Thank you very much, good afternoon, good morning to everyone joining. Welcome to our Major Programs presentation with associated Q&A session afterwards. I'll just quickly run through the agenda before handing over to Charles. Brad, our CFO, will cover the key points from the trading update and highlight our tight alignment to customer priorities in our major markets. 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 10-minute break, and then, as you are well versed, a traditional Q&A session. As said, 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. 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, we 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.
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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 mid-year 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 second half of 2020 compared with the first half. On earnings, we have improved our outlook from where we were estimating at mid-year. We're 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 GBP 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 million figure for the full year, in line with our mid-year guidance. Demand remains strong. 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 teams have done a remarkable job in adjusting to the many challenges this year, and the business is in very good shape.
As a reminder, the GBP 0.094 interim dividend will be paid as scheduled on November 30th. 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 2019. 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 of electronics, radiation hard and resilience, and ground systems should lead to significant growth in this critical domain. As a leading partner with DARPA, we collaborate at the cutting edge of defense technology, ensuring that we are well-sited 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 U.K. government, with a valuable role to play in technology and innovation. While our business in K.S.A. 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 their recent expansion of defense budgets. We're 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.
To recap the headlines here from the 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 increase in 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. A 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-35.
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 Lockheed's schedule. We play a major role in our home markets, full rate production for us is expected in 2021 and will then be maintained for over a decade. With an 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 4 upgrade program. In respect of revenues and outlook, what does that mean for us? In 2019, revenue across the air and Electronic Systems divisions was around GBP 1.3 billion.
As we move to the full rate production, that is set to increase and will continue to grow as sustainment 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 4 award. One thing we often get asked is to give an estimate around what our potential future revenue is from these program incumbencies. Really, in some cases, the backlog we can disclose reflects just a small part of the longevity of those programs. We've given a feel for the illustrative future revenues on a number of programs. Here, for example, there is over 15 years of production ahead for the aircraft in the program of record.
By simply taking last year's revenue number and multiplying that by 15, you get circa GBP 20 billion, 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-35. 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 on board the HMS Queen Elizabeth. 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 U.K., 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 contract secured in 2020, and our technology development on Typhoon is critical for underpinning the U.K. 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 2040. Last year, support and upgrade was around GBP 1.8 billion.
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 GBP 36 billion. 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 is worth just mentioning the Typhoon build, which is around GBP 800 million 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. There remains good opportunities for further orders from the partner nations and in the export market. Let's go to that video. Briefly covering where we are in K.S.A. Typhoon support in the Kingdom, we just covered. The rest of the support and training services business on the Tornado, Hawk, and PC-21 platforms has good visibility and durability, as shown by the predicted out-of-service dates. At about GBP 1.5 billion 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 U.K. sovereign capability, and the U.K. 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 U.K. As you can see from the timeline, the build programs across these two is set for at least 20 years.
In revenue terms, the overall outlook at GBP 1.4 billion per year is stable, with a visibility of future revenues of in excess of GBP 20 billion. As you watch the video, there is footage of the fourth Astute 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 frigate 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 U.K. and Australia, and we provide engineering support and book a design license fee on the Canadian program. Here in the U.K., the Type 26 is an eight-ship build program.
The first two ships, HMS Glasgow 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 end of 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 million, being nearly all Type 26 in the U.K.
As the programs ramp up in the coming years, that revenue will more than double as the U.K. 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 GBP 20 billion. In terms of opportunity, there remains the chance of further export build awards or 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 U.K., there is potential for support at reach through a collaborative international approach. This could yield through 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. BAE Systems has more than 60 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 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.
We're working to develop and deliver next-generation, cutting-edge solutions faster, at commercial timescales. As the slide notes, we see strong growth over the coming five-year period. In particular, we see opportunities for new orders and upgrades from 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 through our full lifecycle support of these electronic warfare systems. You can see some of the key programs here. We covered our support of the F-35 earlier, I want to 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 13 and 14. EPAWSS, which provides advanced aircraft protection and situational awareness on the F-15.
The Digital Electronic Warfare System, or DEWS, which is on a range of new and legacy aircraft. LRASM 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. Of course, given the sensitive nature of electronic combat and the technologies that support it, a significant book of business is classified work. Now a short video highlighting our leadership in electronic warfare. 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'll recall, when we announced two major acquisitions to join our Electronic Systems 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 end of 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 geopositioning in contested battlefields, we expect customer demand to continue for the U.S. 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. We just announced a $100 million investment in a new facility in Cedar Rapids, Iowa, to house this business, which is part of our Precision Strike & 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 U.S. military. It has an installed base of over 1.5 million 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 U.S. National Defense Strategy. Let's play the video. Next, we'll turn to ship repair.
We continue to shape our market-leading U.S. 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 Coasts 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 Stethem 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.
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. We'll roll another video. We'll turn to Combat Mission Systems. Earlier this year, we completed a reorganization of our Platforms & 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 M109, the AMPV, ACV, Bradley, and M88 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-19 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 M109, 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 Multi-Purpose Vehicle, or AMPV, we are working under the low-rate initial production phase now, with the first vehicles delivered this year in August.
When the U.S. Army announced the program in 2015, it was slated for approximately 2,900 vehicles and valued at $10 billion over its life cycle. The Amphibious Combat Vehicle, or ACV, is an increasingly important platform to the U.S. 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 116 vehicles and are preparing for full-rate production. Following the June award on Bradley A4 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. With that, I'll turn it back to Charles.
Many thanks, Tom. 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, at pace, our technology strategy through investing more in self-funded R&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&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. On to Tempest. Launched in 2018 and in response to the U.K.'s Combat Air strategy, there is strong momentum on the Tempest program despite the pandemic, as the team gears up to submit the outline 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 2035.
More than 1,800 people are already working within Team Tempest across the MOD and industry, including hundreds of apprentices, and this will increase to more than 2,500 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. 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 x 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.
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 U.K. 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. Onto 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 U.K., 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 4.0 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 manufacture 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 Warton 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 battlespace. Let's play the video. I'll now hand over to Tom to cover FAST Labs in the U.S. Over to you, Tom.
Thank you, Charles. 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 capabilities. 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 BAE 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 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 applications.
One such example is GenXComm, 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&D from government labs such as DARPA, the Air Force Research Lab, the Office of Naval Research, and others. Technology transition via this model has and continues to deliver products with disruptive capability, like LRASM, or the Long Range Anti-Ship Missile sensor.
LRASM 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-launched offensive anti-surface warfare weapon to counter the growing maritime threats in anti- access, area-denial environments. BAE Systems produces the seeker and guidance system for LRASM 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 aligned 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. With that, we're going to head to a short break, before we take Q&A. I think, Martin, we're going to say about 10 minutes?
Yes, just after the hour.
Just after the hour, we'll regroup.
Yep.
Thanks for joining, and we'll see you in 10 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 to be a question and answer session, primarily led by myself, Martin Cooper. We've got Charles, Brad, and Tom, who will all 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. 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.
Perhaps I'll hand that one straight over to you, Tom, to start with on that.
All right. 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 comes down to the fundamental point that the threats around the world have not changed, and that while a President Biden and his administration may 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 momentum in the areas and the priorities that the services have been paying attention to. We think the work we've done with our own portfolio here over the last handful of years in aligning around those priorities, suits us well. As we've said, as has been written, we are expecting a flattening budget environment.
Especially given what will likely be a balanced government. 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. I think that gets at the highlights. I think as we look, again, at our portfolios and some of the investment and the acquisitions around precision guidance, these are the themes that come up again and again as we talk to our U.S. military customers, participate in and get out briefs around some of the war games that have been going on. 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 follow-on as well, and I guess perhaps it's linked to the F-35 or the U.A.E. announcement the other day. What would you view at this time as the likelihood of a Biden administration continuing to actively support foreign military sales?
The U.A.E. announcement, there are still quite a few hoops to jump through there in order for that to be a done deal. Just on the broader question of Biden's support for FMS, I think that will continue. There may be some change in posture around the geographies support there. I think, there has been, and back into the Obama administration, even when Joe Biden was the vice president, you saw support for foreign military sales. About half of our international business in the U.S. goes through FMS, the other half through direct commercial sales. 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 U.K., with the integrated review ongoing and defense spending outlook in the U.K. Do you want to cover that position?
Yeah, I'm very happy to, Martin. Many of you on the call have read that the U.K. has undertaken the Integrated Defense, Foreign Policy, and Security Review. That is currently held up. We're not entirely sure when the actual review will get published. There's much debate around the associated spending settlement. Obviously, the MOD were looking for a multi-year 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 U.K. business, 90% of our U.K. business is associated with these big long-term program positions. On some of these big programs like Dreadnought and Type 26, have this marching army effect. Also, budgets, 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. 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 U.K. 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 on the line about margins, and margins looking forward. Probably one for you, Brad. One we've had in is the potential for BAE to improve its overall group EBITA margin, and we've had another one in around some of the moving parts on some of the programs. 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? Just want perhaps comment on the overall margin outlook.
Yeah. I think we're well set for margin expansion here. 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, it has the highest margins in the group. 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. That full year effect also has a nice margin expansion effect. Then across the portfolio, certainly when you compare 2021 to 2020, of course, 2020 had the COVID impacts and the underrecoveries in there in particular. Those won't happen next year, so we'll have a lift coming from that.
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. We feel that that will be a stable outlook there. 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. You've got pricing events where you convert from low rate to full rate. I think those factors there combine for, I think, nice margin expansion in combat vehicles.
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. 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 and profit. 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. Has that been a net gain this year for us? Perhaps more widely about sort of perhaps the three-year or long-term trajectory on cash generation, how you see it. Thank you.
Yeah. I guess the first part of that, yeah, we did have in the first half of the year, you saw in our results at the half year, a little bit of a positive operating cash flow. 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. 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 million for free cash flow, 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-50% range.
As we look forward, I see that, and 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. 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. I see us getting into the 80s after that. 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. We've had one in saying, can you give us an update, probably a further update, and we covered it a bit on the two recent acquisitions, the ATR business and the GPS business. 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. I love to talk about the two acquisitions. We are as delighted today, if not more about these than we were when we were successful in our pursuit of them. We'll start with the radio business. Really, a smooth integration. This closed back in May, right at the height of the pandemic. Again, a real tribute to the team's ability to welcome a group of employees, around 100 employees, to the BAE Systems family with all that drama going on around them.
That said, the business is ticking along like clockwork. In fact, in June, you may have seen that we were awarded full rate production on the ARC-231A radio. I remember we spoke about this a bit during the acquisition process. This is a tried and true rotary wing aircraft radio. The 231A is the software-defined version.
This brings all new capabilities to this sort of communication mission. Allows for more and better networking amongst aircraft. All of the future of manned, unmanned kind of scenarios will depend heavily on good, reliable, covert communications. That's where that business is doing well. The GPS, how can you not get excited about that video and 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're breaking ground on their new home, not far from their current site. Business 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 BAE Systems logos on the shipping cartons. A real tribute again to good, solid integration there.
Just from an outlook standpoint, you may have seen an announcement this past Friday where the team is a recipient of an award for $200+ million for already the next generation, the development of the next generation of these military electronics, the core of the electronics that will become the next generation of this M-code. More resilient for what we see as the threats of the future. Just really good progress. A couple of really sort of encouraging wins there. We see 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 I&S. We've had a question in about I&S and its outlook and future. Clearly, we ran a process five years ago now on that business. Perhaps you could give us an update on how that business and franchise is performing. Clearly about a GBP 1.6 billion franchise we didn't cover today. Could you give us an update on how that's looking?
Absolutely. Thank you, Martin. Here's a business, a services-oriented business supporting DoD and many of the agencies here in the U.S. I've got to say, and I think this is true, I could say this of the industry, that when COVID hit, there was quite a bit of fear for the services businesses as many of these programs actually take place in government facilities. As the government saw the need to start depopulating their facilities to make them more safer for the folks who were coming into the workplace, that that would have a negative impact on these services programs. Our discussions with our customers there helped to drive what came out as the Section 3610 of the CARES Act, which largely replaced the revenue for those kind of programs.
Despite that, and in fact, in many instances on our I&S programs, the sort of skills that we provided, 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. We were able to migrate back into standard operations, although obviously following all of the CDC guidelines and so forth. Sort of the net of that is, that business came through COVID-19 in a much better shape than what was expected when that whole thing initiated. Our positions continue to be strong there. Good customer demand, a good continued pull for the kinds of skills and resources that we have in those services business.
I think that team's done a remarkable job delivering on results and as the guidance would suggest, in the midst of all of what's going on around us. Thank you, Martin.
Excellent. Thanks, Tom. Good to hear. Perhaps changing gears a bit. We've had a couple in online around Factory of the Future that obviously stimulated some good interest. Probably one for you, Charles. I guess, can you highlight any of the sort of numbers, targets, milestones associated with what's going on? 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. 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. That is exactly what the team and a lot of these technology demonstrations are out to prove as part of both the outline business case and then leading into the main stage gate.
That is the high-level objective, and I'm very pleased to say we've made some very good progress on that. As part of that and demonstrating some of those capabilities is actually deploying some of these in existing platforms. 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.
We do see benefits to the in-service fleet as well as the new platforms. It's still pretty early days, but I've been hugely encouraged by what I've seen in the work that's being done up at Warton 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 BAE Systems management confidence that we can be less capital intensive? I guess that's burning through working capital and better cash conversion going forward. 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?
Yeah, I mentioned the big one is the pension aspect. That's GBP 250 million a year that stops in 2021. Going forward after 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. We have alignment across the management team on cash conversion and cash flow. That's important too. I think we're driving the business really hard on cash conversion. Just the focus is there. 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. That's all of those things.
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. 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. I guess perhaps it could be wrapped up with Charles and Tom to comment on our planning and our outlook to reiterate. Today we've put a series of directional arrows on our big programs, which as Charles has said, we don't see any of those big franchises sunsetting and are either mostly stable or growing. I guess could you perhaps talk through 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?
My answer is yes. We've obviously 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. As I said, here in the U.K., our incumbent position on a range of large programs that are well in flight with significant momentum, I think gives us, again, a confidence around the kind of guidance that we've been talking about earlier in the call in the presentation.
Tom, anything to add from the U.S.? There's 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, please, Tom?
Happy to, Martin. First I'd echo Charles's point. I would point out that with every transition of administration, we go through these very same questions. I think what's very different at this point in time, unlike some of the previous administration changes, we're in a world environment where there is a clear and present danger based on the threats that we have evidence of existing in the world today. That 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. An administration change layered on top of that is very likely to translate to a relatively intact strategy, again, with some sort of customization around the edges.
To the extent our portfolio has, and we have strong belief that it does, has good alignment with that sustaining strategy, we are very well positioned. To Charles's point, we have good solid backlog in a number of these areas, not the least of which is combat vehicles. We have 1,350 vehicles from backlog. I'll make mention of the fact, I know that there were questions about the recent publishing of the marks out of the SAC-D. I think, in fact, just as predicted, because this came up during the third quarter earnings call. Around that time, the House Committee on Appropriations had marked, and we saw some reduction in some of the funding lines on AMPV, which caused some concern.
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 broader 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. On AMPV, for example, we're under contract for 457 vehicles. We've just begun that here in August, the first of those deliveries. We can see clear through several years of those program deliveries and the funding that things are moderating around will support that. I just want to get that out there.
Just circling back writ large, in these areas, the number of programs that you saw today, these 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 air programs. On F-35 support, we obviously highlighted that as a potential growth area. Could you perhaps give everyone a bit of an update on the latest situation there and how we think that can grow over time?
Yeah. We see that really, the opportunity for us growing in line with the international jets, the 600 jets delivered of the 3,000 jet program, but the number of international jets to date is still quite small. In the second half, through this decade, but particularly in the second half of this decade, there is a significant ramp-up in those internationally deployed jets. We do see 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. We are looking to make sure that we position ourselves for the future growth in that portfolio. Martin?
Thanks. Yeah. Typhoon, I guess, what are the other prospects and how long does the recent German order push that out for?
Well, based on the Kuwait subcontract and then the Qatar final assembly, and now with the German order, we see continuity of production at 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 onto Tempest production again at the end of this decade. Now we have line of sight for that.
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 all Typhoons or a split buy with F/A-18s. We will just see, 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. We'll have to see if that comes to fruition. There is also an opportunity in Finland. There is an opportunity in Switzerland.
There's a number of, within the sort of European, there's more opportunities. Then amongst our Middle Eastern customers, again, further opportunities. I think, having secured, in a sense, the baseline revenue now for the next decade, there's a number of, I would say, good opportunities which will be upside to that scenario.
Great. Thanks, Charles. I've got multiple questions coming in. A couple probably for you and one Brad, and probably one for you as well, Charles. 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? I guess as a follow-on, assuming pension funding does improve and has improved, does that bring share repurchases back onto the table?
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 improved a bit, worked in our favor. We're in a better place today than where we were in June on that score. There's always going to be risk around that. 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. We accelerated our funding obligations with the GBP 1 billion payment we made this year and the remaining payment next year. With that, it's down to asset performance. We have a very, very prudent return assumption.
We see the liabilities, and it looks like by 2026, we're confident that that deficit is neutralized. We're very confident that we're in good shape there. There's always going to be risk. That just has to be stated. We feel pretty good about where we're at. What was the second part of the question?
Before I go to buyback, 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 de-risking the pension and trying to shift it off the balance sheet?
Yeah. To do that, the prudency thresholds are very different to even IAS 19. We're going to look at all kinds of ways in which we can de-risk this very significant balance on our balance sheet. For the time being, what our focus has to be is making sure that no more cash goes into that fund, and that we can meet comfortably our obligations to our pensioners and our existing employees. That is a firm commitment of ours. As I said earlier, I think we're very confident that we can do those things. We'll always continue to look at ways in which we can de-risk our pension. The question on share buybacks, I think that will be an important part of our capital allocation options.
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. I think share buybacks can be an important part of that.
While we're on capital allocation, therefore, we've had a couple around M&A and potential disposals as well. 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&A, and are there any areas of the portfolio we would consider disposing of?
Maybe I'll just start. Having done two significant acquisitions this year, I think the next couple of years, we are obviously looking to de-lever somewhat. 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&D, and also for technology bolt-ons. I think we remain interested in that. When I say bolt-ons, these are really, in many cases, substitutional R&D type investments. With respect to disposals, you want to maybe just talk about philosophy there, Brad?
Yeah, I think in general, I 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. 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. 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. There are a couple of questions coming around, I guess, classified work and also focuses areas of R&D, probably stimulated by the FAST Labs presentation. Perhaps if you could, I know it always gets very difficult, but perhaps scale the level of classified work we do within our U.S. operations, hint at 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.
Well, thank you, Martin. You're absolutely right. These can be sensitive topics. What I can say, and what you could probably derive from the presentation earlier, our electronic warfare business is in the area where a lot of this classified work is focused. However, we do classified work across the portfolio in areas like ISR, in our space business. It is. We hold clearances at the highest levels in order to execute this kind of work. We've got technology investments through FAST Labs and through government-sponsored investment in a number of these areas. If we think about electronic warfare for a moment, as the world heads more toward this kind of collaborative platform mission set where you have, as I mentioned earlier, manned, unmanned teaming, where you've got fighter jets with loyal wingmen in the form of autonomous vehicles.
You're able to network across this set of platforms. You can execute electronic warfare as a group with each element sharing and benefiting from the situational awareness of the others, right? On offensive EW as well, where you're able to sort of parse out the roles associated with jamming and et cetera. Those kinds of technologies, as we move into this more collaborative kind of multi-domain operations world, are the sorts of things we're positioning for. We are uniquely positioned, just given the franchises we have on so many different platforms, to provide that kind of networked capability. That, I think we talked briefly about the small form factor. Electronics are constantly shrinking. We're getting more and more capability into smaller spaces that require less power.
We're able to bring features of what used to be only reserved for fighter jets into smaller and smaller packages. Those are areas of focus. Just in terms of scale, I think you have heard, I believe Brad mentioned, we saw something like 10% growth in our classified portfolio this year. The bulk of this is within Electronic Systems, as you'd imagine. They operate anywhere in the sort of 10%-20% of the portfolio range. With that, actually, as mentioned, on the uptick in recent years. It's a really strong part of our portfolio, well positioned with the technologies there, and factoring into some of the discussions of what are the next generation capabilities our war fighters will need. I hope that helps, Martin.
Yeah. Thanks, Tom. I might need to come back to you in a minute as well. I guess another area, 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 the direction on Applied Intelligence margins, 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. Going to start with you, Charles.
Well, Applied Intelligence, 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. That business actually does pretty well. High single digits on margins. Many of the contracts in which we operate, we're the largest provider. We're not able to actually grow market share much beyond our current position. The growth in that business is, in a sense, limited by government or increases in government spending in the space. The government has been investing, and continues to increase their investments in that space. 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? 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. That's quite hard to compete against. 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, 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 our disposal of SilverSky.
We simply found there were parts of that commercial portfolio which had been a drag on the business because it was very hard to run those profitably. Those are some of the changes that we've made. Our priority for that business remains in the national security space. There, it's a good, solid business with a good outlook, and very much earns its place in the portfolio. I regard that, from our perspective, air, sea, land, cyber, if you're going to be a full in a sense, 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?
Yeah. I did mention earlier on the combat vehicles. There's a few things that will drive margins forward from here. 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. The 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, 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 general ranges of volumes just speaks to how things are ramping up. You get scale efficiencies as those volumes improve. 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. I think that's another. I think broadly speaking, we're getting better at running these programs and more efficient. I think all that really combines for, I think, what we feel is good visibility on margin expansion. Tom, I'm sure, will want to build on that. Tom?
Yeah, Brad, you have that right. I think I would just add the color around what a massive improvement we have seen in the performance of that business just over the last couple of years. There was a period where the word quality would come up again and again. We are well past that. PIM, the M109 program, delivering like clockwork despite the pandemic. 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-19 phenomenon. Programs that were in the startup of transition tended to be a little bit more vulnerable to that, and we've worked around those.
That said, if I could just transport everyone to the floor in Anniston or Elgin, Oklahoma, or particularly up in York, you would see dozens of hulls moving through these production lines with modern robotic welding. Just fascinating technology that is getting better and better every day. As Brad pointed out, we will be in the 400+, 500+ vehicles per year here in these next few years, and it will have the benefit of all of that kind of learning 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. 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.
Just moving forward, there is lots of opportunity for margin expansion there. 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 to command the kind of margins you see in some of our peers. We have 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. Stay tuned.
Thanks, Tom. Charles, first one back to you. We've had one about how you're applying the FAST Labs model to the U.K., Australia, other markets. Is that something that we're looking at?
We certainly are, and in fact, it is a great model, and it is not trivial to export it. The U.K. government, as many of you will be aware, is very interested in the sort of ARPA approach, and looking to do something similar. Given our sort of privileged position in the U.S. and access to DARPA programs, we have certainly been very happy to share our learnings from that. I think importantly, and I will maybe just hand over to Tom to say a little bit on this, what we have been trying to do is make sure that we are collaborating more effectively across the group. While given the sort of national nature and classified nature of many of our programs, it is not trivial.
I think we've, and increasingly over the last couple of years, found a number of really good opportunities where we can actually collaborate and develop things across the group using that sort of Five Eyes footprint with U.K., Australia, and the U.S. 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 the Air Sector and ES. Tom, if you might want to just expand on that particular win that we had.
Yeah, happy to, Charles. Just echo all of what you said. As you mentioned, we have to be very careful with all the series of rules around technology transfer and ITAR. Over the years, we've gotten very good at that. We understand the rules. We work very closely with our customers in all of our nations to make sure that the sorts of things that they'd like to protect and the sorts of things that they're willing to share are clear, well understood, and we're aligned around those.
Say that first. Charles mentioned a program called Skyborg. If you Google that, you'll find that that is a very exciting program, again, along the lines of this kind of manned-unmanned teaming of aircraft, next generation aircraft, autonomous, combined with manned aircraft to bring a real punch to some of these missions, right?
Open up whole new avenues of capability in these mission sets. Just with the wealth of decades and decades of experience at military air in the U.K., they've actually joined the team and are part of this DARPA program in the U.S., and won one of the awards there. Very exciting for the company. A demonstration of how, in our collaborative way, we can bring the power of global legacy to bear on some of these future programs. Very exciting.
Great. That's excellent, Tom. Obviously we look for many more of those opportunities, too.
Thanks. One area, again, that we highlighted in the presentation, but it's come up again, and actually it's a definitive growing area, 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. I would say this, 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. As many of you will be aware, Australia increased their sort of 10-year defense budget by around about 40%. They stepped up from GBP 170 billion to added about GBP 100 billion to that. As I said, that was the two reasons, one, for security, but also because of the prosperity agenda. From our perspective, we're the biggest defense player in Australia. We were already looking at doubling, and it was in train. We're doubling our Australian business based on the Hunter-class win down there.
This additional now budget increase in areas such as hypersonics, these are other areas that we are obviously seeking to gain strong positions in. We have a business in Australia that will double over the next few years on the back of Hunter. My personal view is there is now additional upside even from that, based on this significant step up in defense spending.
Excellent. Thanks, Charles. I think we're coming towards the end of the questions. 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, budget out- progression. We have had one in asking for our outlook in the next five years on early sales and cash. Clearly, we're not going to give our business plan out on today. 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. 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?
Yeah. Just kind of recapping what I've been saying. I think the business is really well-positioned for top line growth. That's the first thing. We're growing. 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. As we get that growth and that margin expansion, we are seeing higher cash conversion coming, and 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.
That gives us great optionality. It gives us optionality to return more to our shareholders. I think we're well-positioned.
Thank you, Brad. I'll probably just wrap up here with a summary slide. 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.
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. 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.