Earnings Transcript for BA.L - Q2 Fiscal Year 2020

Charles Woodburn: Thank you and good morning everybody. In the first half, we delivered orders and sales growth and underlying improved cash flow versus the same period last year, demonstrating that BAE Systems is a resilient business with enduring and strong customer relationships. This is despite a number of pandemic-related disruptions, which impacted profit in the second quarter. Unless there is a significant resurgence in COVID-19, we see that financial impact is being largely contained to the first half of this year. Providing the recovery from COVID-19-related disruptions continues, we expect our defense business to respond positively and deliver second half earnings performance very much in line with original expectations for 2020. This is reflected in our updated guidance for the year. The group has a large order backlog of £46 billion and a well-positioned portfolio with long-term positions on key programs. Customer demand for our capabilities remain strong as demonstrated by our U.S. growing order backlog by over $1 billion in the first half. Supporting this outlook, we delighted to have progressed the two U.S.-based acquisitions this year with Airborne Radios transaction completing in May and the Military GPS transaction expected to close shortly. We have also made the £1 billion one-off cash injection into the U.K. pension scheme to accelerate deficit reduction. These are all foundations for us to return to growth and deliver enhanced cash flow in the coming years underpinned by our improving execution on key programs. Reflecting the fact that our defense operations are now close to normal levels of activity, the Board has declared an interim dividend of £0.138 in respect to the year ended 31st of December, 2019, that being the value of the dividend proposed that subsequently deferred earlier in the year. In addition, the Board has also declared an interim dividend of £0.094 in respect to the half year ended 30th of June, 2020. This will be paid in November in line with our usual dividend timetable, assuming if there are no major additional or unforeseen pandemic-related disruptions. This amount is in line with last year's interim dividend. Moving to COVID-19 impacts and our response. We entered the period in a strong position, which enabled us to be agile in addressing our critical short-term objectives; namely, returning people to work safely, whilst delivering against customer priorities. At the same time, we were protecting our capabilities, driving cost control measures, and maintaining balance sheet strength in order to deliver growth over the coming years. Our U.K. Maritime and Air Defense sites together with our U.S. Commercial operations in avionics and power and propulsion were the most impacted in the second quarter. In our U.S. Defense business, manufacturing facilities and shipyards continued operating with the implementation of COVID safe working practices. In Saudi Arabia and Australia, while there has been some disruption, the impact on the business has not been significant to-date. During this time, the professionalism, agility, and understanding of our employees customers, trade unions, and suppliers was outstanding, as we implemented new working practices such as reconfigured floor plans, shift patterns, home working capabilities, and safe working measures. We thank them all for their important contributions. By taking these actions to building resilience for a prolonged period, we have continued to deliver critical work for our customers. Where operations were impacted, we've ensured that site critical workers have been able to return to work safely. Support for the defense industry from the government in our key markets has been exceptional around prioritization of capabilities and cash flows, recognizing the need to maintain a strong supply chain, and working collaboratively to maintain critical defense and security programs. We in turn, have looked to help our customers. Wherever possible, we've been agile in our working practices to deliver critical work, and where needed, prioritized the social needs of our governments and communities. We deployed our 3D printing capabilities and collaborated with our supply chains to donate more than 150,000 items of PPE to healthcare workers in the U.S. and the U.K. and we're proud to have supported ventilator production as part of the Ventilator Challenge U.K. Consortium. Additionally, we've supported our communities in the U.S., U.K., Australia, and Saudi Arabia through the provision of online educational resources for young people. We've also provided financial support to healthcare providers and local charities. Reflecting our confidence in the outlook, we're delighted to proceed with our plans to recruit a record number of apprentices, some 800 in total, across a wide number of our U.K. sites. As we enter the second half, our defense operations, accounting for around 90% of group revenues are now close to normal levels of activity. There remains some disruption, primarily from supply chain impacts and intermittent production delays are always possible, where precautionary measures may be required. However, the changes we've made mean we have a high degree of operational resilience, giving us confidence in providing updated guidance for the year. I will now hand over to Brad to take you through the financials as usual. Over to you, Brad.

Bradley Greve: Thanks Charles and good morning, everyone. Before I start, I want to thank everyone in the company for their contributions and for helping us find our way through. This is a resilient set of interim results delivered in very difficult circumstances. I'd like to emphasize some key points that summarize our story over these last six months. In spite of the COVID headwinds, demand for our products and services remain strong as evidenced by the 11% increase in orders and that resilience I mentioned is underlined by the 4% increase we see in sales. COVID impacts reveal themselves and our EBITDA, which was down 11%, primarily through lower cost recoveries in air and the market contraction and higher margin commercial operations like civil aviation. When a crisis begins, after employee safety, cash is what matters the most and our focus on liquidity delivered a stronger than usual operating cash position, up over £400 million versus this time last year. On pension, while the accounting deficit increased due to a compression in interest rates, our assets have grown in spite of volatile markets and our funding position, which is what matters the most has improved since the October valuation. We balanced our capital allocation decisions carefully by contributing to the pension fund with a £1 billion one-off payment, resuming our dividend distributions after a temporary and prudent pause due to COVID, increasing our self-funded R&D, and we continued with strategic M&A to support the growth of our business for the long-term. As we have fought our way through COVID in the second quarter, adjusting, adapting, and learning how to operate within its constraints, we have a better sense of how the second half will look and I've updated our full year guidance accordingly. We are now targeting underlying earnings per share in 2020 to be down in the mid-single-digit percentage compared with last year's €0.458 and in terms of underlying free cash flow generation; we are now targeting around £800 million for the full year. Moving to the detail and for reference, the U.S. dollar rate averaged $1.26 per pound in the first half of this year compared to $1.29 last year. So, the headline numbers compared to the first half of 2019, sales increased to £9.9 billion for an increase of 4% on a constant currency basis, led by the growth in Qatar and Air sector and our continued ramp in Combat Vehicles in the U.S. Underlying earnings per -- before interest tax and amortization of £895 million were 11% lower than last year on a constant currency basis, and driven by the COVID-related impacts, which I'll discuss in a minute. Underlying finance costs of £127 million were slightly lower than last year. Underlying earnings per share of £0.187 were down 15% compared to 2019 with an effective tax rate of 19%, up from 17% last year. There was an operating cash inflow in the first half of £120 million, that's up over £400 million before the £1 billion one-off cash injection into the U.K. pension scheme in April. Net debt at June 30th stood at £2 billion. Order backlog has increased over the six months to £46.1 billion. Trading on multiyear long-term contracts in the Air our sector was offset by a 7% increase in our U.S. business and an FX benefit. Reflecting the fact that our defense operations are now close to normal levels of activity, the Board has declared an interim dividend of £0.138 in respect to the year ended 31st December, 2019, that being devalued the dividend proposed but subsequently deferred earlier in the year. In addition, the Board has also declared an interim dividend of £0.094 in respect of the half year ended 30th June, 2020. This will be paid in November in line with our usual dividend timetable assuming that there are no major additional or unforeseen pandemic-related disruptions. This amount is in line with last year's interim dividend. Regarding the balance sheet, other than the impacts from exchange translation where the U.S. dollar closed at $1.24 per pound compared to the opening $1.32, there was a limited number of items that impacted the half year closing balances. Working capital reflected the usual trend at the half year with the usage of advanced customer funding in the Air and Maritime sectors, some timing on receivables and the usual cash timing patterns in Electronic Systems. On Pensions, the group share of the accounting deficit stands at £6 billion and I'll come back to that. The net tax asset has increased due to a higher deferred tax asset on the pension deficit. Assets held for sale container AEC subsidiary in Saudi Arabia, and those of the Silversky business of Applied Intelligence. So, moving to pensions, as a reminder, there are two very distinct methodologies of calculating pension deficits; the accounting method and the funding method. The IAS 19 standard drives the accounting method shown on our balance sheet and uses a conservative AA corporate bond rate to determine the present value of liabilities. It is this measure that results in higher liability at the half year due to the high volatility and interest rates over the period. For reference, a 10 basis point moving in bond rates can affect the gross liabilities by close to £600 million. At times during the first half, these swings yielded accounting deficits that were far lower than our half year ending value. It's this volatility is one of the key reasons why the funding methodology is what drives the decisions around actual cash contributions to the scheme. The formula for calculating liabilities and the funding approach uses a discount rate that is a closer representation of our asset returns as agreed with the trustees. This method of calculation results in materially lower deficit compared with the accounting methodology. And as you can see, the assets have held up well in the first half, so while the accounting deficit appears to have widened, the funding position has improved versus the October 2019 valuation position. As a reminder, the deficit reduction plan runs until March 31, 2026. We accelerated our funding requirements under that plan with the £1 billion payment made during the quarter. The company's final payment under that recovery plan will be the £250 million payment due early next year. The assumptions outlined back in February regarding the pension strategy remain prudent and long-term in nature and we do not expect to make deficit contributions into the U.K. scheme beyond that final contribution next year. Moving on to cash, this slide sets out the movement for my net debt position of £743 million at the beginning of the year to our half year balance. Operating business cash was an inflow of £120 million, up £429 million on last year, reflecting our strong focus on liquidity and proactive efforts from governments and our major markets. Interest and tax payments were £230 million. That gets us to a free cash outflow for the half of £110 million. When you add the one-off £1 billion payment into the U.K. pension scheme, you get a £1.1 billion outflow. Adjusting for the Airborne Tactical Radios acquisition which was £217 million and other minor movements, you get a net debt at the half year of just over £2 billion, which includes gross debt of £4.5 billion and gross cash of £2.5 billion. Looking forward to the second half, gross debt will be impacted by the Military GPS acquisition and we expect to repay a $500 million U.S. dollar bond towards the end of the year. The cash flow performance of the five sectors is shown here and I'll return to this when I cover the results of each of the sectors. So, moving out to the sectors, I'll start with Electronic Systems and the numbers here are in US dollars. Sales were flat year-over-year at $2.8 billion, growth in the defense business was 9%, driven by the F-35 program compass call and increase classified activity offset by lower commercial volumes. Underlying EBITDA was $367 million, delivering a return of sales of 13.2%, down 160 basis points versus last year reflecting the impact of the higher margin commercial sales decline. First half cash conversion of EBITDA typifies the normal patterns with the usual second half bias expected to recur. There was some working capital to build as our defense business grew and we invested in facility expansions to support growth. We expect a higher cash conversion level over the full year. Demonstrating continued high demand, order backlog of $9 billion was at a record high. The book-to-bill ratio of 1.28% was driven by significant awards on F-35, APKWS, and threat detection solutions. The integration of the acquired Radios business is going well and the team is looking forward to bring the GPS business into the family in the coming weeks. Moving on to the Cyber & Intelligence sector. As a reminder, this sector consists of the U.S. Intelligence & Security business together with BAE Systems Applied Intelligence. The numbers here are shown in U.S. dollars. In aggregate and on a constant currency basis, the business performed well, with sales increasing by 5% to $1.2 billion, with the growth led by the Intelligence % Security business. Margin in the U.S. business at 8.4% remain strong based on good program performance. Within Applied Intelligence, the exit from the loss making U.K.-based Managed Security Service was completed in April. Overall, the business made a small profit and improvement on previous years as the Strategic Action started last year took hold following the restructuring charge at £25 million in the first half of 2019. Cash conversion was very strong and the I&S business on accelerated collections on a number of government contracts. Book-to-bill at 1.1% reflected expectations of growth and I&S and continues strong demand in Applied Intelligence government services. Moving on to Platforms & Services, the sector sales were up 10% at just under $2.2 billion, driven by the ramp up of U.S. Combat Vehicle production as M109 delivered at consistent full rate production levels and activity on AMPV, Bradley, and MPF increased. Margin performance for the half year was at 7%. This was impacted by some COVID-related under recoveries and supply chain interruptions. As outlined at the start of the year and reflecting the higher Combat Vehicle sales, we are trading margin on the AMPV and ACV programs at an initial low level as is typical with projects at similar maturity levels. Cash flow performance was very strong as vehicle production deliveries increased and working capital improved. Additionally, the business benefited from COVID-related customer actions on higher progress payments and lower customer retention and ship repair. Strong demand and growth in this business as evidenced by the 1.2% book-to-bill ratio and the order backlog increased to $8 billion as we receive significant awards on M109, Bradley, and AMPV. In the Air sector sales were up 8% at £3.6 billion. As expected, year-on-year, there was higher production activity in the Typhoon program for Qatar and F-35. In addition, sales from MBDA grew on deliveries to Qatar and India. The return on sales of 9.9% was down against original expectations for the half due to the COVID impact of unrecovered costs. As expected, there was a year-on-year increase in self-funded R&D and the Tempest Future Combat Air development program and margin recognition remains lower as we are still in the early phase of the Qatar program. Cash flow conversion largely reflects the utilization of advances on a number of Middle East programs. Order backlog reduced to £23.2 billion, primarily for the trading on multiyear orders received in prior years for Saudi support and the Qatar program, partially offset by funding on F-35 Block 14. Sales in the Maritime business were broadly unchanged at £1.5 billion. Margin performance at 8.1% was slightly lower due to COVID-related costs. The operating cash outflow of £67 million reflects utilization of advances on a number of programs and the usual first half timing profile. Second half cash conversion is expected to be stronger and the annual funding on the U.K. Munitions supply contract is scheduled for December as usual. Order backlog as expected has reduced to £8.1 billion, reflecting trading on long-term contracts for astute and Type 26 programs. For reference, a chart providing a summary of the trading performance of all five sectors and the numbers for headquarters has been added to the presentation materials. So, a good set of resilient results and difficult circumstances. Our teams on the defense side have managed to find a way through to get back to relatively normal operating levels as we exited the first half. As COVID uncertainty still prevail, it is more appropriate to keep our guidance at group level, which we're pleased to present to you. Including the two acquisitions, we expect the group sales to increase by a low single-digit percentage compared to last year. As we see increased volumes and F-35, Combat Vehicles, and growth in the Electronic Defense portfolio, including acquisitions offsetting the fading commercial businesses. The group's underlying earnings per share are expected to be a mid-single-digit percentage lower than last year's £0.458, assuming exchange rate of $1.25 per pound, and at tax rate now expected to be 19%, in line with last year. The final number is, of course, dependent on the geographic mix of profits. In terms of free cash flow, excluding the £1 billion pension payment, we should see something around £800 million for the full year, which is close to our original guidance allowing for the lower earnings. So, with that, I'll turn it back to Charles.

Charles Woodburn: Thanks Brad. On the back of that positive financial outlook for the second half, I wanted to reaffirm the points we made in February around the outlook for the business before moving to the demand environment in our major markets, key program positions, and learnings we will look to take forward. The fundamentals of the defense business remain robust although we do expect some impact to elements of our commercial operations in the medium term. Our strategy remains highly relevant and his working. The group has a well-positioned global defense portfolio. Governments in our key markets continue to prioritize defense and security given the threat environment and also considering the role we can play in the economic recovery phase for the countries in which we operate. We have a large order backlog and exceptional program positions providing visibility of growth. In addition, there remains a strong pipeline of opportunities and the acquisitions provide excellent opportunities to accelerate our technology strategy. Operational performance continues to improve and remains a priority. This all underpins our confidence in improving long-term cash generation. The pension agreement is a very positive outcome for all concerned providing certainty and clarity through 2022. With the business focused on driving operational performance and cash generation, we have a strong and sustainable business model, which is well set to deliver growth. Drilling down further into the outlook and our key markets, an area focus for many, starting with the U.S. Recent budget increases, including the passing of the 2020 Defense Appropriation [ph] Bill and the agreed cap of $740 billion in defense spending for fiscal year 2021 are expected to underpin growth for the coming years. We continue to see positive momentum in support of military readiness and modernization as reflected by our backlog growth in our U.S. divisions. The group's U.S.-based portfolio remains well-aligned with bipartisan supported customer priorities, and the key focus areas outlined in the U.S. National Defense Strategy. Recent defense budgets have maintained funding support for key VA Systems programs, including Combat Vehicles, F-35, Electronic Warfare programs, and current and next generation Precision Weapons Systems. Our Combat Vehicle programs are scheduled for continued production for years to come and our U.S. ship repair and naval gun franchises are supported by the growth outlook in in U.S. Navy budgets and projected fleet size. The U.S. Electronics business closed the half with another record order backlog. The outlook for its defense focused division remains positive, with the portfolio well-positioned to address key growth areas which is helping to offset the most significant pandemic impacts on the commercial business lines. These existing positions are further advanced by the acquisitions, whose strong portfolios underpin further growth. Defensive and Security remains a priority for the U.K. government now and in a post-Brexit world. The government has stated its commitment to meeting the NATO target of spending at least 2% of GDP on defense and to increasing the defense budget by at least point 0.5% above inflation in every year of the current parliament. The government has restarted the integrated foreign policy defense and security review after it was paused due to COVID-19. Our focus continues to be on the execution of the group's long-term contracted positions on critical defense programs, which provide a stable outlook. We employ over 30,000 people across the U.K. and many more in our supply chains. It isn't just our current reduction programs which are supported, the work under the team Tempest contract to develop next generation combat air technologies, skills, and expertise in collaboration with the U.K. government and our industry partners continues towards the outline business case. We progressed to trilateral discussions with Sweden and Italy and continue discussions with other prospective partner nations. In Saudi Arabia, we continue to work closely with industry partners and the U.K. government to ensure that the export licenses required to enable us to fulfill our contractual obligations remain in place. In spite of the low oil price, defense and security remains a key priority for the Kingdom. Over 70% of our employees in the Kingdom are Saudi nationals, and we continue to address current and potential new requirements as part of long standing agreements between the U.K. and the Kingdom with work ongoing on the localization of defense capabilities in Saudi Arabia in support of their National Transformation Plan and Vision 2030. In Australia, the government is recommitted to growing its defense budget as it looks to further its sovereign defense capabilities. The Hunter Class frigate program is a key part of its plan with our design and productionization contract progressing to schedule. As the program moves through prototyping and into the production phase, our Australian business will grow significantly in the coming years. In Qatar, we continue to build our relationship through good performance on existing contracts and to progress a number of opportunities. In Europe, several countries are looking to increase their defense spending and move closer to meeting their NATO commitments. The group is well*positioned to benefit through Typhoon with Germany, the near-term opportunity are holding in MBDA and our Swedish Land Vehicle business. Finally, in our other accessible markets, especially Asia-Pacific, a number of countries are responding to an increasingly uncertain and complex security environment and the need to recapitalize or upgrade aging equipment. So, whilst there may be challenging economic times ahead for many countries, the threat environment remains and defense can play an important role not just in the security of nations, but in the economic recovery and prosperity for many of our customers. With demand remaining robust, I want to remind you of our strong existing program positions and provide an update on operations. As you know, order backlog in some cases represents just a small proportion of the expected through life value of a program. This chart, which we have presented before, shows the duration of our major programs split by what is in the order backlog. What is expected in future awards? And where we have new business winning opportunities? Since February, a number of these positions in the U.S. have further improved, as backlog has increased with U.S. Combat Vehicle funded visibility out for three years in many cases. We provided further color in the back of charts, but these examples highlight the longevity of our programs well beyond the order backlog, which is why we will continue to play such a strong focus on program execution. On our major programs, some milestones have shifted to the right and schedules have been adjusted because of the pandemic, but we've already agreed many of these changes in close collaboration with our customers. I'm very proud of the business' response during these difficult times and I'm seeing underlying program improvement in several areas where we've had recent issues. We're making good progress in U.K. Maritime with a number of commendations received from our customer for performance during the recent months of lockdown. In U.S., our Combat Vehicle programs are scheduled for continued production for years to come. M109 is performing well and delivering consistently at full rate production levels. Our focus for this year is on applying the lessons we learned to scaling up production of our expanding Combat Vehicles portfolio. In Applied Intelligence, the strategic actions are also taking hold. The relevance of the government business remains high and is well-supported in the current environment. The business delivered a profit in the first half for the first time in many years. Importantly, the majority of our businesses continue to perform well, whilst we will always be looking at ways to deliver further operational improvement and efficiencies. In this slide, the enforced changes in working practices may provide learning and improvements to future business operations in certain cases. This could actually contribute to our competitiveness, which remains a strategic priority and provide value for money for our customers and shareholders. Areas highlighted today include streamlining processes, G&A savings, reduced footprint requirements, flexible working practices, and how we can be more agile and adaptable to deliver our commitments in different ways. So, in summary, we've implemented changes in the second quarter to embed resilience to our operations, returning the business to a normal operating tempo, and we expect a good second half of the year. Relationships with, and support from, our customers remain strong. Our large order backlog, program visibility, and an evolving pipeline of opportunities positioned as well for future growth, with earnings and cash growth being driven by improving program performance. From a balance sheet perspective, we remain committed to maintaining an investment-grade credit rating and the capital allocation policy for the group remains unchanged. We remain focused on building a sustainable business with enhanced financial performance supported by free cash flow generation to deliver growth in shareholder value over the coming years. Thank you. We will never be happy to take your questions.

Operator: [Operator Instructions] And your first question comes from the line of George Zhao from Bernstein. Please go ahead. Your line is open.

George Zhao: Hi, good morning and thanks for taking my question. So, the recent fiscal 2021 Defense Appropriation Bill [ph], we saw drastic cuts to the AMPV funding on top of the cut we saw already for the budget request earlier this year. Now, we know the overall funding levels are still the same, but what is the latest funding profile mean for the delivery and revenue ramp up for BAE? And how do you think about the risks that the AMPV will become a bill payer for the other army modernization efforts? Thanks,

Charles Woodburn: George. Good morning. Thanks for the question. We have on the line with us Tom, as you all know, runs our U.S. business. So, Tom, would you like to take that question for us?

Tom Arseneault: Yes, happy to take that, Charles. Thank you. Thank you, George. George, on the FY 2021 markups, I mean, it's still very early in the process. And we've been through three of the committees that the SACD has yet to mark. And so we're expecting to see some of those changes moderate here in the coming months. As we think about the overall profile for the business, we think that we still see very strong demand for our vehicle programs, AMPV, in particular is one of the Army's new family of next generation combat vehicles, prominent program in the in their portfolio and in ours as well. If you look out across our vehicle programs, we have over 1,000 vehicles in backlog and so we see good continued support for that. Budget-wise, we expect some of this -- some of what's happening in the committees commoderate in the coming months.

Charles Woodburn: Yes, I think it's just worth reflecting on what we already have in the plan for AMPV and the backlog gives us visibility of the next two or three years. Thank you anyway Tom. Can we go to the next question, please?

Operator: Thank you. Your next question comes from Mohammed [ph] Stallard from Vertical Research. Please go ahead, your line is open.

Rob Stallard: Thanks. I think that's me. Good morning. Charles, a couple questions -- could be for Brad as well. First of all on the capital structure going forward, now that you've sorted out the pension, how do you see things changing going forward? Are you happy with the net debt at current rates? Or could it come down further? And also, maybe your thoughts on M&A going forward from here? And then secondly, it's probably for Tom, actually, this one. OMV, the Army's having another crack at trying to replace the Bradley, would you be interested in bidding on this program given the revised structure? Thank you.

Charles Woodburn: Morning. Well, maybe we'll do the second question first, so I'll just hand that over to Tom on the OMV.

Tom Arseneault: Thank you, Charles. Good morning Rob. OMV, we've been tracking that very closely working with the Army, we're encouraged by the Army reaching out for industry input and feedback in the various revisions of the draft request of proposal that we've seen to-date. We're optimistic that this next round will be more realistic timeline, more realistic requirements. And so we're -- if we continue to watch it closely, we're optimistic that this will be something we'd be interested in bidding should it remain on track.

Charles Woodburn: Thank you, Tom. Over to you Brad for the capital structure.

Bradley Greve: Yes. So, we're looking forward to having continued free cash flow growth and that will give a natural deleveraging that will occur over the next couple of years. And that's really our focus as we integrate these big acquisitions that we made. So, our focus is on executing the business case for those acquisitions over the next couple of years and that should give very good performance on our net debt ratios. So, we feel very good about that and we are looking forward to welcoming the GPS business here very shortly.

Rob Stallard: Maybe just a quick follow-up, if I may. On the GPS business, could you give us your latest thoughts on what that business could do to say your 2021 estimates? Thank you.

Bradley Greve: Yes, I mean, that the, the GPS businesses is very well-positioned for you know, very accretive growth over the coming years based on this ramp up that we'll see from M-code upgrades that will take place. So, we see very, very significant growth coming on the back of that. So, we'll update in February with our annual results what we see looking forward for that business. But our expectations are very significant growth in the low teens for the next few years for the GPS business itself. So, that's going to be a nice accretive piece of the portfolio. And as we mentioned back when we announced those acquisitions, we'll see accretion and margin and cash flow as well coming from this. So, it's a very exciting addition to our portfolio and we're really looking forward to bringing that into the business.

Charles Woodburn: And it's performing in line with our presentations in January and we're looking to integrate that business shortly.

Rob Stallard: That's great. Thank you very much.

Operator: Thank you. Your next question comes from line of Sandy Morris from Jefferies. Please go ahead, your line is open.

Sandy Morris: Hi, morning everyone. Can I just rattle off a few, hopefully snappy ones? Just on the committee changes to the armored vehicle budget as they came up, I thought the AMPV changes will launch really just due to a delay in the program schedule today. Is that right?

Charles Woodburn: Do you want to give us all your questions Sandy and then we'll allocate? Or do you want to do one-by-one? I mean -- probably best if you just give us a list and we'll--

Sandy Morris: In which case I'll half the number. The second thing is in Electronic Systems, because the black programs are so important and I think at one point you said there may even be about a third. Do you ever look through those programs and sort of wonder whether some may disappear? But I'm just trying to understand what kind of business review you go through. And the third thing -- third one is unbelievably banal. In the pension scheme now that we put the billion in, has there been a significant changes in the asset allocation or does it need to continue with a significant exposure to equities? Thank you. Sorry, I know they're a bit of a mixed bag.

Charles Woodburn: Well, actually is quite good that we did because I think the first couple to that I will -- since we have Tom on the line, I'll hand over to Tom first, and then I'll hand the pension one over to Brad. So, Tom, do you want to go first -- did you catch those two questions; one was committee changes in the AMPV profiling. The other was electronic systems black programs.

Tom Arseneault: Yes, I did. Thank you, Charles. And good morning, Sandy. So, just another minute on AMPV. This question came up earlier as well. I mean if you look at the three committees that have marked so far, two has been largely in line with existing budget and then the third took a deeper cut. Some of this is, Sandy, to your point is the traditional, early to me, right meaning that, as the schedule has laid out over time, an understanding of how much budget is required in order to meet that profile. And so the budget is there. As Charles mentioned, we've got several years of visibility and backlog on those. And so this is just a question of given how the schedule has moderated over the course of the last year or so has that evened out in the budget is there -- budget there to restore? And so again, my expectation is that that will moderate. We are -- that program is solidly funded and is progressing well. We expect to deliver the first AMPV here in August and so good strong performance there. Second question on the black programs, and yes, I mean, our portfolio in the U.S. is largely driven by as you heard, Electronic Warfare, C4ISR, kinds of work, signals intelligence kinds of work as we talked about. Those programs get a lot of visibility in terms of program reviews on a routine basis, portfolio reviews, and we do keep track of their relevance. And in fact as we have been saying, much of the emphasis in the national defense strategy is in these areas, and in fact, we saw a growth of some 10% in our classified work here in the first half as well. And so these are good strong areas, resilient parts of the portfolio, well-tracked and well-supported by our customers. I'll stop there.

Tom Arseneault: Thank you, Tom. Thank you very much, Tom. Brad, over to you on the asset allocation for the pension scheme.

Tom Arseneault: Yes, so Sandy, the pension assets are actually very conservatively invested and there's only maybe a 20% exposure to equities in the U.K. main scheme. So, the rest is a balance of assets that reflect the liabilities. We call the matching assets that generate long-term stable cash flows that coincide with a liability. So, it's a pretty I think conservative portfolio. So, there's no real changes currently to the investment strategy.

Sandy Morris: Okay. Well, great stuff. Thanks very much gentlemen.

Charles Woodburn: Thanks, Sandy. So I understand that the last question that we have. So, I'll just take the opportunity to thank everyone for joining the call. And if you do have any further questions, please feel free to follow-up with Investor Relations, Martin [Indiscernible] as you usually do. So, thank you very much. Thank you.