Thank you very much and good afternoon, good morning to everyone joining. Welcome to our major programs presentation with associated Q and A session afterwards. I'll just quickly run through the agenda before handing over to Charles. We're going to start with an introduction and welcome to Charles. Brad, our CFO will then cover the key points from the trading update and highlight our tight alignment to customer priorities in our major markets.
Then Charles and Tom will spend some time drilling down a bit further into our key programs and franchises to highlight the scale and duration and sales direction and why we feel well set to deliver good growth in the coming years. We finish up this section with some future technology case studies to show how we are investing in the for tomorrow. We'll then have a roughly ten minute break and then as you're well versed a traditional Q and A session, so you can ask questions on the online facility or email myself directly. And I will pose the questions to Charles, Brad and Tom for roughly an hour before we wrap up. And with that, I'm delighted to hand over to Charles, our Chief Executive.
Charles?
Many thanks, Martin, and welcome, everybody. Thank you for joining us today. This is not the site visit event we would have planned, but still important and good to connect through some video footage, and hopefully, can use these to bring to life some of the fantastic privileged program positions we have, the duration and scale of those programs and a feel for some of the technologies we're developing to sustain the business well into the future. To position the session, I wanted to reaffirm the points we made in February and in July around the outlook for the business. The fundamentals of the defense business remain robust.
Our strategy remains highly relevant and is working. The group has a well positioned global defense portfolio. Governments in our key markets continue to prioritize defense and security given the threat environment. And we can play a role in the economic recovery phase for the countries in which we operate. We have a large order backlog and exceptional program positions providing visibility of growth.
In addition, there remains a strong pipeline of opportunities and the acquisitions that we did earlier in the year provide excellent opportunities to accelerate our technology strategy. This is our focus for today. Operational performance continues to improve and remains a priority. This all underpins our confidence in improving long term cash generation. With the business focused on driving operational performance and cash generation, we have a strong and sustainable business model, which is well set to deliver growth.
COVID has clearly dominated the year, but the group has shown its strength and resilience, and I'm hugely proud of how we've responded. We have a short video to highlight the response the company has made to the pandemic and give a visual feel for the resilience we've built into our business.
Feel really safe coming to work because I can see the level of planning that has gone into making it safe. I feel really confident being back at our sites and contributing to work of such great importance. There's plenty of signs everywhere, plenty of places to wash hands. It's important for me. It's important for my wife who's a key worker.
Obviously, I stay safe, then she'll stay safe. And I believe that everybody's very happy with what's going on inside right now. I want to come back to work to support the business.
Well, hopefully that's given you a feel for how we've responded and maintained a strong performance in these challenging times. And we will not forget the lessons we've learned. With that, I'll hand over to Brad to cover the business and market update. Over to you, Brad.
Thanks, Charles. With six weeks left to go in this very eventful year, I'm pleased to bring you an update on how things are shaping up. On the top line, our midyear guidance holds where we said we would be increasing by low single digits in percentage terms compared with 2019. As expected, we have seen sales grow significantly in the 2020 compared with the first half. On earnings, we have improved our outlook from where we were estimating at midyear.
We are now looking at a reduction in percentage terms versus last year in the low single digits. We did have some headwinds in the form of foreign exchange where the pound has strengthened since June, but this has been more than overcome with stronger operational performance and a lower assumed tax rate. Regarding free cash flow, we should be around GBP 800,000,000 figure for the full year, in line with our midyear guidance. Demand remains strong, and we expect our orders for the year to exceed even our pre COVID assumptions. In The U.
S, we have seen demand continue to build with record backlog in our Electronic Systems business and continued growth across the broader U. S. Portfolio. The integrations of the new additions to the group are going well, and the businesses are delivering in line with expectations. Elsewhere, the recently announced order for 38 Typhoons in Germany will secure Typhoon production for years to come.
Operationally, we remain resolutely focused on execution and delivery and converting the top line ultimately to cash. The team has done a remarkable job in adjusting to the many challenges this year, and the business is in very good shape. As a reminder, the 9.4p interim dividend will be paid as scheduled on November 30. So a quick tour around the shop, starting in The U. S, which is the largest defense market in the world.
We continue to grow our business here both organically and through acquisitions. At the half year, The U. S. Accounted for 46% of group sales, and we are set up well for further growth given our tight alignment with the National Defense Strategy. Our backlog in Electronic Systems is at record levels, growing by 14% in the first half of the year versus first half twenty nineteen.
We have posted increases across the ES portfolio, including strong growth in classified activity. The acquisition should deliver double digit revenue CAGRs at high margins for years to come, helping to offset the impact of commercial aviation declines. Growing threat environment and the focus on near peer adversaries drives the stated strategic priorities of the Department of Defense. As you can see in the table, we participate in programs that map well with these directions, and these programs will remain highly relevant under a new administration. We see growth opportunities in the pursuit of autonomous vehicles, leveraging our leading positions in combat mission systems on land and our growing undersea capabilities.
Our competitive advantage in precision bolstered by the acquisitions is increasingly important in air and missile defense, particularly in the growing hypervelocity technologies. Our capabilities in space and provision electronics, radiation hardened resilience and ground systems should lead to significant growth in this critical domain. And as a leading partner with DARPA, collaborate at the cutting edge of defense technology, ensuring that we are well cited on future growth opportunities and requirements. Outside of The U. S, The U.
K. Business remains stable and strong, featuring long term contracts like the Type 26 and Dreadnought programs. We employ over 30,000 people in The U. K. With an extended value chain far beyond that.
We remain an important source of prosperity and capability for the UK government with a valuable role to play in technology and innovation. While our business in KSA remains stable, we see continued growth opportunities in Australia, where we are the leading defense contractor. The Australian government is clearly committed to increasing its capabilities as evidenced by the recent expansion of defense budgets. We are very well positioned to help deliver solutions and drive growth. Across our other international markets, we are pursuing further Typhoon sales opportunities in Qatar and other European markets, and we expect MBDA to continue on its growth track, providing further support for our outlook.
So to recap the headlines here from trading update you saw yesterday, the business continues to deliver and is largely back to normal operating pace after the Q2 impacts from COVID. Our guidance remains in line for sales and cash, and we have an improvement in earnings. As these next few weeks of 2020 wind down, we have very good visibility into what should be very strong top line growth in 2021, featuring both margin expansion and increasing cash conversion. Back to you, Charles.
Many thanks, Brad. Now this slide is one many of you have seen us present before and is the basis of our presentation today. Programs and franchises shown here represent over 60% of group revenues. None of these are sunsetting. They are either stable or in many cases growing as Tom and I will look to demonstrate.
Couple of our other most significant business areas not listed here Brad covered in the positive market alignment slides in MBDA and Australia, both themselves well set with good visibility and opportunity. Tom and I will now spend some time drilling down further into this slide to highlight the scale and duration, a view on the five year sales direction and why we feel we are well set to deliver good growth in the coming years. A good place to start is with the F-thirty five. As you all know, this is the largest defense program in the world and as a Tier one partner, we're delivering up to 15% of each aircraft and running about one year ahead of the lockage schedule. We play a major role in our home markets and full rate production for us is expected in 2021 and will then be maintained for over a decade within excess of 3,000 aircraft in the program of record and just 600 so far delivered.
Within our Electronic Systems division, electronic warfare volumes are expected to be above full rate production driven by the Block IV upgrade program. So in respect of revenues and outlook, what does that mean for us? Well, in 2019, revenue across the Air and Electronic Systems divisions was around £1,300,000,000 As we move to the full rate production, that is set to increase and will continue to grow as sustained revenues, currently at a low level, start to increase as the number of aircraft deployed increases and there will be cycles of electronic upgrades as illustrated by the recent Block IV award. One thing we often get asked is to give an estimate around what our potential future revenue is from these program incumbencies and really in some cases the backlog we can disclose reflects just a small part of the longevity of those programs. So we've given a feel for the illustrative future revenues on a number of programs and here for example there is over fifteen years of production ahead for the aircraft in the program of record.
So by simply taking last year's revenue number and multiplying that by 15 you get circa GBP 20,000,000,000 and that excludes sustainment. The other thing we wanted to highlight was where we have some opportunities on these programs and for example here on the F-thirty five, the opportunity space is in two areas. Firstly, further international orders extending the program of record and secondly, extending our sustainment remit off the back of our availability services support model, especially as more and more international jets go into service. You'll notice in the upcoming video footage the ongoing trials onboard the Queen Elizabeth carrier. Great to see.
Let's go to the video. Moving now to another of our key franchises, Typhoon Support, and pulling out some key points. We provide maintenance support and training for aircraft in service, working with our Air Force partners through an innovative and efficient availability service. We ensure operational requirements are met while driving value for money for our customers. We provide typhoon support services in The UK, The Kingdom Of Saudi Arabia, Oman, and will do in Qatar.
We are developing capabilities in an agile way and faster than ever before, providing a competitive advantage for our customers. An example of this is demonstrated by the radar upgrade contracts secured in 2020 and our technology development on Typhoon is critical for underpinning The UK combat air strategy as we move forward on Tempest and we'll talk more about that later. In respect of revenues, Typhoon is expected to be a key platform for our customers until at least 02/1940. Last year, support and upgrade was around £1,800,000,000 With upgrades ongoing, more jets still coming into service only helped by the German order just announced and with Qatar support ramping up in the coming years as the jets get delivered, we expect our revenues to continue to grow. Given the in service longevity, you can see potential future revenues are probably at least £36,000,000,000 In respect of opportunities, this comes primarily in the form of further Typhoon orders and upgrades on the platform as we move towards the next generation developments.
This evolution is highlighted on the graphic in the slide and one we talked about at the Air Investor Day last year. Before playing some footage or video on the Typhoon support, it's worth just mentioning the Typhoon build, which is around £800,000,000 per year over the five year period as the consortium delivers the Kuwaiti and then the Qatari jets. When contracted, the recent German order will extend our production horizon out further and there remains good opportunities for further orders from the partner nations and in the export market. Now let's go to that video. So briefly covering where we are in KSA, Typhoon support in The Kingdom we just covered, the rest of the support and training services business on the Tornado, Hawk and PC21 platforms has good visibility and durability as shown by the predicted out of service dates.
At about £1,500,000,000 per annum, we see the outlook here as stable with the very long standing contracts renewed every five years. Moving on to submarines. At our submarines build facility in Barrow, we have two programs at different ends of their maturity. Astute, the nuclear powered and conventionally weaponed attack submarine is a seven boat program. Four boats have been delivered and there are three left to deliver and these are at advanced stages of production.
Dreadnought is the nuclear deterrent replacement submarine and it's a four boat program as you know. Production of the first two is underway with the first boat due to enter service in the early 2030s. These build programs represent a key UK sovereign capability and the UK government has and continues to invest heavily in recent years in the site development, the skills academy and in future technologies. This investment is crucial to maintain the key skills and capabilities required for these very long term and critical programs to The UK. As you can see from the timeline, the build programs across these two is set for at least twenty years.
In revenue terms, the overall outlook at £1,400,000,000 per year is stable with a visibility of future revenues of in excess of £20,000,000,000 As you watch the video, there is footage of the fourth Astute boat being delivered during lockdown this year, which was a great achievement by all concerned. Let's play the video. Let's move on to ship build now. The Type 26 global combat ship is set to become a very significant program for the group in the coming years. As two build programs for us ramp up in The UK and Australia, and we provide engineering support and book a design license fee on the Canadian program.
Here in The UK, the Type 26 is an eight ship build program. The first two ships, HMS Glasgow, excuse me, and HMS Cardiff are under construction, and first of class is on track to be delivered to the Royal Navy in the mid 2020s. In Australia, we won the Hunter class frigate contract and the initial design and productionization phase is underway with a build on the nine ship program due to start at the 2022. In Canada, an expected 15 ship program is a different construct. Here, the Type 26 design was chosen, but the program is led by Lockheed Martin and Irving shipbuilding with the BAE element being a warship design license fee and engineering support.
On revenues, the program in 2019 was around GBP 600,000,000 being nearly all Type 26 in The UK. As the programs ramp up in the coming years, that revenue will more than double as The UK and Australian programs reach steady state production and there is a contribution in engineering support revenues from Canada. Given the duration of the programs here, the illustrative future revenue stream could be estimated to be at least £20,000,000,000 In terms of opportunity, there then remains the chance of further export build awards partnerships. Additionally, there is a significant opportunity to develop a truly global support offering with the three classes of ship having a common acoustically quiet hull and open systems architecture to support technological upgrades. Overall, about 70% commonality across these three designs and with bases in Australia, Canada and The UK, there is potential for support at reach through a collaborative international approach.
This could yield true life savings and improvements in availability against historic norms. Initial discussions are already underway as we work with our customers to explore these opportunities. Let's play the video. With that inspiring footage, I'll now hand over to Tom to cover some of The U. S.
Programs and franchises. Over to you, Tom.
Thank you, Charles. VAE Systems has more than sixty years of experience as a pioneer and world leader in full spectrum electronic warfare systems. We've produced more than 10,000 tactical systems fielded on over a 120 platform types around the world. As our adversaries grow in sophistication, we see a strong demand for our capabilities and solutions to detect and defeat the threats of today and tomorrow. We are investing in partnership with our customers to meet requirements for smaller, lighter, and more advanced solutions that provide enhanced situational awareness, and we're working to develop and deliver next generation cutting edge solutions faster at commercial time scales.
As the slide notes, we see strong growth over the coming five year period. In particular, we see opportunities for new orders and upgrades international customers. Taking a closer look at the programs in this business, you can see here some of the key capabilities we provide, full spectrum multi domain electronic warfare, precision geolocation and direction finding, and passive threat detection and situational awareness. We're also doing significant work to enhance electronic warfare capabilities with autonomous and network systems. One key advantage we offer across our solutions is our platform agnostic architectures, which enable more rapid upgrades since they are modular and easier to scale.
These rapid upgrades in combination with our expertise in mission system integration provide growth potential to our full life cycle support of these electronic warfare systems. You can see some of the key programs here. We covered our support of the f 35 earlier, but I wanna add that we continue to provide electronic warfare and countermeasure systems having recently completed lot 12 deliveries earlier this year and now delivering under lots thirteen and fourteen. EPOS, which provides advanced aircraft protection and situational awareness on the f 15, the digital electronic warfare system or DUS, which is on a range of new and legacy aircraft. LARASM is a precision guided anti ship missile sensor we provide, and I'll talk a bit more about this program later as it's one of the many success stories out of our FAST Labs innovation hub.
We also continue to support the electronic warfare system for the f 22 Raptor fighter jet. As you can tell, we are a leading provider of EW systems for fifth generation aircraft and beyond. And, of course, given the sensitive nature of electronic combat and the technologies that support it, a significant book of business is classified work. And now a short video highlighting our leadership in electronic warfare. And now on to our military GPS business.
Of course, one of the most significant strategic actions we've taken as a company this year began in January, as you will recall, when we announced two major acquisitions to join our electronic system sector. You'll recall these acquisitions were a unique opportunity coming out of the Raytheon United Technologies merger, and we successfully completed the second of these transactions to acquire the military GPS business at the July. The business case for the GPS business was a strong one, and we believe it remains strong with a positive outlook for sales growth over the coming years. Given the requirement for ubiquitous secure geo positioning in contested battlefields, we expect customer demand to continue for the US military and partners worldwide. Our team has done an amazing job welcoming and integrating over 750 new employees during a pandemic.
The integration is going very smoothly, and we just announced a $100,000,000 investment in a new facility in Cedar Rapids, Iowa to house this business, which is part of our Precision Strike and Sensing Solutions business area. The business designs and produces advanced, hardened, and secure GPS products that include anti jamming and anti spoofing technologies as well as the team's development of next generation M code or military code GPS technologies for the US military. It has an installed base of over a million and a half devices on approximately 280 platform types around the world, providing a range of ground, airborne, and weapon systems with reliable, high performance operational capabilities in harsh environments. The acquisition supports our priority growth area of precision guidance, which is aligned with The US National Defense Strategy. Let's play the video.
And next, we'll turn to ship repair. We continue to shape our market leading U. Naval ship repair business, maintaining a strong bid pipeline for repair and modernization services. We are a leading provider with incumbent positions for non nuclear ship repair, modernization, overhaul, and conversion work with major shipyards located on both the Atlantic And Pacific Coast in San Diego, Norfolk, and Jacksonville. Featured in the image on this slide, in June, we completed the first tandem dry docking for two Arleigh Burke class destroyers, the USS Steedham and USS Decatur, in our San Diego shipyard where they are now undergoing post dry docking work.
As we continue to work through some of the near term pandemic challenges, the sales outlook for this business is stable to positive over the coming five years, and the navy's demand for repair and modernization remains robust in line with the national defense strategy. And we see opportunities to further leverage our infrastructure investments in current facilities and our dry docking capability to support the navy's goal of increasing utilization levels and ship availability. Let me roll another video. Next, we'll turn to combat mission systems. Earlier this year, we completed a reorganization of our platforms and services sector that included the creation of our combat mission systems business shown here.
With a backlog of almost 1,350 vehicles, we are focused on execution while ramping up production volumes across the portfolio. We remain bullish on the long term outlook for our combat vehicle franchise programs, and this positive outlook is underpinned by our long term contracts for the m one zero nine, the AMPV, ACV, Bradley, and m 88 vehicles. We're on a path to transition AMPV and ACV from limited rate to full rate production, and the Bradley upgrade volumes have increased. Notably, we're making this progress against significant headwinds from COVID nineteen impacts on our workforce and the supply chain. We've been investing in new technologies and modernizing our facilities to implement cutting edge manufacturing techniques to meet increasing production volumes.
We also see opportunities ahead with mobile protected firepower, next generation combat vehicles, and exports. Now I know these programs are of significant interest, so let me share a bit more detail on where they stand. On M 109, we're producing vehicles under a full rate production contract we were awarded earlier this year. We're achieving our delivery targets and are working toward the army's plan of 689 vehicles. On the armored multipurpose vehicle or a m AMPV, we are working under the low rate initial production phase now with the first vehicles delivered this year in August.
When the US army announced the program in 2015, it was slated for approximately 2,900 vehicles and valued at at $10,000,000,000 over its life cycle. The amphibious combat vehicle or ACV is an increasingly important platform to the US Marine Corps. The overall program calls for approximately 700 vehicles, and at present, we're in the LRIP phase under our current contract to produce a 116 vehicles and are preparing for full rate production. Following the June award on Bradley a four upgrade program, we are under contract for 491 vehicle upgrades, and we see this program continuing with additional need for upgrades and with international opportunities. We'll roll another video.
And with that, I'll turn it back to Charles.
Many thanks, Tom. So we've just covered some of the great examples of the incredible engineering capabilities and high end discriminating technologies we have within BAE Systems. This gives us a strong base and growth outlook as outlined from the existing positions and technologies. We want to and can do more through advancing our technology positions. As you've heard from me over the last few years, we're working hard to drive forward and pace our technology strategy through investing more in self funded R and D, making acquisitions to accelerate our positions as shown by some small bolt ons and the two U.
S. Acquisitions this year and working with our customers, industry partners, SMEs and academia. Today, we want to highlight where we've talked about ramping up our self funded R and D spend in the coming years to position us not just for the here and now, but for the future. As we look to drive further growth, providing a differentiating advantage for our customers and sustaining the business model over the long run. We're going to give you a feel for this by looking at three areas leading the way for us, namely Tempest, factory of the future in the air sector, and Tom is going to cover the FAST Labs in the Electronic Systems division, as he mentioned earlier.
So on to Tempest. Launched in 2018 and in response to The UK's Combat Air Strategy, there is strong momentum on the Tempest program despite the pandemic as the team gears up to submit the outlined business case at the end of the year. The main business case will be submitted by 2025 with production expected to begin the following year and initial operating capability planned for 02/1935. More than 1,800 people are working across are already working within Team Tempest across the MOD and industry, including hundreds of apprentices, and this will increase to more than 2,005 by 2021, providing job opportunities at all levels at this critical time in the country's economic recovery. As a whole, the team Tempest partners are currently working on more than 60 technology demonstrations.
At BAE Systems, we're leading this work in a number of areas, including augmented human performance, artificial intelligence and autonomy, cyber technologies and intelligence, surveillance, target acquisition and reconnaissance, and also space and hypersonic technologies. And last month, we revealed some of the latest concepts under development. Leonardo UK is developing new radar technology capable of providing more than 10,000 times more data than existing systems. BAE Systems has begun flight testing wearable cockpit technologies, including augmented and virtual reality displays projected directly inside the visor of the helmet. And Rolls Royce has been developing combustion system technology using advanced composite materials and additive manufacturing to produce lightweight, more power dense components, which will enable the system to go further, faster or produce less carbon dioxide.
International partnering is fundamental in defining and meeting the goals set out in The UK Combat Air Strategy, both addressing affordability, but also providing strategic and capability benefits. We've made significant progress with Sweden and Italy, and we started trilateral discussions with Saab and Leonardo aimed at strengthening the nation's combat air industrial collaboration and furthering a shared vision to develop world leading future combat air capability. And on to Factory of the Future, as part of Team Tempest, we're also transforming the way we work to ensure that we can deliver this future combat air capability faster and more cost effectively than ever before. BAE Systems' Factory Of The Future facility located in the Northwest Of The UK is the result of a multimillion pound investment and collaboration with more than 40 blue chip and SME companies along with several academic institutions. Drawing on Industry four point zero Technologies, the factory is a digitally connected hub of technologies designed to increase pace and cost effectiveness of future military aircraft production.
Bringing together advanced manufacturing technologies, the factory will transform engineering processes. Automated robots, virtual and augmented reality will increase speed, precision and efficiencies as well as reduce the costs associated with the manufacture of complex military aircraft structures. The factory also demonstrates a new approach to the way humans and machines can operate together. Cobotic and flexible robotic technologies remove the need for heavy, fixed, long lead tooling and can quickly switch from the manufacturer of one item or platform to another. Intelligent machines and off the shelf robotic technology from the automotive industry have already been modified to operate at the precise tolerances required for military aircraft.
We've made significant progress and recently started the manufacture of a demonstration front fuselage section using this robotic assisted assembly for the very first time. For those of you who couldn't join us last year in Wharton for our site visit, here's some video footage on Tempest and Factory of the Future to illustrate the incredible technology advancements already underway as we work towards the next generation of air battle space. Let's play the video. So I'll now hand over to Tom to cover FastLabs in The US. Over to you, Tom.
Thank you, Charles. So FAST Labs is at the core of our technology advancement strategy, and it promotes collaboration across all of our businesses to identify, incubate, develop, and implement discriminating technology capability. Our scientists and engineers deliver breakthroughs for some of the toughest technology challenges in defense, aerospace, power and propulsion, and security focused on the five key areas of advanced electronics, autonomy, cyber, electronic warfare, and sensors and processing. As our innovation engine for VA Systems, the business has adopted commercial technology approaches to fuel its innovation velocity, including external technology scouting. We are accelerating the pace of our innovation and technology transition with a dedicated technology scouting team.
This speed is critical since our technology pipeline is a key factor in sustaining our growth trajectory. We are continuously seeking to partner and collaborate with the external innovation ecosystem to drive rapid transition of disruptive capabilities, moving from concept to integration on a customer's program of record. This includes a range of potential partners from accelerators to universities to venture capital. Today, we have nearly a dozen venture capital firms we collaborate with regularly as we look to leverage external technology into dual use military application. One such example is GenXcom, an In Q Tel portfolio company with commercial technology for simultaneous transmit and receive technology, which is an attractive technology for electronic warfare applications.
Our research areas continue to execute customer funded r and d from government labs such as DARPA, the Air Force Research Lab, the Office of Naval Research, and others. Technology transitioned via this model has and continues to deliver products with disruptive capability like LARASM with a long range anti ship missile sensor. LARASM was a DARPA development and demonstration program culminating with flight tests back in 2013 and has now become a navy program of record starting in 2014. The program focused on an air launch offensive anti surface warfare weapon to counter the growing maritime threats in anti air access area denial environment. BA systems produces the seeker and guidance system for LARASM for Lockheed Martin, and the sensor enables the missile to seek and attack specific high threat maritime targets.
As a result of the original transition, we are today positioned for several new opportunities along with the Navy's offensive missile strategy, looking to develop next generation weapons to address future threats. Back to you, Charles.
That's great. Thanks, Tom. And with that, we're gonna head to a short break before we take q and a. So I think Martin we're going to say about ten minutes. Yes.
So just after
the hour. Just after
the hour we'll regroup. So thanks for joining and we'll see you in ten minutes.
Great. Well, good afternoon again everyone and good morning to those in The U. S. Welcome back to the second part of today's session which is going be a question and answer session primarily led by myself Martin Cooper. We've got Charles, Brad and Tom who will field the questions.
We're going to allocate just about an hour to this session. We've had quite a lot of questions in advance and I can see a good few coming in online. So thank you for those. So to start with, we'll start with those that people submitted in advance and it's probably no surprise to most of you listening. One of the key questions we've had in is around the outlook for defense spending and the impact of a Biden presidency with the GOP likely Senate hold on defense spending looking forward.
So perhaps I'll hand that one straight over to you, Tom, to start with on that.
Alright. Happy to take that, Martin. Thank you very much. Certainly a lot has been written and speculated about how the transition will impact the defense budget. I think it really sort of comes down to the fundamental point that the press around the world are have not changed.
And that while while a president Biden and his administration made put their own stamp around the edges of the defense strategy, we think the national defense strategy will stay largely intact. The threats from China and Russia remain, and that is really what's driven the sort of the momentum in the areas and the priorities that the services have been paying attention to. And so I think we think the work we've done in our with our own portfolio here over the last handful of years and aligning around those priorities suits us well. So we think I mean, as we've as we've said, as has been written, I mean, we are expecting a flattening budget environment. We don't especially given what will likely be a balanced government, We'll find out in January, but the the likelihood is we'll have a Republican senate.
We think that that balance brings some stability to the overall posture of the budget. We saw Wall Street react favorably to that as well. So I think that gets hit the highlights. I mean, I think as we look at our, you know, again, at our portfolio and some of the investment in the acquisitions around precision guidance, I mean, these are the themes that come up again and again, as we talk to our new our our, US military customers. I would participate in and get out briefs around some of the war games that, that, have been going on.
And these are the technologies and the priority areas that are bubbling to the top, and we like our position.
Great. Thanks, Tom. Perhaps we had a sort of a follow on as well, which was and I guess perhaps it's linked to the f thirty five or the UAE announcement the other day. But what would you view at this time as the likelihood of a Biden administration continuing to actively support foreign military sales?
Yeah. So so the UAE announcement, I mean, there's still quite a few hoops to jump through there in order for that to, to be a done deal. But, I mean, just on the broader question of Biden support for FMS, I mean, I think I think that will continue. There may be some change in posture around the geographies support there. But I think, you know, there has been and then back into the Obama administration even when Joe Biden was the vice president.
I mean, you saw support, for foreign military sales. About half of our international business in The US goes through FMS, the other half, through direct commercial sales. And so we would expect that to continue. The areas that we target, the countries and the technologies, we would look to sell, are all, I think, in the right spot.
Great. Thanks, Tom. I know another area, Charles, that we get asked a lot around and we've had some questions in is about the position here in The UK with the integrated review ongoing and defense spending outlook in The UK. Do you want to cover that position?
Yes, I'm very happy to Martin. Many of you on the call have read that The UK has undertaken the integrated defense foreign policy and security review. That is, I mean, held up. We're not entirely sure when the actual review will get published. And then there's much debate around the associated spending settlements.
Obviously, the M and A were looking for a multiyear review, but in the light of the a multiyear settlement, but in the light of the COVID pandemic, I think there is at the moment a live debate as to whether it's a single year settlement, a roll on or it ends up being some kind of a hybrid where some of the big programs get multi year settlements and other parts of the defense portfolio get a one year settlement. The point I would always make with our U. K. Position is that we are on these big long term programs and the bulk of our UK business, I mean 90% of our UK business is associated with these big long term program positions. And on some of these big programs like Dreadnought and Type 26, you have this marching army effect, but also budgets.
If you I mean, if you make short term adjustments to budget, all that does is delay schedule and end up over time massively increasing the overall program budget. And we have a sophisticated customer who understands that. And it is for that reason that I've maintained for quite some time that our overall outlook for our UK business is basically steady as she goes. It's a stable outlook for both revenue and margins in a sense despite all that gets written about the ongoing integrated review.
Great. Thanks, Charles. That's probably a good lead into a couple of questions we've had online about margins margins looking forward. Probably one for you Brad. One we've had in is about is the potential for BAE to improve its group overall group EBITDA margin.
And we've had another one in around sort of some of the moving parts on some of the programs. So, there's things like the ramp up in the Type 26 program. Could that be an impact downwards on margins while repricing on AMPV might be enough? Stephen, perhaps comment on the overall margin outlook?
Yes. So I think we're well set for margin expansion here. I mean if you just look at the mix of where our growth is coming from, we're going to have much higher growth rates coming from our Electronic Systems business, which obviously has the highest margins in the group. So as that revenue expands relative to the other revenue streams, the margin lifts from that. We'll also get a full year of acquisition results in next year coming from the GPS and the Radios business.
So that full year effect also has a nice margin expansion effect. And then across the portfolio, certainly when you compare 2021 to 2020, of course, '20 has the COVID impacts and the under recoveries in there in particular, those won't happen next year. So we'll have a lift coming from that. And I think type '26, the point there, that's actually been an overall in maritime. I think in general, we've had nice improving margins there.
But we feel that, that will be
a
stable outlook there. And then broadly speaking, if you look at combat vehicles, consecutively over time for the next several years out, we've got a few effects happening. We've got, first of all, vehicle volumes improving and advancing, and that gives you some scale benefits. You've got learning curve benefits as well with that. And then you've got pricing events where you convert from low rates to full rate.
So I think those factors there combined for, I think, nice margin expansion in Combat Vehicles. So really, when you look across how the portfolio looks and is shaped for growth, and we do have good visibility on top line growth, there'll be a natural fall through effect on that too. And we're also focused on making sure that our management and administrative costs are kept in line so that when we do get top line growth, we get more fall through in profit. So just the growth from the portfolio looks good. I think the mix of the growth is helpful for margin expansion, and we're focused on general efficiencies.
Great. Thanks Brad. I think another one clearly margin is always meant to turn into cash. So cash is often talked about across the group perhaps too. There's one very tactical question come in around DoD accelerated payments and has that been a net gain this year for us.
But then perhaps more widely about sort of perhaps the three year or long term trajectory on cash generation, how you see it? Thank you.
Yes. I guess the first part of that, yes, we did have in the first half of the year, you saw in our results, the half year, a little bit of positive operating cash flow. And a lot of that came from some of these constructive measures that the government customers were taking. A lot of that unwinds in the second half. So I think it's sort of net neutral for the full year.
We have talked about cash guidance for this year being around GBP 800,000,000 for free cash flow. And so all that is embedded in that guidance number. In general, as we kind of look back in the last few years, when you look at our earnings after tax interest and minority interest, our cash conversion has been sort of in the mid-fifty percent range. And as we look forward, I see that as we really continue to increase our focus on conversion, I think we have a ramp to get up to the low 70s next year. And then beyond that, as the pension obligations fall away, which as you recall, we have one more pension payment to make as part of our deficit funding program, that's another ramp up in our conversion.
So I see us getting into the 80s after that. So I think we're on a real nice path of a, top line growth followed by margin expansion and increasing cash flow conversion.
Great. Thanks Brad. Tom back over to you for a couple. Firstly, we've had one in saying can you give us an update, could be a further update and we covered it a bit on the two recent acquisitions, the ATR business and the GPS business. Now we've had time to sort of get on with the integration.
Are you still excited about the growth prospects of these businesses and how they fit in with your electronic systems activities? Perhaps just expand a little bit more on our thought process there Tom.
Thank you, Martin. Yeah. I mean, I I love to talk about the the two acquisitions. I mean, we are as delighted today, if not more than about these than we were when we were successful in in our pursuit of them. So so far, we'll start with the radio business.
I mean, really a smooth integration. I mean, this this closed back in May right at the height of the pandemic. Again, a real tribute to the team's ability to to welcome a a group of employees around a 100 employees to VA Systems family with with all that drama going on around them. That said, the business is is ticking along like clockwork. In fact, in June, you may have seen that we were awarded full rate production on the ARC two thirty one a radio.
I remember we spoke about this a bit during the acquisition process, and this is the this is a tried and true rotary wing aircraft radio. The two thirty one a is the software defined version. So this is this brings all new capabilities to this sort of communication, you know, mission. Allows for more and better networking amongst the aircraft, right, and all of the all of the future of of manned, unmanned, you know, kind of scenarios will depend heavily on good, reliable, covert communications. And so that's where, where that business is is doing well.
And then the GPS I mean, how can you not get excited about that video and and the the sorts of things going on in the GPS business? Again, a really smooth transition and the integration going very, very well. The team out there is excited about we've broken we're breaking ground on their their new home, not far from their current site. Business is is proceeding well. I think I've mentioned within a day or two of the close on the business, we were shipping military GPS hardware with BA Systems logos on the shipping cartons.
And so a real tribute again to to good solid integration there. I mean, just from an outlook standpoint, you may have seen an announcement this past Friday where the team is a recipient of an award for a couple $100,000,000 plus for already the next generation, the development of the next generation of these military electronics, the the core of the electronics that will become the next generation of this MCODE, more resilient, for what we see as a threat to the future. So just really good progress, a couple of really, you know, sort of encouraging wins there, and we see that the future being very bright for those two acquisitions. Thank you, Martin.
Excellent. Thanks, Tom. I'm not going to let you off without covering INS. We've had a question about INS and its outlook in future. Clearly, ran a process five years ago now on that business.
But perhaps you could give us an update on how that business and franchise is performing. Clearly, about a $1,600,000,000 franchise we didn't cover today, but
an update on how that's, looking? Yes. Absolutely. Thank you, Martin. We so here here's the business, a services oriented business supporting, DOD and many of the agencies here in The US.
And and I I gotta say, and I think this was true, I I could say this, of the industry that when when COVID hit, there was quite a bit of fear for the services businesses as they many many of these programs actually take place in government facilities. And as the government saw the need to start, you know, depopulating their facilities to to make them more, you know, safer for the the folks who were coming in to the to the workplace, that that would be have a negative impact on on these services programs. And then, you know, our discussions with our customers there helped to drive what came out as the section thirty six ten of the CARES Act, which largely, replaced the revenue, for for those kind of programs. And so the despite that, and in fact, in many instances, on our INS programs, the the sort of skills that we provided, if if they were not able to do that sort of work remotely and much of the classified work fits that category as you can imagine, our teams were being called back relatively early in the process. And so we were able to migrate back into standard operations, although, obviously, following all of the CDC guidelines and so forth.
But sort of the net of that is that business came through COVID nineteen in in a much better shape than what was expected when when that, whole thing initiated. And and our positions continue to be strong there. I mean, good good customer demand, a good continued, pull for the kinds of skills and resources that we have in those services business. And I think that team's done a remarkable job delivering on results and as the guidance would suggest, in in the midst of all of what's going on around us. Thank you, Martin.
Excellent. Thanks, Tom. Good to Perhaps changing gears a bit. We've had a couple in online around factory of the future that we see interested stimulated some good interest. Probably one for you, Charles.
I guess, can you highlight any of the sort of numbers, targets, milestones and associated with what's going on? And we've had another sort of subsection to that around, is this only sort of for future programs or can some of this capability be used on the here and now?
Thank you, Martin. Yes. So I mean at the high level, the objective is to reduce the cost and time to develop a new air platform, be it manned, unmanned or optionally manned by 50%, which is a pretty ambitious objective. But that is exactly what the team and a lot of these technology demonstrations are out to prove as part of the both the outline business case and then leading into the main stage gate. But that is the high level objective.
And I'm very pleased to say we've made some very good progress on that. And as part of that and demonstrating some of those capabilities is actually deploying some of these in existing platforms. And we've already, for example, some of the parts that have been built or grown in the case of additive layer have been now tested and flown on some of our existing platforms. So we do see benefits to the in service fleet as well as the new platforms. But it's still pretty early days, but I've been hugely encouraged by what I've seen in the work that's been done up at Wharton on the factory of the future.
Great. Thanks, Charles. I think, Brad, not surprisingly, we know it's a popular topic. Can we perhaps just go back to cash and conversion and perhaps we've had one in here sort of what gives BA Systems management confidence that we can be less capital intensive. I guess that's burning through working capital and better cash conversion going forward.
So that step up in cash conversion, what do you see as the sort of the main levers over the next three years to get up to those sort of conversion levels you talked about?
Yes. I mentioned the big one is the pension aspect. I mean that's a couple of £250,000,000 a year that stops in 2021. So going forward after that, that's an instant increase in our conversion percentages. I think a couple of other things I would point to is our incentive structures now have cash as a major part of that.
So we have alignment across the management team on cash conversion and cash flow. So that's important too. I think we're driving the business really hard on cash conversion. Just the focus is there. And then on working capital in general, there's a lot that we can do on just managing the cash cycle a bit better with payables and receivables and inventory in a little bit more of a scientific way.
So that's all of those things. But I think just broadly speaking, we'll have better performance across the business, across the sectors as we get to see the focus pay off. The advanced profiles too are something that I think in the past has been a source of volatility. I think that's going to be stabilizing as we move forward. So I think all those factors combined give us confidence of increasing cash conversion.
Great. Thanks Brad. I think we've got a pretty constant familiar theme coming through in a lot of these questions. And I guess perhaps it could be wrapped up with Charles and Tom to comment on around sort of planning and our outlook to sort of reiterate. So today we've put a series of directional arrows on our big programs which as Charles has said is we don't see any of those big franchises sunsetting and either most are stable or growing.
I guess could you perhaps talk to you for everyone our sort of planning and thoughts outlook and have we taken into some considerations the outlook of the integrated review and U. S. Budget outlook in those directions please?
The answer is yes. We've always had to make some assumptions, but let's not forget in The U. S. We have good visibility based on the existing budget settlement that gives us visibility for the next two to three years. And as I said here in The UK, our incumbent position on a range of large programs that have already that are well in flight with significant momentum, I think gives us again confidence around the kind of guidance that we've been talking about earlier in the call and in the presentation.
Tom, anything to add A lot of questions about I guess exposure to budget lines in difference between investment accounts and various other things. Is there any more sort of color you could give on that for us, Tom?
Absolutely, Martin. I mean, I'd echo Charles' point. Secondly, I I just I would point out that with every transition of administration, we go through these very same questions. And I think what's very different at this point in time, unlike some of the previous administration changes, We're we're in a world environment where there is a clear and present danger that's based on the threats that are that we have evidence of existing in the world today. And that that, you know, creates a trajectory by which there needs to be investment in the kinds of technologies and capabilities that will defend against those sorts of threats.
And so that, you know, an administration change layered on top of that is is very, very likely to translate to a relatively intact strategy, again, with some sort of customization around the edges. And so to the extent our portfolio has, and and we have strong belief that it does, has good alignment with that sustaining strategy, we've we are very well positioned. You know, And to Charles' point, I mean, we have we have good solid backlog in in a number of these areas, not the least of which is combat vehicles. And we have 1,350 vehicles in backlog. You know, I'll make I'll make mention of the fact that I know that there was a there were questions about the the recent publishing of the the sack the marks out of the sack d.
I think, in fact, just as predicted because this came up during the third quarter earnings call. Around that time, the house appropriations committee had marked, and we saw some reduction in some of the funding lines on AMPD, which caused some concern. But as I mentioned at that time, it's exactly the sort of thing that happens in these budgeting exercises as the services look at the profiles of the need for funding and how that needs to be adjusted across their board of portfolio. These are not cuts to the quantities of vehicles. These are adjustments, because the funding was seen as early to need, meaning it wasn't needed at the time it was being programmed.
And so on a and p b, for example, we have 400 we're under contract for 457 vehicles. We've just begun that here in August, the the first of those deliveries. We can see clear through several years of those program deliveries, and the funding that is that things are moderating around will support that. And so I just wanna get that out there. And then just back circling back writ large.
I mean, we in these areas, the number of programs that you saw today, these are are well funded, well supported by our customers, and the teams are performing well, in delivering on these programs thus far. Thank you, Martin.
Thanks, Tom. Charles, perhaps switch a couple of our programs. On F-thirty five support, we obviously highlighted that as a potential growth area. Can you perhaps give one bit of an update on the latest situation there and how we think that can grow over time?
Yes. We see that really the opportunity for us growing in line with the international jets, which really start to the 600 deployed in total, the 600 jets delivered of the 3,000 jet program. But the number of international jets to date is still quite small. And in the second half I mean, through this decade, but particularly in the second half of this decade, there is a significant ramp up in those internationally deployed jets. And we do see our the model that we offer and we've perfected through typhoon support of availability pricing that, that model actually lends itself very well to the international customers.
So we are looking to make sure that we position ourselves for the future growth in that portfolio.
Martin? Thanks. Yes. Typhoon, I guess, what are the other prospects? And how long does the recent German order push that out for?
Well, on the Kuwait subcontract and then the Qatar final assembly and now with the German order, I mean, we see continued production of the current admittedly fairly low rates pretty much through the balance of this decade, which is fantastic because what we've always looked for is a warm production line to move on to Tempress production again at the sort of end of this decade. Now we have line of sight for that. And as many of you will be aware that there are a number of other opportunities. Within Europe, there is additional potentially typhoons for Germany as part of the tornado replacement program. I know there's much speculation as whether it will all be Typhoons or a split by with F-18s.
I mean we will just see, but that would be upside in quantities and production volumes. Spain are also looking at a potential order. In fact, it was priced up as part of the Quadriga, the contract that was just passed through the German parliament. There is an option for Spain to purchase 20 Typhoons, again, assembled in the Manching production line in Germany. And we'll have to see if that comes to fruition.
There is also an opportunity in Finland. There is an opportunity in Switzerland. So there's a number of the within the European, there's more opportunities. And then amongst our Middle Eastern customers again further opportunities. So I think having secured in the sense of the baseline revenue now for the next decade, I mean these there's a number of good opportunities which will be upside to that scenario.
Great. Thanks, Charles. Multiple questions coming in. A couple probably for you and one Brad and probably one for you as well Charles is, I guess around the whole pension issue, we've talked about that's a big kicker to improving cash. Is there any risk around that?
And I guess as a follow on, assuming pension funding does improve and has improved, does that bring share repurchases back onto the table?
Yes. So on the pension question, of course, we do have sensitivity. The liabilities are sensitive to AA bond yields in particular, and there has been volatility there as we talked about in the half year results. Pleased to say, as we sit here today, yields have have improved a bit, worked in our favor. So, you know, we're we're in a better place, today than where we were in June on on that score.
So there's always gonna be, you know, risk around, around that. But, we focus on the funding deficit. And the plan really is to have that deficit neutralized by 2026. That's what we agreed with the trustees. And we accelerated our funding obligations with the £1,000,000,000 payment we made this year and the remaining payment next year.
And with that, it's down to asset performance. And we have a very, very prudent return assumption, and we see the liabilities. And it looks like, you know, by 2026, we're confident that that deficit is neutralized. So, you know, we're very confident that we're in good shape there, but, you know, there's always going to be risk. So that's that that just has to be stated.
But we feel pretty good about where we're at. What was the the second part of the question?
Going to buy back. I've had another one on pensions, which is given the actual pension deficit is quickly shrinking, but the accounting number could still be large. Would we consider completely derisking the pension and trying to shift it off the balance sheet?
Yes. Mean to do that, the prudency thresholds are very different, even IS-nineteen. So I mean we're going to look at all kinds of ways in which we can derisk this very significant balance on our balance sheet. But for the time being, what our focus has to be is making sure that cash no more cash goes into that fund and that we can meet comfortably our obligations to our pensionees and our existing employees. And that is a firm commitment of ours.
And as I said earlier, I think we're very confident that we can do those things. So we'll always continue to look at ways in which we can derisk our pension. The question on share buybacks, I think that is an important will be an important part of our capital allocation options. And as we move forward and as we talked about top line growth, margin expansion and higher free cash conversion, it does mean that we're going to have expanding optionality on increasing shareholder returns. And I think share buybacks can be an important part of that.
Well, we're on capital allocation. Therefore, we've had a couple around M and A and potential disposals as well. So it's probably a broader portfolio question to both you Charles and Brad around how we see any areas we'd look for in potential future M and A and are there any areas of the portfolio we would consider disposing of?
Maybe I'll just start. I mean, done two significant acquisitions this year, I think the next sort of couple of years, we are obviously looking to delever somewhat. But having said all of that, we're still on the lookout for decent technology bolt on acquisitions. We've mentioned before areas and adjacencies around electronic systems, for example, still being an area of interest for us, Precision Guided Munitions, Space, Underwater Autonomy are all being areas that we have active programs, fertile ground for self funded R and D and also for technology bolt ons. So I mean, I think we remain interested in that.
But when I say bolt ons, these are really in many cases sort of substitutional R and D type investments. And with respect to disposals, do want to maybe just talk about philosophy there, Brad?
Yes. I think in general, I mean, think good portfolio management means you're going to be constantly looking at the composition of your businesses and then looking at where the market is growing and trying to make sure that your portfolio is positioned to capitalize on that. And I think that means a combination of divestments in some cases so that you can position yourself for acquiring companies that map to better growth rates as long as they're connected to your competitive advantage and general strategy. So I think just good portfolio management requires us to be doing that constantly and that's what we'll be doing.
Thanks, Brad. Tom, back over to you. We've a couple of questions come in around, I guess, classified work and also focuses areas of R and D probably stimulated by the Fastrab's presentation. Perhaps if you could I know it always gets very difficult, perhaps scale the level of classified work we do within our U. S.
Operations hinted any areas or contracts we might have secured in that sort of area in recent times and then perhaps broaden it to the key technologies that we're looking to invest in and focus in the coming years. Thank you.
Thank you, Martin. You're absolutely right. I mean, these can be sensitive topics. I mean, I can say and what you could probably derive from, the presentation earlier, I mean, our electronic worker business is, in the area where a lot of this classified work, is focused. However, we we do, classify work across the portfolio in areas like ISR, in our space business.
And so, you know, it it is, and we hold clearances at the highest levels in order to execute this this kind of work. And we've got technology investments through FAST Labs and through government government sponsored investment, in a number of these areas. I mean, if we think about, electronic warfare for a moment, I mean, as as the world heads more toward this kind of collaborative platform mission set where you have, as I've mentioned earlier, manned, unmanned teaming, where you've got, you know, fighter jets with with loyal wingmen in the form of autonomous vehicles, and and you're able to network across this set of, of platforms, you can you can execute electronic warfare as a group, right, with each element, sharing and benefiting from the the the situational awareness of the others, right, and or an offensive EW as well where you're able to sort of parse out the roles, associated with the jamming and etcetera. So so those kinds of technologies as we move into this more collaborative kind of multi domain operations world, are are the sorts of things we're positioning for. And we are uniquely positioned just given the franchises we have on so many different platforms to provide that kinda network capability.
And so, that, I think we've talked briefly about the small form factor. I mean, electronics are constantly shrinking. We're getting more and more capability into smaller spaces that require less power. And so we're able to bring features of what used to be, you know, only reserved for fighter jets into smaller and smaller packages. And so that those those are areas of focus.
I mean, just in terms of scale, I think you'd have heard, I I believe Brad mentioned, I mean, we saw something like 10% growth in our our classified portfolio this year. So the bulk of this is within electronic systems as you'd as you'd imagine, and they operate anywhere in the sort of 10 to 20% of the portfolio range with that actually as as mentioned on the uptick in recent years. It's a it's a really strong part of our portfolio, well positioned with the technologies there, and factoring into some of the discussions of what what are the next generation capabilities our war fighters will need. I hope that helps Martin.
Yes. Thanks Tom. I might need to come back to you in a minute as well. We I guess another area and it's back to margins and margin expansion I guess going forward. The two areas we've sort of highlighted in the past that we've probably been below benchmark has been in U.
S. Combat vehicles and in outperformance in Applied Intelligence. Perhaps Charles you could take sort of the direction on Applied Intelligence margins. And then Tom and Brad perhaps if you could tag team on our outlook and what drives the increased outlook in margins to get perhaps not up to GD's levels, but closer to that in the coming years? I'm going start with you, Charles.
Yes. Well, Applied Intelligence, so many of you will know who've been following us for a while, about two thirds of the revenue historically has come from our national security customers both here in The U. K. And abroad. And that business is actually does pretty well, I mean high single digit sort of margins.
But we are many of the contracts in which we operate with the largest providers. So we're not able to actually grow market share much beyond our current position. So the growth in that business is in a sense limited by government or increases in government spending in the space. But the government has been investing and continues to increase their investments in that space. So that's been doing well for us.
The area with Applied Intelligence that has historically been challenging for us is where in the commercial space do you find customers that are prepared to pay a premium for a defense grade product? And whilst it's a hot market, you're up against a lot of competitors who really are just going for top line growth, don't care about making a profitable return. And that's quite hard to compete against. And so we've I think and you've seen some of our struggles in that space of figuring out which customers will pay for this defense grade product. I think we have now identified areas in financial services, I mean the big banks, financial crime, anti money laundering, those are customers where both through regulatory reforms and the cost of getting it wrong have been prepared to pay for that.
You will have seen in the news the our disposal of Silver Sky, I mean, simply found that we're parts of that commercial portfolio, which had been a drag on the business because it was very hard to run those profitably. And so those are some of the changes that we've made. But our priority for that business remains in the National Security space. And there, it's a good solid business with a good outlook and very much earns its place in the portfolio. I mean, I kind of regard that from our perspective, Air Sea, Land, Cyber, if you're going to be a full spectrum prime, this is an area that you do need to be good at partly to protect your own capabilities, but also to make sure that you're offering our government customers a full package of capabilities.
Thanks Charles. Brad, do you want to cover land margins please?
Yes. So I did mention earlier on the combat vehicles. There's a few things that will drive margins forward from here. And I think the first point really is the fact that we have new relatively immature programs that as they mature down the learning curve, you get a lot of benefits from that. Support touch ratios start working in your favor.
You just generally are better and more efficient at building these volumes out as these programs mature. This year, we have relatively young programs in ACV and AMPV. Just across the Combat Vehicles portfolio and just in volumes, we're going to go from something in the 300 ish this year to the 400 ish next year to the 500 ish year after. Those just kind of general ranges of volumes just kind of speaks to how things are ramping up. And so you get scale efficiencies as those volumes improve.
So that's one. I think the other main thing is when you convert from low rate initial production to full rate, you get a pricing event. So I think that's another. And I think broadly speaking, we're getting better at running these programs and more efficient. So I think all that really combines for, I think, what we feel is good visibility on margin expansion.
And Tom, I'm sure we'll want to build on that.
Tom? Yeah. Brent, I you you have that right. I think I I would just add the color around, you know, what a what a massive improvement we have seen in the performance of that business, just over the last couple of years. I mean, there was a it was a period where, you know, the word quality would come up again and again.
I mean, we are well past that. I mean, PIM, the m one zero nine program, delivering like clockwork despite the pandemic. And we've seen this that in the programs as they get more mature, and particularly their supply chains are more mature and we're able to build up buffer stock, have some inventory, that that has helped programs through this COVID nineteen, phenomenon. Programs that were in the in, you know, in the start up of transition, you know, tended to be a little bit more vulnerable to that, and and we've worked around those. That said, I mean, I if I could just transport everyone to the to the floor in in Anniston or Elgin, Oklahoma or particularly up in York, I mean, you would see dozens of holes moving through these production lines with modern robotic welding.
I mean, just fascinating technology that is getting better and better every day. And so as Brad pointed out, I mean, we will be in the 400 plus, 500 plus vehicles per year, here in these next few years, and it will have the benefit of all of that kind of learning and the and the work that was done in the early going to get quality nailed, to get these more modern manufacturing facilities put together up and running and just moving vehicles through. Our customers are delighted with the quality of these vehicles. You know, there's no doubt that COVID has, for some of the programs that were less mature, has sort of changed the trajectory of that ramp just slightly. But if you're just moving forward, there is lots of opportunity for margin expansion there.
You know, not to mention, ultimately, international sales of some of these vehicles as well, where when you're in a DCS kind of environment, you're able maintain the kind of margins you see in some of our peers. We have very, you know, very mature, long legacy older vehicles that, have been in production for a very long time in an international sales environment that drive higher margins. We'll get there too. So stay tuned.
Thanks, Tom. Charles, first one back to you. In fact, one about how you're applying the Farsilabs model to The UK, Australia, other markets. Is that something that we're looking at?
We certainly are. And in fact, I mean, it's a great model and it's not trivial to export it. I mean, the U. K. Government, as many of you will be aware, is interested very interested in this sort the ARPA approach and looking to do something similar.
And given our sort of privileged position in The U. S. And access to DARPA programs, we've certainly been very happy to share our learnings from that. But I think importantly, and I'll maybe just hand over to Tom to say a little bit on this. What we've been trying to do is make sure that we are collaborating more effectively across the group.
And whilst given the sort of national nature and classified nature of many of our programs, it's not trivial. I think we found and increasingly over the last couple of years found a number of really good opportunities where can actually collaborate and develop things across group using that sort of Five Eyes footprint with UK, Australia and The U. S. And there's been a number of good opportunities. I think one in particular maybe I'm thinking about the program that we just won with Air Labs and with the air sector and the S.
Tom, if you might want to just expand on that particular win that we had.
Yes. Happy to, Charles. And so I mean, just echo all of what you said. As you mentioned, I mean, we have to be very careful with the all the the series of rules around technology transfer and ITAR. Over over the years, we've gotten very good at that.
We understand the rules. We work very closely with our customers in in all of our nations to make sure that this is the the sorts of things that they they'd like to protect and the sorts of things that they're willing to share are clear, well understood, and and we're aligned around those. So say that first. Charles mentioned a program called Skyborg. If you Google that, you'll find that that is a is a very exciting program, again, along the lines of this kinda unmanned manned unmanned teaming of aircraft, next generation aircraft, autonomous, combined with manned aircraft to to bring a real punch to some of these missions, right, and and and open up whole new avenues of capability in these mission sets.
And so just with the wealth of decades and decades and decades of experience at military air in The UK, They've actually joined the team and are part of this DARPA program in The US and won one of the one of the awards there. So very exciting for the company, a demonstration of how in in a in a collaborative way, we can bring the power of legacy global legacy to bear on some of these future programs. Very, very exciting.
Great. That's excellent, Tom. And obviously, we look for many more of those opportunities too.
Thanks. One area, again, we highlighted in the presentation that's come up again and actually definitive growing areas is Australia and our Australian market. Charles, do you want to comment on the Australian defense outlook and our position within that please?
Well, I think Australia is in a sense running a defense company, would say this, but Australia is in my view taking a very forward leaning approach to, but also because of a prosperity agenda and recovery from COVID and the impacts on the economy. So as many of you will be aware, Australia increased their sort of ten year defense budget by around about 40%. So they stepped up from GBP 170,000,000,000 to added about £100,000,000,000 to that. And as I said, that was the two reasons, one for security, but also because of the prosperity agenda. And from our perspective, we're the biggest defense player in Australia.
We were already looking at doubling and if it was in train, we're doubling our Australian business based on the Hunter class win down there. And this additional now budget increase in areas such as hypersonics, These are other areas that we are obviously seeking to gain strong positions in. So we have a business in Australia that will double over the next few years on the back of Hunter. And my personal view is there is now additional upside even from that based on this significant step up in defense spending.
Thanks, Charles. I think we're coming towards the end of the questions and we're coming up towards the end of the hour. It's clearly been a constant theme of today. Two areas, one is around obviously project out progression. We have had one in asking for our outlook in the next five years on earnings sales and cash.
Clearly, we're not going to give our business plan out on today, but hopefully we've demonstrated that we feel that we're confident in the outlook for growth and the levers that will pull and we plan prudently. Brad perhaps just turning back to you to finish off before we hand over to Charles. But again the other constant theme is around cash and confidence in this group in generating cash going forward. We've talked about the pension, but what sort of other two or three factors give you Charles, Tom, management team confidence that we can actually move this cash conversion level up in the coming years as we expect.
Yes. I mean just kind of recapping what I've been saying. I think the business is really well positioned for the top line growth. That's the first thing. So we're growing.
And I think we're expanding margins based on where that growth is coming from and also based on how we're
trying
to manage for efficiency across the business. And as we get that growth and that margin expansion, we are seeing higher cash conversion coming. That's coming from several factors. The pension payment obligations going away is very significant to that cash flow conversion growth. That coupled with better focus, better alignment around cash conversion across the management team and also some more science applied to how we manage working capital and then just the profile of advances as they unwind.
I think all those factors give us very good confidence that we will be seeing meaningful improvements in free cash generation. And that gives us great optionality. It gives us optionality to return more to our shareholders. So I think we're well positioned.
Thank you, Brad. So I'll probably just wrap up here with a summary slide. And hopefully today, we've managed to convey why we feel so positive about the outlook for the business and probably more so even in February. We've built in resilience and returned the defense business to a near operational tempo, integrated our two U. S.
Acquisitions smoothly, relationships with and support from our customers remain strong. As we've demonstrated, we're investing in technology aligned to our customer priorities. And our large order backlog, incumbent program positions and evolving pipeline of opportunities are expected to lead to strong and profitable top line growth with increasing cash conversion in the coming years, as Brad just explained. So thank you all for attending, and I look forward to speaking to you again and hopefully seeing many of you face to face in the not too distant future. Thank you very much.