Well, good morning, everybody, a very warm welcome to our preliminary results presentation. In a few moments, you'll hear from Charles and Brad as to what I believe has been really an outstanding performance in another challenging year. As customary, of course, a Q&A will follow. As I'm sure many of you know, I will be stepping down as chairman at our AGM, having served the full nine years that the UK Corporate Governance Code permits. I'll do so with some sadness, having enjoyed the role throughout, let me say I intend to do so until my last working day.
Every day has been a privilege, a real privilege to work with some of the most talented people on the globe, all, I think, united in the common and very worthy purpose of serving and protecting those that serve and protect us. Of course, this year, the war in Ukraine has caused many to recalibrate their views on defense. The case for which is not just having the right equipment, but to invest in the industrial umbrella that will build skills, secure employment and provide prosperity while peace prevails.
As it is my last prelims, there are five points that I would like to make as to how this year's results have been achieved, not just by hard work, but really built on fundamental changes within the company, made over time under the leadership of Charles, Brad, and Tom, and these will underpin and sustain our business model in the years ahead. As a company, our mantra is to be performance-driven and values-led. The primary shift that has been the catalyst for the performance improvement actually has been in our culture. First, the focus of the company is to place our global customers as an absolute priority. To be a partner, not simply a supplier.
Leaning in to identify and develop the next level of requirement and going the extra mile to ensure we are both timely and cost-competitive in satisfying today's needs and providing the thought leadership that is essential to the future. Second, the old traditions of silo management have been breached, and talent now moves, I think, seamlessly between one area of the business and another. This transfers the knowledge, skills, and mindsets, and as a result, reenergizes the business and turbocharges the performance. We've witnessed this over the years, amongst others, in military air, submarine shipbuilding, Electronic Systems to great effect. It will continue to be a strength of this business as we go forward. Third, the management has been de-layered. The principle of, "If you are good enough, you are old enough," has been widely adopted.
It's rather than the emphasis on the time served as the primary qualification for promotion. This has led to a rejuvenation of the leadership team and a strengthening of the talent bench, such that the business is now driven by a very healthy mix of new, youthful expertise and seasoned experience with succession planning now at the very core of our thinking. Progress has been made in baking DE&I into our D&A, such that we increasingly draw from the talent available from all sectors of the community to provide real opportunity for many talented people who may otherwise have been overlooked. Over 1,000 apprentices last year, I think a testament to this policy and indeed our success in people development.
Fourth, we are committed to developing the next generation of capability and investing accordingly, whether in the air with Tempest, underwater with Dreadnought, on land with CV90, at sea with Type 26 and Hunter, in our world-leading electronics and precision weapons technology, and of growing importance in space and cyber with our investment in satellite capability and multi-domain communications. It is these investments that ensure we do combine our ability to capitalize on the remarkable ingenuity and foresight of our predecessors whilst building a legacy of capability that those will undoubtedly follow us. Finally, the commitment of this team, post-COVID, now more than ever, is to care for the security, prosperity, and safety of all our stakeholders, as seen in our relationships with colleagues, our partnerships with customers, our interactions with suppliers, and our reward to shareholders.
It is this management team that has driven improved program performance reflected in order book build, sales growth in diverse regions, profit and margin improvement, significant cash generation, and better capital allocation, which in turn has enabled us to offer a sustainable and rewarding relationship to all who work with us, and 19 years of consecutive dividend growth with the addition of share buyback for those that invest in us. My final comment is this. Corporately, we are in good order, the right people at the right time in the right place. In the sector, we have one of the broadest spread of capabilities in both products and services, and one of the widest geographic reach amongst all our competitors.
Whilst there's always more to do, and there always is more to do, we are pleased that the strength of our position, both individually and comparatively, is increasingly recognized in our valuation and reflected, therefore, in our return to shareholders. In a few weeks, I will leave in the belief that the business has come far, but has much further to go. It's led by a team with the five ingredients of which I value most, energy, ability, humility, agility, and most important of all, integrity. It is this powerful and winning combination that I believe is worthy of all of your support. I wish them, Cressida Hogg, who takes over from me in May, the company and all of you here well in all of your endeavors. With that, I will hand over to Charles. Charles.
Thank you, Sir Roger. I know I speak for all of us in this room in saying that we sincerely appreciate all you've contributed to the company these past nine years. Good morning, everyone. When we came together for this event last year, Russia was beginning its horrific invasion of Ukraine. As we recognize the one year anniversary tomorrow, I would like to take this opportunity to acknowledge the extraordinary bravery, fortitude, and resilience of the Ukrainian people in the ongoing conflict. We're proud to work with our government customers as they continue to support Ukraine. In 2022, we stepped up and delivered mission-critical requirements for all our customers and effectively managed the supply chain, resourcing, and inflationary pressures throughout the year, reflecting our operational consistency and robust business model.
These strengths, coupled with our geographic diversity, underpinned another strong set of financial results announced today with growth in sales, profits, and cash. Importantly for the future, we booked a record year of order intake and significantly increased the backlog, positioning us for sustained top-line growth, good cash generation, and continued margin expansion. It is worth noting that most of this order volume was driven by existing program positions prior to the Ukraine conflict. The real impact to orders will come further down the line. Reflecting the growth outlook, we increased our investments in our people, technology, and sites while still improving margins. At the same time, we further strengthened the balance sheet, had a positive conclusion to the U.K. pension triennial review, and delivered another successive year of increased shareholder returns through higher dividends and the multi-year buyback program.
Reflecting this strong in-year performance and our confidence in the outlook for the group, we are today announcing a proposed 7.6% increase in the final dividend. With the robust outlook, it is vital we're investing appropriately to meet the expectations of all our stakeholders. We've been increasing self-funded R&D, and we are planning further disciplined increases in the coming years. We will be holding a technology-focused event later in the year and running a series of tech talks to highlight our leading technology credentials and their high relevance to our customers and their stated strategies. Building on the CapEx investments over recent years, we continue to improve our facilities and working environment to drive efficiency, support the growth outlook, and provide an excellent employment proposition.
In 2022, we opened a number of new facilities in the U.S. and began work on a new shipbuilding hall in Glasgow. We are continuing to invest in our people, especially in our early careers and outreach activities as we look to hire and retain the best talent with significant increases in apprentices and graduate numbers already announced. As we assist governments in delivering their mission-critical requirements in the face of escalating threats, the importance of our role in contributing to security and prosperity is clearer than it has been for many years. We explained in detail last October the good progress we are making against our ESG agenda, and we've maintained our AA leadership MSCI rating.
We are targeting those areas in which we have an opportunity to support our customers, make a difference, and contribute to our global future, namely, reducing our carbon footprint, ideas, innovation, and technology, opportunities for people and communities, and success through collaboration and partnering. These align with the company's ESG strategic priorities and our core strengths and capabilities. As usual, we will dedicate a full session on our progress in the second half of the year.
I'm pleased that in 2022, we further enhanced our track record of operational and financial delivery and maintained the positive momentum behind the business evolution targets we laid out two years ago. We are delivering against these aspirations, which over the past two years has helped us deliver 10% sales growth, 90 basis points margin expansion, and over GBP 2.7 billion in shareholder returns, while also increasing our investment in the business. Later in the presentation, Brad will explain why we are confident about the scope for further margin enhancement in the coming years and reiterate our strong cash generation expectations and balanced capital allocation policy. I will then recap on the key factors that give us confidence in delivering long-term sales growth. Over to you, Brad.
Thanks, Charles. I'll start with the financial headlines and then cover results at the group level, moving to guidance, the strength of our operating model and margin drivers, and wrap up with capital allocation. The significant tailwind from the stronger dollar is reflected in our reported numbers, but as usual, my comments will be on a constant currency basis, which gives a better picture of underlying business performance. Operationally, the business continues to deliver, and I thank our teams for the remarkable job they do. In my visits to our locations over this past year, I continued to be impressed by the commitment, expertise, and passion of our people. It's their efforts that have led to these strong results with sales, earnings, and cash flow all above guidance.
As you can see, it was a record year for orders at GBP 37 billion, with strong demand driving backlog to GBP 59 billion, demonstrating the growing momentum in the business. We delivered top-line sales growth of 4.4%. While there were supply chain disruptions and inflation headwinds, the quality of program execution drove strong returns, resulting in a 5.5% EBIT growth and a 20 basis point expansion in return on sales, which reached 10.7%. Free cash flow approached GBP 2 billion, fueled in part by a very strong year-end orders and higher than expected advances from new awards. While increasing our CapEx and self-funded R&D, we also returned increased cash to our shareholders. We're making excellent progress with our buyback program, which complements the recommended 7.6% increase in our full year dividend.
The detailed year-on-year financials are shown here. For reference, the dollar rate averaged $1.24 compared to $1.38 last year. This has naturally had a tailwind effect on the reported numbers. Our strong operational performance and progress on the buyback resulted in underlying EPS of 55.5p, up 9% and above the top end of our guidance range. The underlying tax rate for the year was 19%. On pension, the IAS 19 balance sheet position is in surplus compared with a deficit last year, driven predominantly by the move in corporate bond rates. On a technical provisions basis, U.K. schemes are fully funded. I'll move now to our key group financials, starting with orders. We booked GBP 37 billion of new business, up GBP 16 billion over last year and well ahead of our expectations.
As Charles mentioned earlier, most of the order volume was driven by programs or bids already in progress before the Ukraine conflict. The anticipated impact of restocking and recapitalizing will come later as governments convert demand into firm orders, a factor which should contribute to a longer growth cycle for the industry. By sector, our ES business delivered a book-to-bill of over one with key orders secured in precision strike and electronic warfare. P&S booked orders of GBP 5.7 billion, boosted by the CV90 award from Slovakia and the multi-country awards for the BvS10. In Air, the GBP 14 billion mark includes the renewals of both the Saudi and U.K. Hawk support contracts, continued F-35 awards, the Spain Typhoon order, and significant awards in MBDA. Our maritime business booked nearly GBP 10 billion of orders, led by Type 26 Batch 2 and Dreadnought funding.
Our sovereign intelligence business posted a book-to-bill of 1.1, reflecting national security budget priorities. Sales for the year came in ahead of guidance at GBP 23.3 billion, up 4.4%, emphasizing our geographic diversity as well as the depth and strength of our product and service portfolio. Maritime led the group, up nearly 10%, with half the increase coming from submarines and the remainder primarily from the Type 26 and Hunter build programs. Sovereign intelligence maintained the first half momentum, posting a 7% increase for the full year, with strong demand for our capabilities in both the U.S. and U.K., along with the benefit of our BISim acquisition in March. Air was up 3.5%, led by the ramp-up in the Tempest program.
In ES, sales rose by nearly 2%, driven by growth in classified work, Compass Call, and continued increases in F-35 EW activity. This growth came despite the supply chain and resourcing challenges in the year. P&S was stable as expected, with an increase in combat vehicle revenues offset by timing on ship repair contracts. Profits continued to grow ahead of sales, up 5.5%, nearing GBP 2.5 billion, with the return on sales at 10.7%, up 20 basis points on last year. This reflects our continued focus on margin expansion underpinned by operational excellence. ES delivered another strong operational year at the higher end of the guidance range.
P&S margins expanded by 120 basis points to the upper end of guidance on continued operational improvement in both ship repair and in combat vehicles, where nearly 500 vehicles were delivered in the year. The Air sector delivered an excellent year of operational performance, with margins coming in at 11% as risk retirements were delivered over a number of programs. The Maritime margin of 7.7% reflected the high volume of Dreadnought sales in the second half and increased self-funded R&D related to our autonomous and multi-domain capabilities. Cyber and Intelligence margins expanded by 120 basis points to 10.5% as both I&S and DI delivered impressive program performance, high levels of utilization, and effective cost management. Operating cash flow at GBP 2.6 billion was significantly ahead of expectations.
The outstanding conversion rates in P&S and air reflect higher than expected cash advances on new awards. These accelerated collections were the biggest driver of our overall cash outperformance as a group. ES had conversions at 78%, slightly down from last year on increased investment and strategic inventory actions. Maritime's conversion was in line with expectations with the unwinding advances, while cyber and intelligence conversion was in line with expectations. The change year and year in headquarters reflects the sale of the Filton and Broughton properties, which you may recall from 2021. To complete the cash analysis, the movement in net debt is broken out here, starting with the opening balance of GBP 2.2 billion . The operating cash flow, net of interest and tax, resulted in free cash flow approaching GBP 2 billion .
Shareholder returns totaled GBP 1.6 billion , with all other movements totaling around GBP 200 million , leading to an improvement of net debt, which closed at GBP 2 billion . This strong cash delivery meant that we significantly beat our second rolling three year guide. We increased returns to shareholders, accelerated our investment in the business, and maintained a strong balance sheet, all of which gives us good strategic and financial flexibility as we look forward. Moving now to 2023 guidance. With a strong year behind us, we look forward to another year of top line growth, margin expansion, and good cash delivery against our rolling targets, all reflected in our group guidance. These figures use the same rate we averaged in 2022 of $1.24.
We expect sales for the group to increase between 3% and 5%, with gains across all sectors led by anticipated high growth in commercial activities within ES, with more modest growth in air due to the maturity of Qatar programs. We start 2023 with over 75% of sales already in the backlog. We expect EBIT to improve by 4%-6% as we see scope for continued margin expansion, as I will touch on more shortly. We expect underlying EPS to increase between 5% and 7% with the benefits of the buyback program more than offsetting a higher expected tax rate. Free cash flow in 2023 is expected to be greater than GBP 1.2 billion. As mentioned, we had several cash advances in our 2022 cash flow, which will start to unwind as we build out programs.
We will also have higher CapEx to fund growth from our record backlog, as well as a higher cash tax charge. Looking at 2022 and 2023 together, the average run rate in excess of GBP 1.5 billion per year represents strong conversion. When we started our three year cash guide in 2019, we set a target of GBP 3 billion, which we ultimately exceeded. Since then, we have routinely upgraded our three year targets, and we once again outperformed on the most recent target, which concluded in 2022. This demonstrates that the business has structurally improved to deliver increasingly higher levels of cash over these three year horizons. For our next three year cash target, we expect to deliver between GBP 4 billion-GBP 5 billion, reflecting strong cash conversion and investment in our growing business and the normal variability in advances in and out.
We have driven our margin expansion over the last few years by focusing on several key themes and actions, including matching business models commensurate with risk, converting operational excellence into risk retirement rather than risk consumption, inflation management through commercial model and strong supply chain performance, margin-accretive acquisitions and divestments of diluted businesses, and self-help initiatives to improve cost efficiency. Going forward, these themes should continue to be favorable. In addition to these key drivers, we specifically expect to see steeper recovery in higher margin commercial business in ES, a better mix effect from higher relative contribution from ES as supply chain pressures eventually abate across the medium term, further uplift from maturing programs, continued operational improvements in ship repair, and broader efficiency initiatives across the business.
All of these are expected to more than offset the headwinds from higher cost inflation and gradual rolling off of the relatively modest FAS/CAS pension relief in our U.S. business. We expect to drive further margin expansion in the coming years. I'll close with capital allocation, where we have been consistent in our messaging and actions. As you've seen, the business is delivering higher cash and is structurally set to deliver good long-term cash generation. The higher cash flow provides increasing amounts of capital to allocate to maximize value. Through higher disciplined investment in R&D and CapEx, we continue to prioritize investing in our business for growth. We recognize the importance of the dividend to our shareholders, and this year marks the 19th consecutive year that we have increased our dividend.
We will also continue to allocate capital to grow our business through value-enhancing M&A with a focus on the high-end margin-accretive technologies. The current buyback program is progressing ahead of schedule and demonstrates that when there is surplus cash available, we will continue to make additional share repurchases if appropriate and within our capital allocation framework. In summary, we've had a strong year financially and the business is building excellent momentum as we move into 2023 and beyond. With that, back to you, Charles.
Thank you, Brad. As outlined, recent performance has been good and we are well set for a successful 2023. This really is just the start though. Looking further out, we are confident in delivering for our stakeholders and are positioned for good sustained top-line growth, margin expansion underpinned by a robust business model and strong cash generation, allowing for capital allocation flexibility within a balanced framework. Brad has just covered the robust business model and cash generation and deployment. I will now focus on top-line growth. Since the interims, we have seen defense spending commitments coupled with tangible orders drive us to a record order intake. On the back of organic growth in the last four years, we now see a period of sustained top-line growth, driven by our order backlog and multi-year programs providing visibility on long-term value generators, many in their early phases.
Global defense budget increases in the face of acute threats, working through the procurement system. Highly relevant and leading defense technologies and franchises with incumbent positions, often with high barriers to entry, and a diverse geographic footprint and deep customer relationships. Here, I'm excluding any further upside from a significant opportunity pipeline and deployment of our future cash flow. This slide gives more color, and there is further detail by sector in the backup materials. At GBP 59 billion, the order backlog provides the basis of our near-term visibility. As you will remember, what we book in funded backlog is in many cases just a subset of the long-term program outlook. For example, Typhoon support, F-35, submarine and ship build program positions give us visibility of over a decade. All our sectors and major franchises are set to grow over the medium-term with good cash generation.
Since last year, a number which were previously stable are now set to deliver growth, primarily MBDA and our heavy armor and munitions operations around the world. Our Swedish combat vehicle business shows one of the strongest CAGRs over the next five years, and we plan to hold a capital markets event there in June. Observers often underestimate the extent to which BAE Systems is largely a long-term contracting and delivery business, which means that awards made now will be traded out over many years to come, often with a slow start as new programs ramp up. As you know, there is a time lag between announcement, booking an order, and then sales and margin being traded, which means that we have visibility for many years ahead. Which means we have visibility for many years ahead from awards made today.
On this chart, you can see that many of our major programs are in their early phases and will be delivered over the years to come, with corresponding financial returns and retirement of risk. We see our uniquely diverse global defense portfolio as a particular strength at this time, highlighted this year in our strong relative sales performance. Defense spending is high on many national agendas today, with long-term spending commitments and recapitalization programs underway in many areas. Our domestic presence in the U.S., U.K., Australia and the Middle East is well established, and we see good growth from our businesses in these regions. What is perhaps less appreciated is that our ability to export from the U.K., U.S., Australia and Sweden, coupled with our positions on Typhoon and F-35 and our shareholding in MBDA, mean we are uniquely well-placed to compete in multiple allied defense and security markets.
For example, here in Europe and the Asia Pacific, we've secured work in recent months in combat vehicles, electronic systems content on U.S. exports, and the Global Combat Air Programme agreement between the U.K., Japan and Italy. We see good growth coming from these regions, boosting our overall sales outlook with numerous additional near and long-term opportunities. Within BAE Systems, we have evolved, diversified, and strengthened the defense and cyber portfolio such that no one program represents more than 10% of group revenues. We have unique capabilities to design, build, and support air, land, sea, and space platforms, combined with our leading electronic warfare and defense cyber portfolios. Many of these are proving highly relevant at this time. Our product and geographic spread mean we are well-positioned to offer superior platform and technology solutions to our customers as the focus moves towards multi-domain and interoperable capabilities.
Finally, with regard to our growth potential, we have an excellent pipeline of opportunities in long-term structural growth markets to further enhance our core assumptions today. The majority of the in-year order intake was on existing program positions, but in the second half of 2022, we secured GBP 2.5 Billion of opportunities we listed in our interim presentation. The need to restock and upgrade heavy armor and munitions from the ongoing conflict is one area where our portfolio is highly relevant, and we continue to pursue opportunities across all sectors as countries around the world face up to the multifaceted threat environments. Wrapping up, 2022 was another strong year as we continue to build a reliable track record of operational and financial performance.
Strategically, we aim to generate long-term value and leverage core technology capabilities to position the portfolio for evolving customer priorities and future growth areas. We've come a long way. I still see tremendous potential ahead for the following reasons. Program performance is strong, underpinned by a robust operating model. We are investing in the business to support the future. Order backlog has significantly increased, providing the foundation for growth. We have leading technology solutions for our customers. Our geographic and capability diversity is a real strength. We have a global opportunity pipeline to further enhance growth. We have scope to drive further margin expansion. We have a strong balance sheet with good cash generation, supporting consistent value-enhancing capital allocation. I'm incredibly proud that throughout challenging circumstances in 2022, our people continued to deliver for our customers and each other.
That includes our leadership teams, managers, employees, trade unions, and partners up and down our supply chain. These results would not be possible without them. I would like to thank everyone who is either here today or listening on the line on what is a busy day for results. We will now turn it over to questions.
Please, from the front there.
Good morning. There it is. Rob Stallard from Vertical Research. A couple of questions. First of all, on the 2023 guidance, particularly the margin guidance, Brad, what have you factored in there for cost inflation on fixed price contracts and also your expectations for supply chain and sorting those hassles out? Secondly, for Charles, obviously very good order intake in 2022. I was wondering if that's gonna translate into accelerating sales growth next year and in coming years? Thank you.
Want to go with this, Charles?
Yeah. Thanks, Rob. I think first of all, we should demonstrate, point out the 2022 performance on supply chain. You know, we've had lots of inflation as everyone's had to contend with. I think the strength of our business models is really showing up in our 2022 results. About a third of our contracts are cost-plus, but the remaining are, you know, derives of fixed price work. There we have lots of back-to-back arrangements with our suppliers. We do a lot of hedging around energy prices and electricity. We have really strong relationships with our supply chain that really, I think, deepened during the COVID crisis and only got deeper as we moved forward. Those relationships have really, I think, performed well for us.
We took long-term pricing commitments in 2021 for a lot of what we procure, and that's also helped us insulate. I think really good proactive supply chain management has helped us deliver these 2022 results, and that continues into 2023. I think the balance of tailwinds and headwinds that I outlined in the slides makes us confident that we'll still have margin expansion. We will have some unabsorbed inflation in our cost structures. We can't pass on everything, and we have to absorb and become more efficient with how we deliver our business. That's all part of how we're looking at our 2023 outlook. We're confident we'll deliver margin expansion in spite of that.
Yeah. I think to your point, Rob, you know very well that it takes typically 18 months or so before those orders actually start to come through in sales. We've had to trade through on that. What that does mean is that we are expecting from 2024 and beyond to be a material step up in our, in our growth rate.
Please.
Thank you. Nick Cunningham of Agency Partners. It's sort of the flip side of that in-inflation question. The 3%- 5% sales growth that you've got projected for 2023, is any of that inflation, i.e., price driven, or is it all volume? Obviously, given that you've got a long-term contract portfolio in general, pricing is going to be sort of slow to develop. Does that mean that there's going to be a sort of bit of a bow wave of price expansion in future years as you reflect the inflation that we've been experiencing recently? I have a second, different question. The United States Congress has just passed a big budget increase, including some double-digit procurement budget increases.
The Green Book outlook for the next five years for procurement outlays is still basically flat or even down in real terms, which seems like a disconnect. Do we expect the new PBR, when it comes out in the next month or so, to be more realistic in terms of what it's looking for in future outlays? How is BAE positioned relative to where those outlays are likely to fall in your view? Thank you.
You want to take the price one, and I'll probably bring Tom in on the, since we've got Tom here from the U.S. business, on the, U.S. budgets, question.
Yeah. I think there's certainly some element of our, of our 2022 versus 2021 growth that came from our ability to pass on some inflationary costs, but I wouldn't call it material at all. I would say the same comment for 2023 versus 2022. There will be some element of that year-on-year growth that will be from escalations and from the cost plus pass alongs. You know, again, being only a third of our contracts being cost plus, what we're trying to do is de-develop efficiencies that help offset the impacts of inflation. You know, that's, again, why we talk about margin expansion. You know, if you look at some of the sector performances, you know, we still see operational improvements in platforms and services, for instance.
There you've seen in the last couple of years a really, you know, continuous increase in margins there. That's nearing 9% now, and we think there's still room to go there as we get closer to double-digit margins in platform to services. There is a small impact of overall year-on-year growth coming from inflation, but it's pretty immaterial.
As we managed it in 2022, we're confident we can do that in 2023. Tom, do you wanna pick up on the U.S. budgets?
Thank you. Good morning. Nick, great question. We're all watching with the anticipation how the FYDP and actually the FY 2024 president's budget request comes out. We'll see that probably in two or three weeks. You know, the same sentiment that drove the increase year-over-year has manifested, as you mentioned, in FY 2023. That same sentiment remains. Although it's very difficult to predict, as usual, you know, how Congress will treat that president's budget in the coming months, I think the prevailing threat environment, not just in the near term, but in the longer term remains, and that's what's gonna drive their priorities.
You know, the longer term budget that you see today was developed a year or more ago, and so I think we'll be watching to see how that FYDP updates. You know, I think the other thing to keep an eye on is the omnibus, right? The funding that was set aside for Ukraine in particular, and how some of that's gonna ripple through as backfill to the inventories of the defense department that were drawn down here to support Ukraine now. That omnibus outside of the traditional budget will be something to watch as well. Our alignment there, as well as in the traditional budget remains strong.
We've, as we've said, adjusted our priorities over the last five years to align well with the National Defense Strategy, and we're seeing that play out in the, in the alignment. Hope that's helpful.
Just to follow up, on the longer term contracts, so for example, Congress put some language into the NDAA for recovering some of the inflation effect for fixed price contracts, for example. I know that a lot of that's aimed at the smaller guys, but presumably there must be some of that for you. Do you expect some of that to come through in later years?
You're talking about the EPA adjustments, for instance, in the U.S. Yeah, Tom, you want that one?
Yeah, go ahead. If you, if you'd like, Brad. You know, it's, it's mixed. It is not uniform, as you, as you point out, some of it's about the size of the, you know, where you stack up in the supply chain. But there have been, in some segments of the services, application of these Economic Price Adjustment clauses that Brad mentioned, that allows for a bit of a true up on the basis of how inflation actually plays out. We've seen some of that, but we are also, as Brad pointed out as well, you know, focusing on cost efficiencies where we need to absorb some of the inflation that we anticipate. You see in the U.S. that it has stabilized some. It's still high, but it is moving in the right direction and we're planning accordingly.
Maybe Charlotte, next.
Thank you. Morning, Charlotte from Barclays. Just picking up on the outlook, you're guiding to 3%-5% from organic revenue. That seems a little bit low to me, although Tom was very quick to point out that's ahead of U.S. peers. I just wondered, is that something that we should be thinking about in terms of shorter cycle work? I'm just trying to understand the scale of this. I mean, I know obviously by nature it's not in your backlog at the moment, but 10% of your sales, I think, were defined as shorter cycles. I'm just trying to understand how much we might expect this year, what your planning assumptions are around that. The second one was, we've done the U.S., I'll move to the U.K.
The 2021 Integrated Review was obviously done pre-Ukraine. I mean, logically, it's probably going to have a higher gearing to army recapitalization, which I think you'd be a big beneficiary for. Are we still expecting release in mid-March? Is that realistic? Finally on cash, with the sort of two years of beats, significant beats on a three year cumulative free cash, you're over halfway through the buyback in six months on a three year duration. Might you upgrade?
Maybe we'll do this in reverse order. Brad, do you wanna do the cash or a reminder of our capital allocation waterfall?
We are making good progress on the share buyback. You know, we have a three-year, GBP 1.5 billion program. You know, we still have some ways to go to conclude that. Our guidance assumes that we finish the second tranche, and then we'll, you know, we'll update you on where we are, you know, once we finish that. Just you can see the RNS feeds, and you can get updates on how we're progressing. Our assumption is that we finish the second tranche this year. You know, just to Charlotte's point, you know, we're always looking at capital allocation following our hierarchy. You know, we want to grow the business, and those increases in self-funded R&D are really important.
We have a really rich opportunity set of investments and projects, and we're putting those where we have the highest returns, so it's in Electronic Systems and it's in air. You know, we're very disciplined in how we're doing R&D, but we see lots of opportunity there. That secures long-term growth as we convert those projects into revenue generating activities. The CapEx, you know, we will have an increase in CapEx in 2023, and that's supporting this bigger medium-term growth outlook that we're seeing now. I think touching on your first question on sales, if I may , the outlook is you can see it in our backlog.
We expect to see steady increases in our growth rates. CapEx will be needed in 2023 to support that growth, which is up-shifting across the medium term. You know, the dividend increase as well, we've talked about that, how, you know, that's grown for 19 years in a row. We've got a great balance sheet that supports M&A, where we will be disciplined players in that market. I think in the last couple of years, we've demonstrated that we can add really high-quality assets into the portfolio, and we want to continue to do that to grow ourselves inorganically. As we have demonstrated as well, if there's anything left over, we've been using that buyback as a very effective part of the toolkit. You know, we're very comfortable with operating in a mandate as we've been doing.
We're, you know, gonna be continuing to look at that as we move forward.
On the growth rates, I mean, some of that is a shorter cycle. I think, you know, part of it comes back to my earlier answer to Rob, is that those orders that we're seeing, the strong momentum in the business, you know, it does take 18 months or so before that really starts to get traded through and we start seeing that effect and a step-up in growth rates in 2024 and beyond. I mean, 2023, there is a balance of, obviously, making sure we're appropriately investing in the business, you know, hiring the people, building the pipeline of talent. There is a, you know, huge amount of momentum building within the business for the years to come.
On the topic of the Integrated Review, I mean, it was, as you say, being revised in the light of the invasion. You know, there's been a bit of stuff in the press of late as to whether it lands on time or not. I know there's a fair bit of work being done on it, and we all await with interest. It really is, I mean, it wasn't an old review, but given recent events, I think it was entirely right and proper that it's being updated. George.
Yes, George Zhao from Bernstein. First question maybe for Brad. On margins, it looks like C&I, that's the only segment expected to be down in 2023. I guess, what's unique, what's going on in there for it to be the only segment down? On ES, you know, have the earlier supply challenges around labor, you know, have that more or less normalized? How much of the 4%-6% growth this year is driven by the commercial side versus the defense side of the portfolio?
On C&I margins, you know, they've been running pretty hot on utilization in 2022. You know, it's in, you know, over the mid-90% range, and that's, you know, hotter than what we'd like. We will need to resource up to support really strong national security cyber demand that we're seeing. There will be a little bit of reduction in utilization, just, you know, it just needs to get into a more optimal place there. The other thing too is we're investing a lot in our Digital Intelligence business. You know, you've seen some of the materials that we're putting out there on Project Azalea.
This is a low Earth orbit constellation with different sensor payloads, and there's a lot of R&D that's going into that, and a lot of multi-domain network R&D that's going on as well. DEI is one of those spaces where we're really investing for what we see as high CAGR growth over the long term. There's some investment profile that's affecting the 2023 numbers a little bit. But we think that there's really good payback with those projects. Those are the two main factors on C&I. On ES, maybe, Tom, you wanna touch on that?
Sure. Yeah, of course. I think you used the word, normalize, and I think that's a good word. I think what I'd point to is the predictability of the delays associated with the supply chain. Much of what we've seen in Electronic Systems has, as we've reported, been associated with a higher end microelectronics. That sort of delay in delivery remains. However, because it's more predictable, more stable, we've been able to work around that, and I think that will continue. You know, much of the balance of the sorts of commodities we've seen, having been disrupted in the past, we've been able to work through by a number of means, adjustments in our production flows.
Brad mentioned, you know, different approach to inventories, that kind of thing. You know, it's being managed, and we don't expect any additional disruption from there.
On the top line, Tom, on the commercial side, we do see growth in both the flight controls and avionics business and also the hybrid power and propulsion business, if you wanna touch on that.
Well, those are recovering, as you can imagine, as everyone, with any sort of commercial aerospace, in their portfolio is reporting. You know, we're seeing good, our airline travel passenger uptick, the aftermarket that follows. Just for some perspective, this is, this is in our reports, our commercial business is about 10-ish% of the overall Inc. business. You know, proportionally, you know, the bulk of the growth is coming, elsewhere. However, you know, that is certainly a contributor just given the, you know, sort of from to, right, post-COVID. Is that helpful?
Next question, halfway down on my left to your right.
Thank you. Chloe Lemarie from Jefferies. I have two questions, please. The first one is on AUKUS. If you could update us on this, on the discussion and potential timeline on a decision there. The second one is on the margin evolution. You touched on the topic, saying that you still expect further margin expansion. Could you help us understand to where you might be going to and the pace of the increase in margin in the next few years? Thank you.
AUKUS, I'll be brief. Basically, there's not much I can say at a public forum like this, but as you recall, it was announced almost 18 months ago now at DSEI in 2021 with an 18 month sort of study period, with a conclusion, you know, around about first quarter of this year. Everything we hear is that we still expect an announcement within that sort of timeframe. I mean, there are activities. There's two pillars of activities, one around the submarines and then the second around the range of other activities, things like cyber and quantum computing. I would just, you know, say that given the strength of our business across all three nations, I think we are well positioned to benefit.
That's really all I can say on AUKUS, and maybe on, for you, Brad, on the margin progression.
Yeah, I think, well, in 2023, apart from, you know, the cyber intelligence business that George mentioned and we talked about, every sector we see expanding margins. I think over the long term, so, you know, across the medium term, I think the one sector that we'll see, I think the biggest margin expansion will be platforms and services. You know, again, we sort of approaching 9% in 2022. You know, you'll get past that in 2023, and we're on a journey to get to double-digit margins in P&S. That I think is the one sector that probably has the biggest runway left. We see, you know, really at high rates already in Electronic Systems. We wanna make sure we continue to invest and protect that business.
That's where you see us putting a lot of self-funded R&D into. You know, that's a, you know, we're at a high rate already. Then, you know, maritime and services, you know, I think between an 8% and 9% is sort of where you would expect them to be. Then air, I think in 2023 versus 2022, you'll see some margin expansion in air. Going forward, you know, I think that business should be running, you know, at a pretty good margin. I think the one with the biggest runway is P&S.
Question at the back on the again, my right, your left. Oh, Christophe. Sorry. I can barely see that far back. Oh, someone on the phone.
Hi, Good morning, Christophe Menard, Deutsche Bank. I had two questions, one on capital allocation and M&A. Could you comment on or update us on your priorities if they have changed, and also on valuation, if, I mean, we're talking about bolt-on technology acquisition, if the potential targets have become more affordable? Going back to the air margin, the 11%-12%, is it a combination of risk retirement and also slightly lower self-funded R&D, or just risk retirement?
I think on air, maybe you comment, Brad, but I think it's stable on this self-funded R&D and more risk retirements. Over to you on that one.
Yeah, I think it's, you know, again, operational excellence is what allows us to retire risk rather than consume it. I think it's more about risk retirement, than anything on self-funded R&D. Although, I think Tempest R&D is, you know, probably.
Stable
yeah, not gonna be a margin deterrent.
I think on M&A, we are interested still actively in the bolt-on areas that we've spoken about before, Christophe. The strategic fairways that we've identified and highlighted around sort of multi-domain, space, you know, defense electronics, the sustainability driven sort of product space around power propulsion solutions, the air taxis, the EVTOL market, I mean, they're all areas that we're actively looking. I think on valuations, I mean, we've said before that we'll be disciplined on valuations. It's probably fair to say we haven't seen much of a deterioration on valuations yet, although there still may be some as the tech sector has experienced a few challenges. We're actively looking and, well you saw last year we did Bohemia Interactive. It was a very successful acquisition we've done in space.
We've done a number of these smaller deals that have, are already proving to be, you know, I think very, wise buys, and we're very pleased with what we've done and pleased to see that kind of, those kind of deals continue.
Yeah, we're not looking at big transformational M&A. You know, we are still, you know, continuing to look at the bolt-on you know, category. This is less than 10% of market cap is kind of how I define bolt-on. We're looking at bolt-on type deals, not transformational deals.
Yeah. Martin, having reminded me we've got some questions on the line, we probably should take a question on the phone if we can.
Thank you. We will take our first question. Please stand by. The question comes from the line of Iain Douglas-Pennant from UBS. Please ask your question.
Thanks for taking my question. Sorry I can't be there in person. There's a disease going around the last few years, which I didn't want to pass on. First question is on Japan. Japan of course announced some big targets on defense spending. What scope is there for BAE to help them achieve those their rearmament plans here? Can you build on Tempest to expand elsewhere? Is there any comment you can give? Then I've got a second, another couple of questions, or going a bit detail. On MBDA, what is preventing faster growth at this point? Is it predominantly the supply chain, and if so, would additional capital help, or is there anything else you can do to expand that?
I imagine demand is very strong. Lastly, U.S. ship repair. If I've got my numbers right, it looks like it was down in the second half of the year. Of course, there's some commentary in your release as to why that is. Is your sense that demand will then normalize in 2023? Presumably you have some ability to predict where that's gonna go. Thank you.
Yeah, all good questions. on Japan, and you somewhat answered it yourself, I think that there are, further opportunities. Obviously, I mean, GCAP is, and Global Combat Program is a very, very significant, you know, first step. As Japan looks to, double its defense spending over the next, several years or potentially double its defense the next several years, I mean, there will be, I believe, further opportunities there. That's why, you know, we're keen that obviously we stand up the Global Combat Program effectively and then exploit those, you know, hopefully the opportunities that will come in other sectors and make ourselves, you know, very strong partners with MHI, and look forward to working with them, on that program and others.
On MBDA, I think it's something that we see not just in MBDA but in our munitions and others. There's a limit to what you can do in terms of, in a sense, sweating your existing footprint, you know, adding people and getting more out of your existing manufacturing base versus, you know, adding more capacity. In fact, when we have both trains in progress for both MBDA and munitions and so on. Obviously it's the second that really add to the, you know, long-term capacity, and that just takes a bit of time to, you know, build that. I was at Bolton just before Christmas with the team at MBDA, and you're looking at those investments, but those tend to play out in terms of delivering additional, you know, output in 2024, 2025 and beyond.
I think, you know, that's a little bit of what you're seeing. On ship repair, I mean, I've got two experts here, but I'm trying to think who. I mean, Tom, do you wanna tackle that one?
Yeah, no, thanks for the question. As I take the commentary points out, what this was a result of was in the wake of the conflict in Ukraine, the U.S. Navy stepped back and looked at its deployment portfolio and made a few changes that took ships that were scheduled to come in for repair in our Norfolk yard out of the pipeline. That resulted in a temporary dip. Those ships are now back in the pipeline, and we expect that to remain full throughout. A temporary sort of down step in light of the Navy's redeployment. That was it.
There is pretty decent year-on-year growth in ship repair that we expect.
Could I just follow up?
Yeah, go on. Is there another question on the line, or is this another from the same caller?
Yeah, it's Ian again. Can I just follow up on the Japan question? I mean, how soon before you start talking about this in more substantive terms, you know? We can talk about, you know, other programs that might come through. How quickly is the Japanese government moving?
Actually, they are. I mean, what you've seen has been pretty profound changes in the last couple of years in terms of their outlook for defense, and their spending priorities. I think it will take naturally some time for that to come through. Having said all of that, they moved, you know, pretty swiftly on Global Combat Program, and that, you know, opportunity, you know, evolved actually, at a pretty fast pace, over a 12 month period. Let's see. I mean, I think, we're keeping a very close watching eye on that. Another question from the lines? I know we've got a question here. I will come to you though.
We will move to our next question. The question comes from the line of Olivier Broche from Redburn. Please ask your question.
Yes. Good morning, gentlemen. I would have a few. The first one on the order intake. You had a very strong 2022, a record year, but it doesn't reflect the reaction to Ukraine. Can you give us a sense of the order intake that you've baked in for 2023 in your guidance? The second question I would have is on FCAS. You had a pretty large order announced by the U.K. MOD. What was the revenues in 2022 that you did on FCAS and BEST? What can we expect in 2025 or 2026? Same question for Hägglunds Bofors. What was it in 2022? You mentioned a very high CAGR, what could it be for in 2025, 2026?
Last bit, R&D in 2022, what was it, and what should it be in 2023 in your mind? Thank you.
I mean, the order intake going forward is, I mean, as you said, 22 was an exceptional intake. I'd like to say we could do that every year, but we can't, simply put. We are expecting book-to-bill of, you know, well in excess of one certainly for the coming few years. I think, you know, we have continued momentum there, but probably not to the extent that we saw in 2022. On FCAS, I'm not sure we break that out, Brad, and I'm not sure we would really want to break that out.
No, but I will say the activity is, you know, it doubled year-on-year 2022 versus 2021, and we expect it to double again 2023 versus 2022. The growth will start to stabilize as we get to the 2025 key milestone there. It is a source of growth in the air sector. On Hägglunds, you know, I think over the medium term in the next three years, it wouldn't be surprising to see Hägglunds triple in size in three years. It's got some of the highest CAGRs in the group.
That's from a few hundred million dollars, it should be worth saying.
R&D?
We've got a question. Oh, sorry, go on. R&D. Oh, R&D. Maybe you can handle that one.
What was the question on R&D?
The question is the growth in R&D and the step up that we've seen.
Yeah, I think, well, first of all, it has stepped up significantly, you know, 2022 versus 2021. You know, we expect it to ramp up again 2023 versus 2022. You know, it'll be double-digit increases year-over-year.
It's almost a 50% increase in the last three or four years. I think, you know, I remember sitting here, I can't remember if it was 2019 or 2018, saying we're gonna add another 100 to the 200. The two big areas that we're gonna benefit from self-funded R&D investments were Tempest, you know, alongside government funding, and that's what we've been doing. Then continued investments in our electronic systems business, which has proven to be a very rich and fertile ground for R&D investments. There's a great structure over there called FAST Labs, which Tom and the team have created, where we partner our funding alongside and usually co-funded with government funding from U.S. government labs like DARPA.
That's proven to be a very successful initiative for us, which has driven growth in our Electronic Systems business, and that will continue.
I think it's also important to just emphasize that when we do R&D investment, apart from the customer funding, the self-funded R&D really is targeted on high return opportunities. So we're very, very disciplined about how we pursue that. So I think that's been a real success in how we've converted some of these R&D dollars into top-line programs. So we invest in a very disciplined way where we get the highest returns.
Yeah. Thank you.
One more, please.
We will take our last phone question. The question comes from the line of Ben Heelan from Bank of America. Please ask your question.
Yes, morning. Thank you for squeezing me in. I just wanted to come back, Charles, to some of the comments you made about growth from 2023. You said a material step-up in growth rates potential from 2024. Is there a chance we see a period of high single-digit growth at the group level? Is that what we should be thinking about? Thank you.
Is that the only question? I mean, we're not gonna give medium-term guidance. I mean, I think the best I can say is a material increase from where we've been, you know, in the last two or three years as that record order intake and the environment that we see does start to flow through into the business.
Okay. Thank you.
Nick, there's someone behind you who has been waiting, I might add.
Much. This is Alessandro [Ferrara] from JPMorgan. I'd like to ask three questions on behalf of David Perry, please, probably all for Charles. The first one, in land vehicles, you had some very good recent wins in Central and Eastern Europe. What further opportunities do you see in this region? The second question is on ammunition. Please, can you tell us on your current sales and exactly what products you make and for who. Is this a source of upside for you? The third question is, on slide 29, you show opportunities in U.S., Europe and Asia. I'm surprised the Middle East isn't on the slide. Do you see any opportunities in the Middle East in the next few years? Thank you.
I mean, in Eastern Europe, yes, there are further opportunities. I think people often underestimate our footprint across Europe. I mean, not just Hägglunds, but the Bofors businesses out of Sweden, the CV90 wins that we've had, obviously getting Czech Republic on contract. You know, those are two very strong businesses with strong footprints and with Sweden and Finland's ascension into NATO. I mean, they themselves, from a domestic perspective, are gonna see good growth too. Our shareholding in MBDA and our position on Eurofighter actually means that the combination of our European businesses is actually really strong. We've seen that trend of increased European defense spending coming through in recent years. Obviously, given the threat environment we're operating under, we see that continue.
On ammunition, well, I mean, David knows well that we are the, one of the main ammunition suppliers into the U.K. Back to my earlier comments, you know, we've, at, based on taskings from the U.K. customer, been increasing output based on our existing footprint and also adding to that capacity. Adding to the capacity takes time. I mean, it takes, you know, roughly 18 months to add additional manufacturing footprint. We started that, middle of last year, so obviously it doesn't really come on stream until end of this year or, into next year. There are some opportunities there.
Since I have Tom here, it's probably worth highlighting within the U.S., with the two GOCOs, the government-owned, company-operated, you know, we basically run the two facilities in the U.S. that supply the bulk of the energetics that go into the U.S. munition supply. I mean, Tom, is there anything you want to say on that particularly? Yeah.
Yeah. In GOCO, government-owned, contractor-operated, we run those for the government, but these are Army facilities. These facilities span a range of propellants and explosives. We have been working with the Army over the years to modernize some of the facilities to increase capacity. We expect those investments to pay off in terms of more and better output. There are additional modernization opportunities we're working with the Army as well to find other bottlenecks that can be expanded. Good, you know, sort of the, in the raw ingredients of what makes its way into munitions, we play a significant role there as well.
Just to close on the Middle East, yes, there are still quite a lot of opportunities in the Middle East, additional Eurofighter opportunities across, you know, a range of markets where we've historically sold to and further opportunities. It certainly wasn't any omission on the slides. There are plenty of opportunities there too. Nick, I think you're.
Thank you. That my question was also kind of nostalgic for a discussion of Middle East, Typhoon orders. which has already partly been covered, obviously. specifically on Saudi, I can't remember if it was an LOI or an MOU, but it's still out there. I don't think it's lapsed, so to speak. is there any realistic possibility of that crystallizing? Also beyond that, if you look at the Saudi fleet, there's about 80 very old F-15s, which it doesn't look like Congress is going to allow the U.S. to replace. is that something for you to play for or is Rafale going to get it? Thank you.
Well, definitely. I mean, Saudi is an incredibly important customer for us, and we are, you know, working on developing a couple of quite significant opportunities there. That's probably all I'm gonna say on Saudi at this point, but it remains a very important market for us.
So.
Do you wanna wrap up, Charles?
Yeah. I wanna thank you all for coming, but I also want to, since it is the Chairman's final results presentation, I wanted to just have a round of applause for the Chairman and just add to my thanks earlier. Thank you very much, Chairman.
That's very kind. The only results I've ever been to, I've heard a round of applause. I shall take this with me and treasure it. To thank you all, too. You all put a lot of effort into following this business. You know, the team are really worth following. They've done a terrific job. We'll continue to do so. I'm very appreciative of the time I've had with this company, and I'm hugely appreciative for the support that you've all given it and the great people that actually run it. Thank you very much indeed. Thank you.
Thank you.