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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning and welcome to the 2018 interim results presentation for Ultra Electronics. This morning, I'm very pleased to say that we have our new Chief Executive Officer with us, Mr. Simon Pryce. And so you'll be hearing from him later after. Amitabh Sharma is here, the Group Financial Director, and he'll be taking you through the numbers. But first, I thought I'd give you an introduction. Just to say that last November, when I stepped in as Executive Chairman, I had a number of priorities. The first one was to deliver the revised forecast for the 2017 year-end. The second was to set a budget for 2018 that I believed would be achievable. And at that time, I concluded that modest progress could be achieved in 2018. Thirdly, I conducted a strategic review during January, meeting with all of the group's businesses to understand the key drivers, opportunities and issues they faced. And I shared this with our city audiences in March. What I concluded from this review was that despite the reset in performance expectations that we made last November, there was nothing fundamentally wrong with the group's businesses, and there was no reason why the group should not be able to make good progress into the future from there but under the right leadership. However, this is not to say that I discovered several areas where improvements could be made, and these are going to be pursued by our new chief executive officer, whom you'll hear from later. So turning now to the first point on the slide. Overall, we're experiencing improved market conditions. This is particularly so in the U.S. defense market, where defense investment outlays in 2017 were up about 5.6% on the previous year and are expected to be up by about the same amount in 2018. In the U.K. defense market, however, in common with other companies, we have continued to experience fiscal tightness, as the U.K. MOD focuses on what I would call big-ticket items, where expenditure is already committed. In the civil aerospace market, this continues to be buoyant for us, driven by aircraft reduction programs. As a result of the current prevailing market conditions, we have achieved a very strong order intake across the group with the order book up about 18% on the same period last year and 6% higher than at the 2017 year-end. Ami will be giving more details on this but this level of order winning provides good order cover for the second half of 2018. For the first time in a while, we are reporting underlying organic growth. Unfortunately, this is masked by currency exchange headwinds but is a welcome indicator that the group performance is turning around. Specific engineering problems at Herley, however, have impacted profit performance, so that we're unable to report the matching organic growth in profits, which would have occurred without these charges. I'd like to assure you that much management attention is being given to the Herley issues, including full engagement with the customer to ensure that they're contained and that a satisfactory outcome will eventually be arrived at. One of my other priorities last November was to find and appoint a new chief executive officer. I'm glad to report that on June 18, we appointed Simon Pryce, who is here before you, and later will give you his initial impressions of the group. So with that brief introduction, I'll now hand over to Ami to take you through the detail of the first half results.
Thank you, Douglas, and good morning. I'm pleased to present our interim results for the period ended 30 June 2018. We're reporting for the first time under IFRS 15. And in this presentation, all the percentage movements quoted will be against IFRS 15 adjusted comparatives.The group closed June with a strong order book, reflecting improved order intake over the period. At constant currencies, the order book grew 4.9% organically compared to December 2017 and 19% organically compared to June 2017. This is encouraging and reflects our improving major end market. Looking at order intake, this improved 6.6% organically compared to Half 1 2017. As expected, FX movements provided a headwind to our key indicators. Sterling strengthened 9.5% against the U.S. dollar, with the average rate moving to 1.38 in the first half of 2018 from 1.26 in the comparable period last year. For the first time since December 2011, the group achieved organic revenue growth with a constant currency increase of 1.3%. Operating profit reduced organically by 9.4%, which includes a GBP 6.1 million development cost overrun at Herley. Operating profit grew organically when excluding this. Margins as a result were lower at 13.7%. Excluding the cost overruns, margins were in the customary range at 15.4%. Earnings per share declined by 20.9% due to foreign exchange, lower profits and the 2017 equity raise. The share buyback commenced over the period were 3.5 million shares repurchased for just under GBP 50 million. Reflecting these factors, the interim dividend of 14.6p per share is unchanged compared with Half 1 2017. Moving to the revenue bridge. This is self-explanatory and highlights the organic growth and currency impact on the half year. Similarly, the profit bridge shows the impact of currency and development contract overruns on the half year.Turning to cash. Operating cash flow of GBP 6.5 million represented cash conversion of 14% compared to 54% last year. I will take you through the key elements of this. Capital expenditure increased to GBP 8.1 million. This included spend on equipment required for our London Heathrow Terminal 5 contract. Our Montréal military radio production site required investment to help execute the order book. As you may remember, we are undertaking a number of ERP implementations, 6 are in progress. These will go live over Half 2 2018 and Half 1 2019.Working capital increased by GBP 33 million over the first half of the year. A breakdown is included in the box on the right-hand side of the slide. This is larger than the working capital outflow last half year, so let me give you some detail.Inventories represented GBP 13 million of the increase in working capital, with a number of businesses increasing stock levels. The largest increase was at our at Oceans Systems business, where inventories grew by GBP 7 million for deliveries across a number of underwater warfare projects in Half 2. Most of the rest is due to smaller inventory increases, ahead of Half 2 deliveries as a result of the larger order book.Creditors decreased by GBP 23 million overall due to a reduction in trade creditors from year-end. GBP 12 million of this was due to supply chain constraints requiring us to make faster payments to suppliers, and this is included in the 70% to 75% cash conversion guidance. In order to normalize working capital flows and improve business and financial performance, the group intends to review its working capital levels for future years.Moving to net debt. Significant movements include the share buyback, which resulted in a cash outflow of nearly GBP 50 million over Half 1. And as previously advised, the closure of the Sparton forward foreign exchange contract resulted in an GBP 11 million outflow. The net debt-to-EBITDA ratio reduced from 1.79x at the end of Half 1 2017, which was before the Sparton-related equity raise, to 1.39x at the end of June. A slide with more detail is included in the appendices.Moving on to how the 3 divisions performed, we start with Aerospace & Infrastructure. Revenues grew organically at constant currencies as activity increased on our aerospace contracts, notably the Joint Strike Fighter program. This was partially offset by reduced contract manufacturing revenues. Profit margins increased to 16.1% due to lower research and development costs at our Aerospace business.The Communications & Security division also saw organic revenue growth at constant currencies. Increased military radio, air defense systems and electronic warfare deliveries contributed but this was offset by slower crypto revenues and a strong comparative period for forensic equipment sales.The cost overruns at Herley caused margins to reduce to 7.2%. But when excluding the GBP 6.1 million charge, margins were 12.7% compared to 12% in 2017.Looking at the Maritime & Land division, revenues declined organically over the first half. Demand for legacy sonobuoys remains healthy but there have been some maritime system program delays leading to revenues moving into the second half. Margins reduced to 17%, principally due to additional costs of redesign on certain programs.All 3 divisions saw significant increases in their order books compared to June last year. The largest increase was experienced by the Communications & Security division, whose 20% order book growth was driven by military radios, security equipment wins and strong order intake at Herley. Joint Strike Fighter-related orders boosted the Aerospace & Infrastructure division order book, which grew by 18%. The Maritime & Land order book grew 16%, following a significant Indian Navy contract win and a maritime propulsion order.The S3 is now reaching its final 6 months. The S3 initiative was launched in late 2015 with an aim to reduce complexities within our group, so that management can focus on growing on their businesses rather than managing the back-office processes. From left to right, column 1 shows that the program has cost just over GBP 0.5 million in 2018. And column 2 shows that, cumulatively, we spent GBP 19.7 million. The costs to date comprise project costs, together with onerous lease provisions, consolidation costs and the costs of some headcount reductions owing to property closures. S3 costs are anticipated to be around GBP 25 million in total, as the project concludes at the end of 2018.Column 3 shows that S3 has generated savings of GBP 8.6 million in 2018 so far, and we expect the savings will be GBP 20 million from 2019. Notable successes so far in 2018 include further progress on the ERP rollout, a further reduction in our property footprint and the consolidation of U.K. payroll services.While the S3 project will end this year, there remain opportunities for further operational improvements in the future. Let me provide you with some technical guidance for 2018. The strengthening of Sterling will provide an FX headwind. At present, each 1-cent movement in the U.S. dollar represents a movement of GBP 3.2 million in revenues and GBP 0.75 million in profits.In respect to our investment plans, our current guidance is for capital expenditure to be around GBP 20 million, the largest element being the IT system rollouts.The group's effective tax rate is currently expected to be broadly flat. As previously guided, full year cash conversion is expected to be in the 70% to 75% range. In terms of total dividend for the year, we will look at this in the context of the full year performance.The balance sheet remains strong, and we will continue the share buyback, particularly when we see good value in the shares.Thank you. I will now hand over to Simon.
Good morning, everybody. Thank you, Ami. Thank you, Douglas. And what I'm just going to go through in the next couple of slides is what I've been doing for the last 6 weeks. And I've spent most of my time familiarizing myself with the Ultra businesses, with the Ultra leadership and with the working processes and practices that go on within the organization. And my initial impressions very much support the due diligence I did before I joined and what Douglas has highlighted at the beginning of this presentation. In common with a number of other companies with significant defense exposure, constrained defense spending in the U.K. and particularly the U.S. has created a challenging environment for Ultra, which has particularly impacted the group in the last 2 or 3 years. But this shouldn't detract from the underlying strengths of this group. What I've found here is an IP-rich group of businesses with very solid technology base and a wide range of specialist capabilities. And as the U.S. moves into a period of more increased defense spend, Ultra's world-leading technologies in areas such as anti-submarine warfare, in secure comms is particularly relevant in helping to address the perceived threats that our major customers are trying to prioritize. And these technologies and capabilities are supported by good people who are well connected with their customers and a particularly strong and flexible engineering capability.We support a wide range of platforms and programs, and we have a large number of customers. And generally, although not always, we have relatively small ship-set values, which is important from a risk management perspective as we have no major program, platform or customer dependency.And our federated structure allows us to be both agile and flexible in providing solutions that customers need in the most technologically efficient and cost-efficient way. And then finally, we do all this with a pretty lean central overhead. But it does feel, even after 6 weeks, like there's lots more we can do. As our performance over the last few years has demonstrated, there are significant strengths associated with being a federation of autonomous businesses. However, I'm not sure that we have sufficiently robust underlying processes, particularly around risk assessment, risk management and resource allocation, nor necessarily all of the right capabilities to consistently deliver the best possible outcome for all of our stakeholders. I'm not sure that we got an optimized structure and set of management processes that supports the delivery and maximization of long-term sustainable value creation across the wide range of technologies, capabilities and business models within the group. Whether it's to do with the market or for internal reasons, it feels like Ultra, at the moment, is rather tactical and that there are greater opportunities in a long-term business like this from taking a more strategic approach to the way we make decisions. And the challenges the group has faced in recent years and the pressure to achieve profits growth, despite a challenging market, I think, has led to a focus on cost-cutting and a tendency to hold back on investment, together with greater central control over expenditure, perhaps at the expense of a more pragmatic approach to risk, contracting and effective oversight.And then finally, as a number of you will be aware, 1 or 2 of the acquisitions that we did recently are not delivering against the strategic investment cases that were made at the time that the investment was entered into. But importantly, all of these things feel like opportunities rather than problems. They're all fixable, and they all build on Ultra's traditional strengths with its extensive capabilities, differentiated technologies, its very talented people and its strong balance sheet. So in short, it feels like there is lots of medium and long-term opportunity at Ultra.So what we are going to think about over the next 6 to 12 months? Moving forward, it's all about securing the foundations for the next phase of Ultra's development. We will be looking at things that continue to put the customer first, focusing not just on meeting our commitments to them but exceeding their expectations, delivering effective solutions to them, on time, to cost and at a price that they're prepared to pay. We'll look at maintaining that agility and flexibility in finding solutions that meet our customer needs, not just through direct strategic and tactical relationships but also through mutually beneficial teaming and partnering arrangements. We'll be working to ensure that we have the right empowerment framework that allows decision-taking to take place at the right level and that people are empowered and have the resources to deliver their plans in the context of aligned longer-term strategic goals. And whilst the S3 program was a start, as Ami flagged, we'll continue to look at opportunities for process improvement, [ commonization ] and standardization that supports us being more effective in the way that we do business whilst maintaining our independent customer focus.We'll apply the same execution discipline I see in some of our businesses more broadly across the whole group and also in our cross-business and cross-functional projects. And we'll focus on the more effective and structured development of our already talented and most precious resource, our people. And we'll be working on clarifying our strategic objectives and ensuring that in our resource allocation and investment processes, we're aligning them and are disciplined in delivering against those aligned objectives. And most importantly, that investment process is going to be very disciplined, and we'll always support the longer-term group strategic goals.So I'll provide you with -- or Ami and I will provide you with more of our preliminary thoughts in these areas and where we've got to at the time of the prelims in March. But these feel like the areas that we're going to focus on as we enter into Ultra's next phase of development and as we look to focus on returning to long-term and sustainable value creation from this group.So in summary, 6 weeks into the role, and admittedly with still much to learn and see, I very much concur with Douglas' view. Despite a difficult few years, and in no small part due to his efforts, Ultra is well positioned as we enter the second half. The order book's strong, indeed as strong as it's been for a number of years. We've got good, positive momentum as we exit the first half, and good order cover for the remainder of the year. And it certainly feels like the risks to H2 are mainly around execution and effective delivery. And in parallel, we'll be looking at securing and strengthening Ultra's foundations. And I'm extremely excited to be part of Ultra. And I thank Douglas for giving me the opportunity as we take Ultra into the next phase of its development, where it feels there's a lot of potential for this group in the medium and long term. So that's the end of the formal presentation, and I'd now like to open the session up for questions. It would be helpful certainly to me, as I'm relatively new to this audience if you could raise your hand, and then state your name and the institution or firm that you're here representing, followed by your questions. And there are some guys at the back who are wandering around with microphones to facilitate that. If we don't manage to get to your questions during the course of this presentation, please feel free to get hold of Ami or me outside this session and we'll do what we can to answer any concerns or questions that you've got. So with that, I'll open the floor.
Nick Cunningham, Agency Partners. I wanted to ask a bit about Herley, about the issue, things what our U.S. colleagues would call the gift that keeps on giving. And so that leaves the obvious question, which is are you sure that this is now it? And what degree of risk is sort of around that assumption, if you like? Or could we see something in the second half? And the second thing that follows on from that, is this an issue around contract structure? Is it the customer who's at fault here but you're basically -- the risk transfer is such that you have to swallow that cost overrun? And is there anything else of significant sizes in the group that's like that and that could make a similar thing happen? And then final third point on the same issue. I know you can't identify the contracts or the prime. However, could you talk a little bit about the size of the opportunity? Is it all worthwhile, basically?
Thank you, Nick. I'll take most of the high-level stuff and give you the idiot's view, if that's okay? And then if there's any more detail, I'll hand it over to Ami. So first and clearly, we can't talk very much about this contract for obvious reasons, other than to say that we have done a detailed risk assessment on what it will take to complete this contract, which is an engineering development contract. The contract has a relatively short period to run, so it should be done by the end of this year. That gives us some confidence that we have bottomed the costs to deliver it. Clearly, we wouldn't be continuing to incur these costs if we didn't think that the medium- and long-term opportunity associated with this development contract wasn't significant. And I'm comfortable that it is. In terms of whose fault it is, I mean, these things are never clear. And we are more than culpable, for sure. But there are always, particularly in terms of these development contracts, inputs from the customer that can cause the specifications or testing environment or whatever to change. And I'm pleased to say that the customer is taking an appropriately balanced view on where the risks of that falls. We are in continuing discussions with them, and we hope to end up in a good place. And I think what you're seeing in the numbers today reflects a balanced view of where we'll end up. Is there no chance that it's a different number? No. But do I think we've got a very balanced risk assessment of where we'll end up? Yes, we do.
And just to follow up on that, are there any other single-point risks that you've perceived within the group of this sort of scale?
No. I mean, I think we always have a number of ongoing contracts, and we are making and we are reviewing and assessing cost to complete at every appropriate period in time. We don't see any major -- I don't see any major issues. But Ami, you may have a different view. Thanks, Nick.
Rami from Investec. 2 questions. On order cover, is the -- does this offer need to book any significant orders for H2 to deliver on expectations, and maybe some thoughts on cover for 2019? And the second question is, can you provide a little bit of color on some of the supply chain constraints that you've talked about in the presentation?
Ami, it sounds like that's you.
Yes, yes. In terms of -- there's no significant order needed to deliver Half 2, answer to that question. In terms of order cover for 2019, about 75% of the current order book, which is not untypical for prior years, is due for execution over the next 18 months. I can tell you that.
I think -- and I think it's fair to say more broadly that the order cover and order book provides us good momentum into 2019. So...
In terms of the supply chain constraints, I mean, this is due to a, basically, global component shortage, parts really. And this is seen probably by the whole industry. It's just that we are compelled to make payments of it sooner than perhaps we otherwise would have to get those parts for the half year. And that's more of a permanent thing. And we signaled that in the press release, as I talked about earlier.
And I think maybe sort of just on this specific issue around supply chain constraints and working capital. I mean, what we're really interested in is optimizing the average amount of working capital in the business throughout the year and not up to particular points in the year. So I think we will be looking at how we go through a more effective process of managing our working capital throughout the year. And we'll tell you what that means in March of next year. And I think the supply chain constraint that Ami is referring to, it makes managing -- when it's difficult to get ahold of product, it makes managing that working capital at a particular point in time slightly more difficult. Paul?
Paul Hill from Equity Development. Could you just talk about the -- [ well ] about mix of the order book. You mentioned a lot about the different portfolio -- different verticals, obviously, with overlaying them in the context of post-modernization with autonomous vehicles and robotics and cyber warfare. How do you see, firstly, the portfolio, of different capabilities in the business matching the higher-growth areas compared to the broader defense sector? And then how do you see the order book overlaying on top of that? Is it just a perfect match? And then the flow-through of the order book in terms of cash conversion. Because, obviously, with -- almost been 100% cash conversion over the last 2 years, a slight drop this year, are we going to look forward to seeing the quality of the order book coming through? So the 3 questions is, just broadly, what sort of portfolio mix of Ultra Electronics falls into the higher-growth defense sectors? What sort of fit mix and balance do we see in the order book going forward and then likely the cash generation from that?
So I'll take portfolio mix, Paul. And then, Ami, if you can take order book and cash conversion. I think as I alluded to, Paul, Ultra's sort of core capabilities are in areas such as communication -- secure communications and ASW, which address particular threats that our major customers are looking for now. But all of Ultra's businesses are in markets. So they're showing some opportunities for growth. I think it's fair to say and as I alluded to a bit earlier, we will be looking strategically how -- at how Ultra's positioned and which markets and businesses it should be in the long term more -- in more detail over the next 8 to 12 months. And we'll report out on that when we come to a conclusion. Probably, we'll give you a hint on that in March. But Ami, so order book, it's across the board, isn't it?
Yes. Yes, it is. I mean in terms of linking it to cash, I think, is your question. I mean, what you find is that with the U.S.-type orders, you don't get significant upfront payments but you get routine progress payments through the life of that contract. For the overseas contracts, you tend to get higher upfront payments but not quite at the level you used to see 4, 5 years ago, typically 10%, 15%. In terms of the cash profile over 3 years, even up 70% of cash conversion the 3-year average is 86%, which is in the sort of range that we've talked about, 80% to 85% cash conversion. So I think even if you consider that one year in isolation, it doesn't sound so great but you've got to look at it over a long period.
And Douglas, I don't know if have anything else you'd want to add on portfolio and...
What I would say is that we are well positioned in areas of preferential spend. The world is spending generally across the board a lot in the maritime area. The Australians have just selected the Type 26 equivalent vessel for the SC5000 opportunity. We're well positioned in Australia for sonars. There's a program in Canada, the Canadian Surface Combatant, which is an anti-submarine warfare ship, similar to Type 26 in the U.K. Sonobuoys are seeing an upswing in requirement because of activity. I think it's no secret that the U.S. Navy recently set up again the second fleet in the Atlantic because of activity in the Atlantic. It's not just the pivot to the Pacific, which is worrying. And the proliferation of submarines generally is causing fairly significant increased demand in sonobuoys. So I think that across the maritime, we're really well positioned. In the tactical radios, the -- we are seeing we've got a new product that has come to market and is seeing significant demand for that. I see that continuing. We're well positioned all at the aerospace programs, the Joint Strike Fighter. We've got a number of equipments on that. It's an important program for us, from weapons ejection to missile cooling, to ice protection for the engine and for the lift fan. So the Joint Strike Fighter is an important program as numbers increase there. In aerospace, there's lots of activity there, particularly the 787 dragging us along with the ice protection program we do there. And there's a lot of biz-jets that we've recently been well positioned on that are going to production. And I think in the crypto area, in security generally, that there are a number of opportunities for which we're well positioned for key management on cryptos and [ project ] production in crypto equipment generally as well as command and control datalinks that is across-the-board requirement. So I think that [ no matter ] where I look, I think that there are a number of very good, very specialist areas, where the big prime contractors will continue to come to Ultra because we do something that's specialist, a niche that they don't currently cover. And I think that there's lots of opportunities there for us.
This is an Andrew from Berenberg. You've partly both answered this question but I just wanted to take it a little step further. In terms of your references to the wide range of technologies and business models, and this kind of diversity point within the portfolio is deemed to be an asset for Ultra over the years. Is there anything that you're seeing so far that fundamentally needs changing in terms of the broader, the overall Ultra business model in terms of structures as a group? Or is it just too early to say at this point?
So I think I do. I should probably take this. It would be really boring if Ultra was perfect because you wouldn't need me. But as I think I've alluded to a bit earlier, Ultra is a very good business, which we can optimize over time. And in terms of my reference to a broad range of technologies, capabilities and business models, we need to make sure we're the right owner of all the businesses that we own, and that we're the owner that can optimize what those businesses can do for their customers. And we will be going through that process over the course of the next 8 months and, I'm sure, beyond. So I don't really want to say much more than that now but that is what we're doing.
And then another thread on working capital. Can you say in what areas we're seeing pressure? Is it across the board? Is it more commercial aerospace, more defense? Does it -- have we gone through the process now? We don't have extra working capital outflow linked to this issue in the second half. I guess that's implied in your guidance. Have we normalized creditor days and things like that, as it were?
Well, in terms the -- where it is, it's more in aerospace generically both commercial and military. In terms of have we normalized it, the answer is no. I think we've already said that we'll be looking at working capital in the next 6 to 12 months to look at what's the optimum level of working capital. We have covered it within the guidance. So in answer to your question, we will be looking at it a bit more closely.
And if it changes, Andrew, we'll tell you it's going to change before it changes.
And then just one more. On the Herley cost overrun, so GBP 6 million was the upper end of the guidance. Can you say how much of that was Ultra-led and customer-led proportionally maybe? And in terms of the broader point of execution, there were other, I think, you read in the statement, other redesign costs coming into the business. Is there -- are there any sort of significant execution issues that need addressing just generally across the group?
So I'm not going to answer the first question for reasons you can imagine. You know, we are relying on the continuing support of the customer and they're being supportive. It is fair to say that contract execution in Herley hasn't been fantastic, and that is leading us to look at some of the underlying processes that both check what we're entering into when we enter into contracts and then monitor more effectively and with less subjectivity the progress that we're making on those contracts as we progress them through to completion. So I don't think it's a great story in Herley from anybody's perspective, and we will be making sure we've got processes in place that stop that happening again.
More broadly in this group.
Sorry?
More broadly in this group.
Yes. I mean, I think if you had it happen somewhere in the group, you always have got to put in place a process to make sure it doesn't happen anywhere else. Because I think we answered earlier, clearly, we are sensitive to this issue having been bitten in the bum by it. And therefore, we've gone through a fairly rigorous scrub. And I think, Ami, we're pretty comfortable that we haven't gotten another one of those in the [ possible ] moment.
It's James from Barclays. Could we have an update on sonobuoys in terms of [ what space ] there -- customer efforts to increase competition in this market and what that means for your level of R&D spend versus history and maybe areas of revenue where you might decrease? Because I think there was a statement about a certain sonobuoy, which around the [ 125A ]was excluded from. And then secondly on the naval programs that you commented at the year-end about potential higher level of investment and then kind of what the outlook there is and the timings. And then lastly, just, Ami, on S3. On the slide here, where we got GBP 0.5 million spend, then GBP 8.6 million of savings, is that the kind of cash savings for this year? Or is that like a run rate going?
Well, that one is a savings in the half year but the GBP 0.5 million is only a spend in the current year. But obviously, we spent about GBP 19 million to generate those savings already.
We have already saved GBP 8.6 million in H1.
Yes, that's right. Yes.
And is that going to continue?
So the run rate then is around GBP 17 million, GBP 17.5 million if you multiply by 2 to get run rate.
Okay. I'm sorry. So the GBP 8.7 million isn't additional on the basis that we spent this year? It's more the program is based on?
That's correct, yes.
Okay. So just on the sonobuoys and the investments. So just on sonobuoys, I think everybody's aware that there was an announcement that ERAPSCO have been excluded from the 125A. But we've appealed that. I think more broadly, what came out of -- as I think Douglas has shared with you, what came out of discussions with the DOJ and the Navy is that they want more competition in sonobuoys going forward. I think that 125A exclusion, which we are working through, may be part of that. I think more importantly, though, demand for sonobuoys is significant and increasing. And the 125A is only one of a number of sonobuoys that we produce. And the demand for some of the stuff that we do make is probably increasing. This is also not a permanent decision. It's a 5-year program. And I think we're very comfortable that sonobuoys continues to be a good place for us to be. And we're a world leader in that space.
I have a question about naval investment. We're still a year -- a couple of years away from that. Is this around the Canadian Surface Combatant. And probably other programs, probably 2021 is probably when you'll see that, it's some way out?
I think more broadly on broader certainly investment that we are incurring, a private venture investment, you will see us being clear on what we're investing in and when we're investing in it and what we expect the outcome to be than perhaps historically we have been. So to your point on the naval contracts, if we needed to invest money, either customer-funded or not, we'll tell you about it. And we'll give you plenty of advanced warning of what it looks like and what we expect the outcome to be. I think focusing on making sure we get return on that investment when we're funding it is very important. Nick, another one?
Nick Cunningham again. U.S. budgets take anything from 0 to 3 years to come through to outlays, from say, readiness to building an aircraft carrier. And I was just wondering if you could characterize where you think Ultra sits within that time frame. So in other words, is the organic growth that we're seeing now FY '16 money coming through? And so, therefore, it's going to be 2 years before the FY ' 18 comes through and so on?
Okay. So I'll ask either Ami or Douglas to pick that one up rather than to sort of give you -- the headline is it tends to trickle down. So we are not a prime. We are rarely a Tier -- hardly ever a Tier 1. We're definitely not -- we're rarely a Tier 2. So there is definitely a trickle-down effect. But Ami? Douglas?
As we've said previously, it takes 12 to 18 months for the money to play to us. We think that chart, if you remember, at the half year last year, where we tracked organic growth and decline over the last 10 years to DoD defense outlays, you saw the 12- to 18-month lag. So you can look through the maths probably and work backwards.
Yes. There's a strong correlation, by 2 months delay.
But equally, this is slightly program- and threat-specific. So we do see acceleration and deceleration depending on what's important at the time.
Erik Karlsson from Industrial Equity Partners. How are order book margins developing for their respective 3 businesses, please?
Order book margins?
Yes. They're pretty much the same as they've been in the last year or 2. They've not really moved. So very consistent.
Yes. I think if they were materially different, we'd tell you, but I'm not sure we necessary spend too much time guiding on order book margins. So unless there's a material change, you should just assume it's business as usual. [ Henry ]?
Just one sort of housekeeping point on the buyback. GBP 50 million through, what's the kind of expected pace of completion or target? Secondly, do you have any update on the SFO inquiry? I'm guessing the answer is no comment?
So SFO, we can't say anything. So...
In terms of speed of completion on the buyback, we've bought around GBP 10 million worth in July. So we are up to GBP 60 million now at the end of July, and we'll continue to do the buyback where we see value in the shares. So no specifics.
Okay. We're done. That looks like it's about it. And so if there's any questions we haven't answered, please feel free to talk to any of us after this meeting or to contact us outside of this meeting. Thanks very much for attending, and I look forward to seeing you in March.