Good to see you in person.
I'm glad to
hear We always you have this picture of you with your cup of coffee in your pajamas on making the call.
Yes. It's an ugly picture. I wanted to continue on with India. I mean, I'm certainly nowhere near as knowledgeable as your team about how this goes. But it's my impression is that the BAE team knows how to sell this stuff around the world and that having Casidian lead the team and having Germans under French German EADS is somewhat less than optimal and the results weren't what you wanted.
Is there any plan to sort of change the way you behave during the process where you wait for the L2 opportunity? And is there anything that you have learned from the debrief about how they selected the other guy that might cause you to do something a little different in the interim?
I mean the answer to all those questions are yes. I mean as I mean we've not had a formal debrief yet formal, formal, formal debrief. But there are certainly information that we have which would lead us to believe that we can do something in terms of how we structured our bid. And the U. K.
Government you will have seen Prime Minister's responsive public responses to this is going to get more front to central. But the one thing that we have to recognize is that there is an L1 and there is an L2 and the L2 is a Casidian bid, German led bid. And that has to remain otherwise then the competition can't work because there aren't two bids on the table. So any support has to be done in terms of the structure of the original bid. But I think you will be quite certain that we and the U.
K. Government will be pushing hard to get our German partners to move forward.
I don't really expect a it's hard to have a really frank answer. But is it I mean how much of this should we think of as a low probability brave face? And how much of this should be game on?
We've always said that this was a fifty-fifty. And so when everybody was out there running away is this is a shoe in for Typhoon, we never ever said that. That was always a fifty-fifty. It's a capable aircraft. Typhoon has some aspects of it which are better.
So we have to work hard on this. But we're not giving up. There's a long, long way to go in this process yet before it turns into a contract. And we're going to give it our best shot. But it is a capable aircraft.
I don't want anybody to believe that it's not. Thanks again. Just behind Joe. David, I think. Thanks.
David Perry at Goldman Sachs. Three questions please. Peter the first one just for clarification. The use of cash in 2012 and you've got the £200,000,000 into pension and maybe I misheard you. Thought you talked about £200,000,000 going in over five years.
So can you just clarify what exactly is happening now on the pension and if you're referring to the sort of additional top up over and above your normal funding?
The £200,000,000 that I referred to is the top up on top of where we were before and that's over a five year period.
So what's the £200,000,000 outflow in twelve years?
We've been running before these sets of valuation agreements we just reached, we've been running with about £350,000,000 per annum of deficit funding. So this takes the agreements we've now reached takes it up to about £400,000,000
Sorry, maybe I misread it. Did you say you had £200,000,000 to put in pension in 2020 on your use of cash?
What I said total yes, in terms of cash, I said we've got £1,800,000,000 of cash today as at December 31. And what I said was of the funding that we will put in the £400,000,000 in 2012, pounds 200,000,000 of that goes in the first quarter.
Okay. So your near term cash utilization is No, no, Why is that relevant to us? I just wondered why you're showing us the £200,000,000
I'm showing what I'm showing you is there's a we have £1,800,000,000 of cash and £1,000,000,000 of that is earmarked already. So we have £800,000,000 of cash if you like that we have to use within the balance sheet.
Okay. Okay. The second one is, I mean, obviously the guidance for 12% is predicated on Saudi coming through. Can you just say what possible risks there might be around that? And then my final question is just can you comment on the recent press reports of possibly closing one of The U.
K. Shipyards please?
We've always said in terms of the VOP discussion escalation conductions is one of the quantum that we want to get rather than the timing. And so the issue will be timing and how we conclude the negotiation. But we are active in those negotiations. And we the will right deal. We're not going to do an early deal.
In terms of all of the press speculation on the closing of the yards, I'll just remind everybody that when we signed up to the terms of business agreement, which was a ten year agreement, it talked about making sure that we had the right capabilities in The U. K. To maintain a warship complex warship capability. Coming and what that meant is that coming off the massive high of the around carrier we need to make sure that as we then went into the Type 26 program we had the right capabilities to deliver. Now we're just getting to that time in carrier where we have to make decisions relative to the terms of business agreement and we appointed a company called LEK to help us do some work on looking at what capabilities needed to be sustained against the future program as defined by the U.
K. Government. And that's what we're doing. That's it. Sandy and then Ben again.
Yeah. Morning. It's only Sandy. You've got to guess who I'm working for today.
Well, it's a bit confusing that we were still here in this building.
You're confused. This is all getting a little bit granular. I mean your balance sheet is in working capital. It was always a little bit of a mystery to me. But if I looked at the cash flows in The U.
K. Business, they've probably been 400 or £500,000,000 better than the over the last five years than I would have thought. And essentially it looks to me like in 2011 and 2012 we're going to take all that extra cash away and hence be back on a level playing field. Now am I barking up the wrong tree?
Not quite. I mean, you look at 2012 in particular in The U. K. Businesses, we're dealing with three issues on the cash front in Nigel's businesses. The first one is we've got the Amano PV contract.
It's a loss making contract. We are going to have to fund that contract and get those ships delivered. We've got the rationalization program. We've announced losses job losses in 2010 in 2011. Those rationalization costs will be funded.
And we've got advances sat there on the European Typhoon Tranche two program, which we will utilize through 2012. So we've got those three items running through the 2012 cash flow.
Right. But it still sort of feels to me like in terms of EBIT cash conversion we're going to be back more in the normal balance.
Yes. Right. We will be.
Thank you. And then 2,000,000,000 pounds of core land vehicle programs. I know you don't want to go probably into even more detail, but when you go through The U. S. Budget and you try and add up the line by line items, you don't get too much more than £05,000,000,000 on PIM, Bradley, FIST or whatever.
Is it safe for me to assume that the other £1,500,000,000 is kind of spares and service and support or not?
I mean, there is a lot of support. That means 50% of the business. Don't if 50% of the business is
You've studied this in some detail.
The assumptions are consistent, Andy.
He's over there.
There he is. There he is. Yes.
So it's consistent. When you look at the budget of major programs, there really wasn't anything we expected in. And the business is about half of it is spares repair, you won't see a line for it itself. So you find that in and of itself on an individual line when you add it up. So we feel pretty comfortable with where we're at for 2013.
I think the risk Linda highlighted around sequestration and stuff and as that plays out that's probably the biggest risk you see in the environment that you'd have that would have an impact if it went forward. But we aren't assuming an impact of sequestration in any of our assumptions right now. Other than that we feel good about where we are in The U. S. Land content for 2012 and 2013.
Yeah. I wasn't going to ask this question. But in one of the Senate hearings, the guy was pointing out that if the President's FY 2013 budget goes through along with the tax increases he's planning and all the rest of it, the sequester would actually disappear. So Obama is trying to make the thing go away, isn't he? Yes.
If they can find
what about $1,200,000,000,000 worth of cuts, that's what they would have to do over the budget is they've got to find in order for sequestration not to happen, they've got to find that $1,200,000,000,000 in cuts over time for that not to occur. And that's not an insignificant challenge.
But do we think he's trying to make it go away? Oh, yeah. Absolutely. Answering your question, yes. They're trying to finesse it so it goes away.
Absolutely.
All right. Good man. And then a very nice chap. And then just on Saudi. Now that we've got all this extra visibility like a five year ruling plan, mean how is that going to change the way we operate?
And do we have any other visibility therefore into the way the Saudis now run the defense budget with a view to Bradley coming down the tracks at some point?
Guy? It will be interesting to see what he says here because we might have to increase his targets for this year.
Well, I'll come to Bradley in just a minute with a bit of help from Bob. But in terms of the five year budgets that were approved that Ian referred to that were approved in the same Royal Decree just before Christmas, they provide really for two fundamental things. One is for a continuation and of the basic support services that we provide at all the Air Force bases across Saudi Arabia. And across the five year period, the decree provided for $12,000,000,000 funding in relation to that activity. And on top of that, the decree provided for enhancement of the training environment that Ian referred to in terms of the acquisition of three new types of training aircraft including Hawk at an allocation of budget of US3 billion dollars So we're now in the process of translating all that into formal contractual commitments.
And the sales phasing and the cash phasing will be determined as part of those negotiations. In terms of the broader sort of budget visibility, the Kingdom Of Saudi Arabia does not put in the public domain its government expenditure budgets whether for defense or for other items. In terms of Bradley specifically, the prospective procurement is being conducted through a following military sales case between the Saudi and U. S. Governments.
And at the moment the operational requirement has been confirmed. But what we don't have I don't have any way specific visibility that the budget is being created, although we see a lot of activity on the Saudi side aimed at doing that. But certainly the discussions that are going on give us confidence I think that a letter of requirement is likely to be issued at some point later this year.
But if you upgrade your tanks which is what they're doing now, they should do the Bradley's later than this?
Well, the Bradley requirement is they've articulated operationally is both for a new buy, which would they would start with and when they're taking delivery of the new buy then they'd look to a reset program for their existing inventory. I think that's right Bob?
Yes. So the answer to your question is yes.
Sandy, can I just come back on the cash? It might be more helpful. Simple cash flow model for the group. If the aim is you turn your operating profit to cash, the way we look at it we sort of say okay you've got EBITDA of about £2,000,000,000 If you think of sort of interest tax and dividends which comes to £1,000,000,001,100,000,000 so that's 0.9 We've got our pension deficit funding now at about £400,000,000 So the free cash flow for the group is about £05,000,000,000 in any one year. Do we ever deliver that number in any one year?
No, we don't because we've got working capital volatility up and down. But that's the sort of the baseline position which we would look at the business before we then talk about well are we using up advances this year? Are we going to get advances on new programs? But that's the sort of simple model that we would use.
Ben, we'll come back to you in a minute because we just got one on the line. Oliver?
Can you hear me?
Yes, we can.
Hi. Yes. It's Oliver Flea. Just a quick one from Credit Suisse. Just for Linda, on the issue of the sequestration, you said that you don't think the full sequestration on the sort of DKK500 billion to DKK600 billion of cuts is likely to happen.
Just in terms of where we are right now, we've seen the first round, if you like, of cuts have come through the $450,000,000 to 500,000,000 initial from the Budget Control Act. Do you think it is likely that we end up with some level of additional cuts somewhere between what we've already seen and the full sequestration?
Yes. The short answer to that, we do expect there will continue to be cuts. But and in fact our planning number that we've mentioned in the past was as we came through this year, we were planning for cuts in the neighborhood of 600,000,000 to $650,000,000 And so we were anticipating a slightly larger cut than what actually materialized. And I think it's likely somewhere in the horse trading of how all of this gets resolved with sequestration that there will be further cuts you know, to specific programs. But this idea of a broad based massive cut across the entire Department of Defense is something that I I mean, I I live in Washington, DC, and no one to the best of my knowledge really believes that an action like that is gonna take place.
Of course, we're caught up, as you well know, and and the Democrats have a plan that does it, but it involves raising taxes. The Republicans have a plan that does it, and it involves taking more cuts to social programs. And somewhere in between there's going to be a solution someday and hopefully it's sooner rather than later. And the likelihood that that could have some further impact I think is a realistic set of expectations. But we don't expect and I don't know anyone that expects anything like a 500 to $600,000,000,000 further impact on day one on January.
So as has been said several times, we planned conservatively. This is not an environment where you get overly bullish about what's going to happen. And it's more difficult to get programs affected because of the sensitivities around earmark. So I think we're making the right kinds of assumptions and being very prudent about how we look at our programs and staying focused on delivering and performing on our programs so that they don't get caught up in in trouble category. And I think that's where you're going to start to see more programs terminated.
Okay.
Okay. Thanks very much.
Okay. Ben? And then there's Sabine again.
Yes. It was one on a follow-up one on Saudi, which Guy has kind of partially answered, but I wonder if we could maybe try and dig down a bit deeper. That it's just this training environment contract, non contract. But to try and understand what's really in that for you. So you talked about $3,000,000,000 earmarked for that over three aircraft types.
What do you see as potentially on the table for you guys? And when do you that progressing
to looking to place it in a prime contract structure. So that where we would be looked to would be to procure all three aircraft types including the simulators, including the facilities and training the people to operate the system.
So all that value goes to you. And when might we be looking at progress on that?
I think they'll start placing contracts in 2012 against an agreed forward plan.
Just no, no, you carry on. Okay. Just a follow on question on the Platform Solutions business. If you could just give us a bit more color on the performance in 2011.
I mean, it's supposed to grow next year, but in 2012, sorry. But I expected the business did have significant growth in 2011 as well given the civil
Well, a flood remember.
But so but excluding okay, right.
If you put aside the impact of the flood, the business grew pretty well. It was almost double digits in terms of the commercial aerospace side of it. So it was good.
Another double digit, I would say on a business level again excluding the flood? Yes.
The business is It's a strong growth area.
Very robust performed very well and the customers have stuck through us through all of the floods. What are Boeing going to do Linda?
Boeing has informed us that our Johnson City operations, which is where Platform Solutions was located as a standalone entity is being selected as their supplier of the year and largely because of the way they recovered from the flood and got back up online delivering products. So I'll be very
pleased with that. If you ever sort of ask us about whether our disaster recovery plans work then we can give you chapter and verse that they work with respect to that. It tested every element of our plans I can assure you.
And have you removed any of your services?
Yes. It's integrated into the business. It's part of our electronic systems business under Tom Arsenault. It's fully integrated into our business. We are going to go organically drive that business really hard.
There's a question over there.
Stephen Cahall from Royal Bank of Canada. You talked a little bit about the services in The U. S. And I think the O and M account is one of the few bright spots in the FY twenty thirteen request increasing by five percent. But there is equally and a lot in the FY twenty thirteen request about how services margins are under pressure and that looks to be the most aggressive part of the DoD's cost takeout strategy.
So firstly, can you give us a little color on how you're looking at services margins in 2012 in The U. S? And then also how much of your 2012 services are going to be recompetes versus contracts you're already on with a fairly stable flow through?
Right. Larry, you're on. Thank you, Ian.
We expect the margins as Peter said would be to the lower end of the range because it's a big investment year for us. So as we won Radford on top of what we do with Holston there is a ramp up that we're going to be undertaking. We have a very rich pipeline. Our book to bill last year was 1.3. So as we go forward, it's equally rich this next year and grew our qualified pipeline 30% year to year.
So for us using a bit of that margin to invest in that growth both in capturing business as well as ramping up as we win some of it is going to stress that margin a little bit, but helps fuel the organic growth that we contribute to the group.
You talked about profitability, the profitability part of this question.
Yeah. So it's the pressure on margins if you will.
Well, so what we've seen is there when you look at the budget in FY 2013, everyone expects that you're going to see O and M always be the front end cuts in a lot of the budget pressure. We think we're in some very solid segments where we've got a very competitive position and are very able to defend ourselves and guard that profitability.
Have we got many recompetes ourselves coming up in No.
I mean if you think of last year in terms of just percentages the fact that we won all of our multi ship contracts took care of the lion's share of the recompetes that we were facing. So as we're going forward, we're aggressively going after other people's recompetes. And it's a year for us to try and get out there and take on market share.
Do you have a split of what your recompete is? What percentage of the services business is recompeted in 2012?
It's less than 30%. Think for us a lot of our contracts are five years. So your normal cycle is about 20% of your business each year is recompeted. We had a big year last year, so it will be less than that this year.
But we won them all last year?
Yes, we did.
And we also obviously had big takeaways with Radford. And I'd like to point out with our joint venture with Winchester with U. S. Munitions, we're going after Lake City as well. We love Winchester.
Okay. We're done