Right. Good morning to everyone joining us today. I realize that there are a large number of company announcements in our sector, so we will keep this briefing tight for you. But there are some key points I want to make before passing over to Pete. First, the environment is challenging, but 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 and 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 Vassalb shareholding and Regional Aircraft. Third, the balance sheet is strong and 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 £500,000,000 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 and 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 costs 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, but there are a number of specific items that impact the appearance of the numbers and I'll highlight these as I go through. So firstly in headline terms and compared to the 2010, as expected sales declined 13% to £9,200,000,000 for the volume reduction in Land and Armaments, the impacts of the SDSR on The U.
K. Business and this year's weighting to the second half from the Salaam program. Underlying EBITDA decreased 12% to £968,000,000 after taking the recently announced charge of £160,000,000 on the Amani OPV program and a benefit of £125,000,000 from a U. K. MOD settlement agreement.
Underlying EPS at 19.2p reduced by 4%. Operating cash flow totaled £176,000,000 and net debt closed at $1,122,000,000 pounds Finally, the interim dividend has been increased to 7.5p per share, up 7.1% on the 2010 interim. The twenty eleven first half figures have been affected by both M and A and exchange rates. The acquisitions announced in 2010 were all completed in the period. In addition, following the announcement of our disposal of the Regional Aircraft Asset Management business, which completed on the July 15, 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 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 £1,300,000,000 of which 1,100,000,000 came from the land volume reductions. Underlying EBITA of £968,000,000 gave a return on sales of 10.5%. Underlying finance costs were £76,000,000 a reduction of £20,000,000 over 2010. There was also a £41,000,000 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 £22,000,000 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. Firstly, the acquisitions that I mentioned earlier, which have increased the intangible assets secondly, the disposal of the Regional Aircraft business reducing the tangible fixed assets thirdly, and as anticipated, there was an increase in working capital as advances were consumed on the Salaam and European Typhoon Tranche II programs. I'll come back to pensions on the next two slides. Net debt increased to £1,100,000,000 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 2019. The value of the scheme assets has increased over the period to £17,600,000,000 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 £300,000,000 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 £100,000,000 So that's the accounting. I'll now turn to the funding valuations that are underway now on the two largest U. K. Schemes the 2,000 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. However, and 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 £1,000,000,000 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 schemes trustees at the time of the last valuation was eighteen years of which fifteen years still remain. Sustaining this multiyear 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 £176,000,000 After net capital expenditure of £146,000,000 dividends received of 6,000,000 and pension contributions of £25,000,000 made into the trust mechanism, the operating business cash flow totaled £11,000,000 Looking at the operating groups, there was the expected level of cash generation in the EEI and 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 Salaam and the European Typhoon Tranche two program and those drove the cash performance at Programs to Support and International. We do expect cash inflows in the second half year as major Surviv milestones are scheduled. The cash outflow at head office includes 11,000,000 for the first installment of the U. S. Department of State settlement and £96,000,000 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 £242,000,000 Interest, tax and dividends amounted to £568,000,000 The acquisitions completed in the first half net of £152,000,000 proceeds from the disposal of our SAF shareholding amounted to £382,000,000 Disposal proceeds of $187,000,000 from the Regional Aircraft transaction were received in July and are therefore not yet included here. Exchange translation and all other movements totaled £59,000,000 closing net debt then of £1,100,000,000 I'd like to now focus on the issue of capital allocation. Firstly, an update on the numbers and this chart shows the gross debt, cash and net debt of the group. At the beginning of the year, total borrowings amounted to £3,000,000,000 with cash held of £2,800,000,000 giving the reported net debt of 200,000,000 In the first half of the year, the total cash outflow was £900,000,000 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 £300,000,000 was repaid in June. So therefore at the June 30, total borrowings have reduced to £2,800,000,000 Cash held stood at £1,700,000,000 and net debt was therefore £1,100,000,000 The share repurchase program announced today of up to £500,000,000 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 £160,000,000 into the pension schemes as was the case last year. The interim dividend is payable on the November 30. The combination of share buybacks and dividend payments in 2010 and 2011 will now exceed £2,000,000,000 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 and S with the figures here shown in U.
S. Dollars. Sales increased by 4% to $4,200,000,000 Although like for like sales reduced by 2% when compared to 2010 due to the completing F-twenty two and A Turcum 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 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 is 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, but then only funded by the customer incrementally. The order backlog therefore recognizes the remaining period of the contracts awarded, but not yet funded. Contract rewards were strong in the period, particularly in the support and the intel and 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 $850,000,000 competitive award for the Radford Army Munition Plant has been protested by the incumbent contractor as expected and is therefore not yet included within order backlog. In the Intel and 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 $12,100,000,000 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 $350,000,000 we continue to anticipate some like for like sales growth in this business this year with margins remaining in our target range of 10 to 12%. Sales at Land and Armaments reduced to $3,000,000,000 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 would have been almost halved, a reduction of some 13,500 since the sales high point of 2,008.
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 the business to deliver sales of around $6,000,000,000 and at a target return of 10%. This is also our medium term outlook for this business. Programs and Support has had a mixed first half.
Compared to 2010, sales were up 3% or 2% on a like for like basis, so a little higher than expected. Underlying EBITDA reduced by £31,000,000 compared to 2010. The Oman OPV charge was £160,000,000 And 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 £125,000,000 An element of this had been expected later in the year and therefore the benefits for the full year compared to our previous guidance is some £90,000,000 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 EBITDA of £221,000,000 was almost unchanged. Earlier than planned risk reduction on the Tornado upgrade program has contributed to the Haas higher return on sales. The customer changes to the Salaam program that require both contract and pricing revisions remain under negotiation. These changes are planned to be concluded in the second half year, but 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 Salaam program as milestones are scheduled for the second half. The cash out turn 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 twenty ten'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 20.4p.
From that, there are reductions for the Regional Aircraft restatement and the impacts of foreign exchange. Then 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. And 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 19.2p.
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. So in summary, a resilient set of figures in the face of difficult market conditions and despite the OPV setback. As 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 twenty ten'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 and having been in the role for four months now and 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.
And later in the year, I will provide a briefing on this together with twenty ten restatements and we will report against that new structure at the February prelims presentation.
Ian? Thank you, Peter. The line got their interest. Okay. 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 reschedule 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 multiyear 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 and 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. Armed Forces. By way of example, we have participated in the forward deployment of Tornado and 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 $1,000,000,000 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 BA 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 £2,000,000,000 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 £6,500,000,000 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 in our established and new home 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. And 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 and Oman and 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 and 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 eighteen year deficit funding agreement and 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. But 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 and 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 and notwithstanding some material near term cash flow volatility, the capacity remains to address pension obligations, sustain our dividend policy and buy back shares. As Peter's described, we see a number of moving parts this year. But in aggregate, the group anticipates that earnings per share will be broadly similar to twenty ten's restated earnings. Cost will be key to affordability in all our markets and cost reduction continues. We are driving hard and there is more to come.
Over the last two years, we will have returned over £2,000,000,000 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?
Ben Friedrich from Deutsche. A couple
of questions.
Firstly, 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're 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. And then the third question just on Land and Armaments. Am I correct you're now saying you see $6,000,000,000 as the right revenue number going forward?
So that seems am I right a slight step back from where you talked about modest growth thereafter? Or have I misunderstood what you're trying to communicate there? Thank you.
Well, I'll swiftly pass a lot of those questions over Ben. But let's just hit the last one. Pounds 6,000,000,000 absolutely, 6,000,000,000, 10% return on sales in the medium term. That's what you
why has that changed modestly over the growth you use 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 $6,000,000,000 10% return on sales that's what you should model. Peter do you want to Yes.
Sure. On the cyber question in terms of growth and we probably need to split that into two parts. We have The U. S. Services business and then we have Detika including now ETI and NORCOM.
So U. S. Services business has had a very good first half. Order intake has been fantastic. Growth is certainly high single digit.
And in the on the Detika side, if you look at the business excluding the two acquisitions, Detective has had a sort of a mixed first half. We've seen significant step down in government spend particularly on the consulting side. But 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 and then Bob Murphy who runs our products who can talk about the Indian prospects for land vehicles.
So 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 are 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 time scales they've set themselves.
So we're just about to enter I think an extremely busy period in the commercial evaluation of that bid.
Hey, 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 we're the governments are now government to government working through the final instruments on the LOA to enable that deal to happen.
So we'd expect that to close late this year early twenty twelve. And that remains on track right now. There are a number of we do have a joint venture in India as well that we are teamed on and that is also focused on vehicles particularly. And so there are some good strong vehicle opportunities in India that we are also working to progress in the future. And the most nearest terminal is called FICV, which is the infantry India's fighting infantry fighting vehicle.
So we'll continue to work that through. We'll put our proposals in here and that's an ongoing competition. Should hear from that and that will mature in time.
Bob, why don't you just if you pass the microphone to Alan, not that Alan is overused to having a microphone. Could perhaps just talk about the other typhoon campaigns, because I'm sure the questions will come up.
Yes. Thanks, boss. Probably four things to update on Oman. We continue to be in discussion on Typhoon. The discussions currently have been centered on the type of aircraft, the standard of aircraft they want and also the significant training that we were to 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-thirty five and the F-eighteen. The Japanese bid is due 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. And 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 issued their request for quotation.
Thank you, Alan. All right. Next question. All right. You must all be worn out after sort of hiatus.
So you're coming in looking exhausted. Lady at the back. Sorry.
There. Celine Fornaro.
I'm seeing you behind
you.
Fornaro, Bank of America Merrill Lynch. Two questions if I may. Just quickly following up on the typhoon campaigns an update on Brazil maybe. And my second one is on Land Systems. Thinking about the order book as it stands now, how much is contracted for 2012 assuming a $6,000,000,000 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?
Interest for BA Systems in Brazil or in the naval sector at the moment. So right now nothing for us in Brazil.
Peter? Okay. In terms of land, we've probably got about 66 about two thirds of next year's sales in the order book. So we've got orders to get in the second half, which is sort of normal. Nothing unusual.
Bear in mind what portion of the land business Bob is military is services?
That's coming in. And some of that does to Peter's point come short cycle, it's not abnormal to see that. But as you saw from the trading and that should give you confidence gives us confidence is this is a business that does have some second half bias in trading. We are on track. Pete showed you earlier the 3,000,000,000 this year.
So we have very, very good visibility for 2011 on track to deliver that. To a little bit to Ben's question earlier, yes, there is if you add up all the opportunities and stuff there is some potential beyond $6,000,000,000 in this market. You can't ignore the fact that the overall environment has risk to it. And we have seen that in the past and so we've incorporated that into our forecast. So we believe $6,000,000,000 is the right number.
Probably two thirds is I would say it's going to be between two thirds and 70% to 75% is what we would have in backlog at this point in time. The rest of those are generally short cycle orders that will we would close on in the second half of the year. So right now we have high confidence in our ability to deliver that $6,000,000,000 in 2012 and in the medium term as well.
Okay. Thank you, Bob. We've got a call on the line from Harry, Harry Breach.
Thank you. Just one moment.
Can you
hear me? Hello. Yes. Iain, can you hear me?
Yes, can. Yes.
Yes. 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?
And secondly, for Bob. Bob, you just update us on where you see decision time lines on both GCV and JLTV?
Okay. Thank you, Henry. 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 that there are three competitors. We all submitted our proposals a couple of times. We have the requirement right now and we expect that we will hear very shortly.
The U. S. Government did in fact get through the Defense Acquisition Board, is the first milestone approval. That was done a couple of weeks ago. So we would expect to hear any time now on the outcome as to awards relative to GCV.
Obviously, we are very we think we've put together a terrific solution that's very responsive to what the customer needs. And so we look forward to that decision. JLTV Down
two, Bob.
I'm sorry?
Sorry, I had
Down Selector two.
Oh, the down selector the procurement plan that the government has previously said, they have the ability, the authorization to award up to three contracts for the TB phase. And they have funding also in place to support those three. So they do have that level of flexibility. I believe what they'll look at is the government will be 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's a that is an army a decision that the U. S. Army and the Office of Secretary of Defense will make and we'll wait and see what that outcome is. But it could be two or it could be three. I don't think it will be just one.
JLTV? JLTV obviously remains on track. We have finished the TV program. You'll recall that we are on two of the three teams that are there. We have an indigenous solution coming out of
S. Combat Systems business and we are also teamed with Lockheed another JLTV solution. TD 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 twenty twelve. And then that program will move on from there, but it does continue apace.
We'd obviously like to see that procurement move along faster than it is and we'll see what alternatives present themselves. But right now that's the stated plan.
Okay. Thank you very much, Bill. Peter? Yes.
On the like for like point Harry, there's two of the four operating groups have got like for like issues. The first one is EI and S. And 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-twenty two and the A Turkm production contracts which I've completed. And then in the guidance what I said was that we will get about $350,000,000 from the acquisitions made and some like for like sales growth as well. And by some you interpret low single digit.
The other business that was affected is the programs business. And what I said there was we had growth of 3% of which 2% was like for like.
Okay. Harry? You very much. Can Bob just clarify JLTV, the down select and firstly whether that's the fiscal twenty twelve or calendar twenty twelve?
Fiscal or calendar twenty twelve?
That will be calendar.
Toss a coin. Calendar.
Thank you.
Okay. Thanks very much. Have we got any other questions in the room? Because we've got a couple on the wire. There's one right.
We'll take one in the room and then we'll take Jason on the wire after that. Thanks.
Thanks. Andrew Gollin, Investec. Just a couple of questions. First one, well for either of you really. Peter mentioned the renegotiations on the Salaam contract.
Yes. And that there's a sort of trading dependency on that. Obviously very sensitive negotiations, but 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, I mean the issue we're dealing here is one of timing. The programs changes and the negotiations that are complex and they cover both aircraft standard, final assembly, recovery of escalation. So it's a complex basket. And as you know, we don't sort of speculate on sort of outcomes or values. But I think it's fair to say we see these changes as an opportunity and we have a pretty good track record to satisfactorily resolve these types of negotiations.
But we are not going to rush it. I mean the outcome is the issue not the timing. But 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 operational service. So we're in a position where they absolutely see as a fundamental part of that capability.
Is there any more you can say because this is Guy's specialist subject. I
mean, I think it's worth just setting out 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 buildup of the first squadron in Saudi.
That squadron was actually put on quick reaction alert on the July 2, 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. And 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. And 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 Iain 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. So 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, very heart of their force mix. So 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.
And second question with respect to growth. And you've talked previously and again today on your sort of conservative internal planning 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?
Okay. Well perhaps do it in two ways. Get Peter to answer that question. Maybe just ask Linda to talk about what we have assumed in terms of The U. S.
Market. I mean you know where we are in The U. K. Market. We came out following the STSR, said what the effect on earnings would be.
The MOD is and governments come out with its three month review. There's nothing in that three month review which doesn't but support what we previously committed. So Linda in terms of our assumptions on The U. S. Market and what you've been planning for?
Sure.
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 forecasting in their budgets. We actually took our internal planning down substantially more than what the department was forecasting, particularly in the land arena. And so 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. So we've been downsizing for a tougher market ahead of the tougher market.
And 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 yet 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 and when contracts are awarded. But 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. And it's worth mentioning that Brazil, we do have an angle in Brazil. Our 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. So 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. And this broad portfolio of products that go and largely the Tier two and support arena continued to have strong demand. And 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? Yes. I think as you
know we don't normally give next year guidance at the interims. But just to sort of build on what the story that Linda's given you there. Mean clearly with that backdrop we are expecting some growth in EI and S. If you look at land, we've pretty much given you the guidance today of a £6,000,000,000 10% ROS rate in the medium term. So that's pretty much given the guidance for next year on land.
International will pretty much be driven really around the timing of the profile of the Salaam aircraft deliveries. There is a couple of aircraft less next year than there has been this year. And then if you look at the Nigel's business and programs to support, we'd expect that to be pretty similar year over year. So you can get the whole from the sum of the parts.
So he's given you a lot more than George used to give you. All right. Jason, we hadn't forgotten you.
Good morning, everyone. Good morning. All right. Two quick questions. The first one for you, Ian.
Noted that you said the strategy is involving in the current market. And I was wondering if you can elaborate on that a little bit. In particular, have your thoughts around M and 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%, margins up quite a bit.
And then the guidance is for similar sales and margins in particular here. I'm wondering is the when I look at the last year 10.5% margin you guys sitting on 11.9% 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, mean, think we've said for a long time that this market The demands of our customers are changing. I mean, 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.
And we as Linda has articulated have been anticipating for some time these changes. And so the emphasis that we place on our organization on electronics, on cyber and intelligence, on our services offerings and the types of platforms we're offering is what's evolving. Now 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. So scale of the acquisitions are lower. And 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 buybacks.
So and 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. So 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.
Peter? Okay. Yes. On international, there's a couple of things going on in the trading. I mean, you've got a we have got a first half, second half bias and that is on the back of the Salaam 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. So 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. So when you sort of take that in the aggregate back to the guidance, I'd probably describe that more as realistic and as distinct from conservative.
Thanks. We've got another one on the line. Rupee?
Yes. Good morning, everyone.
Good morning.
A couple of quick questions perhaps one for you first Peter. Just around the pension, sorry to bring up the topic. I mean, 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?
And then I guess associated with that, what is the accelerated pension cost likely to be? Mean, any indication at this stage of what kind of numbers we could be thinking about there? And then a question for Linda on The U. S. Side.
Obviously, Lee, were just talking about what you've done within the land business to realign the group with activity. I mean is there more that can be done there? I mean 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. Yes. I mean in terms of pension, are not flagging that the recovery plan is going to change. We have an eighteen year recovery plan.
We're three years through it. And the engagement with the trustees that we've been doing is absolutely aligned to ensuring that we keep that fifteen years in place. So the £1,000,000,000 sorry £1,000,000,000 increase to the actual funding deficit that I was talking about. What we're trying to message here is it may be £1,000,000,000 but we've got fifteen years to deal with it. Will that require some extra cash?
Yes. But it is a long term window. And the other thing that's driving that of course is the low discount rate. And 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 fifteen year recovery period.
Yes.
Linda? Or do you want Bob to Bob,
want to talk about what you can do if it gets worse?
I would say, as Linda mentioned, we started this process early because we you could see that the market was going to turn. And we are clearly into it now. It's not 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 pursue invest in and pursue because there are a lot of very big and important opportunities
in the
land domain. So 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 ROSS and cash. So 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. So yes, I
think the
business if we see significant changes we will continue to adjust as required. And 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.