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Executives

Ian G. King - Chief Executive Officer, Executive Director and Member of Non-Executive Directors Fees Committee

Peter J. Lynas - Group Finance Director and Executive Director

Linda P. Hudson - Head of EI&S, Executive Director, Member of Advisory Board on Tanzania, Member of Non-Executive Directors Fees Committee, Chief Executive Officer of BAE Systems Inc, President of BAE Systems Inc and Executive Director of BAE Systems Inc

Tom Arseneault - Chief Technology Officer and Executive Vice President of Product Sectors

Nigel Whitehead - Group Managing Director of Programmes & Support

Guy Griffiths - Group Managing Director of International

Alan Garwood - Group Business Development Director

Analysts

Christian Laughlin - Barclays Capital, Research Division

Robert Stallard - RBC Capital Markets, LLC, Research Division

Carl Walton

Nick Cunningham

David H. Perry - Goldman Sachs Group Inc., Research Division

Benjamin Fidler - Deutsche Bank AG, Research Division

Charles Armitage - UBS Investment Bank, Research Division

Zafar Khan - Societe Generale Cross Asset Research

Jeremy D. Bragg - Citigroup Inc, Research Division

BAE Systems (OTCPK:BAESY) Q2 2012 Earnings Call August 2, 2012 4:00 AM ET

Ian G. King

Okay. Good morning, everyone, and thank you for joining us on this webcast of our first half results. The Executive Committee, as usual, is either here in person or in the phone to support Peter and I. So what I will do is I will shortly ask Peter to describe the group's first half financial performance and full year outlook, and then we will take questions.

But first, I would like to provide a brief overview of our markets and how we are managing our business through these challenging times. What you are going to hear is a business operating in a difficult environment but taking the actions necessary to reduce costs, protect and grow margins and generate good cash flow. Despite top line headwind in some parts of the business, we have through these actions further improved the group's return on sales, and we've remained committed to our earnings guidance for the year. The group continues to demonstrate sustained earnings performance and is successfully winning new business in international markets, generating order intake that will underpin future sales.

To characterize the U.S., we have the uncertainty of how the administration will handle the deficit reduction going forward. And with Defense representing around half of the discretionary spend in the U.S., the Defense budget is under the spotlight. Nobody has real visibility as to how this will unfold. Secretary Panetta has, however, 487 billion pounds of -- dollars of savings over the 10-year reduction period targeted by the Budgetary Control Act. We have assumed reductions over this period will be greater than those declared, and our current plans are based on a $600 billion reduction. This does not address the extreme impact that would result under sequestration. But if you put our U.S. activities in context, they represent some 40% of group turnover. After allowing for protected areas of spend, even an across-the-board 15% reduction would be just a mid-single-digit impact to the group's top line. We will take the necessary and appropriate mitigation actions, as we have demonstrated in the past.

I will now describe the U.S. trading environment. Our Support Solutions business is progressing well. We have good visibility in activities such as naval sustainment, and we are seeing both new business wins, such as our Radford facilities contract, and a good product pipeline of future opportunities.

In Land, we are on the right programs. The Joint Light Tactical Vehicle and Ground Combat Vehicle remain funded in the demonstration phases, and we are also moving forward on a number of international prospects. There is also a good awareness of our position as a provider of key industrial capability. We anticipate structurally smaller Land forces going forward, and although we believe we may be nearing the low point in Land activity in the U.S., if necessary, we will undertake additional rationalization to ensure we stay ahead of any further weakening in volume. We have also announced some disposals as we refine our land portfolio.

The U.S. electronic sector continues to be encouraging. Despite pressures, our defense electronics procurement environment has benefited from budget stability in 2012 with no continuing resolution at the start of this year as there was in 2011. In addition, we continue to see good sustained support in the growth fast lanes such as electronic warfare systems and persistent surveillance. We continue to see good growth in commercial electronics, and the team have done a great job reestablishing facilities and recovering post the Johnson City flood.

In Cyber & Intelligence, we are seeing, currently seeing lower growth in U.S. government Cyber & Intelligence spend, with some $2 billion of bids in the pipeline. And with the focus of our activity on supporting key missions rather than consulting and outsourced manpower, our business remains robust.

We are also seeing some benefit from more activity in the government securities sector in the U.K. In addition to the U.K. secure government work, BAE Systems Detica is leading our drive into commercial Cyber markets and other secure government markets outside the U.S. We have recently formed 3 regional hubs and are making significant organic investment in BAE Systems Detica as we accelerate our plans to address these new growth markets, including addressing commercial cyber opportunities in the U.S.

Turning to U.K. Defense. We have good stability and have seen no material program changes since the Strategic Defence and Security Review. We have a good backlog in military air, a commitment to enable Surface Ships plan and visibility through to the 2030s in our submarines business, with significant activity well under way on the Successor deterrent program. More recently, the U.K. government confirmation that the defense budget plan was now in balance with the equipment plan was very good news.

The business in the U.K. is performing strongly, the result of improved visibility, good program execution and swift management action to address cost and improve efficiency. Following extensive cost-reduction actions over the last 3 years, further rationalization is continuing this year. I am determined that this group, both in the U.S. and the U.K., will remain agile and focused in its drive to remain competitive. Decisions of this nature are not taken lightly but are essential to maintain a sustainable business. We are sustaining and will continue to sustain our franchise positions, which deliver the intellectual property that drives our success in international markets.

We are delivering well on our plans in international markets with several significant wins and good progress on a number of other prospects. Order intake in markets outside the U.S. and U.K. was well up in the period and totaled GBP 4 billion compared to GBP 4.8 billion for the whole of 2011. Indeed, we have seen the first increase in the group's order backlog since 2009. Contributing to the first half increase was the training aircraft and equipment contract for Saudi and the GBP 500 million CV90 vehicle contract for Norway. The latter secures the outlook for the Swedish business, and we have other good CV90 prospects.

The GBP 1.6 billion training package for Saudi was not just a large win. It was achieved ahead of plan, having moved from agreed budget in December to cash prepayment and contract effectivity in less than 6 months, a major achievement in any market and a good indicator as to the pace of activity with this important customer. We are working on a number of additional streams of business in Saudi, including support for tornado and typhoon, weapons packages and the anticipated conclusion later this year of an agreement on Salam price escalation. Salam Typhoon aircraft are now in build for a resumption of deliveries next year.

Elsewhere, we also see good progress. We are working towards a contract for 12 newbuild Typhoons in Oman. Prospects in India are moving closer with the Indian government approval to proceed with the U.S. foreign military sale of M777 artillery. Order intake in India within the first 6 months was over GBP 300 million, a good start towards my target of GBP 1 billion across 2012 and '13. We continue to see additional business supporting the manufacture and operation of the Hawk trainer program in India. We are currently bidding for a further 20 Hawk aircraft and the expansion of their training bases.

So in summary, not all plain sailing, as you would expect in this financial climate and with the uncertainty in the U.S. However, the business is progressing to plan, driven by our focus on cost and efficiency, strong performance from our stable U.K. business and with some exciting opportunities materializing in international markets, not least being a vibrant outlook in Saudi Arabia.

Thank you. Pete?

Peter J. Lynas

Thanks, Ian, and good morning. I will give a trading update as usual and then move on to the 2012 full year guidance. So firstly, in headline terms and compared to the first half of 2011, as expected, sales declined by 10% to GBP 8.3 billion, primarily for the volume reduction in Land & Armaments and for contracted scheduling of Typhoon aircraft on the Salam program. Despite the sales decline, underlying EBITA decreased by just 3% to GBP 939 million, and underlying earnings per share increased to 18.8p. There was good operating cash flow of GBP 742 million, and net debt was reduced to GBP 1,230,000,000. Order backlog increased to GBP 40 billion despite an adverse exchange translation impact of GBP 400 million. And as Ian mentioned, this is the first time backlog has grown since 2009. Finally, the interim dividend has been increased to 7.8p per share, up 4% on the 2011 interim.

The 2012 first half figures have been affected to some extent by exchange rates, acquisitions made in 2011 and some small disposals from the Land & Armaments business. The average U.S. dollar exchange rate for the reporting period is $1.58 compared to $1.62 for the first half of '11. And appended to the presentation posted on the web are the adjustments made to produce like-for-like comparisons. Like-for-like sales reduced by 11% or GBP 1 billion, of which half came from the expected land volume reductions. The impact of there being no Typhoon deliveries this year on the Salam program amounted to a further GBP 200 million. Underlying EBITA of GBP 939 million gave an improved return on sales of 11.3%. Underlying finance costs were GBP 91 million, a reduction of GBP 13 million over 2011. Last year included a charge in respect of early redemption of debt relating to the disposal of the Regional Aircraft Asset Management business. The goodwill impairment charge taken of GBP 39 million in the half related to the 2 Land & Armaments business disposals completed in July. The effective tax rate for the period was 27% compared to 26% in the first half of 2011.

There were a limited number of items impacting the balance sheet in the period. Intangible fixed assets reduced mainly for the amortization and impairment charges taken. Within working capital, and as anticipated, advances were consumed on the European Typhoon Tranche 2 program. Provisions created in previous years were utilized for costs incurred on the Oman offshore patrol vessel contract and for rationalization. However, significant down payments were received on the new Saudi training aircraft contract. And in June, GBP 480 million of advanced payments were received from the Saudi customer on the Tornado upgrade program. So in aggregate, working capital was improved by circa GBP 100 million.

The IAS 19 accounting pension deficit increased to GBP 4.7 billion, and I'll cover that on the next slide, and the deferred tax asset has increased on that higher pension deficit. Net debt was reduced to GBP 1.2 billion, and all other movements were mainly due to foreign exchange rate translation.

This slide shows the pension scheme assets, liabilities and deficit as accounted for under IAS 19. The value of the scheme assets has increased over the period to GBP 18.6 billion. Liabilities increased by GBP 1.2 billion to GBP 24.5 billion. Real discount rates have reduced by a further 20 basis points in the U.K. and by 60 basis points in the U.S. since the start of this year on lower bond yields, and this has increased liabilities by some GBP 1 billion. The usual 6 months of discount unwind net of pensions actually paid accounts for the rest of that increase in liabilities. The aggregate impact of these movements is an increase to the group's tax -- pretax accounting pension deficit of around GBP 500 million. As you all know, these mark-to-market movements have no bearing on our scheme funding. As outlined at the prelims, revised funding agreements were reached in February this year with the trustees of the 2 largest U.K. schemes. And notwithstanding volatility in the accounting deficit, these funding agreements are sustained through 2014. Total deficit funding across all group schemes is around GBP 400 million per annum over that period.

Cash flow from operating activities totaled GBP 940 million. After net capital expenditure of GBP 189 million, dividends received of GBP 16 million and pension contributions of GBP 25 million made into the trust mechanism, the operating business cash flow in the first half year totaled GBP 742 million. The cash flow performance of the 5 sectors is shown here, and I'll return to this when I cover the results of each of the sectors. But just one point to note, the total cash outflow for pension deficit funding in the first half year was GBP 236 million. The cash outflow at head office contains GBP 170 million of that.

This slide sets out the movement in net debt since the beginning of the year. We started with GBP 1,439,000,000. The operating business cash flow was GBP 742 million. Interest and tax payments totaled GBP 124 million. And 2011's final dividend, which was paid in June, was GBP 367 million. Proceeds from the business disposal completed in the first half year were on GBP 18 million, and GBP 19 million has been received since from the 2 Land & Armaments business disposals completed in July. Exchange translation and all other movements totaled GBP 60 million, closing net debt, then, of GBP 1,230,000,000.

This next chart shows the gross debt, cash and net debt of the group. At the start of the year, borrowings amounted to GBP 3.2 billion, with cash held at GBP 1.8 billion, giving a reported net debt of GBP 1.4 billion. The total cash inflow for the 6 months was GBP 200 million. New 10-year term debt of GBP 400 million was put in place in June, and that debt was secured at 4 1/8% and prudently pre-finances debt maturing in 2014, which has a blended rate of 6.3%. Holdings of low-cost short-term commercial paper were reduced by around GBP 300 million. And therefore, the 30th of June, total borrowings have increased to GBP 3.3 billion, cash holdings have increased to GBP 2.1 billion and net debt was reduced to GBP 1.2 billion.

In addition to the GBP 400 million of pre-financing of 2014 debt, there are a number of short-term demands on that GBP 2.1 billion of cash. Much of the remaining commercial paper will be redeemed in the short term. Pension deficit funding in the second half year will be close to GBP 200 million. The interim dividend is payable on the 30th of November. And of the advances that we received in June on the Tornado upgrade program, some GBP 300 million is expected to be utilized in the second half of the year.

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. As a reminder, our approach to capital allocation is that we will meet our pension obligations and continue to pursue organic investment opportunities that meets 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 strategy.

Turning now to the sectors, and I'll cover our year-to-date performance here and then return to the full year outlook a little later.

So to the first of those sectors, Electronic Systems, and the figures shown here are in U.S. dollars. Sales compared to 2011 decreased by 6% to $1.9 billion, primarily due to the completion of deliveries of thermal weapons sights as operational tempo-driven activity reduces. Within this sector, sales in the commercial avionics business grew by 12%. The $100 million of sales that was deferred from 2011 due to the Johnson City flooding is expected to be recovered in the second half of the year. The return on sales achieved at 13.9% was at the top end of our forecast range, benefiting from good program execution and continued cost reduction actions. Cash conversion of EBITDA in the first half year was similar to last year's, and we would expect an improved conversion level in the second half. The order backlog of $5.6 billion was unchanged from the start of the year.

The Cyber & Intelligence sector comprises the U.S. Intelligence & Security business together with BAE Systems Detica. The numbers here are again shown in U.S. dollars. In aggregate, sales of $1.1 billion increased by 7% over 2011. Growth in the BAE Systems Detica business was 13%. And the U.S. business, it was 6%. The margin achieved at the half year of 7.6% was after increased levels of organic investment in the Detica business in support of targeted future growth in commercial and international markets. Cash flow in the first half of last year included the settlement received under the terminated Raytheon e-Borders contract. Order backlog at $1.6 billion was marginally lower than at the start of the year, and we have a significant number and value of competitive bids from our U.S. Intelligence & Security business awaiting award decisions.

The U.S. Platforms & Services sector aggregates the Land & Armaments business and the Support Solutions business. The numbers here again shown in U.S. dollars. We continue to provide transparency of the 2 businesses within this sector, so this slide shows the performance of those 2 businesses. You should note here that the comparative numbers for 2011 have been amended to reflect the transfer made at the beginning of this year of the protection systems line of business from Land & Armaments into Support Solutions. That transfer was made to better position that line of business to address readiness and sustainment opportunities for soldier protection equipments, vehicle seating and armor systems and aviation seating.

So first, addressing Land & Armaments. Sales declined by 29% or 26% on a like-for-like business (sic) [basis], taking into account the impact of businesses -- business disposals made and foreign exchange. As we expected, sales reductions were on the FMTV program, which completed in 2011, and for lower volumes at Bradley, Caiman and MRAP activity. The reported margin of 8.5% includes accelerated rationalization charges in respect to the New Castle site and for certain legal claims. Margin excluding those charges would have been at 9.4%.

With regard to cash flow. Investment in the U.K. munitions facilities continue through this year, and cash performance will be second-half-biased due to the timing of funding on the U.K. munitions contract. Order backlog increased to $8.7 billion and includes the important Norwegian CV90 contract award. In the Support Solutions business, sales were 2% higher, and margin of 8.2% was marginally better than last year's level. Order backlog there increased to $5.6 billion following the award for the Radford Army munition plant.

In the Platforms & Services U.K. sector, sales of GBP 2.7 billion reduced compared to 2011 by 13%. There being no aircraft deliveries on the Salam Typhoon program in 2012, completion in 2011 of the South African aircraft deliveries and timing of milestone achievements on the Astute contract. The return on sales of 15.8% has benefited from very strong program execution, particularly on European Typhoon production and on the Type 45 contract as ships successfully enter into service. Some of that performance does relate to earlier-than-anticipated risk reduction, giving a timing benefit to the first half year from the second half and some which will improve the full year outlook. As expected, cash performance in the period reflects the utilization of customer advances on the European Typhoon program. And in addition, provisions are being utilized for cost incurred of rationalization and the Oman OPV program. This has been partly offset by down payments received following the GBP 1.6 billion contract award for supply of training aircraft to the Royal Saudi Air Force, and that contract has helped to increase order backlog to GBP 19.5 billion.

Sales in International business for the first 6 months of GBP 1.6 billion are 10% lower than in 2011, and that reduction is primarily on the Saudi core Tornado support program, where spares and repairs activity has been pushed back to later in the year. 2012 performance is heavily weighted to the second half, as deliveries under the Tornado upgrade and core support programs ramp up significantly. Formalization of price escalation on the Salam Typhoon program has deferred trading until the current negotiations are satisfactorily concluded, and we remain optimistic that these will be completed within the year. EBITDA was GBP 161 million, and the return of sales of 10.2% is in line with guidance. Operating cash flow was very strong and benefited from those accelerated advances on the Tornado upgrade program. Order backlog has fallen marginally pending receipt of significant contracts following the budgets approved in December on the Saudi Typhoon and core support program. For reference, there is a chart, a summary chart providing trading performance for the 5 sectors along with numbers for HQ appended to the presentation posted on the web.

So this final chart seeks to provide updated guidance for each of the sectors through to the end of this year. And as you'll see, whilst we are light on sales overall, the bottom line is unchanged and we are reconfirming previous earnings guidance for the group in the aggregate.

So firstly, Electronic Systems. In the expectation of the continuing resolution operating throughout the final quarter of 2012, sales volumes are now likely to be marginally below those for 2011, albeit with a different mix. Some 15% of the business is in the commercial avionics market, where we are seeing good levels of growth. Deliveries in respect to the sales lost in 2011 from the Johnson City flood have been rescheduled with customers and so should be recovered in the second half of the year.

And on the Defense side of the business, we are seeing the expected sales reduction from completion of operational tempo-driven activity. Our margins we would now expect to be at the higher end of guidance, the range there, 12% to 14%, building on the first half performance.

Next, Cyber & Intelligence. Sales growth for the year is also now marginally below previous guidance. The U.S. business, which is some 80% of this sector, is now expected to have a stable year as competitive program awards are taking longer to be placed than expected. Growth in the Detica business remains forecasted at double-digit level, supported by continued expansion into commercial markets. Margins in 2012 are expected to be at the lower end of our 8.5% to 9.5% guidance range, reflecting our continued investment in Detica to support future growth in commercial markets.

Moving to Platforms & Services U.S. Whilst the overall guidance is as shown on the chart, this is best considered in 2 parts. On Land & Armaments, we are adjusting the previous $5 billion guidance to reflect the various business disposals announced, and those businesses contributed sales of around $250 million in 2011 and also to reflect the transfer of the $300 million protection systems line of business into Support Solutions. For 2012, the sales for Land & Armaments are now expected around $4.3 billion. On a like-for-like basis, this is just below our previous guidance, reflecting a lower level of U.K. support activity and delivery timing on the Medium Mine-Protected Vehicle contract.

We have accelerated some rationalization from 2013 into this year, and as a result, we would now expect margins closer to a 9% rather than 10% level. Both the award and timing of key programs, such as JLTV, will determine the viability of the tactical wheel vehicle facilities, and we will take further rationalization action if needed.

In the Support Solutions business. We continue to anticipate 2012 sales to be around the 2011 level with only limited downside from the probable continuing resolution. As expected, customer scheduled activity in naval shipyards is lower this year, but that is being compensated for by new business, including from the Radford munition plant award. Margins in the Support Solutions business for the full year expected to be close to those delivered at the half year.

Turning next to Platforms & Services U.K. We continue to expect sales in '12 to be broadly similar to last year's. In line with the contract amendment now received to complete final assembly of the Salam Typhoon in the U.K., aircraft deliveries will recommence in 2013. The second half bias this year arises from the deferred trading from the Salam price escalation and milestones to be traded on the Astute program as the second boat moves into sea trials. Building on the strong program execution delivered in the first half year, margins for this sector should now be at the very top end of our guidance range.

And to the last of the sectors, Platform & Services International. With the Saudi customer focused on order placements for amendments, upgrades and new requirements rather on the shorter-term operational budgets, some sales previously expected in 2012 will now be pushed out to 2013. Albeit lower than previous guidance, sales will still show good growth, around the 15% mark. The second half bias in the year arises from the high level of support to the Typhoon aircraft now in service and from the increased level of weapon deliveries under the Tornado upgrade program. And margins here are expected to be at the higher end of our guidance range.

To complete the 2012 model, headquarters’ costs are expected to be broadly similar. Finance costs should be lower following the early debt redemption charge taken in '11, partly offset by the 7 months cost of carry of June's GBP 400 million bond issue. The effective tax rate is still expected to be within the 26% to 28% range, with the final number dependent upon the geographic mix of profits.

So in aggregate, strong program execution and cost reduction actions have offset the top line headwinds seen in parts of the business. Now for the group as a whole, modest growth in underlying earnings per share continues to be anticipated. This assumes a satisfactory conclusion to the Salam price escalation negotiations in 2012 and excludes the 2011 benefit of the research and development tax settlement. As to cash and recognizing the first half performance, a higher level of operating business cash inflow is planned in 2012 compared with 2011, including the anticipated benefit of the cash payment related to the Salam program.

Thank you. Ian?

Ian G. King

Okay. Thank you, Pete. We will now take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Christian Laughlin from Barclays.

Christian Laughlin - Barclays Capital, Research Division

Just a couple brief ones. One, going to the Land & Armaments, could you provide some additional color on what exactly was behind the sales decline that we saw this year? I mean, I think FMTV came in, and MRAP were largely factored in, but I know the sales were even weaker than that. So over and above those items mentioned, could you provide some commentary on what else is behind that? And then, sequestration aside, when do you see the trough in the sales growth profile in this business?

Ian G. King

Okay. Well, we'll take it in 2 parts. I'll ask Peter to answer the second question. On the first question, then, what we have seen in reduced demand is largely in the U.K. and U.K. Support in Land & Armaments. It's not the U.S. Support business. It's the U.K. Support, as the U.K. has been revising what its floor structure for the land is going to be going forward. So we have seen some reduced volumes there. Which is why, as we say, we are taking the action to accelerate some rationalization from 2013 into 2012.

Peter J. Lynas

Just to add to that, I mean, the -- just to be clear, because I'm sure we're going to get the question in a while, the outlook for the year in terms of the perception on further weakness, just to be clear, we were at GBP 5 billion. If you take out the impact of the disposals we've made in the first half and just announced in July, they would have contributed about GBP 200 million of sales this year. And we've had the GBP 300 million transfer from -- in respect to the Protection Systems business from Land into Support Solutions. So on a like-for-like basis, we're saying GBP 5 billion, it's GBP 4.5 billion, and the guidance here we're now saying is GBP 4.3 billion. And to Ian's point, we're seeing some weakness in the U.K. support activity, and there's one particular program, MMPV, where we're seeing some sales moving out of '12 into 2013. So it's GBP 4.3 billion against GBP 4.5 billion.

Ian G. King

So on our franchise positions in the U.S. particularly on Bradley, the activity's been pretty strong. And I think, maybe just ask Linda to comment, I think we've recently sort of signed up for the next phase of the Bradley program, haven't we?

Linda P. Hudson

Yes. We just got notice yesterday that we had finalized the contract with the U.S. government for another $645 million on the Bradley program, excuse me. So the Bradley franchise remains funded and very strong and moving forward.

Ian G. King

Thank you, Linda.

Peter J. Lynas

On the second question, which was around sort of when do the sales bottom out, it's probably just worth -- what is in Land, because I think there's the perception that this is all around U.S. vehicles. If you split out those first half sales of $2 billion, about $1 billion is on track and will be, of course, in the U.S. What you've also got is the volume going through in the U.K. on the munitions contract, on Support, which is about $400 million. We've got Sweden and South Africa, which are largely export-driven models, would contribute another $300 million. We have the naval guns business in there as well, and we have the protection systems -- sorry, the remaining first half $100 million from the individual protections system business. So if you're looking for how much more can this business reduce, if you're just focusing on the U.S. piece, it's $1 billion of vehicles business in the first half, roughly $2 billion over a full year. So this is not at the level that we saw back in 2009 when this business was sort of around $8 billion, which is why we've taken so much cost out of the business.

Ian G. King

Okay. Does that answer your questions?

Christian Laughlin - Barclays Capital, Research Division

It does. And then if I could just conclude with one more additional question. Just in general, what is your view on the survivability of major U.S. Army land programs such as GCV and JLTV in the medium term and the risk of funding timeline shifting drastically to the right if we do to survive this next round of budget scrutiny intact?

Ian G. King

Well, all we have in our plans going forward are the demonstration phases at this time frame. I mean, they're fairly extended programs, and so it takes a while for the budgets to ramp up. I mean, you could argue that if they're going to maintain their heavy brigade capability, they're all going to have to do something continuing on the license of Bradley franchise, which is why we've been very careful to make sure that we're sustaining the industrial capability to support that franchise.

Operator

Your next question comes from Robert Stallard from Royal Bank of Canada.

Robert Stallard - RBC Capital Markets, LLC, Research Division

Ian, I thought we'd kick off on a comment you made about Electronic Systems. There had been some impact to this division from lower op tempo, presumably in the U.S. Looking forward, as we anticipate troop pull-down in Afghanistan, what sort of exposure have you got left to operational activity to overseas [ph] and where do you see that going?

Ian G. King

We'll perhaps ask Tom Arseneault, who's on the phone, to answer. But I'll just lead him in while he thinks of his answer. I mean, we have very little left on operational tempo in our profile. That was -- there's a little bit in our Cyber, but even that is quite small for counter-IED-type work. But in terms of our Electronic Systems, it really was these thermal weapons sights. Tom, would you just give a comment on that and how you see progress is going on your fast lanes?

Tom Arseneault

Yes, I'd be very happy to comment on that, Ian. We have, for some time and following the downturn in op tempo, and that has had an effect on parts of our business related to soldier-oriented electronics, things like thermal weapons sights and other handheld electro-optical devices, we have pretty much reached the end of production on those programs at this point in time. So there's very little additional exposure that we see. We had also some exposure to electronics provided for vehicle applications, so that has come down as well. In the meantime, much of our attention has shifted through electronic work there. We've been managing that with the change and focus on the part of the U.S. Department of Defense. As for the Asia Pacific, more sophisticated threat and electronic warfare has been an area growing emphasis and one in which we are well positioned, with legacies dating back some 50, 60 years. And so that has been a change in focus as well as continued emphasis on persistent surveillance, the ISR sector, that continues to enjoy much attention. And so I think it's safe to say that the op-tempo-related decline has come to an end, and now we're shifting [ph] our focus on these 2 areas that we call fast lane.

Ian G. King

Okay. Thank you, Tom. Robert, does that cover your question?

Robert Stallard - RBC Capital Markets, LLC, Research Division

Yes. And secondly, a quick one for Pete, if I may, on the guidance. You cut your sales guidance in 4 of the 5 divisions, but your margin guidance overall seemed to be fairly similar to what it was 6 months ago. Is it fair to say that you're now expecting, perhaps, margin to be towards the top end of the range to still arrive at this modest growth in EPS?

Peter J. Lynas

Yes. I think you're -- your summary is a good one. We are guiding down slightly on sales. But if you look at those margins with top end on Electronic Systems, Cyber and Intel will be slightly lower as will the Land, but not that much. But then in the U.K., we'll be right at the very top end, and international, also at the higher end. So you sort of get to a bottom line sort of earnings before interest and tax, which is unchanged in terms of guidance. So sales slightly down, margins higher.

Ian G. King

So the business operationally is performing well in all of its programs. And we're winning good new business.

Operator

Your next question comes from Carl Walton from Bank of America Merrill Lynch.

Carl Walton

I just had a clarification and then a couple of question. Just a clarification on the U.K. platforms and services. I mean, just about the bank [ph] split from the first half, you mentioned that you see -- I think there was a timing benefit saw in the first half versus the second half. But just to be clear, did you say that, that was kind of an increased guidance for the full year? So just a clarification there. And then questions after that first one, sequestration. It seems as if -- I mean, would you say you are being more cautious now compared to FY '11 results? I think we've seen more caution coming into what some companies have been saying. So I just wondered if you had, in your eyes, increased your caution there? And then final question, just on the Cyber business. It looked like a sort of 8% underlying margin, and you mentioned the increased investment for Detica. But just wondering how you think progress onto the mid-term guidance for that business, how are you thinking that? Evolving at the same pace you thought, or is the outlook a bit slower?

Ian G. King

Okay. Well, let's do it in reverse order. We'll do the sequestration in Cyber, and then Peter can clarify the others. I mean, on Cyber, I mean, the investment is going in, because we are seeing growth in excess of what our previous plans were. And so we are investing particularly heavily into getting into the commercial markets. In Detica this year, government activity has been pretty buoyant, probably off the back of quite a bit activity around the Olympics, as you would -- might imagine, but that is sustaining going forward. So our government franchise is strong, and we're very excited about the prospects that we have for getting into the commercial areas, in particular, driving into the U.S. commercial areas. As you know, we're very strong in government activity through our Intelligence & Security business there. But we now are going to focus on the U.S. Commercial. So we're more excited, which is why we're spending the organic investment. Linda, do you want to sort of -- because sequestration is a moving piece. I mean, just remember, we've always said that in our planning assumptions, we were always working on the basis of a $600 billion reduction as opposed to the $487 billion declared by Secretary Panetta. So we've not changed our planning assumption but -- so how are all the moving parts going in all this, then, Linda?

Linda P. Hudson

Well, you did summarize our planning assumptions quite well. We decided about a year ago that it was prudent to be conservative in what we were assuming with regard to future budget cuts. So we factored into our plans a bit more reduction than the original Budget Control Act reduction. And that continues in our baseline plan today. So I don't know that I would characterize it as being more conservative. We were conservative last year, and that has continued. Trying to figure out exactly what's going to happen with sequestration is a bit of anyone's guess. But in the last week, some information has emerged that, I would say, reinforces many of the assumptions that we've made. We've heard from the Department of Labor, we've heard from the Office of Management and Budget and in testimony before Congress that whatever happens, even if sequestration happens, as currently required by law, the likelihood of the way it gets implemented will be, to some degree, more gradual than, perhaps, we expected. So I think the prudence in the assumptions we've made so far are consistent with what we may very well see even if sequestration goes into effect. And when you talk to people around Washington, I don't think anyone expects sequestration in its current form to actually happen. There is an expectation that some further cuts will happen as part of some kind of an agreement going forward, whether it happens before the election in the lame-duck Congress or after the new Congress gets into session after the first of the year. So it's my view that we are prudent, and no reason, at this point in time, to change our assumptions.

Ian G. King

Thank you, Linda. Peter, do you want to cover the...

Peter J. Lynas

Yes, there's a couple of other points. In terms of the margins on the Cyber and Intel business, our U.S. business continues to operate at high-single-digit margins. We see no reason why that can't be sustained. And on the Detica business, where we are putting a lot of organic growth, when we bought Detica and then ETI and Norkom, those businesses were all operating in the sort of 12% to 14% range. So over time, to your question about where should the medium-term outlook for those businesses be, we should be able to get those businesses back there. What's key at the moment is to invest for the top line, and we'll do that through this year and also through next year. The question -- the clarification question around Eurofigher and Type 45, yes, you're right. There was a mix in there. Some of the risk retirement on those 2 programs we've achieved earlier. So whereas we would have expected to deliver some of it in the second half, we got it in the first. And the full year outlook, where our guidance range is 10 to 12, we are now steering to the very top end of that range. I mean, it might just be worth putting a bit of color. On the European Typhoon Tranche 2 and the Type 45 program, those programs in total are about GBP 10 billion. So when we trade margin on those programs as we retire risk, we are always going to get some lumpiness. We're not going to get a nice, smooth profit profile. We trade margin when we retire risks, so we are likely to see this sort of lumpiness. But on GBP 10 billion worth of contracts, this is not unsurprising.

Ian G. King

And if you think about the cost reduction and efficiencies that we've been driving through the business for the last 3 years, you're now starting to see the benefits coming through in these very high-performing programs.

Operator

Your next question comes from Nick Cunningham from Agency Partners.

Nick Cunningham

I'm sort of perhaps coming a bit from experience. You worry when you make kind of lazy assumptions, if you like, and I've tended to assume that once SDSR is done in the U.K., the U.K. is sort of done and dusted, and it's all okay going forward. And indeed for you, that seems to be turning out that way. But the tier 2 and 3 players are beginning to complain about the new process in Whitehall, particularly the whiteboard process, some of the, if you like, the non-core definition of some of the programs. Are you okay? Because everything you do is inside that core ring fence and is, therefore, now well-funded. Or do you have some exposures? Are there any bits of BAE in the U.K. that we need to worry about, say in the form of support, for example, that could be adversely affected over the next couple of years by a cash squeeze?

Ian G. King

I think we -- I mean, your observation is quite right, that we always said very early on in this process of the SDSR and their planning process, that we, BAE Systems, would get extreme visibility from this process because of the major programs that we were working on. But the government needed to be careful that it didn't introduce processes and structures which then compromise the SMEs and the Tier 2 and Tier 3 players, because they would not have the same visibility that we had. So you're right to say that we have been consistent with the visibility that we've got and consistent with the approach that we've taken and the results that we've got through the SDSR. So you shouldn't be worried about anything about that. But perhaps, I'll just ask Nigel Whitehead to just comment on what is it that we're still waiting on decisions or where we're working with the government on.

Nigel Whitehead

Thanks, Ian. Hello, Nick. Yes, the SDSR provided a great degree of certainty. And indeed, the comments that were made by the Secretary of State when he announced the balanced budget have also provided further certainty, in particular around the Type 26 program, the Successor program, further confirmation of Astute and with the varying choice of the JSF aircraft for the U.K., confirmation that they anticipated 2 carriers will be operational. So that has provided further clarity. With relation to further programs beyond the things that have been confirmed today, then, the political statements around the commitment to further development of Typhoon have been welcomed. And equally, the announcement within the last few days of the early stages of the joint demonstration program across the Anglo-French relationship, again very positive. It's not clear to me exactly how much budget has already been assigned for that, and I wouldn't expect them to tell me in any detail at this stage. But certainly, signs are positive.

Ian G. King

Peter, so what order book cover do we have? To maybe give Nick a bit more confidence...

Peter J. Lynas

Yes. I mean just to give you some confidence, Nick, I mean, excluding the impact of -- or the effect of Salam escalation, then, this year, we've got -- and clearly, with only 6 months left, you'd expect this number -- we've got 97% coverage of sales in the order book. And if you look to next year, it's in excess of 90%. Our 5 largest programs, Typhoon, Carrier, JSF, Subs and Type 45 give us 2/3 of the sales in this business. So to Nigel's point, we're not looking for a lot of new awards to meet the guidance we are giving here.

Ian G. King

And the types of discussions that we're having on the future contracts, I would say, is business as usual. We would always be having those conversations about next phases of unmanned technologies or areas like that.

Nick Cunningham

Could I just follow up on one point of detail, which is on the ToBA. I believe, HMD [ph] is struggling a bit to find enough revenue to meet its ToBA promises. How does it -- a, do you think they'll find something to fill that gap? Or b, if they don't, how does it then work?

Ian G. King

Well, there's 3 -- 3 things that had to happen in ToBA. One, there was an underlying core program of work, and we have much more clarity now the Type 26 program is defined and the carrier program is getting defined than we had before, and we're putting those planning assumptions in the mix. We then had to hit our cost-reduction targets, so it made it an affordable set of industrial capabilities relative to the program, and we're ahead of our plans. And then we had to agree with them a set of industrial capabilities which supported those future plans, and that's the bit that we're now working on, to define what it is that the ToBA should protect going forward. And all of those are in the mix, and that's what we're working on. But getting the defined program and the balanced budget and the balanced set of programs was the key enabler to that. So we're always going to be where we are. We've met our requirements, and the government's meeting its requirements.

Operator

Our next question comes from David Perry from Goldman Sachs.

David H. Perry - Goldman Sachs Group Inc., Research Division

I've got a few questions. They're all kind of related to the same thing. The first one is this. In your full year guidance, you are assuming -- just to confirm, you are assuming you sign the Al Salam agreement for the second batch of Eurofighter. Is that right?

Ian G. King

No.

Peter J. Lynas

No.

David H. Perry - Goldman Sachs Group Inc., Research Division

You're not assuming that?

Ian G. King

No. We are assuming that we close out the escalation pricing on the first batch of Typhoon aircraft for Salam.

David H. Perry - Goldman Sachs Group Inc., Research Division

And does that have an impact on EBITA?

Peter J. Lynas

Yes.

Ian G. King

Yes.

David H. Perry - Goldman Sachs Group Inc., Research Division

Okay. Now if you can just bear with my train of thought here, if we look at the EBITA that you didn't get last year because you didn't conclude that, and we assume it comes this year, I would guess it's about GBP150 million. Okay, I might be wrong, but I think it's in that region. Now you've given us guidance of a 12% margin for the full year in U.K., Programs and Services U.K., where I think you take that profit. So you're implying a 9% margin in H2, and it looks likes just under half of that is the Al Salam price escalation. Am I barking up the wrong tree, but it seems to me that the core U.K. business would have a 5% margin in the H2 without the Al Salam? Or am I thinking on the wrong lines here?

Peter J. Lynas

Yes, you're thinking along the wrong lines, David. I mean, we are not going to -- it's prejudicial to commercial negotiations to discuss pricing and margin on this contract at this point. So we've given our guidance that it's subject to delivery of the escalation on the first batch. But we're not going to get into pricing and margin discussions.

David H. Perry - Goldman Sachs Group Inc., Research Division

Would it be fair to say that signing that deal is material to your full year guidance or not material to your full year guidance?

Ian G. King

That's why we've made the statement that we have in the full year guidance.

David H. Perry - Goldman Sachs Group Inc., Research Division

Sorry, which is what?

Ian G. King

Which is the guidance is supported by closing the escalation agreements with the Saudis.

David H. Perry - Goldman Sachs Group Inc., Research Division

Am I right that, that EBIT, if you sign it, is taken in the U.K. business? Or is it taken in the International business?

Ian G. King

It is taken in both businesses. The contribution is split between the manufacturing content that goes in for the U.K. business and then the balance which gets supported as the prime contract through the Kingdom of Saudi Arabia.

David H. Perry - Goldman Sachs Group Inc., Research Division

Is it broadly equal, or is it...

Ian G. King

David, we're not going to go into the details of our commercial arrangements on this program.

David H. Perry - Goldman Sachs Group Inc., Research Division

No, it's just that we have incredibly volatile margin progression in Programs and Services U.K. I was just trying to figure it out. Okay. My second question related to that, is can you just sort of -- what are the risks -- are you quite confident that the pricing escalation contract will be signed, or if you -- what are the risks that it wouldn't happen?

Ian G. King

We are confident that we will close this out in the second half. But perhaps I'll ask Guy Griffiths here just to talk about to progress that we've made, without going to the detail of the commercial settlement, Guy.

Guy Griffiths

Right. We've always emphasized that the important thing was to do the right deal rather than a quick deal. That having been said, the pace of discussion was during the first half on the escalation negotiation has really ramped up. And there is a real sense of determination, I think, both on our part and the customer's part to get this behind us before the end of this year so that we can actually concentrate on more strategic sort of operational issues which are of importance to the Royal Saudi Air Force. An indication, I think, of the ramp-up of activity is that we're now into the holy month of Ramadan in Saudi Arabia. Normally, that would be a period where, actually, things slow down. I can tell you that the pace of activity is being sustained on this negotiation and the other contract award negotiations that Ian referred to as we go through that month. So I am personally confident we will reach a settlement by the end of the year.

Ian G. King

I think you just -- the point that Guy refers to is that, if you remember, at the end of last year, the King approved $16.5 billion of budgets associated with this program, of which what we've resolved so far this year is we've resolved the training aircraft, as you say, turning that from a budget to sort of contract and the effective contract within 6 months, sorting out these unbudgeted items relative to the original Salam program. And now we have to focus on the support, the long-term support and other upgrades on the programs. So there are big budgets agreements. Then we have to sort of focus on the next batch of Typhoons and the support of the existing batch of Typhoons. So there's an unprecedented volume of activity. And as Guy said, people are working very hard through this process. The relationship is very strong and proactive.

Operator

Our next question comes from Ben Fidler from Deutsche Bank.

Benjamin Fidler - Deutsche Bank AG, Research Division

A few questions, if I could, as per usual, I'm afraid. I'll try to make it 3. Thanks for the comments from Guy just over the progress on the repricing. I wondered if you could -- of the Eurofighter. Wondered if you could also just share with us your expected time line for some of the other orders that you potentially see coming this year, particularly Oman, the confidence level that, that actually gets done and signed and delivered by the year end. And also, this quite sizable Saudi support for the Tornado, the extension of that, how confident you are that we reach conclusion of that by the year end. That's the first question. The second one on cash flow. Pete, thanks for taking us through the scale of outflows that you see in the second half. I wondered if you could also help us just to understand some of the good news on the other side, if there is any, of any potential inflows that you see helping the cash in the second half? And where we should think of year-end net debt potentially coming out at? And the final question was just on restructuring costs. What was the overall level of restructuring costs that you took in the first half? How did that compare year-on-year? And can you just help me understand what you expect for the full year restructuring costs?

Ian G. King

Okay. Well, while Peter thinks about the last 2, we'll ask Guy to stand up again, and then I'll ask Alan Garwood to talk about Oman.

Guy Griffiths

Right. I think as far as the Saudi activity is concerned, beyond the price escalation negotiations that we've just talked about, there are probably other 3 sort of big components of order intake that we would anticipate before the end of this year. The first is really linked to the aircraft, the training aircraft contract that we secured in the first half. There is then a package of work which relates to the training services that we would supply to the Saudi Air Force utilizing those aircraft. We're negotiating at the moment a 5-year deal for the provision of those services, and we would expect that to go to contract in the second half. Secondly, there then is a series of weapons procurements for both Tornado and Typhoon which we'd expect to go to contract in the same period. And then thirdly, on the Salam program, we are negotiating at the moment an extension of the existing 3-year support arrangement for those aircraft. And again, we'd expect that to come to contract in the second half.

Ian G. King

Okay. Alan, Oman?

Alan Garwood

Thanks. So I think we've had 2 significant milestones recently. We had the meeting between his Majesty, Sultan Qaboos of Oman, and Prime Minister David Cameron. Both governments committed to getting the Typhoon deal done this year. And over the last few weeks, culminating in the Farnborough Air Show, we've had extensive meetings with the Omani Minister of Defense and the Chief of the Air Force. And we have an agreed negotiating timescale, which will start this month. And pretty much as Guy said in Saudi, the Omanis are working through the holy month of Ramadan, and we're seeing very high level of activity. So we're confident we can get it done this year.

Ian G. King

Okay. Thanks, Alan. Then on the cash flow.

Peter J. Lynas

Second half cash flow, our normal model of can we turn our EBITDA into cash? And the headwinds we've got is around the pension, where we've got another 200 million of deficit funding to go through. I mentioned of that GBP 480 million we've got on the Tornado program, we'll burn about GBP 300 million of that in the second half. We continue to utilize Oman and rationalization costs in terms of using -- spending the cash and charging the costs against the provisions. And we will continue to utilize advances on the European Typhoon program. So most of that profit that will turn into cash is being matched by those outflows. In terms of the upsides, clearly, the outcome of the Salam escalation negotiations will be a determinant factor. We've got to get through the pricing, make sure that's satisfactory. Once we got through the pricing, we then got to negotiate how that pricing gets funded. Will it be over the life of the program? Will it be on aircraft? Will it be a lump sum? The best spread? That would be a second negotiation. And then the final determinant will be around the Oman Typhoon program and the timing of that award as to any down payment that we will get with our program. If we get it secured this year, we'll get the down payment this year. If not, it will move into the first half of next year. In terms of restructuring charges, I haven't got the first half, second -- first half comparative numbers like for like. But the only real difference is on Land where, as I mentioned, we've accelerated charges in respect to the Newcastle site. Other than that, it's at pretty steady level.

Benjamin Fidler - Deutsche Bank AG, Research Division

And just coming back -- thanks, Pete, on the moving pieces and the cash flow. My brain isn't big enough to kind of compute all these issues. At the end of the day, what sort of range of net debt outcomes do you see for the full year? Are you able to comment on where that could be? I know it depends on a number of different scenarios, but just given that it's a range, just to help us understand it.

Peter J. Lynas

Well, if you look at what we delivered at the half year, in our guidance, we say that operating cash flow will be better than last year's. And we delivered GBP 742 million of operating cash flow in the first half of this year, and it was GBP 634 million in the whole of last year. So it really, to your point, is going to come down to second half performance. If you work on the basis of the EBITA turning to cash flow is pretty much offset by those items I outlined just now, then if you take the tax interest and dividend payments we'd have in the second half year, which are about GBP 0.5 billion, if we get the Salam cash in, then the net debt we have today will be broadly the same. Did I answer your question?.

Ian G. King

Okay. Well, I'm glad you followed that, Ben. I was struggling a bit there, for myself.

Operator

Your next question comes from Charles Armitage from UBS.

Charles Armitage - UBS Investment Bank, Research Division

Actually, it was pretty much what Ben's question was. I didn't have enough time to press *2. So I apologize, already been answered.

Operator

Our next question comes from Zafar Khan from Societe Generale.

Zafar Khan - Societe Generale Cross Asset Research

I've got 3 really brief ones for Pete, and then a philosophical one for you, Ian, if I may.

Ian G. King

Oh dear. You better give my mine first so I can think about it.

Zafar Khan - Societe Generale Cross Asset Research

Okay. Well, the question I was going to put to you was really just discuss the BAE valuation compared with your international peer group. And the question I wanted to ask is, one, do you believe that you're substantially undervalued against the peer group, as some of us do believe? And if you do agree with that, then what do you think are the reasons for that undervaluation in your view? And how do you think you may be able to close that valuation gap in time? So that's the one for you, Ian, if you could please just ponder that. And the brief ones were really just on the -- it was really a follow-on from David's question on the margin in the U.K. Platforms and Services. I understand this year will be higher end of the range because, obviously, of the risk retirement that you're enjoying on these programs. But what is the kind of longer-term level that we should be thinking about? Because you're not going to get this risk retirement every year. It's lumpy. So just in terms of where is the most sustainable margin in the Land and Systems U.K. -- sorry, Platforms and Services U.K.? And then, I wanted to talk about the overseas contracts that you're bidding for, just want to think about the margins price a bit. Because Fin-Mac [ph] keep warning about the very severe price pressures on overseas bids, and I just want to know what your experience is on that. And then the third one was really on the Land & Systems. There's been quite a bit contraction in sales, then, and that does look structural me. Now if I remember correctly, you did take a write-down on these assets in 2010, if I remember correctly. I'm just wondering is there another write-down due on these businesses?

Peter J. Lynas

Do you want to do yours first, or should I do my 3?

Ian G. King

No, I'll go on and do mine first. I mean, I think in terms of where we are relative to our valuations, for me, it's about 3 things. One is that -- is the order book and generating the international orders and the maintaining of our franchise positions. Because since 2009, we've not had an increase in the order book. And we've been talking about these international prospects and our maturing of both our home markets and our other markets. And what we're coming up to is that period in 2012 and '13 where these are going to turn into absolute firm business. As you will have seen in the first 6 months, the -- or the non-U.K., non-U.S. order intake of GBP 4.3 billion compared to GBP 4.8 billion for the year, if you listen to what I was Guy was saying and Alan were talking about Oman and the prospect, continued prospects in Saudi, you can see that there's going to be a step change in our order intake and our order book through that process. And until that -- in these current climates, until you deliver some of that, I don't think you can agree attributing [ph] the value that your business is worth. And so for us, that's why we're focusing on that metric. I think there was also a bit before where when we didn't have a sectorial analysis down to the different dynamic businesses. There was a bit of, "You're obfuscating the facts," and so we've given that analysis. That obviously gives different challenges, because it gives you warts-and-all movements. We're now taking you through, and you will see that the strength of those businesses will come through even in these difficult climates. And then the final bit is, is this the bottom on Land? Where is Land? And I think, as we say and we're getting to the end of the cycle, and we might be talking about some of variances, but they're small variances. And we are, and I can assure you, we are protecting our franchise positions, which will secure our business for the future and our International business. So I think it's the whole mix of those things. How long will it take? I don't know. I suspect until people get through the other side of sequestration and what does that mean on budgets. But it's not impacting our desire and our will to continue to deliver our strategy and do the right thing for our business and our shareholders, and that's what we are committed as team to doing.

Peter J. Lynas

Coming back to your specifics, Zaf. On the U.K. margins, our guidance range is 10% to 12%. It's probably not just an in-year guidance. It's more sustainable, and really, it comes down to the cycle where you are in development programs versus production programs. On development programs, we take less risk, and therefore, you're likely to see lower margins. So if you're in development cycle, you'd be at the bottom end of that range. If you're in the production cycle and maturely through the risk profile on those programs, then we'll be at the top end. And at the top end is where we are now. But on a sustaining basis, I think our range of 10% to 12% holds. On the overseas bid margins, was there any particular bid that you're referring to, or was it just generally?

Zafar Khan - Societe Generale Cross Asset Research

Just general.

Ian G. King

I'll make a comment. We do not take overseas bids as loss leaders. They are all generating normal margins for our business. If you remember that where we're succeeding in pricing Typhoon in Oman and the Kingdom of Saudi Arabia, these are sort of government-to-government arrangements. And the U.K. government underwrites the relative sort of pricing structures of these relative to what they would pay. So what Finmecannica is saying, I don't know. It's up to them what they're saying. But I can assure you, in overseas markets, we are bidding as we have always bid into those markets. And we'll make more normalized profits relative to our government, the U.K. and U.S. government business.

Peter J. Lynas

And your final question was around Land and the charges, and I guess you're looking at the level of goodwill...

Zafar Khan - Societe Generale Cross Asset Research

Yes, that's what I'm looking at. I'm just wondering if, perhaps, you should be taking another write-down on that?

Peter J. Lynas

Yes. I mean, we do our goodwill impairment reviews every year once we go through our 5-year planning cycle. We do that in the second half. And to your point, yes, we did take -- I think it was about $1.6 billion back in '09, which is really around the armour [ph] business in respect to the FMTV contract and on the products business. We still have a fair amount of headroom in terms of those goodwill impairment tests we take. Sequestration, where that may take us, we'll have to take a look at to what our long-term assumptions are. But where the business sits -- again, back to the point I made earlier, where the business sits at sort of around of $4 billion, $4.5 billion, of which only half is actually in the land vehicle sector, then the downside is probably limited. So if you went through our goodwill, where is the area of weakness? You're right, it's probably in Land. But where we are today, we don't believe we need to take another charge.

Operator

And our final question comes from Jeremy Bragg from Citi.

Jeremy D. Bragg - Citigroup Inc, Research Division

I've got a pretty basic one, please. You had a fair slug of cash coming in the International division in the first half. Can you just confirm that's separate to and distinct from the cash that will come in when you negotiate -- when you finish the negotiations of the Salam deal? Are you the kind of -- GBP 500 million was the number that I was thinking about?

Peter J. Lynas

Yes, confirmed.

Operator

We have no further questions on the phone. At this time, I'd like to hand the floor back to Ian King.

Ian G. King

Okay. Thank you, everyone. Thanks for coming into the call. Hope it worked for you and that we managed to get through all the questions. So thanks very much. Have a good day.

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