BAE Systems plc - Analyst/Investor Day

| About: BAE Systems (BAESY)

Bae Systems Spons Ad (OTCPK:BAESY)

March 07, 2012 6:00 am ET


David Brent -

Peter Lynas - Group Finance Director and Executive Director

David Brent

Well, good morning, everybody, and welcome to our 2011 Annual Results Presentation for our Banking Group. By way of introduction, and I think most of you know me, but for those of you who don't, I'm David Brent, and I'm the Group Treasurer of the company. And with me today is Pete Lynas, our CFO. This presentation was given by Pete and our CEO, Ian King, to the equity analysts about 2 weeks ago. And the way this will work today is that I will deliver Ian King's presentation, and then I'll hand over to Pete for him to take you through the results for 2011 and the outlook for 2012.

The results contain a number of elements that were not planned at the beginning of the year. We handled the slowing demand in land, the disruption from flooding at Johnson City in the U.S., the Oman OPV contract, the Ground Combat Vehicle and Radway award protest and the deferred trading on Salam. We've been agile and adjusted to mitigate these events, and what should become apparent, as Pete takes you through the detail, is that the underlying business remains strong. Underpinning that solid core has been a combination of good program execution and aggressive cost reduction to maintain returns for shareholders in the face of those headwinds.

We're operating in a difficult and rapidly changing business environment. These market pressures have been apparent for some time, and the group strategy has developed accordingly. We've moved quickly to take the actions necessary to sustain the bottom line in the near term and establish a platform from which growth can be pursued. Affordability has become the priority for our customers. We've cut costs aggressively to both address reducing demands in some activities and to secure competitive advantage. Cost-reduction and efficiencies actions have been under way since 2009. We are staying ahead of the volume reductions. The activity will continue. We can still do more. We don't take these decisions lightly. They are difficult but essential if we're going to sustain our business.

At the same time, we continue to develop our already substantial position in the services sector of our markets, to invest in the faster growth streams of business, including cyber, commercial avionics and high-priority defense electronics, to sustain our core industrial capabilities through the strong positions on key programs and to address growth in selected international markets. Cost reduction funds our ability to continue developing the strategy and maintains our competitive edge. We have been successful in growing our position as one of the major providers of capability and services in the cyber and security markets. Having established a strong position in the government and intelligence-related sectors of these markets, we are now seeing the benefits of our most recent drive to expand in the fast-growing commercial and financial services markets.

We are well positioned on a number of key platform programs such as the Typhoon, the F-35 combat aircraft, submarines, naval ships and armored vehicles. These programs form a large core of business with good multiyear order visibility. These programs additionally generate substantial services and support business. Our services offering is one of the differentiating strengths of the group. Through the provision of military and technical services, we continue to deliver enhanced capabilities whilst reducing costs for our customers across the air, land and maritime domains. The partnership relationship between the company and the Armed Forces continues to strengthen. We have been active in supporting the U.S. and U.K. operations in Iraq and Afghanistan. And more recently, our products and people made a significant contribution to the success of the U.K. operations over Libya.

In the U.S., delays in approving defense budgets resulted in the business operating under continuing resolution restrictions for 7 months of 2011. Our business remained resilient through this, with only a modest amount of trading disruption as a consequence. The 2012 budget has now been passed, with the base budget at the same level as 2011 and a similar level of spend on the investment accounts. The January announcement by the President and Secretary Panetta describing the future strategic direction for U.S. Defense and Security and the recent defense -- DoD budget were in line with our planning assumptions. The near-term budgetary issues have had some impact on the business, and there remains significant uncertainty as to U.S. federal budgets over coming years, but we plan on conservative assumptions. We have already made decisions on likely spending trends, and we'll respond with agility as the facts become clearer. We will not be a victim of the process, and we'll stay ahead of the game.

In the U.K., budget constraints remain, but following the Strategic Defence and Security Review in October 2010, there is now greater program stability and better alignment of government funding with defense program commitments. The SDSR impact on the group following the program changes has been to reduce annual sales by some GBP 500 million. Actions taken to mitigate the impact of these changes are well underway, including workforce reductions and facility rationalization. Contract settlement agreements have been concluded. There is also more that can be done to drive efficiency. These opportunities reside not just here within industry but also in the enhanced contribution that industry can make through the delivery of cost-effective support and capability to the Armed Forces and the security agencies. We continue to work with our U.K. customer to help identify further efficiency improvements.

We are seeing major opportunities mature in our International markets. With order intake in 2011 of GBP 4.8 billion from our markets outside the U.S. and U.K., we are seeing the benefits of our strategy to develop the business across a broad international base. The international footprint provides resilience for the business at a time when defense spending is under pressure in the U.K. and U.S. In India, we are seeing a steady flow of business from the large Hawk program with Hindustan Aeronautics. In 2011, we booked a further GBP 124 million in Hawk-related business. And other new business, order intake from India totaled GBP 170 million.

We are also bidding on the large Future Infantry Combat Vehicle program through a joint venture with Mahindra & Mahindra and continue to progress the potential sale of M777 artillery. We also benefit from the Mirage 2000 update in India. Our share of the weapons order is valued at GBP 300 million. On the recent announcement in India, which placed Rafale as the lowest-priced compliant bid against Typhoon in the M-MRCA competition, we all should recognize that this is just a step in the process and not as yet a contract. We will continue to support the Indian customer and the evaluation process.

In Brazil, the contract for 3 OPVs was great news and paves the way for further opportunities to be explored for the Brazilian Navy. In Australia, we continue to build on our position as the leading provider of equipment and support to the Australian Armed Forces, working with the Commonwealth government to deliver against a clearly laid out, multiyear defense and security plan.

The potential sale of Typhoons to Oman continues to make good progress. A formal request for proposals has now been received. This is expected to lead to business valued in excess of GBP 2 billion, with opportunity for further Hawk business on top of that. Interest in Typhoon is high. In addition to Oman, we have discussions underway in Malaysia, Qatar and the U.A.E. We also anticipate requirements in Saudi will extend beyond the existing order. Defense spending remains a high priority in the Kingdom of Saudi Arabia, and we continue to deliver a broad range of capabilities to their Armed Forces. Our announcement at the start of the year identified the streams of work that are underway, including the changes to the Salam programme. The proposed changes relate to final assembly of the last 48 of the 72 Typhoon aircraft, to the creation of a maintenance and upgrade facility in the Kingdom of Saudi Arabia, initial provisioning for subsequent insertion of Tranche 3 capability in respect to the last 24 aircraft and finalization of price escalation.

On the core Saudi British Defense Co-operation Program, budgets have been established for the next 5 years. The budget provides for an upgrade of the training environment, including new Hawk aircraft, and that's significant new business. As we reported, good progress on these discussions had been made in the weeks before year end, with budgets now approved in the Kingdom on all items other than price escalation. To scale this, we have already booked GBP 1.2 billion of orders following approval of the budgets in Saudi. Negotiations will continue into 2012 on the price escalation. And as we said last year, the contract settlement is key, not the timing of the settlement.

In summary, this is a difficult operating environment, but the focus on cost efficiency and program execution, together with our international footprint and strong positions in priority segments of the defense, aerospace and security markets, are contributing to our sustained performance. We have a resilient platform for future growth, but in a rapidly changing environment, agility at all levels of the group is becoming ever more important, whether it be responding quickly to meet urgent customer requirements or to address changes in markets. We will continue to keep our strategy under review, and we'll move to adjust our portfolio of businesses where it is in the interest of shareholders. Growth in shareholder value remains the unambiguous objective.

Our position on capital allocation is clear. Despite the challenging trading environment, we have returned GBP 2.2 billion to shareholders over the last 2 years, as well as maintained the development of the business. We are particularly pleased with the integration and performance of the acquisitions that we completed in the year.

I'll now turn over to Pete, who will take you through the 2011 results and the outlook for '12. And after that, there will be an opportunity for any questions that you'd like to raise. Thank you.

Peter Lynas

Good morning, everybody. Today's the first time that we've reported under the new segmental structure. We made these changes for 3 primary reasons: firstly, to better align to the group's strategic direction of Electronic Systems, platforms and services; secondly, to give disclosure on how our Cyber & Intelligence assets are performing; and thirdly, to improve external alignment of our reported performance to management of the operations. And I'm sure you'll find the increased disclosure helpful.

There are several items that impact the numbers materially, and I'll highlight those as I go through the relevant sectors. I'm going to cover the 2011 results first and then move on to guidance for 2012. So firstly, the headline numbers and compared to 2010, sales declined by 14% to GBP 19.2 billion primarily from the volume reductions in Land & Armaments, the impacts of the SDSR on the U.K. business and delay in securing some of those contract changes to the Saudi Typhoon program. Underlying EBITA reduced by 7% to GBP 2,025,000,000. Underlying earnings per share of 45.6p included 5.9p arising from the previously announced U.K. R&D tax settlement, and excluding that benefit, underlying EPS was almost unchanged over the prior year. Operating cash flow totaled GBP 634 million, and net debt closed at GBP 1,439,000,000.

Finally, the dividend for the year has been increased to 18.8p per share, up 7.4% on the 2010 dividend, and at this level, the dividend is covered 2.1x by underlying earnings per share, excluding the R&D tax settlement.

The 2011 results and their comparison to 2010 have been affected by both M&A and exchange rates. The acquisitions announced towards the end of 2010 were all completed in the first half of '11. In addition, following the disposal of the Regional Aircraft Asset Management business, the results of Regional Aircraft are now reported as a discontinued operation, and prior-year figures have been restated accordingly. The average U.S. dollar exchange rate for the year was $1.60 compared to $1.55 in 2010. And we have appended to the presentation pack the adjustments we've made to produce like-for-like comparisons. So like-for-like sales reduced by 15% or GBP 3.2 billion, of which GBP 2.2 billion came from the volume reductions in the Land business. Underlying EBITA of GBP 2,025,000,000 gave a return on sales of 10.6%. Underlying finance costs of GBP 199 million were GBP 8 million higher than in '10, and this included a charge of GBP 28 million for the costs arising from the early debt redemption related to the Regional Aircraft disposal. Most of that cost would have been borne in '12 and '13. There was a goodwill impairment charge taken of GBP 94 million relating to the Surface Ships and Land businesses. The underlying tax rate of 26% was 2% lower than previous guidance, and this excludes the benefit arising from the U.K. R&D settlement.

A number of items have impacted the balance sheet in the year. Firstly, the acquisitions made have increased intangible assets. Secondly, the Regional Aircraft disposal has reduced tangible fixed assets, and thirdly, working capital has increased for the consumption of advances on the Salam and European Typhoon Tranche 2 programs, utilization of provisions and for the delay in expected cash receipts pending completion of the changes to the Salam contract. The reported pension deficit has increased by GBP 1.1 billion, and I'll get to the pension position on the next couple of slides. Deferred tax assets increased on the higher pension deficit. Financial assets and liabilities at the beginning of the year contained the carrying value of our holding in Saab, which we sold in the first half. And finally, their net debt increased to just over GBP 1.4 billion.

This slide shows the pension scheme assets, liabilities and the deficit as accounted for under IAS 19. The value of the scheme's assets has increased over the year to GBP 18.1 billion. In aggregate, across all the group's pension plans, equity investments now comprise 51% of scheme assets. Over the year, liabilities have increased by GBP 2 billion. The year's discount unwind accounts for GBP 1.1 billion of that increase, and a further GBP 0.3 billion arises from changes in assumptions primarily relating to mortality increases. Real discount rates reduced by the net of lower bond yields and lower inflation assumption, and this accounts for the rest of that increase. So the net impact of all those movements is an increase to the group's accounting pension deficit of GBP 1.1 billion. Now that's accounting at 31st of December. I'll turn now to the funding valuations, which determine our cash contribution levels, and the positions that we have now reached on the 2 largest U.K. schemes, the main scheme and 2000 plan, plus 2 of the smaller U.K. schemes.

This chart shows the new funding deficit on those 4 schemes and a comparison to the position expected in 2008, when the last deficit recovery plans were agreed. Whilst the funding deficit has increased only slightly to some GBP 3 billion, it is GBP 1.1 billion higher than would have been expected 3 years ago due primarily to the lower discount rates and the resulting increase in liabilities. The company and the scheme's trustees have now reached agreement as to these funding deficits, the sustainment of the remaining 15-year deficit recovery period and revised funding profiles. The U.K. pensions regulator has been briefed, and we await final acceptance from him of those agreements.

Of the incremental GBP 1.1 billion of funding required, some GBP 130 million was paid in 2011, around GBP 200 million in aggregate will be paid over the next 5 years, and the remainder, some GBP 800 million, is scheduled over the subsequent 10 years. Total annual deficit funding across all group schemes will be some GBP 400 million in 2012. The agreement reached on the sustainment of our multiyear deficit recovery period and on new schedules for deficit clearance are an equitable outcome. The group's U.K. defined benefit schemes are all being closed to new entrants.

Turning to cash flow. Cash flow from operating activities totaled GBP 951 million, and this number is stated after pension deficit funding of GBP 375 million. After net capital expenditure of GBP 268 million, dividends received of GBP 88 million and further pension contributions of GBP 137 million made into a trust mechanism, the operating business cash flow totaled GBP 634 million. The cash flow performance of the 5 sectors is shown here, but I'll return to this when I cover the results of each of the sectors. Just one point to note here, the all-up total for pension deficit funding made in 2011 was GBP 512 million, and the cash outflow at head office contains GBP 266 million of that.

This next slide sets out the movement in net debt throughout the year. We started the year with debt of GBP 242 million. Interest, tax and dividends totaled GBP 1,039,000,000. The GBP 500 million share buyback program announced with the interim results was completed in December. We acquired 184 million shares or 5.4% of the issued capital at an average price of GBP 2.73 per share. The acquisitions completed in the first half, net of the proceeds received on disposals, including our Saab holding and the Regional Aircraft transaction, amounted to GBP 256 million. Exchange translation and all other movements totaled GBP 27 million, closing net debt then of GBP 1,439,000,000.

This next chart shows the gross debt, cash and net debt of the group. At the start of the year, borrowings amounted to GBP 3 billion, with cash held of GBP 2.8 billion, giving the reported net debt of GBP 0.2 billion. The total cash outflow for the year was GBP 1.2 billion. Within the year, we repaid debt financing of GBP 1 billion, and the blended rate of that debt was 5 1/2%. New term debt of GBP 0.8 billion was put in place in October, and that debt was in 3 tranches over 5, 10 and 30-year terms at a blended rate of 4 3/4%. Holdings of low-cost, short-term commercial paper were increased by GBP 400 million, and therefore, at the end of the year, total borrowings had increased to GBP 3.2 billion, cash holdings reduced to GBP 1.8 billion and net debt was, therefore, GBP 1.4 billion. We expect much of the commercial paper to be redeemed in the short term. Pension deficit funding will be some GBP 200 million in the first quarter of 2012, and the final dividend for 2011 of GBP 400 million is payable on the 1st of May.

We continue to manage the group's balance sheet conservatively to retain our investment-grade credit rating and to ensure operating flexibility in dealing with our working capital volatility. The cash dependency from the Salam contract amendments is a prime example of that volatility. Our approach to capital allocation is that we will meet our pension obligations and continue to pursue organic investment opportunities that meet our financial criteria. We plan to pay dividends in line with the group's policy of long-term sustainable cover of around 2x and return capital to shareholders when the balance sheet allows. Investment in value-enhancing acquisitions will be considered when market conditions are right and where they deliver on the group's strategy. The combination of share buybacks and dividend payments in 2010 and 2011 has been around GBP 2.2 billion or around 20% of current market capitalization.

Now turning to the sectors, and I'm going to cover the in-year performance here and then turn to 2012 outlook a little later. So to the first of those sectors, Electronic Systems, and the figures here are shown in U.S. dollars. Sales compared to 2010 decreased by 7% to $4.2 billion primarily due to the completed F-22 and ATIRCM production contracts, the rescheduled JSF program and the Johnson City flooding, which resulted in sales of some $100 million being deferred into 2012. The return on sales achieved at 14.6% was marginally above the very top end of our forecast range. Program execution was strong, with good risk retirement seen on those completing production contracts. But this has also delivered in-year benefit from continued cost reduction actions. Order backlog increased marginally to $5.6 billion despite some delays and disruption in contract awards caused by the continuing resolution, which operated throughout the final quarter of 2011. Cash conversion of EBITA for the year was 69%. Excluding pension deficit funding, that conversion rate was 80%, which was impacted slightly by the timing of insurance receipts following the Johnson City flood.

The Cyber & Intelligence sector comprises the U.S. Intelligence & Security Solutions business together with Detica, and the numbers here are, again, shown in U.S. dollars. In aggregate, sales of $2.2 billion increased by 21% over 2010. Of this growth, 17% came from the acquisitions of L-1, ETI and Norkom, and each of those acquisitions has been accretive to earnings in the year and are on track to meet the performance underpinning their acquisition cases. The margin achieved of 9.7% was after both the integration costs of the business acquisitions made and organic investments as we've positioned Detica to have less reliance government consulting business and towards growth in commercial markets. Cash conversion of EBITA for the year was at 90%, and order backlog increased to $1.7 billion, primarily on the backlog acquired with the acquisition of L-1.

The U.S. Platforms & Services sector aggregates the Land & Armaments and the Support Solutions businesses. The numbers here are, again, shown in U.S. dollars. As promised, we wanted to provide appropriate transparency as to the respective performance of the 2 businesses within this sector. So this slide shows the performance of those 2 businesses. Firstly, addressing Land & Armaments. Sales declined by 38% to $5.7 billion, some 5% short of the guidance that we gave at the interim results presentation. There was the expected reduction arising from the completing FMTV contract and lower level of Bradley reset activity. And most of the shortfall to guidance arose from the delayed start of the Ground Combat Vehicle program following the award protest and deferred customer funding for the Caiman upgrade activity. Both of those programs are now underway. In addition, there was some small impact from business disposals made in the year. Margin at 9.3% was also below guidance. We self-funded the costs of the GCV team during the 3 months of award protest, and as a result of the delayed contract placements for GCV and Caiman upgrades, there was a short-term under-recovery of overheads. Cash conversion of operating profit was at 84% as investment in the U.K. munitions facility continued throughout the year.

In the Support Solutions business, sales increased as expected by 5%, including the benefit from last year's Atlantic Marine acquisition. Margin of 8.4% was at the high end of our forecast range, and cash conversion was at 91%. Order backlog increased to $5.2 billion primarily for the 3 multi-ship, multi-option 5-year awards that we received in the first half year. The $850 million award for the Radford Army Ammunition Plant was finally confirmed in January, and this is therefore yet to be included within the reported backlog.

In the Platforms & Services U.K. sector, sales of GBP 6.3 billion reduced compared to 2010 by 4% due to the delay in securing certain of the contract amendments on the Salam Typhoon program. The 2011 return on sales of 10.5% included 3 material items: the GBP 125 million benefit from the higher level of rationalization cost recovery agreed in June with the U.K. MoD; the first half charge of GBP 160 million taken on the Oman Offshore Patrol Vessel contract; and the GBP 60 million benefit from the increase in carrying value of the ex-Trinidad and Tobago ships to recognize their value under the resale contract to the Brazilian Navy signed in December. As forecast, there was only a small cash inflow in the year as customer advances were consumed on Typhoon and cash expended on the Oman OPV program.

The 2011 performance of the International business has been materially impacted by the delay in securing the contract amendments to the Salam Typhoon program and, particularly, the formalization of price escalation, where applicable trading has been deferred until ongoing negotiations have been completed. As a result, the year's sales of GBP 3.8 billion are 12% lower than in 2010. The absolute year-over-year reduction is primarily on the maturing Tornado upgrade and core support programs and the completed Tactica vehicle delivery contract. However, EBITDA of GBP 449 million is unchanged from the prior year as strong performance in risk reduction was delivered on both the Tornado upgrade and core support programs. In the absence of the cash payments we had expected from the Salam contract amendments, there was a significant cash utilization on the Salam program. Order book has reduced pending receipt of contracts against the budgets approved in December on the Saudi core and Typhoon programs.

For reference, there is a chart providing a summary of the trading performance of the 5 sectors, along with the numbers for HQ, which are little changed from last year, and that's appended to the presentation packs that you have. Now given the number of moving parts within the year's results compared to 2010's, we've provided this chart to bridge between the 2 years at the earnings per share level. Starting at the left of the chart is last year's earnings per share of 39.8p. From that, the 2 red boxes represent the impacts of the lower land volume and the year-over-year charges taken on the Oman and Trinidad and Tobago ship contracts. The next 3 green boxes show the U.K. rationalization cost recovery benefit, the write-up of the ex-Trinidad and Tobago ships and then all other operational improvements. Then there is the impact of exchange translation and increases from the year's lower tax rate and reduced share base following the 2010 and 2011 buyback programs. Earnings per share then of 39.7p, plus the R&D tax settlement, giving a total for the year of 45.6p.

Now what I'll move on to now is the outlook for 2012, which I'll do sector by sector before giving an overall guidance for the group. With the new sector reporting structure now in place, this final chart seeks to give better granularity as to how we see each sector's performance developing from 2011 through into 2012 within the context of the U.S. and U.K. market conditions that David referred to earlier. Given uncertainties in the market, we feel it is appropriate this year to give this extra disclosure.

So firstly, Electronic Systems. Overall, we expect sales volumes in 2012 to be broadly similar to those in 2011, albeit with a different mix. Some 15% of this business is in the commercial aerospace and hybrid drive markets, where we expect good levels of growth. The majority of the sales lost in 2011 from the Johnson City flooding should also be recovered. On the defense side, we anticipate a small reduction as operational tempo-driven activity completes. And on margins, we would expect the high level seen in 2011 to return to within our long-term guidance range of 12% to 14%.

Next, Cyber & Intelligence. And here, we continue to plan for growth at around the mid-single-digit mark. And whilst the U.S. business, which is some 80% of this sector, is expected to have a lower growth rate, the Detica business is planned at a double-digit level, supported by its continued expansion in commercial markets. Margins in 2012 are expected to be within an 8.5% to 9.5% range, with further organic investment planned for Detica and the acquired ETI and Norkom businesses.

Moving to Platforms & Services in the U.S., the overall guidance, as shown on this chart, that is with a further reduction in sales but an improvement in margin levels. And the guidance for this sector is best addressed in 2 parts. On Land & Armaments, we now see sales at the GBP 5 billion level rather than the previous GBP 6 billion guidance. And whilst we have seen recent positive customer commitments to land programs, we do see land as being the largest bill payer under the U.S. defense cuts, with uncertain levels of force reductions clearly impacting the business. On specific programs such as GCV, JLTV and Caiman upgrades, we've already seen delayed and reduced levels of funding being committed by the customer, and we expect this to continue.

And in giving this further downward revision, we are seeking to provide a top line floor. And to that end, and excluding the more short-term individual protection systems business, some 88% of the sales guidance is within order backlog. They're giving a limited worst-case downside. Of the remaining 12%, half is from sole-source procurements to be won in the year, the remainder to be won competitively. At the margin level, we target delivery close to the 10% mark, but both the award and timing of key programs, such as JLTV, underpin the viability of the tactical wheeled vehicle facilities.

In the Support Solutions business, we anticipate 2012 sales to be around the 2011 level. Customer scheduled activity in the naval shipyards is lower in '12. We expect this to be compensated for by new business elsewhere, including from the Radford Ammunition Plant award. And margins in the Support Solutions business are expected to be slightly lower than in 2011.

Turning next to Platforms & Services U.K., we expect sales in 2012 to be broadly similar to last year's. Under the Salam Typhoon contract, there are now no aircraft deliveries scheduled until 2013 following completion in 2011 of the last 6 of the 24 aircraft that were diverted from the U.K. build program. In the absence of any such large events as seen in 2011 and despite a slightly higher pension service cost arising from the lower pension discount rates, margins in this sector should be maintained within our 10% to 12% range.

And so the last of our sectors, Platforms & Services International, here, we expect sales to show significant growth, well in excess of 25%. Firstly, for the deferred trading arising from the Salam price escalation, on which, as David said earlier, we expect to conclude negotiations this year; secondly, for the high levels of support to the Typhoon aircraft now in service; and finally, for commencement of weapon deliveries under the Tornado upgrade program. Clearly, the timing of the Salam price escalation negotiations will determine the shape of the 2012 first-half second-half split, and margins are expected to be around the 10% level.

HQ costs are expected to be broadly similar, and finance costs will be lower, following the early debt redemption charges taken in 2011. Our effective tax rate is now expected to be within the 26% to 28% range, and this is a little higher than in '11 but well below our previous guidance of 30%. So in aggregate, whilst little sales growth can be expected in the current market conditions, modest growth in underlying earnings per share is anticipated, assuming a satisfactory conclusion to the Salam negotiations in 2012 and excluding the benefit of the 2011 R&D tax settlement. And as to cash, a higher level of operating business cash inflow is planned in 2012 with the anticipated benefit of the cash payments related to the Salam program. And we'll now turn it over to questions.

Question-and-Answer Session

David Brent

Who wants to ask the first question? If not, we can take questions informally over lunch or, further, coffee, if that's how people would prefer to handle it. Yes.

Peter Lynas

Looks like it.

David Brent

Okay, we'll go with that. Thank you.

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