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Edited Transcript of COB.L earnings conference call or presentation 25-Jul-19 8:00am GMT

Half Year 2019 Cobham PLC Earnings Call

Wimborne Jul 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Cobham PLC earnings conference call or presentation Thursday, July 25, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Mellors

Cobham plc - CFO & Executive Director

* David C. Lockwood

Cobham plc - CEO & Executive Director

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Conference Call Participants

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* Celine Fornaro

UBS Investment Bank, Research Division - Head of EMEA Industrials Research

* Sandy Morris

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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David C. Lockwood, Cobham plc - CEO & Executive Director [1]

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Good morning. Welcome to the 2019 interim results. Thank you for those who have made it at very short notice to come here because we recognize we pulled forward and haven't made life easy for you. So you have seen this morning that we have announced an offer of 165p per share from Advent International. The offer has been unanimously recommended by the Board, judging it to be in the best interest of shareholders and taking into account the interest of other stakeholders. You will understand that in the context of this announcement we are in an offer period and governed by the takeover code, which will constrain how much we can say in answer to some of your questions compared with our normal position, which means in practice if you see me glancing at the people back there, it is because I'm not sure whether I'm allowed to answer the question or not, and they will shake their heads or nod wisely.

So outside the offer, the core of this presentation, therefore, is the interim results. And I have to say that they are a good set of interim results showing progress with the actions of the last 2.5 years feeding into the financial results, although with variation in sector performance as we've expected and have flagged repeatedly. Overall though, our confidence is improving in the business that we can see real evidence that the turnaround is taking hold. We're going to touch on Advanced Electronic Solutions several times in this presentation to go through the actions that are taking place to improve execution and the change in management. But certainly, the transparency and the clarity is much improved.

We've reduced the risk in the business against the legacy items, with the tanker settlement already announced and the resolution of the U.K. tax dispute, although some risks remain, and we've had to adjust our views on certain tax risks. We've also announced a strategic review, that a strategic review of Aviation Services in Australia has commenced. I'll touch on that later when I do the business overview, but it is an important event for both the employees and customers of that operation. An encouraging thing is that with good cash generation we've retained a strong balance sheet even after funding the settlement of the legacy issues identified earlier.

And finally, we've been able to resume the dividend as previously announced, declaring an interim dividend of 0.4p, which is further evidence that we are able to implement our capital allocation policy we explained last year. And most importantly of all, our full year expectations remain unchanged.

So before I go through the business review, David is going to add some exciting color to all those financial numbers. David?

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David Mellors, Cobham plc - CFO & Executive Director [2]

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Thank you, David, and good morning, everyone. This is a good set of first half results, which help underpin our full year expectations. In summary, organic revenue growth was 11%, with approximately half of that due to timing on existing programs and half due to higher demand. That drove higher operating profits up to GBP 107 million and margins up to 10.4%. The real margin increase was slightly higher than the headlines suggest, as last year was flattered by some one-off credits, which I'll remind you of here in a moment. EPS was up to 3.2p as a result of the higher profitability and the GBP 20 million make-whole payment last year. Cash conversion of 60% was better than originally expected, and that's after we incurred GBP 66 million of cash outflow on our onerous contracts.

The free cash flow is stated after the GBP 69 million settlement of the tax dispute we announced in May. The period-end balance sheet now has a net debt of GBP 148 million after the inclusion of lease liabilities following the new IFRS 16 accounting standard, and our debt ratios are on frozen GAAP. So the gearing ratio is nil. And finally, we've reintroduced the dividend after 2 years of suspension. As indicated at the prelims in March, the interim dividend is 0.4p.

Moving to the revenue summary. There are 2 key points here. One, it's the first period for some time that all sectors have enjoyed organic revenue growth; and two, the 2 big contributors, CMS and CAES, both have had higher throughput on existing programs as well as higher demand driving the top line. One other point worth mentioning is the full year revenue cover. We currently have approximately 90% of the full year revenue forecast under contract, which is a similar percentage to this time last year.

Despite all sectors growing the top line, the group profit increase is the result of CCC and CMS being further ahead in the turnaround process and delivering much stronger results than last year, and CAES and CAVS further behind for reasons I'll go into in a moment.

And just to remind you, on operating profit margins, last year's result was flatted by approximately GBP 5 million of nonrecurring credits, being the net of 3 things: GBP 4 million we disclosed last year at the interims; a further GBP 2 million one-off credit relating to IFRS 16 related to a lease surrender; and the GBP 1 million trading loss in the AvComm and Wireless business disposed of last year. So whilst the reported margin for last year is 10.3%, if you strip out those one-offs, the real margin was closer to 9.8%, and therefore the year-on-year improvement is around 60 basis points overall.

So on to net debt. To start with, I'll make 2 IFRS 16-related points. Firstly, the opening net debt has obviously been restated to incorporate the IFRS 16 lease liabilities, put them on the balance sheet. And secondly, Cobham has elected to include the capital element of lease payments as an operating cash outflow, and therefore is included within operating cash conversion, as otherwise conversion would be artificially high. And the capital element of lease payments was GBP 9 million in the period.

And so on to the cash flows, the headline operating cash conversion was 60% as shown here. Working capital, excluding exceptional charges, increased by GBP 14.9 million, which was mainly inventory in CMS. The net CapEx number of GBP 19 million is after GBP 13 million of proceeds received from asset disposals. There was GBP 66 million of net cash outflow on our onerous contracts, including GBP 49 million KC-46 settlement payment in March. And the group, therefore, generated operating cash conversion before exceptional items of 122%. The other big cash outflow in H1 was the GBP 69 million U.K. tax settlement. And after other small interest and tax outflows, the resulting free cash outflow for the period was GBP 15.7 million and a closing net debt of GBP 148 million.

As we said in the statement, we expect the cash outperformance in H1 will be retained in the full year and the outperformance against our original expectations come from 3 main areas: one, a lower working capital outflow; two, the proceeds on sale of assets reducing net CapEx; and three, a more favorable tax settlement.

This slide shows the balance sheet position of the onerous contracts and our other legacy issues at the half year. The main point to note is the remaining balance of GBP 140 million. Apart from the GBP 66 million net cash outflow, there are no other movements in the period. And as you know, these balances are split into a number of balance sheet lines with GBP 114 million in provisions and GBP 26 million in working capital.

So on to the sectors, CCC first. CCC has continued the progress of the last 18 months, with modest organic revenue growth of 2% and margin progression to 13%. The organic revenue was the net result of an increase in avionics and radio volumes and a decrease in maritime SATCOM. And the operating profit and margin increase was the result of a number of factors as set out on the slide, including the revenue increase, but also continued operational improvements and lower PV expense.

And finally, to remind you again, last year's profit for CCC included a one-off charge of GBP 4 million.

Moving to Mission Systems. Mission Systems' organic revenue increase of 31% was largely due to 2 factors. Firstly, 19% being increased throughput on existing programs. This was contributed to by improving execution, improving supply chain management and reduction in arrears. The main programs with increasing revenues are in air-to-air refueling and actuation. And we flagged again today that the actuation revenues have been helped by urgent operational requirements and are expected to moderate and possibly reduce in the months to come. And the second factor is a 12% revenue increase, being higher demand for products such as releases and restraints, fuel tank inerting and weapons carriage and release.

Profitability was obviously driven by the higher revenue, notwithstanding an increase in PV and extra quality and supply chain costs required to improve the manufacturing process. Profit was also enhanced by a small amount of high-margin product supply and license income, which is not expected to repeat. And margins overall increased to 15.6%.

CMS also had an increase in orders, largely due to a further multiyear refueling contract for the C-130 tanker.

Of the organic revenue growth in Advanced Electronic Solutions of 9%, approximately half was driven by volume increases in a number of EW and missile guidance programs and half in demand for products including semiconductors, waveguides and rotary joints. At the prelims in March, we said 2019 would be a transition year for CAES as the new management team took over and began to make the changes. We've previously flagged cost growth on certain programs in CAES leading to reduced margins, and this has continued in H1 as the existing backlog is worked through. CAES have had to recognize a further program charge of GBP 9 million, but this was largely offset in the period by a profit on sale of a building and the net positive impact of the restructuring program announced at the full year. The margin of 8.2% is below where this business ought to be, but the building blocks are now in place to set CAES on a path to recovery. And just as a reminder, the prior year profit for CAES included a GBP 4 million credit we disclosed last year.

Moving to Aviation Services. Despite the completion of the DHFS contract at the end of Q1 last year, the revenue line grew 4% organically, and this was largely due to growth in the Australian commercial revenues. Operating profit included a GBP 3 million write-down and loss on disposal of helicopters no longer required, leading to an overall margin of 0.8%. And the prior year profit is also flatted by 2 one-off credits totaling GBP 6.5 million, as set out on the slide.

We expect 2 important issues will be clarified in this sector in H2. Firstly, we've begun a strategic review of the Australian business to determine the best option for shareholders. And secondly, we need a resolution on whether the U.K. 020 contract will be extended, following the cancellation of the ASDOT bid earlier this year.

And with that, I'll now hand back to David for the business overview.

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David C. Lockwood, Cobham plc - CEO & Executive Director [3]

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Thank you, David. So these were the 5 objectives we've set, which we go back to each 6 months. So just a quick summary before we go into some detailed slides. So fix the balance sheet. Very encouragingly, the balance sheet remains in good order despite the cash outflows, as David said, on the large historic items, and we've been able to continue to implement the capital allocation policy. I would pick out there that we have launched a new Cobham delivery framework, which is a much simplified version, a much more accessible version of the way in which we go about executing our programs than the one we had previously been using. It's been very well received by the business, and there's lots of evidence that it's making a difference to the programs and how the programs perform. Portfolio, I've got another slide on the CAVS. The only other thing I'll pick out on the summary slide is, we launched Every Mission Matters as a cultural change program. And against that we have a number of values and behaviors that we're encouraging, and there is lots of evidence on the leadership, WhatsApp and other things, that this is taking hold in quite a significant way and helping us address some of the behavioral things that also affect cost of quality. So we're getting to the nub of issues much faster and addressing them much more openly. So that's also very encouraging.

So KC-46, we've referred the settlement several times, that's done. So that's good. We're now in full rate production on the Centerline System, part of what David alluded to in terms of supply chain and quality reinforcement is against that program. It has a complicated and quite challenging supply chain, and we need to make sure that it's there to support long-term deliveries of CDS and WARPs. The WARP qualification is consistent with our previous guidance and is going to plan, although it's relatively soon since we did the reset and the early tests are always the easiest tests because you're testing at a lower level, fairly simple things, and you build them up and retest. So the big tests are still to come.

And flight tests started a couple of weeks ago, and it's pretty similar there. The first flight tests are pretty -- you do the most difficult ones last because they always are the most dangerous, so you build up, so that started well, but it's still an 8- to 10-week process to go. Timing is a bit weather-dependent, particularly as you get to the tougher tests. Actually not because you need good weather, you actually need bad weather to do a tough test. So you need to wait for some bad weather to fly in. So on the whole, going well, but still quite a lot to do.

Advanced Electronic Solutions, we've made a number of management changes and brought in people who have a track record of winning and executing the kind of business we do and there's really 2 things we've been doing. One is making sure we book better orders by changing the way we approach bidding in contracts, whether that is more tightly defining technical specs or being more scrupulous in how we get milestones to collect cash. And then program management. As David said, there are some programs still in the system, which have either been booked against terms which we would rather they hadn't been, or have had to have write-downs so they're running at lower margins. So it will take time. '19 is a year of change as they work their way through the system, but there are lots of positive signs as those changes bed down. And that drives renewed focus on cash and profit. The good sign about the decisiveness in the new management is they devised the cost reduction plan and it went from being devised to fully implemented in a matter of months, which is a rate of action in CAES which is quite new. So we're seeing lots of good early signs that these things will take hold.

I wanted to pick out a non-CAES example of a turnaround. So Wimborne has tremendous capability, but was in financial terms one of the laggards in the business. It is the leading provider of aerial refueling pods. It makes great weapons carriage and release products and services. So the improvement plans seem quite basic. We're going to have a much better relationship with our strategic suppliers. We're going to improve our program execution, invest in the shop floor. What's different is the way we've gone about it. So if we look at the investment in the shop floor, for example, that was done in conjunction with a major customer who lent us free of charge their green and black belt specialists in lean manufacture. We worked together using their product as an exemplar, to work through how we could do the business differently. It just wasn't in the culture of this business to reach out to external input like that. So this is a big, big change, both culturally and operationally. Had a major impact in cost of poor quality and increased our first time yield. So all of this change means that in a very short time we've halved customer arrears, which is part of the reason that contributed to the CMS greater throughput on existing programs because we cleared a backlog. We've got a major contract, which was off schedule and causing our customer a lot of problem back on schedule, productivity has increased and customer on-time metric has improved significantly. So we've got happier customers, actually happier employees. Their, as you know, head office is at Wimborne, so -- I eat in the canteen and it is a visibly more cheery place. So we've got happier customers, happier employees and we should have more satisfied shareholders because this is a major contributor to CMS's good half. So turnaround in action.

So we've commenced a strategic review of Australia, which is Australia's -- or CAVS Australia, which is Australia's third largest Aviation Services Group, triggered by market change. So a recovery in the fight for market needing -- leading to a need to recapitalize and grow the fleet there and change its -- some M&A change that's been going on in Australia. Those 2 things led us to say we need to have a long hard look to see how we extract the best value for our customers, employees and shareholders out of this business. So that's ongoing. We'll finish this year.

So overall, you've seen the bid and the reaction to it, and in the round, I would say the turnaround is going as we had hoped, if not slightly ahead.

So with that, we'll take questions on anything subject to the 3 wise men and very wise lady over there. But we'll take the question, we just may not answer them. Do we have a mic?

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Questions and Answers

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Celine Fornaro, UBS Investment Bank, Research Division - Head of EMEA Industrials Research [1]

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Celine Fornaro from UBS. My first question would be just on the bid, a very specific question, but do you expect any CFIUS regulatory approval to be needed for the deal? And the second one is, I think you've said the timing by year-end, which basically gives 5 months, more or less. Is that not a little bit ambitious, do you think?

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David C. Lockwood, Cobham plc - CEO & Executive Director [2]

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So largely, the regulatory is the responsibility of Advent, not us, it's our job to help them, and they don't see a CFIUS requirement, which is why it's not in the document. And I think I'm not the right person to ask about ambition on this since I've never done it before, but the experts seem to be comfortable with that. I'm looking at the experts, they're all nodding wisely.

Sandy?

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Sandy Morris, Jefferies LLC, Research Division - Equity Analyst [3]

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We'll get going. And sorry, I was vaguely -- I know I'm irritating about this, I know I'm irritating generally. The GBP 67.3 million increase, sorry, we always hack around through the bush about how much of KC-46 is in there at 0 margin.

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David Mellors, Cobham plc - CFO & Executive Director [4]

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So we haven't actually disclosed that, but if we said at 0 margin, the onerous contract part would have been around GBP 10 million.

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Sandy Morris, Jefferies LLC, Research Division - Equity Analyst [5]

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And then we haven't ever explored in Advanced Electronic Solutions, whether the amount of revenue going through at 0 is also significant. Is it?

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David Mellors, Cobham plc - CFO & Executive Director [6]

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Not as significant compared to the sector. They do have some contracts that were -- that had to take a hit back at the end of 2016 when the overall onerous contract provision was set up, but smaller than KC-46 by a lot.

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Sandy Morris, Jefferies LLC, Research Division - Equity Analyst [7]

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Oh, so quite already. And then backtracking to KC-46 -- you're obviously just going to answer this or you're not, aren't you? There was a design developed lower-rate initial production contract, bang, after 18 aircraft. And I don't know, have we got up to 11 or 12 now or something? But there's not...

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David C. Lockwood, Cobham plc - CEO & Executive Director [8]

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So CDS is actually in full rate production as we said there, so we're beyond the LRIP.

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Sandy Morris, Jefferies LLC, Research Division - Equity Analyst [9]

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So you're beyond the LRIP. Are you then making a "proper" margin on CDS now and recognizing it? Or are you making a proper margin, but not recognizing it?

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David C. Lockwood, Cobham plc - CEO & Executive Director [10]

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So what we have said before is when you first move into full rate production obviously -- you're right about the onerous contract covered development in the first 3 LRIP loss. And then after that, it was accounted for separately. Obviously, as you go from one to the other, you've still got a lot of learning to do. So you don't go from loss to profit straightaway, and that's just life. So there's economies of scale, there's learning, there's efficiencies that have to bake in before you get to a "normal margin" or whatever you say, but it's not part of the onerous contract.

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Sandy Morris, Jefferies LLC, Research Division - Equity Analyst [11]

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And so I -- can I look at the 18th aircraft going and breathe a big sigh of relief? I know we've got the WARPs hanging up around separately, but when we get to the 18th delivery, is that really significant in terms of parking KC-46 risk?

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David C. Lockwood, Cobham plc - CEO & Executive Director [12]

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So -- well, there are several parts to it. I mean, the WARP qualification and the WARPs are obviously a big issue going forward, as we've said. So qualifications due to finish mid-2020 and there are flight tests going on now for 10 weeks or so. So I think they're quite important. And as far as CDS is concerned we're starting full rate production. So the focus from a risk point of view will be on WARP, although managing the supply chain for full rate production is still challenging, it's not risk-free.

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Sandy Morris, Jefferies LLC, Research Division - Equity Analyst [13]

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Right, okay but I'm not quite sure how to look at that. But if CDS is fine, if all the inerting is fine and all the fuel tank business is fine, KC-46 is now going from 0 or very low margin and going up over time.

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David C. Lockwood, Cobham plc - CEO & Executive Director [14]

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Over time.

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Sandy Morris, Jefferies LLC, Research Division - Equity Analyst [15]

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Right, stop there, come back. If in the annual report, it tells me what the depreciation is on aircraft in Aviation Services, I apologize, but what would the Australian business be? I mean, clearly, if we take the 020 contract out, it doesn't look very pretty in Australia, but there must be a lot of depreciation on the search and rescue aircraft. I'm not sure if we're still depreciating the Sentinel aircraft? What would it -- would it have an EBITDA of any consequence?

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David C. Lockwood, Cobham plc - CEO & Executive Director [16]

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So we -- you're right, we don't split out the geographic profits or the contract profits or depreciation below sector level. We've split out the revenue, we've said it's about GBP 200 million of revenue and we haven't split out depreciation. So I'm not going to do that. But you're right, there is depreciation on the aircraft out there.

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Sandy Morris, Jefferies LLC, Research Division - Equity Analyst [17]

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Right. Are we depreciating the aircraft over the terms of the initial contracts, like search and rescue? Will we fully depreciate the aircraft?

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David C. Lockwood, Cobham plc - CEO & Executive Director [18]

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Largely, yes.

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Sandy Morris, Jefferies LLC, Research Division - Equity Analyst [19]

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Okay, I can probably work it out then. I'm done for now but not necessarily finished.

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David C. Lockwood, Cobham plc - CEO & Executive Director [20]

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Can't wait. Other questions? Tom.

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Unidentified Analyst, [21]

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I noticed in the acquisition announcement, one of the things that it talked about was that you felt that under private equity ownership you'd be maybe able to do things that you couldn't do when you were in the scrutiny of the public markets. Can you say anything about what you'd do differently?

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David C. Lockwood, Cobham plc - CEO & Executive Director [22]

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So it wasn't us. That was what...

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Unidentified Analyst, [23]

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That was Advent.

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David C. Lockwood, Cobham plc - CEO & Executive Director [24]

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That's what they said. And I'm not allowed to comment on what they said. So -- I'm sorry. Any other questions?

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Unidentified Analyst, [25]

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Yes, maritime is going again. When did that happen?

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David C. Lockwood, Cobham plc - CEO & Executive Director [26]

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Asking us that. It's -- we're not -- we don't want anything to happen because it just fails to recover. We don't believe we're losing material share, it's just market conditions.

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Unidentified Analyst, [27]

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And getting yourself certificated. I can't remember the other provider, satellite service provider that you...

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David C. Lockwood, Cobham plc - CEO & Executive Director [28]

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Iridium.

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Unidentified Analyst, [29]

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Iridium. Just sort of hedging your bets a bit?

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David C. Lockwood, Cobham plc - CEO & Executive Director [30]

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Yes.

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Unidentified Analyst, [31]

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Right. And I didn't understand this, I read it as drains, but of course it's [DREAMS]. I thought we had [RAIMS] as was on A350 from long ago. I thought A350 was the initial integrated radio and audio management system contract that we got years back.

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David C. Lockwood, Cobham plc - CEO & Executive Director [32]

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It is. There is an element of cannibalization of market in this product and then go on to other systems, because it's modular unlike that one, which was an integrated system.

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Unidentified Analyst, [33]

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And dare I ask -- I know -- we asked about Aviator S getting its design and whatever was approval and you said that means nothing. So how far along are we now?

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David C. Lockwood, Cobham plc - CEO & Executive Director [34]

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So which -- are we talking about with Airbus or with...

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Unidentified Analyst, [35]

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Well, I don't care because you've had this stuff puttering around on United, Hawaiian and Sichuan for a while. So you must know whether it works.

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David C. Lockwood, Cobham plc - CEO & Executive Director [36]

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Not Aviator S. We've had -- not the next generation. We've had the older generation flying.

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Unidentified Analyst, [37]

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And so how close is Aviator S now to the point where you're going to stand up and reassure us?

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David C. Lockwood, Cobham plc - CEO & Executive Director [38]

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Well I can reassure you now. I think it's -- you've seen that the PV has gone down because we're just doing a lot, specifically on David's CCC slide, Aviator S PV was down because we're out of the heavy lifting, and now we're into the final paperwork stage. So it's held its schedule since we last spoke about it in March.

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Unidentified Analyst, [39]

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All right. You see, it's back to this whole thing. For the first time, you start sounding optimistic and things seem to be going relatively well. And you're selling yourself off to private equity because they've got more freedom to do things you can't do. I mean, given what you've done in the last 2 or 3 years, you've got loads of freedom.

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David C. Lockwood, Cobham plc - CEO & Executive Director [40]

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So the statement about freedom was made by them, not us. What we did was consider all other stakeholders and made sure that we'd taken their interest into account and then we had to evaluate an unsolicited offer and decide whether we thought it was in the interest of shareholders and we should recommend it. And as a Board, we unanimously decided we should. All of the other assets -- that's the only thing we should and are obliged to consider is in the interest of shareholders. And that's what we did.

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Unidentified Analyst, [41]

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Well yes, you see, I don't want to get flung out of here, it's hot.

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David C. Lockwood, Cobham plc - CEO & Executive Director [42]

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It could get hot in here.

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Unidentified Analyst, [43]

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And I'm trying to be pleasant and kind, but you refer to other stakeholders. If the DoD or Boeing has told you actually you're too weak, and after KC-46 we're not willing to commit to big contracts with you like this in the future. What are these other stakeholders? You just said you're answerable to shareholders, which I agree. I'm not a shareholder, which is why Boeing once flung me out of a meeting for asking questions like this. Who are these other stakeholders?

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David C. Lockwood, Cobham plc - CEO & Executive Director [44]

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So the law requires us to consider people like our employees, for example. So we have considered the impact on employees as a very, very, very important community. So the law lays out the things you should consider, which we have considered. We tick those boxes. Once you tick those boxes you say, do I believe this is in the interest of shareholders? So you then evaluate the business against the offer and have to draw that conclusion. And we, as a Board, unanimously having reassured ourselves about other stakeholders, decided that this was in the interest of shareholders and therefore have recommended it. That's -- everything else is a distraction. Questions that I've been asked about our futures, industrial. All these things are irrelevant. But that's the only thing. I am the custodian of the shareholders' money. And once I've satisfied the other issues, my only job is to do what I believe is the right thing for shareholders, and that's the only job of the Board. And I think the Board had a very proper discussion around it and did its job well under Jamie's guidance.

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Unidentified Analyst, [45]

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(inaudible)

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David C. Lockwood, Cobham plc - CEO & Executive Director [46]

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Any other questions?

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Celine Fornaro, UBS Investment Bank, Research Division - Head of EMEA Industrials Research [47]

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Just again, sorry, on Advanced Electronic Solutions, maybe if you could share a little bit on the slowness of the recovery on the business there even though on the H1 period you've just appointed our Chief Operating Officer, I think, in the division, which suggests that you still have changes that are going on. So it's fairly, I would say, less recent in this process of restructuring than you think for this division. So why have you done that? What is this person mandate, where we see the improvement? And also, are you not concerned that we've seen the best years of growth, we could have a U.S. budget flattening in 2, 3 years from now. And what that means in terms of really the margin progression.

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David C. Lockwood, Cobham plc - CEO & Executive Director [48]

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So I'll have a go and then David can have a go about the number impact. So there's no way the U.S. budget can continue to grow the way it has been growing. So we have to plan accordingly and then see any upside as upside. And that was always recognized in our margin targets. So that's not new news. When it comes to recognizing and implementing actions to correct issues in a business it is a fact of life that if you expect -- a company under a special security arrangement like CAES has a separate Board, things have to go through that Board, everything inevitably takes a bit longer. So we're not -- nothing is happening in CAES that hasn't happened elsewhere. It just takes a bit longer to go through the gears, which is why CAES is a bit behind, as we've said, for the last 18 months. But we're not doing anything unusual in terms of running an engineering company in CAES. There's nothing intrinsically unusual about CAES, which would say it should have lower than market margins. We're just a bit behind the rest of the group because of the structural issues. Do you want to add anything?

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David Mellors, Cobham plc - CFO & Executive Director [49]

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Well, I'll just repeat. So 8% margin is below where we've always said this group should be. It should be 10% to 12%. If you look at the market, it will be slightly more margin-constrained than some of the other sectors, for all the reasons we've rehearsed historically. It takes a while in this business with long-term programs to work through the system because you've got the backlog you've got, and you've signed up the bids you've got and they last awhile. So it doesn't happen overnight. But when I was saying that the building blocks are in place, it obviously starts with the people. But the changes that are being put in place around bidding, around projects, around programs are very, very similar to what's happened in the rest of the group, and the new management team are doing this themselves. They're not -- they are the kind of people that focus -- that understand the importance of that, of cash, of profit, of margin. And the fact that we are currently underperforming where we should be. So I think I'm very encouraged by what's happened over the last few months or so, but it does take time to feed through into market. As it did, frankly, in the other sectors, it's just that they're probably 18 months ahead.

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David C. Lockwood, Cobham plc - CEO & Executive Director [50]

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Any final...

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Unidentified Analyst, [51]

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[Based on this, are you done rebuilding San Diego?]

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David C. Lockwood, Cobham plc - CEO & Executive Director [52]

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Towards the end of this year. It's one whole -- there are 6 buildings there, as you know, and it's just, they're on the last building.

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Unidentified Analyst, [53]

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Sorry, I mean because San Diego is, typical the salary is at about 1/3 of the revenue?

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David C. Lockwood, Cobham plc - CEO & Executive Director [54]

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1/3 of the headcount, less than 1/3 of the revenue.

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Unidentified Analyst, [55]

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So they're still not...

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David C. Lockwood, Cobham plc - CEO & Executive Director [56]

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It's a big site. Well, it's not... it's due to be around the end of this year.

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David Mellors, Cobham plc - CFO & Executive Director [57]

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Just so you know why, because just to remind, there are a number of processes where we hold the license specifically only to do it in certain buildings and so actually moving things around and not getting breaks in production is quite a complex thing. So it was always going to be a slow process to rebuild because you can't just sort of vacate, refurbish and move back in because of our operating licenses for certain chemical processes and so on. So they had to be very mindful of all of that. So it's not off schedule.

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Unidentified Analyst, [58]

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And you said we discussed this margin constraint, but actually one of the things would just be in terms of the margin strength, is some of the stuff that we've got coming, Patriot, THAAD and Standard Missile 6, are these actually really much higher volumes than we've coped with in the past, because candidly, it looks like missile volumes are going to be really high between restocking in the States, but also the export orders they've won. So we don't quite get the margin we might once have associated with REMEC. I know I'm going back into archeology. But we have more and more volume -- but it feels to me like, okay, we get a little bit suppressed on margin, but loads of volume, if we get it right.

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David C. Lockwood, Cobham plc - CEO & Executive Director [59]

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So missile volumes at generally San Jose, not San Diego just for what. So San Diego is more kind of high mix, slightly lower volume and San Jose is high volume, lower mix, is kind of how the 2 plants are run, because San Jose is better at automation and you need volume for automation. So you could be right on missile volumes, you could be right. But I don't think we're going to see a sudden, if you look at the budget, I don't -- a lot of this is a replenishment thing. So I think you'll see a bump and then a leveling, and that will happen while platforms are leveling off. So F-35 volumes are less, so there's no growth in F-35s, the F-35 growth is now replaced by -- which is why you then see, you're going to average mid-single-digit because as one levels off another starts to grow. So that's how -- how we've got to saying that it should be a mid-single-digit business.

Any other questions? Okay. Well, thank you for your attention. And once again, thank you for making it here this morning.