Right. Good morning to everyone joining us today. I realize that there are a large number of company announcements in our sector, we will keep this briefing tight for you. There are some key points I want to make before passing over to Pete. First, the environment is challenging, the company continues to perform well, underpinned by aggressive cost reduction now and into the future. Second, strategy. We continue to pursue the fast lanes of growth that we have described to you before, military services, cyber and intelligence, and high-end electronics. Our platform positions have been sustained. In addition, we see growth in our home markets and from exports. Any acquisitions to develop the business will be modest in size and highly focused. For example, OASIS was, in essence, a fast-track substitution for R&D spend in electro-optics.
We have been and are looking for further opportunities to streamline the portfolio. We have recently completed the sale of the Saab shareholding and Regional Aircraft. Third, the balance sheet is strong, we have a good track record of cash conversion, something I intend to retain. With the U.K. pension fund valuation process now well underway, we have been able to announce for the second consecutive year a share buyback of up to GBP 500 million. Our structured capital allocation strategy will balance organic investment dividends, share repurchases. Selective acquisitions will also be considered when they benchmark against the other uses of capital. Lastly, in this environment, customer affordability is the overriding consideration. We have already taken a great deal of cost out of the business, we will continue to drive efficiencies and offer more cost-effective solutions to our customers.
This action on cost has contributed to the resilience of the business, with margins maintained despite the 13% reduction in sales during the period. I don't want you to be in any doubt that this is a key focus of mine. It is that focus on cost that will enable us to compete, win, and prosper. Pete.
Thanks, Ian. Good morning. These are a robust set of results delivered in a challenging market environment that demonstrate the resilience of the group. I will give a trading update as usual, there are a number of specific items that impact the appearance of the numbers, I'll highlight these as I go through. Firstly, in headline terms compared to the first half of 2010, as expected, sales declined 13% to GBP 9.2 billion for the volume reduction in land and armaments, the impacts of the SDSR on the U.K. business, this year's weighting to the second half from the Salam program. Underlying EBITA decreased 12% to GBP 968 million after taking the recently announced charge of GBP 160 million on the Oman OPV program, a benefit of GBP 125 million from a U.K. MOD settlement agreement. Underlying EPS at GBP 0.192, reduced by 4%.
Operating cash flow totaled GBP 176 million. Net debt closed at GBP 1.122 billion. The interim dividend has been increased to GBP 0.075 per share, up 7.1% on the 2010 interim. The 2011 first half figures have been affected by both M&A and exchange rates. The acquisitions announced in 2010 were all completed in the period. Following the announcement of our disposal of the Regional Aircraft asset management business, which completed on the 15th of July, the results of that business, which were previously included in headquarters, are now reported as a discontinued operation. Figures for the comparative period have therefore been restated. The average U.S. dollar exchange rate for the reporting period was $1.62, and that compared to $1.52 for the first half of 2010. We have appended to the presentation pack the adjustments made to produce those like-for-like comparisons.
Like-for-like sales reduced by 13% or GBP 1.3 billion, of which GBP 1.1 billion came from the land volume reductions. Underlying EBITA of GBP 968 million gave a return on sales of 10.5%. Underlying finance costs were GBP 76 million, a reduction of GBP 20 million over 2010. There was also a GBP 41 million charge for costs arising from the early redemption of debt, arising from the Regional Aircraft disposal. Some of those costs would have been borne in 2012 and 2013. There was a goodwill impairment charge taken of GBP 22 million in the half on the Surface Ships business. The tax rate for the first half year was 26%, benefiting from settlements reached in both the U.S. and the U.K. on a number of prior year items.
The full-year planning rate is therefore likely to reduce to around 28%, the precise outcome being largely determined by the mix of profits between the U.K. and the U.S. It is not expected that these settlements will give a materially sustainable benefit in future years. There were a number of items impacting the balance sheet in the period. The acquisitions that I mentioned earlier, which have increased the intangible assets. The disposal of the Regional Aircraft business, reducing the tangible fixed assets. As anticipated, there was an increase in working capital as advances were consumed on the Salam and European Typhoon Tranche 2 programs. I'll come back to pensions on the next two slides. Net debt increased to GBP 1.1 billion, and other movements were mainly due to foreign exchange translations. This slide shows the pension scheme assets, liabilities, and the deficit as accounted for under IAS 19.
The value of the scheme assets has increased over the period to GBP 17.6 billion. Real discount rates reduced by 10 basis points in the period on marginally lower bond yields in the U.S. and higher inflation in the U.K. This has increased liabilities by some GBP 300 million. The usual six months of discount unwind accounts for the rest of the increase in the liabilities. The net impact of all these movements is an increase to the group's accounting pension deficit of around GBP 100 million. That's the accounting. I'll now turn to the funding valuations that are underway now on the two largest U.K. schemes, the 2000 Plan and the Main Scheme. This chart shows the development of the estimated funding deficit on these two schemes compared to the position we would have expected at the time of agreeing the deficit recovery plans.
The asset returns achieved have been marginally ahead of previous expectations. Primarily due to the lower discount rates, liabilities have increased, and this has led to an estimated increase in the deficit to be funded of some GBP 1 billion. The company and the trustees of the schemes have commenced discussions on the underpinning assumptions behind the calculation of those liabilities, but those discussions will not be concluded until later in the year. Therefore, the estimated deficit shown here is subject to adjustment. You may recall that the deficit recovery period agreed with the scheme's trustees at the time of the last valuation was 18 years, of which 15 years still remain. Sustaining this multi-year deficit recovery profile is very important to the group. The company expects to have agreed assumptions for the liabilities and to have commenced discussions with the trustees on new deficit recovery plans by October.
Cash flow from operating activities totaled GBP 176 million. After net capital expenditure of GBP 146 million, dividends received of 6, and pension contributions of GBP 25 million made into the trust mechanism, the operating business cash flow totaled GBP 11 million. Looking at the operating groups, there was the expected level of cash generation in the EI&S businesses, and we anticipate good cash delivery in the second half. At Land and Armaments, we expect a much stronger level of cash generation in the second half year. Customer advances were consumed, most notably on Salam and the European Typhoon Tranche 2 program. Those drove the cash performance at programs of support and international. We do expect cash inflows in the second half year as major Salam milestones are scheduled.
The cash outflow at head office includes GBP 11 million for the first installment of the United States Department of State settlement and GBP 96 million for previously agreed pension deficit contributions. This slide sets out the movement in net debt through the first half year. We started with a net debt of GBP 242 million. Interest, tax, and dividends amounted to GBP 568 million. The acquisitions completed in the first half, net of GBP 152 million proceeds from the disposal of our Saab shareholding, amounted to GBP 382 million. Disposal proceeds of $187 million from the Regional Aircraft transaction were received in July and are therefore not yet included here. Exchange translation and all other movements total GBP 59 million, closing net debt of GBP 1.1 billion. I'd like to now focus on the issue of capital allocation.
Firstly, an update on the numbers. This chart shows the gross debt, cash, and net debt of the group. At the beginning of the year, total borrowings amounted to GBP 3 billion, with cash held of GBP 2.8 billion, giving the reported net debt of GBP 0.2 billion. In the first half of the year, the total cash outflow was GBP 0.9 billion, inclusive of some commercial paper issuance. In addition, as part of the disposal of the Regional Aircraft asset management business, debt financing amounting to some GBP 0.3 billion was repaid in June. The 30th of June, total borrowings had reduced to GBP 2.8 billion, cash held stood at GBP 1.7 billion, and net debt was therefore GBP 1.1 billion.
The share repurchase program announced today of up to GBP 500 million is supported by that level of cash held, the improved clarity on the pension funding position, and progress in engagement with scheme trustees. It is expected that the buyback program will require a payment of some GBP 160 million into the pension schemes, as was the case last year. The interim dividend is payable on the 30th of November. The combination of share buybacks and dividend payments in 2010 and 2011 will now exceed GBP 2 billion, or around 20% of current market capitalization. The group's balance sheet will continue to be managed conservatively, both in line with the group's policy to retain its investment-grade credit rating and to ensure operating flexibility. Consistent with this approach, we will meet our pension obligations and continue to pursue organic investment opportunities.
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 through accelerated returns when the balance sheet allows. Investment in value-enhancing acquisitions will be considered when market conditions are right and where they deliver on the group's strategy. Turning to the operating groups, and the first of those, EI&S, with the figures here shown in U.S. dollars. Sales increased by 4% to $4.2 billion. Although like-for-like sales reduced by 2% when compared to 2010, due to the completing F-22 and ATK production contracts, margins were achieved at the higher end of our forecast range. I would just like to dwell for a moment on a new key performance indicator you can see on this slide, order backlog.
We are introducing this to give you more visibility and to show why we have confidence in the growth prospects and sustainability of this business. This KPI provides visibility of the total value of contracts won, not just the funded value, which is recorded in the order book. In this operating group, order backlog gives a more meaningful measure of the sustaining business levels. A good example of order backlog would be in the ship repair business. Multi-ship, multi-option contracts for five years are secured, then only funded by the customer incrementally. The order backlog therefore recognizes the remaining period of the contracts awarded, but not yet funded. Contract awards were strong in the period, particularly in the support and the Intelligence & Security sectors. In the naval support business, three multi-ship, multi-option, five-year contract awards were received, securing activity in all our naval yards.
The $850 million competitive award for the Radford Army Ammunition Plant has been protested by the incumbent contractor as expected and is therefore not yet included within order backlog. In the Intelligence & Security sector, important awards were placed by the Defense Intelligence Agency under the Solutions for Information Technology Enterprise program, and from another U.S. government agency for full-motion video and geospatial imaging analysis. Order backlog increased to $12.1 billion. Cash conversion of EBITDA was at 76%, and we would expect improvement to this over the full year. In addition to an increase from acquisitions made of circa $350 million, we continue to anticipate some like-for-like sales growth in this business this year, with margins remaining in our target range of 10%-12%.
Sales at Land and Armaments reduced to $3 billion in the first half year as the FMTV program concluded and on a lower level of Bradley reset activity. Rationalization programs continue to address the lower volumes, underpin the return on sales, and enhance competitive positioning. By the end of this year, net headcount will have been almost halved, a reduction of some 13,500 since the sales high point of 2008. Margins were just below the 10% target due to the timing of rationalization costs. We do anticipate improved cash flows in the second half of the year, and for 2011 as a whole, we expect this business to deliver sales around $6 billion and at a target return of 10%. This is also our medium-term outlook for this business. Programmes and Support has had a mixed first half.
Compared to 2010, sales were up 3% or 2% on a like-for-like basis, a little higher than expected. Underlying EBITA reduced by GBP 31 million compared to 2010. The Oman OPV charge was GBP 160 million, subsequent to last year's SDSR, agreement was reached in June with the U.K. MOD on a number of outstanding items, including an increased level and early recovery of rationalization costs. The benefit from this recovery in the first half year was GBP 125 million. An element of this had been expected later in the year, therefore the benefit to the full year compared to our previous guidance is some GBP 90 million. As forecast, there was only a small cash inflow in the first half as customer advances were consumed and cash was expended on the Oman OPV program. We do expect a cash outflow in the second half of the year.
We now anticipate sales for 2011 to be marginally higher than in 2010. The impacts to profit from the Oman charge and the higher rationalization cost recovery flow through to the full year. Turning to International. As expected, due to the weighting to the second half year, like-for-like sales reduced by 13% compared to 2010. However, underlying EBITA of GBP 221 million was almost unchanged. Earlier than planned risk reduction on the Tornado upgrade program has contributed to the half's higher return on sales. The customer changes to the Salam program that require both contract and pricing revisions remain under negotiation. These changes are planned to be concluded in the second half year, clearly there is a trading dependency on achieving a timely conclusion this year. There was, as expected, significant cash utilization in the first half, primarily on the Salam program, as milestones are scheduled for the second half.
The cash outturn for the year will be determined by achievement of those milestones. For the year overall, we continue to anticipate sales and margins at a similar level to those for 2010. Given the number of moving parts within this half year's results compared to 2010's, I thought it might be useful to provide a bridge between the two periods at the earnings per share level. Starting at the left of the chart is last year's reported earnings per share of GBP 0.204. From that, there are reductions for the Regional Aircraft restatements and the impacts of foreign exchange. There are the increases from the lower tax rate and reduced share base following last year's buyback program. The two larger red boxes represent the impact of the lower Land volume and the Oman OPV charge.
The final two green boxes show the rationalization cost recovery benefit and all other operational improvements. The earnings per share then for the first half year is GBP 0.192. To complete your models, HQ and other businesses now excludes the Regional Aircraft business. Headquarters cost for 2011 will be significantly weighted to the second half year. In summary, a resilient set of figures in the face of difficult market conditions and despite the OPV setback. Regards to the outlook for the year, the group continues to anticipate a reduction in sales in 2011, as the volume adjustment in Land and Armaments is expected to complete. Earnings have also been impacted by a combination of the first half charge for the Oman OPV program and foreign exchange movement.
These impacts are partially offset by the one-off benefit from the MoD settlement agreement, and some further mitigation will result from an anticipated lower tax rate in the year. In aggregate, the group anticipates that underlying earnings per share will be broadly similar to 2010's restated earnings. The increase in the dividend reflects both the current year's expected financial performance and a reduction in dividend cover towards the group's policy of long-term sustainable cover of around two times. One final point, having been in the role for four months now, having received much feedback from many of you and our shareholders, it is very apparent that our segmental reporting structure doesn't provide the level of transparency needed to best understand the investment proposition of our Electronic Systems, cyber and security, and platforms and services businesses.
We are currently looking at a new segmental reporting structure, later in the year, I will provide a briefing on this together with 2010 restatements, and we will report against that new structure at the February prelims presentation. Ian.
Thank you, Peter. Well, that got their interest. Before you take your questions, I want to address areas of interest most frequently raised as we speak to our investors. Firstly, trading. Yes, the environment is difficult. We have already seen significant changes to the shape of spending in the U.S. and U.K. defense markets, with program cuts and rescheduled spending already factored in. We do expect more change, but this is a highly resilient business, and I believe we have demonstrated our ability to adapt to these changes and continue to deliver good returns. In the U.S., recent proposals for reductions against the multi-year defense plans would see convergence with our own in-house forward budget assumptions. Our cost reduction in the U.S. has outpaced the rate of volume reduction in Land and continues to contribute in enhancing our competitive position.
The most recent organizational change to merge the Electronics and Platform Solutions businesses will generate further cost savings. The market continues to tighten, but we do expect to see fast lanes of growth. In the U.K., we have completed settlement agreements relating to the Nimrod and Harrier curtailment. At the same time, closed a number of other outstanding commercial issues with MoD. This was an equitable outcome. The company continues to be very relevant to the U.K. We continue to generate substantial operating cost savings for the MoD, and through our support contracts, we contribute significantly to the operational effectiveness of the U.K.'s Armed Forces. By way of example, we have participated in the forward deployment of Tornado and the Typhoon aircraft to Southern Italy as part of the Libyan no-fly.
This is being achieved within the existing commercial frameworks and is proving to be a very good stress test of these significant partnered support arrangements. Our customers trust us to deliver in these critical missions, and our people will not let them down. Our strategy is focused on addressing growth opportunities in Electronics and the services sectors. In addition, we look to sustain and grow our established defense platform positions, including the development of new home markets and export opportunities. We continue to see growth from support and other services activities. The recent award of the contract to manage the Radford ammunition plant was a notable achievement building on our services strategy. Another success story is our ship repair business in the U.S.
We are the leader in the U.S. Navy ship repair and sustainment markets, and recently secured more than $1 billion in contracts to repair an overall mission-critical U.S. Navy ships over the next five years. With the recent award of the multi-ship, multi-option for Norfolk, we have secured a clean sweep of the available contracts. In cyber and intelligence in the U.S., our focus is the work we do for the intelligence and security agencies. Our other stream of security business, BAE Systems Detica, is addressing the expanding commercial opportunities, countering crime in the global financial services and the telecom sectors, in addition to working with the U.K. agencies. The market for cyber and intelligence represents a good sustainable growth opportunity for our business. We now have significant scale in this area, generating some GBP 2 billion of annual sales in the global security sector.
The recent acquisitions have helped establish a differentiated position from which to address growth in security product sales in both the secure government and commercial markets. One of the concerns we hear from investors is that they cannot track progress. We buy a small, high quality, albeit high multiple security business, and it disappears into a GBP 6.5 billion business group. We will address this. We will add greater disclosure in this space through new sector reporting. As Pete mentioned, he will provide a briefing with past restatements later this year. At the same time, there have been, and will continue to be, disposals of product lines and business activities where we can no longer add material value. Our stake in Saab and Regional Aircraft are such examples. There are significant new business opportunities emerging and are established in new home markets, as well as in the wider export markets.
In land, there are, for example, good prospects for M777, Bradley, and CV90 in India, Saudi, and Canada respectively, as well as a number of U.S. opportunities, including the Ground Combat Vehicle. In air, we also see an active market with Hawk prospects, including the U.S. Air Force TX program, and continued good interest in a number of other countries. Typhoon is generating much interest around the globe. We continue to make good progress towards the sale of Typhoon in Oman, The selection of Typhoon into the next phase of the Indian competition is a great development. Any of these campaigns would represent material new business for us. As I mentioned earlier, capital allocation has been a major part of our dialogue with many investors for some time. You will be aware of the linkage between share buybacks and pension funding.
Accelerated returns to shareholders need to be considered by trustees as part of their covenant review. Pension funding, More specifically, a structured engagement with trustees regarding the valuation of the U.K. schemes are now underway. This has been a major factor when considering the further phase of share repurchases. As Pete said earlier, we are currently three years into an 18-year deficit funding agreement, We will not take any preemptive action that might compromise these long-term deficit funding arrangements. We continue to regard developing the business, including acquisitions, as an important element in enhancing the company's competitive position and growth prospects going forward. I must stress that such investments are subject to rigorous evaluation to ensure that shareholder value is optimized. This includes benchmarking against other uses of capital, such as share repurchases.
Clearly, a share buyback is a compelling use of capital at today's share price, We will, when the balance sheet allows, continue to repurchase shares when it represents a good use of capital. The company's balance sheet remains strong, Notwithstanding some material near-term cash flow volatility, the capacity remains to address pension obligations, sustain our dividend policy, and buy back shares. As Pete has described, we see a number of moving parts this year, In aggregate, the group anticipates that earnings per share will be broadly similar to 2010's restated earnings. Cost will be key to affordability in all our markets, Cost reduction continues. We are driving hard, There is more to come. Over the last two years, we will have returned over GBP 2 billion to shareholders in dividends and buybacks. Shareholder value is and will always be central to our strategy.
Our strategy is evolving in this difficult and changing business climate. We have made great strides. The company is resilient and will succeed in this environment. Thank you. Questions?
Yes, sir. Ben Fidler from Deutsche. A couple of questions.
Ben.
I wonder if you were able to share with us some numbers, even if in fairly broad terms rather than wildly specific, but how the performance of the cyber and intelligence businesses went in the first half, what sort of growth we saw coming through there. The second question was just an update on where you are up to with some of these various export campaigns going on at the moment. India Eurofighter, M777 in India as well, some bits and pieces in land and armaments, I seem to recall, in the Middle East. The third question, just on land and armaments, am I correct, you are now saying you see $6 billion as the right revenue number going forward? Am I right, a slight step back from where you talked about modest growth thereafter, or have I misunderstood what you are trying to communicate there? Thank you.
I will swiftly pass a lot of those questions over, Ben, let's just hit the last one. $6 billion, absolutely. $6 billion, 10% return on sales in the medium term.
I suppose, why has that changed modestly over the sort of growth you used this
I think what we said to you was that we would give you a number that would bottom out this business when we had the investor day, $6 billion, 10% return on sales. That's what you should model. Peter, do you want to-
Yeah, sure. On the cyber question in terms of growth, we probably need to split that into two parts. We have the U.S. services business, we have Detica, including now ETI and Norkom. U.S. services business has had a very good first half. Order intake has been fantastic. Growth is certainly high single digit. On the Detica side, if you look at the business, excluding the two acquisitions, Detica's had a sort of, a mixed first half. We've seen significant step down in government spend, particularly on the consulting side. On the commercial side, we've had growth of about 33% in the first six months.
Okay. Well, we'll take the India bit in two parts. We'll get perhaps Guy Griffiths, who runs our international operating group, to talk about the MMRCA campaign, Bob Murphy, who runs our products group, can talk about the Indian prospects for land vehicles.
The MMRCA campaign is a competition running for the initial supply of 126 combat aircraft. We were down-selected along with Dassault for the final phase of that evaluation earlier this year. In preparation for the opening of the commercial envelopes, which we're expecting now to be opened probably within the next month, there have been some question and answer processes going on, particularly in relation to the local industrial participation and offset packages. As far as we're advised by the Indian authorities, their intention, once they've opened the commercial envelopes, would be to complete a fairly swift comparison of the two respective offers and to move to what they call L1, which is lowest compliant bidder, within the space of two to three months, and thereafter to complete contract negotiations with the preferred contractor.
Every indication from what we've seen, as far as the conduct of this competition is concerned, indicates that the Indians have succeeded in adhering very strictly to the sort of timescales they've set themselves. We're just about to enter, I think, an extremely busy period in the commercial evaluation of that bid.
Okay, Bob.
Yeah. On the land side in India, we are, as Ian mentioned earlier, working with the Indian government on FMS order between the U.S. and India on M777. We've successfully gotten through now the bulk of this test, and the governments are now government to government, working through the final instruments on the LOA to enable that deal to happen. We'd expect that to close late this year, early 2012, and that remains on track right now. We do have a joint venture in India as well that we are teamed on, and that is also focused on vehicles particularly. There are some good, strong vehicle opportunities in India that we are also working to progress in the future, and the nearest terminal is called FICV, which is India's infantry fighting vehicle. We'll continue to work that through.
We'll put our proposals in here, and that's an ongoing competition. We should hear from that, and that'll mature in time.
Bob, why don't you just, if you pass the microphone to Alan, not that Alan's ever used to having a microphone, he could perhaps just talk about the other Typhoon campaigns? I'm sure the questions will come up.
Yeah. Thanks, boss. Right. Probably four things to update on. Oman, we continue to be in discussion on Typhoon. The discussions currently centered on the type of aircraft, the standard of aircraft they want, and also the significant training that would be required by the Royal Air Force, to give by the Royal Air Force in the U.K. In Japan, the Japanese government, despite all that's happened there this year, have proceeded apace with their requirement for a new fighter. We're in competition against the F-35 and the F-18. The Japanese bid is due in in a few weeks' time, and the government there say they are committed to a decision this financial year, as far as we're concerned. The other two we're chasing, Qatar is holding a competition with the usual suspects. We're waiting to be invited for flight evaluation trials in Qatar.
In the last few weeks, Malaysia has also declared its intention to hold a fighter competition, and we are in discussion with the Malaysian government over the last few weeks, and we'll be entering that competition fully at the point they issue their request for quotation.
Thank you, Alan. All right, next question. There's one on the line here. All right. You must all be worn out after your sort of hiatus. I saw all you coming in looking exhausted.
Céline.
Lady at the back. Lady at the back. Oh, sorry.
Hi there. Céline Fornaro . Hi.
I can see you behind.
Yeah.
You always sit behind this pillar.
Céline Fornaro , Bank of America Merrill Lynch. Two questions, if I may. Just quickly following up on the Typhoon campaigns and update on Brazil, maybe. My second one is on Land Systems. Thinking about the order book as it stands now, how much is contracted for 2012, assuming a GBP 6 billion guidance, or how much do you still have to win for that? Thank you.
Right. Alan, do you want to talk about Brazil? Peter, you cover the order book point.
On Brazil itself, we're not playing at the moment. The Brazilian government have a long-standing competition that's been going on with other contractors, we haven't actually been playing in that. The interest for BAE Systems in Brazil are in the naval sector at the moment. Right now, nothing for us in Brazil.
Okay. Peter?
In terms of land, we've probably got about 66, about two-thirds of next year's sales in the order book. We've got orders to get in the second half, which is sort of normal. Nothing unusual.
Bearing in mind, what portion of the land business, Bob, is military is services?
Yeah. Basically what you get is you get about half the services. We have obviously very good visibility into that, we know that that's coming in. Some of that does, to Peter's point, come short cycle, so it's not abnormal to see that. As you saw from the trading, and there should be confidence because it does complement this. This is a business that does have some second half bias to the trading. We are on track. Pete showed you earlier, the $3 billion this year, we have very, very good visibility for 2011, on track to deliver that. A little bit to Ben's question earlier, yeah, if you add up all the opportunities and stuff, there is some potential beyond GBP 6 billion in this market.
You can't ignore the fact that the overall environment has risk to it, we have seen that in the past, we've incorporated that into our forecast, we believe GBP 6 billion is the right number. Probably two-thirds is, I would say, it's going to be between two-thirds and 70%-75% is what we would have in backlog at this point in time. The rest of those are generally short-cycle orders that we would close on in the second half of the year. Right now, we have high confidence in our ability to deliver that GBP 6 billion in 2012 and in the medium term as well.
Okay. Thank you, Bob. We've got a call on the line from Harry Breach.
Just one moment.
Can you hear me?
Hello.
Yeah. Ian, can you hear me?
I can, yes.
Yeah, great. Can I ask two quick questions? Firstly, I didn't catch some of what Peter was saying about the like-for-like revenue growth numbers at the divisions. Could he go over those? Secondly, for Bob. Bob, can you just update us on where you see decision timelines on both GCV and JLTV?
Okay. Thank you, Harry. Bob, why don't you take the first one while Peter goes back through his notes. He'd ripped them up after he presented them.
Yeah, I'll start with GCV. On GCV, as you all know, there are three competitors. We all submitted our proposals a couple of times. We have the requirement right now, we expect that we will hear very shortly. The U.S. government did in fact get through the Defense Acquisition Board, which is the first milestone approval. That was done a couple of weeks ago. We would expect to hear any time now on the outcome as to awards relative to GCV. Obviously, we think we've put together a terrific solution that's very responsive to what the customer needs. We look forward to that decision. On JLTV.
Is it down-select to two, Bob?
I'm sorry?
Sorry, Harry.
Is it down-select to two?
Oh, the down-select. The procurement plan that the government has purchased is, they have the ability, the authorization to award up to three contracts for the T&D phase. They have funding also in place to support those three. They do have that level of flexibility. I believe what they'll look at is, the government will look at the three separate proposals that they have received. Assuming that they've got three very different solutions that are all credible and all worth pursuing, that could meet the requirements and the needs going forward, they may take all three through. If they have a couple of proposals that are very similar, they may in fact decide to only take two through. Again, that is a decision that the U.S. Army and the Office of Secretary of Defense will make, we'll wait and see what that outcome is.
It could be two or it could be three. I don't think it will be just one.
JLTV next, Harry.
On JLTV, obviously remains on track. We have finished the T&D program. You'll recall that we are on two of the three teams that are there. We have an indigenous solution coming out of our U.S. Combat Systems business, and we are also teamed with Lockheed on another JLTV solution. T&D is now over, that we are in fact, we'll be presenting our proposals for the EMD phase. We'd expect that to get on track, again through Milestone B for EMD. I'd say first, second quarter in 2012. That program will move on from there, it does continue apace. We'd obviously like to see that procurement move along faster than it is. We'll see what alternatives present themselves, right now, that's the stated plan.
Okay, thank you very much, Bob. Peter?
Yeah, on the like-to-like point, Harry, two of the four operating groups have got like-for-like issues. The first one is EI&S. What I said was that at the half year, sales were up 4%, but like for like were down 2%, and that's due to the F-22 and the ATK production contracts which have completed. Then in the guidance, what I said was that we would get about $350 million from the acquisitions made, and some like-for-like sales growth as well. By some, you can interpret low single digit. The other business that was affected is the programs business. What I said there was we had growth of 3%, of which 2% was like for like.
Okay, Harry?
Thank you very much.
Okay.
Can Bob just clarify, JLTV, the down select, firstly whether that's the fiscal 2012 or calendar 2012?
Fiscal or calendar 2012.
It will be calendar.
Toss a coin. Calendar.
Thank you.
Okay, thanks very much. Have we got any other questions in the room? We've got a couple on the wire. There's one. We'll take one in the room, and then we'll take Jason on the wire after that. Thanks.
Thanks. Andrew Gollan, Investec. Just a couple of questions. First one, well, for either of you, really. Peter mentioned the renegotiations on the Salam contract.
Yeah.
That there's a sort of trading dependency on that.
Can you just give us some idea of what we should be thinking about in terms of risks and opportunities as that long-term program moves forward?
Well, the issue we're dealing here is one of timing. The program's changes and the negotiations, they're complex and they cover both aircraft standard, final assembly, recovery of escalation. It's a complex basket. As you know, we don't speculate on outcomes or values. I think it's fair to say we see these changes as an opportunity. We have a pretty good track record to satisfactorily resolve these types of negotiations. We are not going to rush it. The outcome is the issue, not the timing. We still believe that we can conclude these matters this year. I think the key is, and perhaps I'll get Guy just to talk a bit about the program, is the customer really likes the aircraft and has actually entered it into operational service.
We're in a position where they absolutely see it as a fundamental part of their capability. Is there any more you can say? Because this is Guy's specialist subject.
I think it's worth just setting out the context in which these negotiations are taking place. The first thing to say is, we're ahead of a contract in terms of the aircraft deliveries. We've delivered 22 aircraft. The last two of the initial 24 are to be delivered in the second half of the year, and that completes the build-up of the first squadron in Saudi. That squadron was actually put on quick reaction alert on the 2nd of July, which means it actually becomes a frontline operational force and is actively now deploying in support of day-to-day operational activities for the Saudi Air Force. The support infrastructure, and we support these aircraft now indigenously with our own resources in Saudi Arabia. That support infrastructure has been working exceptionally well, and that's seen in terms of the number of flying hours which the Saudi Air Force are achieving.
The quality and the quantity of sorties that they're flying are actually meeting and exceeding their expectations. As we look forward, the Saudis have also been watching with very close interest the performance of the Typhoon platform in Libya. It's that experience that has caused them to say that they really now want to negotiate with us the sort of scope changes that Ian has been talking about to ensure that the platform which they are now operating is one that is capable of being enhanced and developed in line with the European Typhoon program. I think the message and the context in which these negotiations are taking place are ones where now the Saudis have taken Typhoon into service and are operating it at the very heart of their force mix.
Quite clearly, they're envisioning that this platform will be central to their defense capability for many years to come, and they're trying to make sure that they negotiate arrangements now for which they can secure and reserve appropriate funding for the future.
Okay.
Thank you. Second question with respect to growth. You've talked previously and again today on your conservative internal planning-
Yes
assumptions. Now we're seeing the world getting more and more difficult by the day. Do you still or do you anticipate at the trading level and the operational level, that we will get a return to trading growth next year, notwithstanding the tax rate on earnings and everything, but just at the operating level?
Well, perhaps, do it in two ways. Get Peter to answer that question, and maybe just ask Linda to talk about what we have assumed in terms of the U.S. market. You know where we are in the U.K. market. We came out following the SDSR, said what the effect on earnings would be. The MOD is, and government's come out with its three-month review. There's nothing in that three-month review which doesn't but support what we previously committed. Linda, in terms of our assumptions on the U.S. market and what you've been planning for.
Sure. I can. Thank you. As Bob indicated when he got up, a couple of years ago, we formed our own opinion that defense markets were going to decline far more than the Defense Department was, excuse me, was forecasting in their budgets. We actually took our internal planning down substantially more than what the department was forecasting, particularly in the land arena. We had been planning for the better part of the last two years for a precipitous reduction in defense, which is when we laid out our restructuring plans for the land volume decline. We actually did a reduction in force and facilities and square footage far more aggressive than anything that the normal budget forecast would have indicated. We've been downsizing for a tougher market ahead of the tougher market.
What we're finding is that our assumptions were pretty much dead on with where things appear to be going at the moment. Is there some upside? Yeah, potentially, but in this environment, we think it's not prudent to be overly aggressive in looking at upside in our planning. We'll continue to pursue it with everything we can. We find our Intelligence, Security, and Electronics businesses impacted a bit by timing here and there. When there's a continuing resolution or something, we get a few months impact on when contracts are awarded. We continue to see robust demand for everything we do in our Electronics business. We see growth in certain aspects of the Electronics business. We continue to see growth in supporting the intelligence agencies. Our support businesses are going gangbusters. Ship repair, 100% win rate on these multi-ship, multi-option contracts.
Just winning hand over fist in terms of every competition we go after, the Radford opportunity as well. It's worth mentioning that Brazil, we do have an angle in Brazil. What used to be Platform Solutions, now a part of Electronic Systems, just yesterday announced a strategic relationship with Embraer for the flight control system for one of their medium tanker aircraft. Across the spectrum in Electronics, Intelligence, Security, and our support businesses, we see strong demand. The budgets support it. We expect they will continue to support it in the environment we're going into. This broad portfolio of products that go in largely the tier 2 and support arena, continue to have strong demand. We've got a great position in our land business.
It may have come down in volume, but it's still the number one land business in the world, and is continuing to improve its performance.
Okay. Thank you very much, Linda. Peter?
Yeah. I think as you know, we don't normally give next year guidance at the interims. Just to build on the story that Linda's given you there, clearly, with that backdrop, we are expecting some growth in the I&S. If you look at land, we've pretty much given you the guidance today of a GBP 6 billion, 10% gross rate in the medium term. That's pretty much given you guidance for next year on land. International will pretty much be driven really around the timing of the profile of the Salam aircraft deliveries. There is a couple of aircraft less next year than there has been this year. Then if you look at Nigel's business and Programmes and Support, we'd expect that to be pretty similar year-over-year. You can get the whole from the sum of the parts.
He's given you a lot more than George used to give you. All right, Jason, we hadn't forgotten you.
Good morning, everyone.
Morning.
All right, two quick questions. The first one for you, Ian. I noted that you said the strategy is evolving in the current market, and I was wondering if you can elaborate on that a little bit. In particular, have your thoughts around M&A changed, or your internal hurdle rate? Secondly, on the international division, could we just get a little bit more color on what is going on here, specifically with the first half, second half split? We had revenues down 13%, but margins up quite a bit, then the guidance is for similar sales and margins. In particular here, I'm wondering, when I look at the last year, 10.5% margin, you guys sitting on 119 at the first half, is that margin guidance perhaps a little bit conservative?
We shouldn't have left you alone for so long. You've been refining your answers. On the strategy evolving, I think we've said for a long time that this market is changing, the demands of our customers are changing. I think the one thing which is not changing is that there is going to be a defense and security requirement, but it is going to be different tomorrow than what it is today. We, as Linda has articulated, have been anticipating for some time these changes. The emphasis that we place on our organization, on Electronics, on cyber and intelligence, on our services offerings, and the types of platforms we offer, is what's evolving.
Clearly, in terms of the hurdle rate on acquisitions, I think as we previously said, when you're operating in the type of environment that we are, that we want pure plays, we want modest size that can be integrated quickly, we can hit the ground running, and it's the types of capabilities that we see for the future. The scale of the acquisitions are lower. In terms of hurdle rates, yes, in terms of where our share price is, we have to benchmark against the allocation of capital against everything, including share buyback. We are not going to be taking on acquisitions that have any collateral in them, where they're not pure, and they're not things that we want.
You could say the hurdle rate or the hurdles that we use to define whether it's the right things to us have gone up higher because of the nature of the environment we're in.
Yeah.
Peter.
Okay. Yeah, on international. There's a couple of things going on in the trading. We have got a first-half, second-half bias, and that is on the back of the Salam program, where we're subject to these contract variations that we've been talking about, particularly in respect of moving final assembly to the U.K. What that is meaning is that, whereas we would have been delivering assemblies for final putting together the aircraft in country, that is now going to be deferred and done in the U.K. That is pushing sales back to the right. On the margin side, we have a Tornado upgrade program, and the way we recognize profit on these big programs is really against risk retirement. We've had excellent program execution on that program, and that has enabled us to take earlier release of margin on the program.
When you take that in the aggregate, back to the guidance, I'd probably describe that more as realistic, and that's distinct from conservative.
Okay.
Thanks.
We've got another one on the line. Ruthie?
Yep. Morning, everyone.
Morning.
A couple of quick questions, perhaps one for you first, Peter, just around the pension. Sorry to bring up the topic. Can you just give us an idea, you talked about the deficit recovery period clearly potentially having to come down. Can you give us any sense of what the drop could be there? Then, I guess associated with that, what is the accelerated pension cost likely to be? Any indication at this stage of what kind of numbers we could be thinking about there? Then a question for Linda on the U.S. side. Obviously, Linda, you were just talking about what you've done within the Land business to realign the group with activity. Is there more that can be done there? Obviously, we've seen a lot of job cuts in that business.
Is there more that you can do if things were to take a further turn for the worse, if you like?
Okay, I'll take the pension one first.
Yeah.
In terms of pension, we are not flagging that the recovery plan is going to change. We have an 18-year recovery plan. We're three years through it. The engagement with the trustees that we've been doing is absolutely aligned to ensuring that we keep that 15 years in place. The GBP 1 billion increase to the actual funding deficit that I was talking about, what we're trying to message here is it may be a billion, but we've got 15 years to deal with it. Will that require some extra cash? Yes. It is a long-term window. The other thing that's driving that, of course, is the low discount rate. Certainly, from my perspective, a low discount rate is not a very strong argument for putting lots of money in upfront.
I can assure you that we will not sacrifice the 15-year recovery period.
Yep.
Linda. Do you want Bob to
No, go on. It was a good answer.
Bob, you want to talk about what you can do if it gets worse?
I would say, as Linda mentioned, we started this process early because you could see that the market was going to turn. We are clearly into it now. You should view this as part of our business model at this point. This isn't a once and done. This is, for us, a way of life and culture. The way we will drive Land will be, we will provide a double-digit return at 10%. We got to that 10% faster than we thought when we started this process, and we believe that gives us the right flexibility to invest in and pursue, because there are a lot of very big and important opportunities in the Land domain. We believe we've got the investment profile right while returning a strong return to our shareholders, backed by strong cash generation. With that, we will continue.
As we see fit, and we can, we will take every opportunity to either free up investment dollars so we can chase or provide a stronger return to shareholders in the form of RoS and cash. For us, this is a way of life, and we will continue to look at this every day to get more cost-effective, more competitive, and reduce costs. I think the business, if we see significant changes, we will continue to adjust as required. Those are the parameters that we are guiding the business to in Land.
Thank you, Bob.
Thank you.
Okay. Any more questions? All done? Okay. Thank you very much. Thanks for your attention on this very busy day.