Earnings Call: H2 2011

Feb 16, 2012

Right. Shall we all get started? We've hit the appointed hour. We've got this big clock up there keeping me in order. All right. Well, thank you for coming. I'm sure you will have all have 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 announce 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 Oman OPV contract, the Ground Combat Vehicle and Radford Award protests, and the deferred trading on Al Salam. 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. The group strategy has developed accordingly. We have moved quickly to take the 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 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-35 combat aircraft, submarines, naval ships, and armored vehicles. These programs form a large core of business with good multiyear 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. More recently, our products and people made a significant contribution in the success of U.K. 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 will stay ahead of the game. In the U.K., budget constraints remain, but following the Strategic Defence 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 GBP 500 million. 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 GBP 4.8 billion 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 GBP 124 million in Hawk-related business. With other new business, order intake from India totaled GBP 170 million. 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 2000 update in India. Our share of the weapons order is valued at GBP 300 million. On the recent announcement in India, which plagued 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 GBP 2 billion, 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 Salam 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 Tranche 3 capability in respect of the last 24 aircraft, and finalization of price escalation. On the core 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 GBP 1.2 billion of orders following approval of the budgets in Saudi. As we said last year, the correct settlement is key, not the timing of the settlement. In summary, this is a difficult operating environment. 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. 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 will 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 GBP 2.2 billion 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 take your questions. Pete. Thanks, Ian, and good morning. Today's the first time we've reported under our new segmental structure, 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 intelligence assets are performing, and to improve external alignment of reported performance to the management of the operations. 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. I'm going to cover the 2011 results first, then move on to guidance for 2012. Firstly, the headline numbers compared to 2010, sales declined by 14% to GBP 19.2 billion, primarily from the volume reductions in Land & 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 GBP 2,025 million. Underlying earnings per share of GBP 0.456 included GBP 0.059 arising from the previously announced U.K. R&D tax settlement. Excluding that benefit, underlying EPS was almost unchanged. Operating cash flow totaled GBP 634 million, and net debt closed at GBP 1,439 million. Finally, the dividend for the year has been increased to GBP 0.188 per share, up 7.4% on 2010, and at this level, the dividend is covered 2.1 times by underlying EPS, excluding the R&D tax benefit. The 2011 results and their comparison to 2010 have been affected by both M&A and exchange rates. The acquisitions announced towards the end of 2010 were all completed in the first half of 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 US dollar exchange rate for the year was 160, compared to 155 in 2010. We have appended to the presentation packs adjustments made to produce like-for-like comparisons. Like-for-like sales reduced by 15%, or GBP 3.2 billion, of which GBP 2.2 billion came from the volume reductions in the Land & Armaments business. The underlying EBITA of GBP 2,025 million gave a return on sales of 10.6%. Underlying finance costs of GBP 199 million were GBP 8 million higher than in 2010, this included a charge of GBP 28 million for the costs arising from the early debt redemption related to the regional aircraft disposal, most of that cost would have been borne in 2012 and 2013. There was a goodwill impairment charge taken of GBP 94 million, that relates to the surface ships and land businesses. The underlying tax rate of 26% was 2% lower than previous guidance, this excludes the benefit arising from the U.K. R&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 Salam and European Typhoon Tranche 2 programs, utilization of provisions, and for the delay in the expected cash receipts pending completion of the changes to the Salam contract. The reported pension deficit has increased by GBP 1.1 billion, 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. Finally, net debt increased to just over GBP 1.4 billion. 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 GBP 18.1 billion. In aggregate, across all the group's pension plans, equity investments now comprise 51% of scheme assets. Over the year, liabilities have increased by GBP 2 billion. The year's discount unwind accounts for GBP 1.1 billion of this increase, and a further GBP 0.3 billion 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, this accounts for the rest of that increase. The net impact of all these movements is an increase to the group's accounting pension deficit of GBP 1.1 billion. That's the accounting at 31st of December. 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 2000 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 2008 when the last deficit recovery plans were agreed. Whilst the funding deficit has increased only slightly to some GBP 3 billion, it is GBP 1.1 billion 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 15-year deficit recovery period, and the revised funding profiles. The U.K. pensions regulator has been briefed, and we await final acceptance of those agreements. Of the incremental GBP 1.1 billion of funding required, some GBP 130 was paid in 2011, around GBP 200 million will be paid over the next five years, and the remainder, some GBP 800 million, is scheduled over the subsequent 10 years. Total annual deficit funding across all group schemes will be some GBP 400 million in 2012. The agreement reached on the sustainment of our multi-year 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 GBP 951 million, this number is stated after pension deficit funding of GBP 375 million. After net capital expenditure of GBP 268 million, dividends received of GBP 88 million, and further pension contributions of GBP 137 million made into the trust mechanism, the operating business cash flow totaled GBP 634 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 here, the all-up total for pension deficit funding made in 2011 was GBP 512 million. The cash flow at head office you see here contains GBP 266 million of that number. This next slide sets out the movement in net debt through the year. We started the year with debt of GBP 242 million. Interest, tax, and dividends amounted to GBP 1.039 billion. The GBP 500 million share buyback program announced with the interim results was completed in December. We acquired 184 million shares or 5.4% of the issued capital at an average price of GBP 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 GBP 256 million. Exchange translation and all other movements totaled GBP 27 million, closing net debt then of GBP 1.439 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 billion, with cash held of GBP 2.8 billion, giving the reported net debt of GBP 0.2 billion. The total cash outflow for the year was GBP 1.2 billion. Within the year, we repaid debt financing of GBP 1 billion. The blended rate of that debt was 5.5%. New term debt of GBP 0.8 billion was put in place in October. That debt was in 3 tranches over five, 10, and 30 years at a blended rate of 4.75%. Holdings of low-cost short-term commercial paper were increased by GBP 0.4 billion. Therefore, at the end of the year, total borrowings had increased to GBP 3.2 billion. Cash holdings had been reduced to GBP 1.8 billion and net debt, therefore, was GBP 1.4 billion. We expect much of the commercial paper to be redeemed in the short term. Pension deficit funding will be some GBP 200 million in the first quarter of 2012. The final dividend for 2011 of GBP 0.4 billion is payable on the 1st of May. 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 Al Salam 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. Return capital to shareholders when the balance sheet allows. Investment in value-enhancing acquisitions will be considered when market conditions are right, where they deliver on the group's strategy. The combination of share buybacks and dividend payments in 2010 and 2011 has been GBP 2.2 billion or around 20% current market capitalization. Turning now to the sectors, I'm going to cover the in-year performance here and then return to the 2012 outlooks a little later. To the first of those sectors, Electronic Systems, 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 $4.2 billion, primarily due to the completed F-22 and A-Turkam production contracts, the rescheduled F-35 program, and the Johnson City flooding, which resulted in sales of some $100 million being deferred into 2012. The return on sales achieved of 14.6% was marginally above the very top end of our forecast range. Program execution was strong, with good risk retirement seen on those completing production contracts. The business also delivered in-year benefit from continued cost reduction action. Order backlog increased marginally to $5.6 billion, despite some delays and disruption in contract awards caused by the continuing resolution which operated throughout the final quarter of 2011. Cash conversion of EBITAR 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 Detica. The numbers here again shown in U.S. dollars. In aggregate, sales of $2.2 billion increased by 21% over 2010. Of this growth, 17% came from the acquisitions of L1, ETI and Norkom. 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 cost of the business acquisitions made and organic investment as we positioned Detica to have less reliance on government consulting business and towards growth in commercial markets. Cash conversion of EBITAR for the year was at 90%. Order backlog increased to $1.7 billion, 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. As promised, we want to give appropriate transparency as to the respective performance of the two businesses within this sector. This slide shows the performance of those two businesses. Firstly, addressing Land and Armaments, sales declined by 38% to $5.7 billion, 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 Caiman 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 3 months of award protest, and as a result of the delayed contract placements for GCV and Caiman 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 $5.2 billion, primarily for the 3 Multi-Ship, Multi-Option, five-year awards received in the first half-year. The $850 million award for the Radford Army Ammunition 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 £6.3 billion reduced compared to 2010 by 4% and were similarly below our last guidance due to the delay in securing certain of the contract amendments on the Salam Typhoon program. The 2011 return on sales of 10.5% included three material items. The GBP 125 million benefit from the higher level of rationalization cost recovery agreed in June with the U.K. Ministry of Defence, the first half charge of GBP 160 million taken on the Oman Offshore Patrol Vessel contract, and a GBP 60 million 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 Al Salam program, particularly the formalization of price escalation, where applicable trading has been deferred until ongoing negotiations have been concluded. A result, the year's sales of GBP 3.8 billion 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, EBITA of GBP 449 million is unchanged from the prior year. A 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 Al Salam 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. For reference, there is a chart providing a summary of the trading performance of the five sectors, 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 2010'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 GBP 0.398. 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, all other operational improvements. There is the impact of exchange translation and increases from the year's lower tax rate and reduced share base following the 2010 and 2011 buyback programs. Earnings per share then of GBP 0.397, plus the R&D tax settlement, giving a total for the year of GBP 0.456. 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. 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 Ian referred to earlier. Given the uncertainties in the market, we feel it appropriate this year to give this additional disclosure. 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. 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%-14%. Next, cyber and intelligence. Here, we continue to plan for growth at around the mid-single-digit mark. Whilst the U.S. business, which was some 80% of this sector in 2011, is expected to have a lower growth rate, the Detica business is planned at a double-digit level, supported by its continued expansion into the commercial markets. Margins in 2012 are expected to be within our 8.5%-9.5% range, with further organic investment planned for Detica and the acquired ETI and Norkom 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. The guidance for this sector is best addressed in two parts. On land and armaments, we now see sales at the GBP 5 billion level rather than the previous GBP 6 billion guidance. Whilst we have 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 Caiman 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. To that end, excluding the more short-term individual protection systems business, some 88% of the 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 shipyards is lower in 2012, but we expect this to be compensated for by new business elsewhere, including from the Radford Army Ammunition Plant award. 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 Al Salam 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 cost arising from those lower discount rates, margins in this sector should be maintained within our 10%-12% guidance range. The last of the sectors, platforms and services international. Here we expect sales to show significant growth when in excess of 25%. Firstly, for the deferred trading arising from the Al Salam price escalation, on which, as Ian said, we would expect to conclude negotiations this year. For the higher levels of support to the Typhoon aircraft now in service in Saudi. Finally, for weapon deliveries under the Tornado upgrade program. Timing of those SALAM price escalation negotiations will determine the shape of the first half, second half split. Margins are expected to be around the 10% level in this sector. To complete the 2012 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. The effective tax rate is now expected to be within a 26%-28% range. This is a little higher than the rate in 2011, but below our previous guidance of 30%. 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 SALAM negotiations in 2012, and excluding the benefit of the 2011 R&D 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 SALAM program. With that, we'll turn it over to questions. 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 2013 budget that we saw published earlier this week. First one on land systems. I think probably of your $5 billion or so for 2012, maybe about two or so would be actually land platforms as such, programs of record. Looking in the detail of the FY 2013 budget, there's worryingly little money for a lot of those programs. Do you think that if your $5 billion is a floor, does that still contain some further downside for those big platforms, if you like, your Bradleys and so on? Then second question, F-35 has been pushed off to the right. What's your picture now of the shape of F-35 ramp-up? Was that already contained in your previous guidance? Where do you see it really inflexing 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, while he thinks of what he's going to respond to your question. On F-35, 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 ramping up in the latest plans? The plan we have essentially shows production rates of 35 aircraft per year for the next 45 years. We're talking about land tactical vehicles in the U.S. Bob, FY 2013, we'll just ask Peter after that just to talk about it, because our GBP 5 billion isn't just vehicles in the U.S. let's get Peter after that just to talk about the shape of the overall sales. I think when we look at the 2013 budget, we didn't really see anything that was a surprise or a hard right turn. we feel very comfortable right now that what's in that budget is, as Ian said, consistent with our planning assumptions going forward. 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, you'll also see a number of smaller programs attachable to vehicles. we feel good about where we are in the U.S. pieces of it. as well, you'll also see there is a number of other opportunities in that GBP 5 billion, to Ian's point, that aren't necessarily in the U.S. of that GBP 5 billion. There is an awful lot of good, solid international opportunities as well that continue to mature in the marketplace. 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. Pete, why don't we just go through what's in the GBP 5 billion? Yeah, that's fine. There is the sort of view, GBP 5 billion, this is not just about U.S. vehicle program. If you break the land business down into its constituent parts, the U.K. is just over GBP 1 billion of that GBP 5 billion, and that's supported by the long-term munition contract and the M777 gun contracts we have. In Sweden, there's about half a billion GBP. In South Africa, there's half a billion GBP. We have a naval guns business in the U.S. as well, which is another half a billion GBP. Where you're then at is sort of about, that's half of the business. The other half, we have what's called an individual protection systems business. This is everything from individual soldiers' body armor. That's another half a billion GBP. The core land vehicles program business is GBP 2 billion out of that GBP 5 billion. Just to put it in perspective. Okay. There was one, yeah, another one in the window. Ed Stacey from Espirito Santo, two questions. Firstly, on Typhoon exports. I think there's two customers now for Rafael who are still in the position of having selected Rafael but not wrapped it up. The UAE, could you comment on whether that one is still sort of a live negotiation, 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? 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 UAE? Yeah, sure. Yeah, UAE, we're very much in play. The UAE government have announced that they were not satisfied with the offer they had from Rafael Typhoon. We are experiencing incredibly high level of 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. 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. I'd expect negotiations to start almost immediately afterwards on the contract that, as Ian said, we expect to generate over a GBP 2 billion order this year. We're also in play in Qatar and Malaysia, which is slightly longer term. Malaysia is actually evaluating the aircraft this week in the U.K. There's a lot to go for, an awful lot of aircraft orders there at the moment. 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. We don't see that that's going to be the game that is played. 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. 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 got 100%, didn't we, Linda? Yes. No, it's just the programming of when the customer releases the ships to us. Yes. Hi, good morning. Celine Fanaro, Merrill Lynch. Hey. 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. 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. The second one is more for Pete, maybe on the land systems. 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%? 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? Want me to take those, Ian? Pete, take the first two, then we'll ask Guy, who runs our Saudi business, to comment about reaction. Yeah. First question, Celine, 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 enduring view of those businesses. Specifically, yes, you're right, the order book in aggregate for the group has declined. The order book Is lumpy. It does depend upon timing of some major contracts. Give you an example, if you look at Typhoon Tranche 2, for example, you get a big contract, then you trade that over a number of years. We are 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. 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. We 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 20 basis points on the margin. Because of the delay in both the Caiman 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. We still, for 2012, we're still looking at a 10% target. 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. 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, I think it's important to note that in the Royal Decree that Ian referred, published further budgets for the Salam program, which His Royal Highness, King Abdullah, signed just before the end of last year. That provided for some significant budget releases, about GBP 1.5 billion 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 3 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 has also provided for a series of further enhancements, including weapons fit on the program. The strategic significance, I think, of that Royal 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. 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 Saudis' operational requirements. In summary, I don't see anything in the Indian decision that diminishes Saudi commitment to the Typhoon platform. Ben. Oh, you're going to get two microphones there, Ben. You could've been in stereo. Questions. Twice as bad. Twice. Yeah. Ben Heelan from Deutsche. A couple of questions. Firstly, just on capital allocation, it seems that your commentary is consistent with 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. Couple of sub-questions within that, if I could. Firstly, what was the actual organic growth in the commercial cyber business that we saw in 2011? Secondly, how much longer will this investment phase continue in some of the Detica Norkom businesses? Because it sounds like that's 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. What is the organic growth in the commercial sector? In terms of the, let's call it, the legacy Detica business, we had 37% growth in the commercial part of Detica this year. 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 a different way. We have a number of initiatives going on. We're not going to stop in terms of the investment that we need to put in to grow into that sector. It won't be over in 2012. I'd also add to that, Ben, the shape of the Detica business now is, it was 70/30, sort of government commercial. We're now approaching 50/50. The focus on commercial is much higher than it's ever been. I come 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&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 GBP 1.8 billion. We've got GBP 1 billion of that earmarked in the next three months. Clearly, there is a cash dependency around getting this price escalation sorted on the Salam contract. In terms of when would we revisit a view on what the balance sheet looks like in terms of cash availability, that's the trigger. Just one follow-up. The earnings guidance obviously excludes anything further on buybacks. Correct. Yes. Yes. Absolutely. Okay, one in the middle. Thank you. Ravina Vig, Morgan Stanley. Two questions, please. Ian, one perhaps for you on India. Yeah. Can you just clarify what exactly is the status? Rafale team saying they've effectively won, they're in sole negotiations now. Under what mechanism do you get let back in, just so we can be sure on this? Then a question perhaps for Linda on the U.S. side. Are you fully expecting the FY 2013 budget to go into a continuing resolution? Is yours based upon that planning assumption? Then a follow-up on that in terms of sequestration. What's your view on that? 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 35 minutes left, haven't we? Go on, Linda, while you're there. Aaron, you can help me if I get myself in trouble here. This is a presidential election year, not a whole lot's 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, then we'll see if a lame duck Congress can actually get something done. It happened in the past, it's not a real high probability. We'll have some uncertainty that will play out through the election and into the first of next year, 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., 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, Congress is trying desperately to find a way to make it go away. So we do not have a plan that takes into account another GBP 500 billion-GBP 600 billion worth of cuts beyond the cuts that have already been announced. Our customers are not doing any such planning either. 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. That is the basis upon which we are moving forward now, and it is consistent pretty much with the rest of the industry. Right, I am going to let Guy answer the question on India, because the last time I gave a public response to this, I got myself into a bit of hot water. 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 the Indian 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. It will not surprise you that in order that we are ready for any such engagement, we are working very closely now with our German Cassidian 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. That, if and when the day comes when the Indian customer decides he has got to a point where he does want to engage the L2, we have something interesting to say to him. Well, that is very politically correct. That is as the process runs. There are enough examples in Indian procurement where the L2 has actually ended up with the contract. Hi, Ian. Hello, Joe. It's Joe. It's good to see you in person. Yes, I'm glad to be here as well. We always have this picture of you with your cup of coffee and your pajamas on making the call. Yes, it's an ugly picture. I wanted to continue on with India. Yeah. I'm certainly nowhere near as knowledgeable as your team about how this goes, but my impression is that the BAE team knows how to sell this stuff around the world, and that having Cassidian 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 change the way you behave during the process, where you wait for the L2 opportunity? 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? The answer to all those questions is yes. We've not had a formal debrief yet. There is certainly information that we have, which would lead us to believe that we can do something in terms of how we structured our bid. The U.K. government, you will have seen Prime Minister's public responses to this is going to get more front and central. The one thing that we have to recognize is that there is an L1 and there is an L2, and the L2 is a Cassidian bid, German-led bid, and that has to remain, otherwise the competition can't work because there aren't two bids on the table. Any support has to be done in terms of the structure of the original bid. 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 It's hard to have a really frank answer, 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 50/50, when everybody was out there running away, this is a shoo-in for Typhoon, we never, ever said that. This was always a 50/50. It's a capable aircraft. Typhoon has some aspects of it which are better. We have to work hard on this. We're not giving up. There's a long way to go in this process yet before it turns into a contract, and we're going to give it our best shot. 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. You've got the GBP 200 million into pension. Maybe I misheard you. I thought you talked about GBP 200 million going in over five years. Can you just clarify what exactly is happening there on the pension? Yeah. If you're referring to the sort of additional top-up over and above your normal funding. The GBP 200 million that I referred to is the top-up on top of where we were before, and that's over a five-year period. What's the GBP 200 million outflow in 2012 in use of cash? Before these sets of valuation agreements we just reached to, we've been running with about GBP 350 million per annum of deficit funding. The agreements we've now reached takes it up to about GBP 400 million. Sorry, maybe I misread it. Did you say you had GBP 200 million to put in pension on your use of cash? What I said. Yes, in terms of cash, I said we've got GBP 1.8 billion of cash today. Yeah Well, as at 31st of December. Yeah. What I said was of the funding that we will put in of GBP 400 million in 2012, GBP 200 million of that goes in the first quarter. Okay. Your near-term cash utilization is. GBP 200 into pension- Why is that relevant to us? I just wondered why you're showing us the GBP 200. What I'm showing you is we have GBP 1.8 billion of cash, and GBP 1 billion of that is earmarked already. We have GBP 800 million of cash, if you like, that we have to use within the balance sheet. The second one is, obviously the guidance for 2012 is predicated on Saudi coming through. Can you just say what possible risks there might be around that? 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, the escalation discussions, it's one of the quantum that we want to get rather than the timing. The issue for me, timing and how we conclude the negotiation. We are active in those negotiations. We will do the 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 would just remind everybody that when we signed up to the Terms of Business Agreement, which was a 10-year agreement, it talked about making sure that we had the right capabilities in the U.K. to maintain a complex warship capability. What that meant is that coming off the massive high 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. 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 is a bit confusing that we're still here in this building. You're confused. This is all getting a little bit granular. Your balance sheet and working capital is always a little bit of a mystery to me. If I looked at the cash flows in the U.K. business, they've probably been GBP 400 million or GBP 500 million better over the last five years than I would've thought. 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. Am I barking up the wrong tree? Not quite. I mean, if 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 Oman OPV 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 job losses in 2010. In 2011, those rationalization costs will be funded. We've got advances sat there on the European Typhoon Tranche 2 program, which we will utilize through 2012. We've got those three items running through the 2012 cash flow. Right. 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. Brilliant. GBP 2 billion 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 to much more than half a billion on PIM, Bradley, FIST, or whatever. Is it safe for me to assume that the other $1.5 billion is kind of spares and service and support or not? I mean, there is a lot of support. I mean, it's 50% of the business. I don't know if 50% of the business is- You've studied this in some detail. The vehicles, as I said before, the assumptions are consistent, Sandy. He's over there. Where he went to. Hi. There he is. Yeah, it's consistent. When they look at the budget of the major programs, there really wasn't anything we expected in, and the business is about half of it is spares, repairs, so you won't see a line for it itself. You won't find that in and of itself on an individual line when you add it up. We feel pretty comfortable with where we're at for 2013. I think the risks Linda highlighted around sequestration and stuff, and as that plays out, that's probably the biggest risk you see in the environment 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 '13. Yeah. I actually 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 sequestration would actually disappear. Obama is trying to make the thing go away, isn't he? Yeah, if they can find, what, about $2.2 trillion 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 $1.2 trillion in cuts over time for that not to occur. That's not an insignificant challenge. Yeah. Do we think he's trying to make it go away? Oh, yeah. Absolutely. In answer to your question, yes. They're trying to finesse it so it goes away. Absolutely. All right. Good man. A very nice chap. Just on Saudi, now that we've got all this extra visibility, like a five-year rolling plan, I mean, how is that going to change the way we operate? Do we have any other visibility, therefore, into the way the Saudis now run their defense budget, with a view to Bradley coming down the tracks at some point? Guy? It'll 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. 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. Across the five-year period, the decree provided for GBP 12 billion funding in relation to that activity. 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 $3 billion. We're now in the process of translating all that into formal contractual commitments, 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 Foreign Military Sales case between the Saudi and U.S. governments. At the moment, the operational requirement has been confirmed, but we don't have, I don't have, anyway, specific visibility that the budget has been created, although we see a lot of activity on the Saudi side aimed at doing that. 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. If you upgrade your tanks, which is what they're doing now, they should do the Bradleys later, then? The Bradley requirement, as they've articulated operationally, is both for a new buy, which 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? Yep. 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 billion. If you think of interest, tax, and dividends, which comes to 1.1 billion, that's 0.9. We've got our pension deficit funding now about 400 million. The free cash flow for the group is about half a billion GBP 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. That's 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? That's the sort of simple model that we would use. That wasn't the intention. 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. It's Oliver Fleet. Just a quick one from Credit Suisse. Hi. Just for Linda, on the issue of the sequestration, you said that you don't think the full sequestration on the $500 billion or $600 billion additional 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 billion to $500 billion 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, is the short answer to that. We do expect there will continue to be cuts. 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 billion to $650 billion. 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 to specific programs. This idea of a broad-based, massive cut across the entire Department of Defense is something that, I live in Washington, D.C., and no one, to the best of my knowledge, really believes that an action like that is going to take place. Of course, we are caught up, as you well know, 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 is going to be a solution someday, hopefully it is sooner rather than later. The likelihood that that could have some further impact, I think, is a realistic set of expectations. We do not expect, and I do not know anyone that expects anything like a GBP 5 billion to GBP 600 billion further impact, on day one on January of next year. As has been said several times, we planned conservatively. This is not an environment where you get overly bullish about what is going to happen, and it is more difficult to get programs affected because of the sensitivities around earmarks. I think we are 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 do not get caught up in trouble category. I think that is where you are going to start to see more programs terminated. Okay. Okay, thanks very much. Okay. Ben, then there is something again. it was 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 is just this training environment Yes non-contract. To try and understand what's really in that for you. You talk about GBP 3 billion earmarked for that over 3 aircraft types. What do you see as potentially on the table for you guys, and when do you see that progressing through the contract? They're looking to place it in a prime contract structure, that where we would be looked to would be to procure all 3 aircraft types, including the simulators, including the facilities, and training the people to operate the system. 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 a- That's all right. No, you carry on. Yeah. Okay. Just a follow-on question on the Platform Solutions business. Yeah. If you could just give us a bit more color on the performance in 2011. It's supposed to grow next year, in 2012, sorry, I expected the business did have significant growth in 2011 as well, given the Well, we had a flood, remember. The flood. Excluding Okay, right. If you put aside the impacts of the flood, the business grew pretty well. It was almost double digits in terms of the commercial aerospace side of it. It was good. It was another double digit, I would say, just on a business level, again, excluding the flood. Yeah. Yeah. Yeah. Yes. It's a strong growth area. very robust, performed very well. The customers have stuck through us through all of the floods and 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. Largely because of the way they recovered from the flood and got back up online delivering products. That was great news. If you'll ever sort of ask us about whether our disaster recovery plans work, we can give you chapter and verse that they worked with respect to that. It tested every element of our plans, I can assure you. Have you removed any idea of selling the business? Yes. It's integrated into the business. It's part of our Electronic Systems business under Tom Arseneault. It's fully integrated into our business. We are going to go organically drive that business really hard. There's a question over there. Steven Cahall from Royal Bank of Canada. You talked a little bit about the services in the U.S. I think the O&M account is one of the few bright spots in the FY 2013 request, increasing by 5%. There's equally and a lot in the FY 2013 request about how services margins are under pressure, and that looks to be the most aggressive part- Yeah of the DoD's cost takeout strategy. Firstly, can you give us a little color on how you're looking at services margins in 2012 in the U.S.? 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. 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. 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. As we go forward, it's equally rich this next year, and grew our qualified pipeline 30% year-to-year. 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. Can you talk about the profitability part of this question? Yeah. You know, the pressure on margins, if you will. What we've seen is when you look at the budget in FY 2013, everyone expects that you're going to see O&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? No. 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. 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 % of the services business is recompeted in 2012? It's less than 30%. I think for us, a lot of our contracts are five years, your normal cycle is about 20% of your business each year is recompeted. We had a big year last year, it'll be less than that this year. We won them all last year. Yes, we did. 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. Are we done?