Ladies and gentlemen, thank you for standing by, and welcome to today's BAE Systems 2020 half year results conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question answer session. If you wish to ask a question, please press star one on your telephone keypad. I must advise you that your conference is being recorded today on Thursday, the 30th of July 2020. I would now like to hand the conference over to your first speaker today, Dr. Charles Woodburn. Please go ahead, sir.
Thank you. Good morning, everybody. In the first half, we delivered orders and sales growth and underlying improved cash flow versus the same period last year, demonstrating that BAE Systems is a resilient business with enduring and strong customer relationships. This is despite a number of pandemic-related disruptions, which impacted profit in the second quarter. Unless there is a significant resurgence in COVID-19, we see the financial impact as being largely contained to the first half of this year. Providing the recovery from COVID-19 related disruptions continues, we expect our defense business to respond positively and deliver a second half earnings performance very much in line with original expectations for 2020. This is reflected in our updated guidance for the year. The group has a large order backlog of GBP 46 billion and a well-positioned portfolio with long-term positions on key programs.
Customer demand for our capabilities remains strong, as demonstrated by our U.S. business growing order backlog by over GBP 1 billion in the first half. Supporting this outlook, we are delighted to have progressed the two U.S.-based acquisitions this year with the Airborne Tactical Radios transaction completing in May and the military GPS transaction expected to close shortly. We have also made the GBP 1 billion one-off cash injection into the U.K. pension scheme to accelerate deficit reduction. These are all foundations for us to return to growth and deliver enhanced cash flow in the coming years, underpinned by our improving execution on key programs.
Reflecting the fact that our defense operations are now close to normal levels of activity, the board has declared an interim dividend of GBP 0.138 in respect of the year ended December 31st, 2019, that being the value of the dividend proposed but subsequently deferred earlier in the year. The board has also declared an interim dividend of GBP 0.094 in respect of the half year ended June 30th, 2020. This will be paid in November in line with our usual dividend timetable, assuming that there are no major additional or unforeseen pandemic-related disruptions. This amount is in line with last year's interim dividend. Moving to COVID-19 impacts and our response. We entered the period in a strong position, which enabled us to be agile in addressing our critical short-term objectives, namely, returning people to work safely whilst delivering against customer priorities.
At the same time, we were protecting our capabilities, driving cost control measures, and maintaining balance sheet strength in order to deliver growth over the coming years. Our U.K. maritime and air defense sites, together with our U.S. commercial operations in avionics and power and propulsion, were the most impacted in the second quarter. In our U.S. defense business, manufacturing facilities and shipyards continued operating with the implementation of COVID safe working practices. In Saudi Arabia and Australia, while there has been some disruption, the impact on the business has not been significant to date. During this time, the professionalism, agility, and understanding of our employees, customers, trade unions, and suppliers was outstanding as we implemented new working practices such as reconfigured floor plans, shift patterns, home working capabilities, and safe working measures. We thank them all for their important contributions.
By taking these actions to build in resilience for a prolonged period, we have continued to deliver critical work for our customers. Where operations were impacted, we've ensured that site-critical workers have been able to return to work safely. Support for the defense industry from the governments in our key markets has been exceptional around prioritization of capabilities and cash flows, recognizing the need to maintain a strong supply chain and working collaboratively to maintain critical defense and security programs. We, in turn, have looked to help our customers. Wherever possible, we've been agile in our working practices to deliver critical work and where needed, prioritize the social needs of our governments and communities.
We deployed our 3D printing capabilities and collaborated with our supply chains to donate more than 150,000 items of PPE to healthcare workers in the U.S. and the U.K., and we're proud to have supported ventilator production as part of the VentilatorChallengeUK consortium. Additionally, we've supported our communities in the U.S., U.K., Australia, and Saudi Arabia through the provision of online educational resources for young people. We've also provided financial support to healthcare providers and local charities. Reflecting our confidence in the outlook, we are delighted to proceed with our plans to recruit a record number of apprentices, some 800 in total, across a wide number of our U.K. sites.
As we enter the second half, our defense operations, accounting for around 90% of group revenues, are now close to normal levels of activity. There remains some disruption, primarily from supply chain impacts, and intermittent production delays are always possible where precautionary measures may be required. However, the changes we've made mean we have a high degree of operational resilience, giving us confidence in providing updated guidance for the year. I will now hand over to Brad to take you through the financials as usual. Over to you, Brad.
Thanks, Charles. Good morning, everyone. Before I start, I want to thank everyone in the company for their contributions and for helping us find our way through. This is a resilient set of interim results delivered in very difficult circumstances. I'd like to emphasize some key points that summarize our story over these last six months. In spite of the COVID headwinds, demand for our products and services remains strong, as evidenced by the 11% increase in orders. That resilience I mentioned is underlined by the 4% increase we see in sales. COVID impacts reveal themselves in our EBITDA, which was down 11%, primarily through lower cost recoveries in air and the market contraction in higher margin commercial operations like civil aviation.
When a crisis begins, after employee safety, cash is what matters the most, and our focus on liquidity delivered a stronger-than-usual operating cash position, up over GBP 400 million versus this time last year. On pension, while the accounting deficit increased due to a compression in interest rates, our assets have grown in spite of volatile markets, and our funding position, which is what matters the most, has improved since the October valuation. We balanced our capital allocation decisions carefully by contributing to the pension fund with a GBP 1 billion one-off payment, resuming our dividend distributions after a temporary and prudent pause due to COVID-19, increasing our self-funded R&D, and we continued with strategic M&A to support the growth of our business for the long term.
As we have fought our way through COVID in the second quarter, adjusting, adapting, and learning how to operate within its constraints, we have a better sense of how the second half will look. I have updated our full year guidance accordingly. We are now targeting underlying earnings per share in 2020 to be down in the mid-single-digit percentage compared with last year's GBP 0.458. In terms of underlying free cash flow generation, we are now targeting around GBP 800 million for the full year. Moving to the detail. For reference, the U.S. dollar rate averaged $1.26 per GBP in the first half of this year compared to 1.29 last year.
The headline numbers compared to the first half of 2019, sales increased to GBP 9.9 billion for an increase of 4% on a constant currency basis, led by the growth in Qatar in the air sector and our continued ramp in combat vehicles in the U.S. Underlying earnings before interest, tax, and amortization of GBP 895 million were 11% lower than last year on a constant currency basis and driven by the COVID-related impacts, which I will discuss in one minute. Underlying finance costs of GBP 127 million were slightly lower than last year. Underlying earnings per share of GBP 0.187 were down 15% compared to 2019, with an effective tax rate of 19%, up from 17% last year. There was an operating cash inflow in the first half of GBP 120 million.
That's up over GBP 400 million before the GBP 1 billion one-off cash injection into the U.K. pension scheme made in April. Net debt at June 30th, 2020 stood at GBP 2 billion. Order backlog has increased over the six months to GBP 46.1 billion. Trading on multi-year long-term contracts in the air sector was offset by a 7% increase in our U.S. business and an FX benefit. Reflecting the fact that our defense operations are now close to normal levels of activity, the board has declared an interim dividend of GBP 0.138 in respect of the year ended December 31st, 2019, that being the value of the dividend proposed but subsequently deferred earlier in the year. In addition, the board has also declared an interim dividend of GBP 0.094 in respect of the half-year ended June 30th, 2020.
This will be paid in November, in line with our usual dividend timetable, assuming that there are no major additional or unforeseen pandemic-related disruptions. This amount is in line with last year's interim dividend. Regarding the balance sheet, other than the impacts from exchange translation, where the US dollar closed at $1.24 per pound compared to the opening $1.32, there was a limited number of items that impacted the half-year closing balances. Working capital reflected the usual trend at the half year, with usage of advanced customer funding in the air and maritime sectors, some timing on receivables, and the usual cash timing patterns in Electronic Systems. On pensions, the group share of the accounting deficit stands at £6 billion, and I'll come back to that. The net tax asset has increased due to a higher deferred tax asset on the pension deficit.
Assets held for sale contain our AEC subsidiary in Saudi Arabia and those of the ex-SilverSky business of Applied Intelligence. Moving to pensions, as a reminder, there are two very distinct methodologies of calculating pension deficits, the accounting method and the funding method. The IAS 19 standard drives the accounting method shown on our balance sheet and uses a conservative AA corporate bond rate to determine the present value of liabilities. It is this measure that results in higher liability at the half year due to the high volatility in interest rates over the period. For reference, a 10-basis-point movement in bond rates can affect the gross liabilities by close to GBP 600 million. At times during the first half, these swings yielded accounting deficits that were far lower than our half-year ending value.
It's this volatility is one of the key reasons why the funding methodology is what drives the decisions around actual cash contributions to the scheme. The formula for calculating liabilities and the funding approach uses a discount rate that is a closer representation of our asset returns as agreed with the trustees. This method of calculation results in a materially lower deficit compared with the accounting methodology. As you can see, the assets have held up well in the first half, while the accounting deficit appears to have widened, the funding position has improved versus the October 2019 valuation position. As a reminder, the deficit reduction plan runs until March 31st, 2026. We accelerated our funding requirements under that plan with the GBP 1 billion payment made during the quarter. The company's final payment under that recovery plan will be the GBP 250 million payment due early next year.
The assumptions outlined back in February regarding the pension strategy remain prudent and long-term in nature. We do not expect to make deficit contributions into the U.K. scheme beyond that final contribution next year. Moving on to cash. This slide sets out the movement from our net debt position of GBP 743 million at the beginning of the year to our half year balance. Operating business cash was an inflow of GBP 120 million, up GBP 429 million on last year, reflecting our strong focus on liquidity and proactive efforts from governments in our major markets. Interest and tax payments were GBP 230 million. That gets us to a free cash outflow for the half of GBP 110 million. When you add the one-off GBP 1 billion payment into the U.K. pension scheme, you get a GBP 1.1 billion outflow.
Adjusting for the Airborne Tactical Radios acquisition, which was GBP 217 million, and other minor movements, you get a net debt at the half year of just over GBP 2 billion, which includes gross debt of GBP 4.5 billion and gross cash of GBP 2.5 billion. Looking forward to the second half, gross debt will be impacted by the military GPS acquisition. We expect to repay a $500 million bond towards the end of the year. The cash flow performance of the five sectors is shown here. I'll return to this when I cover the results of each of the sectors. Moving now to the sectors, I'll start with Electronic Systems, and the numbers here are in US dollars. Sales were flat year-on-year at $2.8 billion. Growth in the defense business was 9%, driven by the F-35 program, Compass Call, and increased classified activity offset by lower commercial volumes.
Underlying EBITDA was 367 million, delivering a return of sales of 13.2%, down 160 basis points versus last year, reflecting the impact of the higher margin commercial sales decline. First half cash conversion of EBITDA typifies the normal patterns with the usual second half bias expected to recur. There was some working capital build as the defense business grew, and we invested in facility expansions to support growth. We expect a higher cash conversion level over the full year. Demonstrating continued high demand, order backlog of GBP 9 billion was at a record high. The book-to-bill ratio of 1.28 was driven by significant awards on F-35, APKWS, and threat detection solutions. The integration of the acquired radios business is going well, and the team is looking forward to bringing the GPS business into the family in the coming weeks. Moving on to the Cyber & Intelligence sector.
As a reminder, this sector consists of the U.S. Intelligence & Security business together with BAE Systems Applied Intelligence. The numbers here are shown in U.S. dollars. In aggregate and on a constant currency basis, the business performed well, with sales increasing by 5% to $1.2 billion, with the growth led by the Intelligence & Security business. Margin in the U.S. business at 8.4% remains strong based on good program performance. Within Applied Intelligence, the exit from the loss-making U.K.-based managed security service was completed in April. Overall, the business made a small profit, an improvement on previous years as the strategic action started last year took hold following the restructuring charge of GBP 25 million in the first half of 2019. Cash conversion was very strong in the I&S business on accelerated collections on a number of government contracts.
Book-to-bill at 1.1 reflected expectations of growth in I&S and continued strong demand in Applied Intelligence government services. Moving on to Platforms & Services. The sector's sales were up 10% at just under GBP 2.2 billion, driven by the ramp-up of U.S. combat vehicle production as M109 delivered at consistent full rate production levels and activity on AMPV, Bradley and MPF increased. Margin performance for the half year was at 7%. This was impacted by some COVID related under-recoveries and supply chain interruptions. As outlined at the start of the year and reflecting the higher combat vehicle sales, we are trading margin on the AMPV and ACV programs at an initial low level, as is typical with projects at similar maturity levels. Cash flow performance was very strong as vehicle production deliveries increased and working capital improved.
Additionally, the business benefited from COVID-related customer actions on higher progress payments and lower customer retentions in ship repair. Strong demand and growth in this business is evidenced by the 1.2 book-to-bill ratio and the order backlog increased to GBP 8 billion as we received significant awards on M109, Bradley and AMPV. In the Air sector, sales were up 8% at GBP 3.6 billion. As expected, year-on-year, there was higher production activity in the Typhoon program for Qatar and F-35. In addition, sales from MBDA grew on deliveries to Qatar and India. The return on sales of 9.9% was down against original expectations for the half due to the COVID impact of unrecovered costs.
As expected, there was a year-on-year increase in self-funded R&D in the Tempest Future Combat Air Development program, and margin recognition remains lower as we are still in the early phase of the Qatar program. Cash flow conversion largely reflects the utilization of advances on a number of Middle East programs. Order backlog reduced to GBP 23.2 billion, primarily for the trading on multi-year orders received in prior years for Saudi support and the Qatar program, partially offset by funding on F-35 Lot 14. Sales in the maritime business were broadly unchanged at GBP 1.5 billion. Margin performance at 8.1% was slightly lower due to COVID-related cost. The operating cash outflow of GBP 67 million reflects utilization of advances on a number of programs and the usual first half timing profile.
Second half cash conversion is expected to be stronger, and the annual funding on the UK Munitions Supply Contract is scheduled for December as usual. Order backlog, as expected, has reduced to GBP 8.1 billion, reflecting trading on the long-term contracts for Astute and Type 26 programs. For reference, a chart providing a summary of the trading performance of all five sectors and the numbers for headquarters has been added to the presentation materials. A good set of resilient results in difficult circumstances. Our teams on the defense side have managed to find a way through to get back to relatively normal operating levels as we exited the first half. As COVID uncertainties still prevail, it is more appropriate to keep our guidance at group level, which we are pleased to present to you.
Including the two acquisitions, we expect the group sales to increase by a low single-digit % compared to last year, as we see increased volumes in F-35, combat vehicles, and growth in the electronic defense portfolio, including the acquisitions, offsetting the fade in commercial businesses. The group's underlying earnings per share are expected to be a mid-single digit % lower than last year's GBP 0.458, assuming exchange rate of $1.25 per GBP and at a tax rate now expected to be 19% in line with last year. The final number is, of course, dependent on the geographic mix of profits. In terms of free cash flow, excluding the GBP 1 billion pension payment, we should see something around GBP 800 million for the full year, which is close to our original guidance, allowing for the lower earnings. With that, I'll turn it back to Charles.
Thanks, Brad. On the back of that positive financial outlook for the second half, I wanted to reaffirm the points we made in February around the outlook for the business before moving to the demand environment in our major markets, key program positions, and learnings we will look to take forward. The fundamentals of the defence business remain robust, although we do expect some impact to elements of our commercial operations in the medium term. Our strategy remains highly relevant and is working. The group has a well-positioned global defence portfolio. governments in our key markets continue to prioritize defence and security given the threat environment, and also considering the role we can play 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 provide excellent opportunities to accelerate our technology strategy. Operational performance continues to improve and remains a priority. This all underpins our confidence in improving long-term cash generation. The pension agreement is a very positive outcome for all concerned, providing certainty and clarity through 2022. 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. Drilling down further into the outlook in our key markets, an area of focus for many, starting with the U.S. Recent budget increases, including the passing of the 2020 defense appropriations bill and the agreed cap of $740 billion in defense spending for fiscal year 2021, are expected to underpin growth for the coming years.
We continue to see positive momentum in support of military readiness and modernization, as reflected by our backlog growth in our U.S. divisions. The group's U.S.-based portfolio remains well-aligned with bipartisan supported customer priorities and the key focus areas outlined in the U.S. National Defense Strategy. Recent defense budgets have maintained funding support for key BAE Systems programs, including combat vehicles, F-35, electronic warfare programs, and current and next-generation precision weapons systems. Our combat vehicle programs are scheduled for continued production for years to come, and our U.S. ship repair and naval gun franchises are supported by the growth outlook in U.S. Navy budgets and projected fleet size. The U.S. electronics business closed the half with another record order backlog.
The outlook for its defense-focused divisions remains positive, with the portfolio well-positioned to address key growth areas, which is helping to offset the more significant pandemic impacts on the commercial business lines. These existing positions are further advanced by the acquisitions, whose strong portfolios underpin further growth. Defense and security remains a priority for the U.K. government now and in a post-Brexit world. The government has stated its commitment to meeting the NATO target of spending at least 2% of GDP on defense and to increasing the defense budget by at least 0.5% above inflation in every year of the current parliament. The government has restarted the integrated foreign policy, defense, and security review after it was paused due to COVID-19.
Our focus continues to be on the execution of the group's long-term contracted positions on critical defense programs, which provide a stable outlook. We employ over 30,000 people across the U.K. and many more in our supply chains. It isn't just our current production programs which are supported. The work under the Team Tempest contract to develop next-generation combat air technologies, skills, and expertise in collaboration with the U.K. government and our industry partners continues towards the outlined business case. We've progressed to trilateral discussions with Sweden and Italy and continue discussions with other prospective partner nations. In Saudi Arabia, we continue to work closely with industry partners and the U.K. government to ensure that the export licenses required to enable us to fulfill our contractual obligations remain in place. In spite of the low oil price, defense and security remains a key priority for the Kingdom.
Over 70% of our employees in the kingdom are Saudi nationals, and we continue to address current and potential new requirements as part of long-standing agreements between the U.K. and the kingdom, with work ongoing on the localization of defense capabilities in Saudi Arabia in support of their national transformation plan and Vision 2030. In Australia, the government has recommitted to growing its defense budget as it looks to further its sovereign defense capabilities. The Hunter Class frigate program is a key part of its plan, with our design and productionization contract progressing to schedule. As the program moves through prototyping and into the production phase, our Australian business will grow significantly in the coming years. In Qatar, we continue to build our relationship through good performance on existing contracts and to progress a number of opportunities.
In Europe, several countries are looking to increase their defense spending and move closer to meeting their NATO commitments. The group is well positioned to benefit through Typhoon, with Germany the near-term opportunity, our holding in MBDA, and our Swedish land vehicle business. Finally, in our other accessible markets, especially Asia-Pacific, a number of countries are responding to an increasingly uncertain and complex security environment and the need to recapitalize or upgrade aging equipment. Whilst there may be challenging economic times ahead for many countries, the threat environment remains and defense can play an important role, not just in the security of nations, but in the economic recovery and prosperity for many of our customers. With demand remaining robust, I want to remind you of our strong existing program positions and provide an update on operations.
As you know, order backlog, in some cases, represents just a small proportion of the expected through life value of a program. This chart, which we have presented before, shows the duration of our major programs split by what is in the order backlog, what is expected in future awards, and where we have new business-winning opportunities. Since February, a number of these positions in the U.S. have further improved as backlog has increased, with U.S. combat vehicle funded visibility out for three years in many cases. We've provided further color in the backup charts, but these examples highlight the longevity of our programs well beyond the order backlog, which is why we will continue to place such a strong focus on program execution.
On our major programs, some milestones have shifted to the right and schedules have been adjusted because of the pandemic, but we've already agreed many of these changes in close collaboration with our customers. I'm very proud of the business's response during these difficult times, and I'm seeing underlying program improvement in several areas where we've had recent issues. We're making good progress in U.K. Maritime, with a number of commendations received from our customer for performance during the recent months of lockdown. In the U.S., our combat vehicle programs are scheduled for continued production for years to come. M109 is performing well and delivering consistently at full-rate production levels. Our focus for this year is on applying the lessons we've learned to scaling up production of our expanding combat vehicles portfolio. In Applied Intelligence, the strategic actions are also taking hold.
The relevance of the government business remains high and is well supported in the current environment. The business delivered a profit in the first half for the first time in many years. Importantly, the majority of our businesses continue to perform well, while we will always be looking at ways to deliver further operational improvement and efficiencies. In this light, the enforced changes in working practices may provide learning and improvements to future business operations in certain cases. This could actually contribute to our competitiveness, which remains a strategic priority and provide value for money for our customers and shareholders. Areas highlighted to date include streamlining processes, G&A savings, reduced footprint requirements, flexible working practices, and how we can be more agile and adaptable to deliver our commitments in different ways.
In summary, we have implemented changes in the second quarter to embed resilience to our operations, returning the business to a normal operating tempo, and we expect a good second half of the year. Relationships with and support from our customers remain strong. Our large order backlog, program visibility, and an evolving pipeline of opportunities position us well for future growth, with earnings and cash growth being driven by improving program performance. From a balance sheet perspective, we remain committed to maintaining an investment-grade credit rating, and the capital allocation policy for the group remains unchanged. We remain focused on building a sustainable business with enhanced financial performance, supported by free cash flow generation to deliver growth in shareholder value over the coming years. Thank you. We will now be happy to take your questions.
Ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will only take a few moments. If you wish to cancel your request, please press the hash key. Once again, that is star one if you wish to ask a question. Your first question comes from the line of George Zhao from Bernstein. Please go ahead. Your line is open.
Hi. Good morning, and thanks for taking my question. The recent fiscal 2021 Defense Appropriation Bill, we saw drastic cuts to the AMPV funding, on top of the cuts we saw already for the budget request earlier this year. Now we know the overall funding levels are still the same, but what does the latest funding profile mean for the delivery and revenue ramp up for BAE? How do you think about the risks that the AMPV will become a bill payer for the other Army modernization efforts? Thanks.
Well, George, good morning. Thanks for the question. We have on the line with us, Tom, as you all know, runs our U.S. business. Tom, would you like to take that question for us?
Yes, happy to take that, Charles. Thank you. Thank you, George. George, on the FY 2021 markups, it's still very early in the process, we've been through three of the committees. The SAC-D has yet to mark. We're expecting to see some of those changes moderate here in the coming months. As we think about the overall profile for the business, we think that we still see very strong demand for our vehicle programs. AMPV in particular, is one of the Army's new family of next-generation combat vehicles. A prominent program in their portfolio and in ours as well. We look out across our vehicle programs, we have over 1,000 vehicles in backlog. We see good continued support for that. Budget wise, we expect some of what's happening in the committees to moderate in the coming months.
Yeah, I think it's just worth reflecting on what we already have in the plan for AMPV, and the backlog gives us visibility of the next two or three years. Thank you anyway, Tom. Can we go to the next question, please?
Thank you. Your next question comes from Rob Stallard from Vertical Research. Please go ahead. Your line is open.
Thanks. I think that's me. Good morning.
Hey.
Charles, two questions. Well, actually it could be for Brad as well. First of all, on the capital structure going forward, now that you've sorted out the pension, how do you see things changing going forward? Are you happy with the net debt at current rates, or could it come down further? Also, maybe your thoughts are on M&A going forward from here. Then secondly, it's probably for Tom, actually, this one. OMFV, the Army's having another crack at trying to replace the Bradley. Would you be interested in bidding on this program, given the revised structure? Thank you.
Good morning. Well, maybe we'll do the second question first. I'll just hand that over to Tom on the OMFV.
Thank you, Charles. Morning, Rob. OMFV, we've been tracking that very closely, working with the Army. We're encouraged by the Army reaching out for industry input and feedback in the various revisions of the draft request for proposal that we've seen to date. We're optimistic that this next round will be a more realistic timeline, more realistic requirements. We'll continue to watch it closely. We're optimistic that this will be something we'd be interested in bidding, should it remain on track.
Thank you, Tom. Over to you, Brad, for the capital structure.
Yeah. We're looking forward to having continued free cash flow growth, and that will give a natural de-leveraging that will occur over the next couple of years. That's really our focus as we integrate these big acquisitions that we made. Our focus is on executing the business case for those acquisitions over the next couple of years, and that should give very good performance on our net debt ratios. We feel very good about that, and we're looking forward to welcome the GPS business here very shortly.
Maybe just a quick follow-up, if I may. On the GPS business, could you give us your latest thoughts on what that business could do to, say, your 2021 estimates? Thank you.
Yeah. The GPS business is very well positioned for very accretive growth over the coming years based on this ramp up that we'll see from the M-Code upgrades that will take place. We'll update in February with our annual results what we see looking forward for that business. Our expectations are very significant growth in the low teens for the next few years for the GPS business itself. That's going to be a nice accretive piece of the portfolio. As we mentioned back when we announced those acquisitions, we'll see accretion and margin and cash flow as well coming from this. It's a very exciting addition to our portfolio, and we're really looking forward to bringing that into the business.
It's performing in line with our presentations in January, and we're looking to integrate that business shortly.
That's great. Thank you very much.
Thank you. Your next question comes from the line of Sandy Morris from Jefferies. Please go ahead. Your line is open.
Top of the morning, everyone. Can I just rattle off a few, hopefully snappy ones? Just on the committee changes to the armored vehicle budgets as they came up, I thought the AMPV changes were largely just due to a delay in the program schedule to date. Is that right?
Do you want to give us all your questions, Sandy, and then we'll allocate them? Did you want to do one by one? Probably better if you just give us the list.
Yes
We'll allocate them each.
In which case I'll halve the number. The second thing is, in Electronic Systems, because the black programs are so important, and I think at one point you said they may even be about 1/3 , do you ever look through those programs and sort of wonder whether some may disappear? I'm just trying to understand what kind of business review you go through. The third one is unbelievably banal. In the pension scheme, now that we've put the GBP 1 billion in, has there been a significant change in the asset allocation? Does it need to continue with a significant exposure to equities? Thank you. Sorry. I know they're a bit of a mixed bag.
Well, actually, it's quite good that we did. I think the first couple, two that I will, since we have Tom on the line, I'll hand over to Tom first, and then I'll hand the pension scheme one over to Brad. Tom, do you want to go first? Did you catch those two questions? One was committee changes.
Yes, I did.
The AMP profiling, the other was Electronic Systems black programs.
Yes, I did. Thank you, Charles. Good morning, Sandy. Just another minute on AMPV. This question came up earlier as well. If you look at the three committees that have marked so far, two have been largely in line with existing budget. The third took a deeper cut. Some of this is, Sandy, to your point, is the traditional early to need, right? Meaning that, as the schedule has laid out over time, an understanding of how much budget is required in order to meet that profile. The budget is there. As Charles mentioned, we've got several years of visibility and backlog on those. This is just a question of, given how the schedule has moderated over the course of the last year or so, has that evened out, and is there budget there to restore?
Again, my expectation is that that will moderate. That program is solidly funded and is progressing well. We expect to deliver the first AMPV here in August. Good strong performance there. Second question on the black programs in ES. Our portfolio in ES is largely driven by, as you've heard, electronic warfare, C4ISR kinds of work, signals intelligence kinds of work as we talk about. Those programs get a lot of visibility in terms of program reviews on a routine basis, portfolio reviews, and we do keep track of their relevance. In fact, as we have been saying, much of the emphasis in the National Defense Strategy is in these areas. In fact, we saw a growth of some 10% in our classified work here in the first half as well.
These are good, strong areas, resilient parts of the portfolio, well tracked and well supported by our customers. I'll stop there.
Thank you, Tom. Thank you very much, Tom. Brad, over to you on the asset allocation for the pension schemes.
Sandy, the pension assets are actually very conservatively invested, and there's only maybe a 20% exposure to equities in the U.K. main scheme. The rest is a balance of assets that reflect the liabilities. We call them matching assets that generate long-term stable cash flows that coincide with the liability. It's a pretty, I think, conservative portfolio. There's no real changes currently to the investment strategy.
Okay. Well, great stuff. Thanks very much, gentlemen.
Thanks, Sandy. I understand that's the last question that we have. I'll just take the opportunity to thank everyone for joining the call. If you do have any further questions, please feel free to follow up with investor relations at Martin Cooper as you usually do. Thank you very much. Thank you.
That does conclude our conference for today. Thank you for participating. You may all disconnect.