Good morning, everybody. I'm very pleased to report that 2019 was another good year for the company. Now, as always, Charles Woodburn and Peter Lynas will review our performance for the year in some detail, but I really wanted just to preface their comments with some remarks as to the overall position of the business as I see it today at the start of what is clearly a new decade. Essentially, I believe the company is at a pivotal moment in its development, transitioning from a sound base built over the last 10 years under one management to a higher growth, higher cash generative, technology-led model under a new executive team. The financial foundations put in place by Peter Lynas of rigor, project discipline, and prudent accounting have been the bedrock on which the current business has been and will continue to be developed under Charles Woodburn and his team.
Jerry DeMuro has mirrored the great work done outside the U.S. A. by stabilizing and then strengthening the North American business, and most importantly, growing land and electronics. The benefit of his leadership has been successfully dovetailed into the overall growth of the business mix. Both Peter Lynas and Jerry DeMuro will leave the business in a much better place than they found it, and we are all hugely appreciative of their legacy. Now, whilst Jerry DeMuro will undertake some special assignments for the company in the balance of the year, Peter Lynas will leave the company in March, and I have to say, we wish them both well for the future. It is on these very secure foundations that the baton will be, I think, now seamlessly passed by Peter Lynas and Jerry DeMuro in the coming weeks to Brad Greve and Tom Arseneault.
Brad Greve now having had six months to get to know the business, and Tom Arseneault moving up in April from President and Chief Operating Officer to President and Chief Executive of BAE Systems, Inc. Together, Brad Greve and Tom Arseneault will become the new key lieutenants for Charles Woodburn in taking the business forward and delivering the potential it has from a strong order book and an expanded electronics business. I think in this regard, the acquisition of Collins Aerospace Military Global Positioning Systems and Raytheon's airborne tactical radio business, which we hope, let me say, to conclude following regulatory clearance from UTC Raytheon, the merger in the near future. We hope this will mark a very material step forward in accelerating our growth, reinforcing our strength in the electronic sector, and continues the rebalancing of the geographic spread of our global activities.
These acquisitions were at the sweet spot of our strategic ambition, delivering immediate benefits in profit and cash returns, demonstrated the wisdom of patience and prudence in our M&A strategic thinking. Finally, we wish to address the challenge of our pension deficit by taking advantage of current benign interest rates and the strength of our business and balance sheet, providing certainty to our scheme members and greater clarity as to the future cash flows of the business. While there are still some political uncertainties to navigate and of course, export license to secure, future prospects are encouraging. To be clear, our focus remains on execution, integrating the acquisitions, delivering the growth, and generating the cash.
I am confident that Charles Woodburn and his team have both the mindset and the skill set to deliver these important goals. With that, I'll hand over to Charles Woodburn . Charles Woodburn ?
Thank you, Roger Carr, and good morning to everyone here in the room and those joining us via webcast. I'll start with a summary of the results and then a business overview with a focus on our order backlog, major programs, key markets, and how we're driving our strategy, all of which provide me with confidence in our growth outlook. Peter Lynas , as usual, will cover the detailed financial results and provide forward guidance, as well as covering the pensions agreement announced today. As usual, we'll take your questions at the end of the presentation. Turning now to 2019 performance. We've announced a good set of results consistent with our earnings and cash guidance, which reflect a much improved operational performance against a backdrop of significant geopolitical turbulence. Operationally, the Electronic Systems and Air sectors once again performed strongly, and we made progress in Maritime and U.S. combat vehicles.
Positively, our U.S. business again delivered growth and is well set to maintain that momentum in the coming years with the order backlog growing by $1.8 billion. We're delighted with the two proposed acquisitions, both of which are strategically attractive, falling within and complementary to the sweet spot of our electronic systems portfolio. They represent a golden opportunity to purchase high-quality technology-based businesses with market-leading capabilities and long histories of leading innovation in their respective fields. The pension agreement announced today is a good outcome for all stakeholders, providing greater near-term clarity for all concerned. From a business perspective, it will give us additional cash flow from 2022, and therefore, opportunities for further generation of shareholder value. 2019 has been a year of significant progress on a number of fronts.
Reflecting both the in-year performance and the board's confidence in the outlook for the business, the dividend has been increased by 4.5%, the highest increase in 8 years. As I said last month when we announced the proposed acquisitions, I'm delighted they've emerged at a time when my confidence in our business has improved significantly. Operational performance continues to improve. We have a large order backlog and exceptional program positions providing visibility of growth, and there remains a strong pipeline of opportunities. We're driving program performance to ensure successful delivery of that backlog. This underpins confidence in long-term cash generation, as outlined by our new 3-year cash guidance. Recognizing the importance of free cash flow, the RemCo intends to include cash targets in our updated long-term incentive plans. Our strategy is consistent and working. The group has a well-positioned global portfolio.
Governments in our key markets continue to prioritize defense and security, and there is a strong demand for our capabilities, products, and services. The pension agreement is a very positive outcome, bringing forward the triennial review and providing certainty and clarity through 2022. Meanwhile, the proposed acquisitions provide excellent opportunities to accelerate our technology strategy. 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 continued growth. This growth is underpinned by performance on our large programs. At this point, let me run through how we're progressing. On F-35, production ramped up to the planned 142 sets, and in 2020, we're targeting full rate production levels of around 160. The Qatar Typhoon and Hawk contract is meeting its contractual milestones with Typhoon aligned to the accelerated delivery schedule.
Typhoon support continues to perform strongly in the U.K. and Oman, and in Saudi Arabia, we're meeting our contractual requirements. In U.K. Maritime, there is increasing activity on Dreadnought, with revenues on the program now exceeding those on Astute. The Offshore Patrol Vessel program stabilized in the year with ships two and three delivered. The fourth was accepted this past month. The final ship is expected to complete this year. The Queen Elizabeth Aircraft Carrier build program was completed with HMS Prince of Wales being accepted by the customer. Manufacturing work on U.K. Type 26 continues to increase following cut steel on the second ship. In Australia, the Hunter-class frigate program has commenced the initial four-year design and development phase. In Canada, mobilization activities are progressing.
The U.S. Combat Vehicle business continues to implement a number of process and automation improvements to meet the increased production volumes across multiple programs. M109 met its delivery targets in the second half of the year and has now reached its steady state monthly production rate. Initial amphibious combat vehicle deliveries were made and work on the armored multipurpose vehicle program is progressing towards deliveries in 2020 with all five variants in build. The combat vehicle ramp remains an area of focus with three upgrade and three new build programs now going through our facilities. We continue to shape our market-leading ship repair business, maintaining a strong bid pipeline for repair and modernization services, and working with the U.S. Navy to improve utilization levels. To that end, the first tandem docking of destroyers in our San Diego facility was a very welcome milestone.
Electronic Systems had another excellent year with increased activity on F-35 classified work and APKWS. A great backdrop against which to integrate our acquisitions. To summarize our operational status, steady progress is being made with a number of legacy program challenges either completed or stabilized with investments in people, processes and tools ongoing to provide strong and sustainable performance. As you know, order backlog can, in some cases, represent just a small proportion of the expected through life value of a program. This chart 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. Pulling out some key examples.
On F-35, where we currently contract annually, we move to full-rate production this year and expect that to continue through the decade with the opportunity to secure long-term support positions as the U.K. and global fleets grow. Typhoon manufacturing activity at current levels has been secured for the coming years. The potential pipeline for Typhoon is positive, with opportunities both with partner nations and through exports. Furthermore, on Typhoon support, incumbent positions are expected to extend beyond the current contractual horizons. On Dreadnought, we're contracted until early 2021, this program will run for the next two decades. On Type 26, we have an order for the first three ships of an eight-ship program that will extend through the 2030s. On the Australian Hunter-class program, we have booked the initial order, which runs to 2022, with the build program then extending into future decades.
In the U.S., where contracting tends to be based on annual funding, the M109 is now proceeding towards the full-rate production phase, and the combat vehicle programs such as AMPV and ACV could yield close to $10 billion over 10 years in combination with additional export potential. In U.S. ship repair, we're a leading player with high barriers to entry. Our electronic systems portfolio again closed with record order backlog and received a multi-year $2.7 billion IDIQ contract for future U.S. and international APKWS orders. We've provided further color in the backup charts, these examples highlight the longevity of our programs well beyond the order backlog. This is why we're placing such a strong focus on program execution. We must meet our customers' requirements to best position us to secure future opportunities and to deliver top and bottom-line growth and improving cash flow in the coming years.
Moving now to our key markets. In the U.S., which represents over 40% of group sales, our portfolio remains well-aligned with customer priorities and the key focus areas of the National Defense Strategy. Recent budget increases include the passing of the 2020 Defense Appropriations Bill, which will underpin near-term growth and see positive momentum in support of military readiness and modernization. As mentioned earlier, our combat vehicle programs run for years to come, and our U.S. ship repair and naval gun franchises are supported by the growth outlook in Navy budgets and the projected fleet size. In electronic systems, our strong technology positions and increased levels of classified work will be supplemented by the two proposed acquisitions. Here in the U.K., currently around 22% of group sales, we have political clarity following the general election. The U.K. remains Europe's largest defense market.
The U.K. government recently restated its commitment to uphold defense spending to at least 2% of GDP and to increase the defense budget by at least half a percent above inflation in every year of the current parliament. The government is also expected to launch an integrated foreign policy, defense, and security review during the course of 2020. Our business here in the U.K. has a stable outlook based on long-term contracted programs in both air and maritime. We employ over 30,000 people across the U.K. and many more in our supply chains. Additionally, work under Team Tempest to develop the next-generation combat air technologies, skills, and expertise in collaboration with the U.K. government and industry partners is progressing at pace. The commitment of Sweden and Italy to work with the U.K. on creating next-generation capability is a very welcome development.
In Saudi Arabia, which now represents around 13% of group sales, we're working 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. We continue to address current and potential new requirements as part of the 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, currently 3% of group sales, the pace of military modernization in the Asia-Pacific region continues to drive their commitment to increase defense spending. Through the Hunter-class frigate program, our Australian business will double in size over time. In Qatar, our relationship has started a new chapter through the Typhoon, Hawk, and MBDA programs and is now a key market for us.
A number of European countries are looking to increase their defense spending and move closer to meeting their NATO commitments. The group is well-positioned to benefit through potential Typhoon opportunities, our holding in MBDA, and our Swedish land vehicle business. Finally, in our other accessible markets, especially Asia-Pacific, defense and security remains high on national agendas, with a number of countries responding to an increasingly uncertain security environment and the need to recapitalize or upgrade existing equipment. Moving to strategy. When I took this job in 2017, I outlined three strategic priorities, namely operational excellence, competitiveness, and technology. I'm certain they remain as relevant today as they were then. We are now seeing the benefit in our results.
Additionally, we've made good strides in shaping the portfolio to strengthen the business for the future. In addition to the two proposed acquisitions, we made two technology bolt-ons in the year, continued to shape our shareholdings in Saudi partner companies, completed the land vehicle joint venture with Rheinmetall, and are progressing the disposal of the ex-SilverSky business within Applied Intelligence. The balance sheet remains robust, and positive actions were taken in the year by repaying the $1 billion maturing bond from cash and reaching a positive outcome in respect of overseas tax matters. The pension agreement and the proposed acquisitions enable us to accelerate the strategy. People management is particularly vital in a time of growth, and we are embedding strategic workforce planning into the business to ensure we're building the right people, skills, technologies, and facilities to deliver our future growth plans.
In summary, top-line growth is underpinned by our strong order backlog, program visibility, and an evolving pipeline of opportunities, whilst earnings and cash growth is 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. Our strategy is clear and consistent. We are 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. I'll now hand over to Peter Lynas to run through the financials. Over to you, Peter Lynas .
Well, thanks, Charles Woodburn , good morning, everybody. Just before I step through the detail, I'd like to draw out the key points we've got here. Firstly, in terms of 2019, underlying earnings per share, GBP 0.458, that was delivered in line with guidance. Free cash flow performance was slightly ahead, delivering GBP 850 million in the year. The dividend was grown by 4.5%, earnings cover sustained, that's the 16th consecutive year of dividend growth. Although the accounting pension deficit is up over the year, the funding deficit has reduced, as I'll cover later, we today announced an accelerated deficit funding plan. Looking ahead, we're targeting mid-single digit growth in underlying earnings per share for 2020.
In terms of free cash flow generation, we now target in excess of GBP 3.5 billion over the next three years, and I'll talk more about that when I get to the guidance. Just to be clear, guidance today does not include the recently announced acquisitions. Given the uncertainty as to timing of the completion date, we will provide an update to the year's guidance at that time. Just before I get to the numbers, a reminder that these results include the changes under IFRS 16 lease accounting. Adoption of that standard increases our EBITA by around GBP 50 million, but that's matched by higher finance cost, and 2018 numbers have not been restated. For reference, the U.S. dollar rate averaged at 128 in 2019 compared to 133 in the prior year. The headline numbers when compared to 2018, sales increased to GBP 20.1 billion.
That's up 7% on a constant currency basis. Underlying earnings before interest, tax and amortization of GBP 2,117 million were 10% higher than last year. That's a 5% increase on a like-for-like basis. Underlying finance costs in the year of GBP 257 million were GBP 42 million higher. That includes the IFRS 16 impact. The stronger U.S. dollar and the higher cost in joint ventures largely offset the six months benefit from the billion-dollar bond that we repaid back in June. Underlying earnings per share were GBP 0.458, up 7% compared to 2018. That's with an effective tax rate of 19%. There's a bridge chart highlighting the major year-over-year EPS movements attached to the presentation materials.
As we announced back in July, there was also a one-off benefit to earnings of GBP 0.05 arising from agreements reached in respect of an overseas tax matter, net of a provision taken on an exposure arising from the EU's decision on the U.K.'s controlled foreign company regime. There was an operating cash inflow of GBP 1.3 billion and net debt at the end of the year closed slightly better than our guidance at GBP 743 million. Order backlog has reduced over the year to GBP 45.4 billion, with trading on multi-year long-term contracts in the air sector, partly offset by further growth in our U.S. businesses. The dividend for the year has been increased by 4.5% to GBP 0.232 per share, and as I mentioned earlier, at this level, the dividend is covered at two times by EPS.
Turning to the balance sheet and other of the impacts from exchange translation, where the U.S. dollar closed at 132 compared to the opening 127, there were a limited number of items impacting the closing balance sheet. Firstly, with the adoption of IFRS 16, around GBP 1.3 billion now appears within both fixed assets and lease liabilities. Working capital has increased by around GBP 300 million, mainly for some inventory build in our U.S. businesses, some receivables timing, and utilization of provisions. In addition, there was some usage of last year's customer funding on the Qatar program. On pensions, the group share of the accounting deficit stands at GBP 4.5 billion, and I'll get back to that in a minute. The net tax asset has increased following the one-off provision release made back at the half year, together with a higher deferred tax asset on that pensions 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 and firstly covering off the accounting. The value of the scheme assets has increased over the year to GBP 27.7 billion. Asset returns in the year were strong at 12%, generating GBP 3 billion. Pension benefits paid out amounted to GBP 1.4 billion. Reported liabilities at the end of the year increased to GBP 32.5 billion. Real discount rates in the U.K. reduced by 50 basis points and by 110 basis points in the U.S. Those changes in rates increased reported liabilities by GBP 3.2 billion. Against that, current mortality assumptions have reduced liabilities by almost GBP 500 million.
Some significant moving parts, but the combined impact of them all is a reported accounting deficit increase of about GBP 500 million, with a group share of the deficit now at GBP 4.5 billion. As you know, it's not the IAS 19 accounting which is important here, it's the funding position of our U.K. schemes. As we approach 2020, a key issue for us was the next triennial funding valuation. I'm very pleased to brief you on the agreement that we announced this morning. On the 1st of October, we completed the consolidation of six of our nine U.K. schemes. Following that scheme consolidation, the company agreed with the new trustee board to accelerate the funding valuation that was scheduled for 2020, bringing it forward to October 31st 2019.
Following agreement with the trustees, and in consultation with the Pensions Regulator, the deficit has been agreed at GBP 1.9 billion, and the scheme is 92% funded. The deficit funding plan has been replaced by a new plan, under which GBP 1 billion will be paid in the near future as a one-off, together with payments of GBP 240 million in 2020 and circa GBP 250 million in 2021. The deficit recovery also assumes an allowance of 50 basis points for asset outperformance. This is clearly a positive move for the pension scheme trustee board and the company and provides improved certainty to both and, as shown on the chart, gives sight of enhanced free cash flow for the group in the near term.
For reference, the three smaller U.K. schemes are each fully funded, and in the U.S., deficit funding will be $80 million in 2020 and expected at $40 million per annum through to 2025. One last point before I leave pensions, and one I've made many times before, the reported accounting deficit is not representative of the underlying funding requirements. Those are almost GBP 2.5 billion lower. Moving on to cash, and this slide sets out the movement for our net debt position of GBP 904 million at the beginning of the year. The operating business cash flow of just over GBP 1.3 billion was a little better than guidance. Interest in tax payments were GBP 457 million.
That then gives free cash flow in 2019 of GBP 850 million. Dividend payments, including those paid to minority interest, totaled GBP 780 million, and net proceeds from M&A were GBP 74 million.
All other movements, including FX, were GBP 17 million. In June, we repaid from cash a $1 billion bond, which had a 6.4% coupon, and so we closed the year with gross debt of GBP 3.3 billion, cash of GBP 2.6 billion, and net debt of GBP 743 million. The cash flow performance of the five sectors is shown here, and I'll return to this when I cover the results of each of the sectors. Just to note, the total cash outflow for pension deficit funding made in 2019 was GBP 231 million and the head office number contains GBP 160 million of that.
Moving now on to the sectors, the first of those Electronic Systems and the numbers here in U.S. dollars. Sales compared to 2018 were up 7% at $5.7 billion. Growth in the defense business was at 9%, driven by the F-35 Program, APKWS volumes, and increased classified activity.
Commercial sales of engine and flight controls and hybrid drive units also grew. At $1.2 billion, now amount to 21% of the sector. Underlying EBITA was at $877 million. That's a return on sales of 15.5% at the higher end of our guidance range. As expected, cash conversion of EBITA was very strong in the second half and close to 100% for the full year. Order backlog of $7.9 billion was at another record high, with significant awards on F-35 for LRIP 14 and Block 4 development, APKWS volumes, and the radar warning receiver upgrade. The cyber and intelligence sector comprises the U.S. intelligence and security business, together with BAE Systems Applied Intelligence. The numbers here again in dollars. In aggregate on a constant currency basis, sales were broadly unchanged at $2.2 billion. Sales in the U.S.
business were just 2% lower, and that was down to several customer awards made but subsequently protested. In the Applied Intelligence business, sales were up 4%, all arising in the government business line. Margin in the U.S. business was unchanged from last year at 9.1%, and within Applied Intelligence, the business recorded a loss of GBP 20 million following the restructuring charge that we took in the first half. Disposal of the ex-SilverSky business and the exit from the U.K.-based managed security service are expected in the near future, both of which will improve profitability in future years.
As expected, order backlog was stable at GBP 2.3 billion, and that's after adjusting for the expected Applied Intelligence disposals. Moving then on to the U.S. platforms and services sector and the numbers again in dollars. Sales in the year were up 6% within guidance of GBP 4.3 billion. In the U.S.
combat vehicles business, the second half challenge to deliver the ramp-up in M109 deliveries was met. Margin performance for the year improved to 8% with no material charges taken this year. As regards the ramp in combat vehicle sales, we are trading margin on the AMPV and ACV programs at an initial low level. Cash flow performance was very strong in the second half as vehicle production deliveries increased and working capital was liquidated. Order backlog was further increased to $7.7 billion, with total in-year funded combat vehicle orders received of $ 2.5 billion. In the air sector, sales are up 11% at GBP 7.5 billion. As expected, there was higher production activity on the new Typhoon and Hawk program for Qatar, and the F-35 program continues to ramp up towards full rate next year. In addition, sales from MBDA grew on deliveries to Egypt and Qatar.
The return on sales of 11.9% was ahead of expectations on strong program execution. As you'll recall, last year's margin benefited by 70 basis points from the completing Typhoon Oman contract. The return on sales in 2019 reflects low initial margin recognition on the early stages of the Qatar program and an increased level of self-funded R&D on the Tempest Future Combat Air Development. Cash flow conversion largely reflects some timing on receivables, the usual difference between consolidated joint venture profits and the dividends received, and some utilization of provisions. In addition, there was some usage of prior year Qatar funding. Order backlog reduced to GBP 23.9 billion, primarily for the trading on multi-year orders received in prior years for Saudi support and on Qatar. Sales in the maritime business were up 5%, ahead of guidance at GBP 3.1 billion.
Whilst the Dreadnought submarine and Type 26 programs continue to ramp up, the carrier and Offshore Patrol Vessel programs are close to completion. Activity levels in Portsmouth Naval Base support remained strong throughout the year. Margin performance was at 8.6% within our guidance range. The operating cash inflow of GBP 150 million reflects utilization of the naval ships provision created last year and completion of the carrier program. Order backlog has reduced slightly to GBP 8.6 billion, with further awards for funding on the Dreadnought program outweighed by trading on Astute, Carrier, and Type 26. For reference, a chart providing a summary of the trading performance of all five sectors and the numbers for HQ is appended to your presentation packs.
As I mentioned at the half year, within HQ, we have taken a charge of GBP 10 million relating to a self-insured claim following a fire at our Holston munitions facility. Moving now on to guidance, as I said earlier, this does not include the impact of the recently announced acquisitions. Whilst the group is always subject to geopolitical uncertainties, we continue to provide guidance on a business as usual basis. This chart seeks to give our view as to how we see the performance of each sector developing from 2019 through into 2020. For reference, our exchange planning assumption for the U.S. dollar is at 130, and sensitivity to a $0.10 movement in the dollar is now approximately GBP 0.018 of earnings per share. Firstly, Electronic Systems.
Overall, we expect 2020 sales in dollar terms to show mid-single-digit growth, driven by a number of electronic warfare contracts, particularly F-35. In aggregate of 2020's projected sales, some 70% are in the 2019 closing order backlog. That's a similar starting point to this time last year. On margins, we'd again expect performance at the higher end of our 14%-16% range. Next, cyber and intelligence. After several years of small reductions, we now expect in aggregate stability in the top line. The U.S. business, which was circa 70% of this sector in 2019, is expected to see low double-digit growth. In the Applied Intelligence business, we expect good top-line expansion in the government and financial services areas. However, the proposed disposal of the ex-SilverSky business would reduce sales by around $100 million.
Aggregate margins in 2020 are expected to improve into the 7%-8% range. The U.S. business is again expected to contribute around the 8%-9% mark. At Applied Intelligence, we would expect the business to move back into profitability absent the restructuring charge taken in 2019 and following the exit from the businesses being disposed. Moving to platforms and services U.S. Here we expect high single-digit sales growth with increasing volumes from both the U.S. combat vehicles backlog and from ship repair. Of this sales guidance, more than 80% is within order backlog, and again, that's a similar starting point to this time last year. At the margin level, we expect to remain at the low end of our 8%-9% range.
The ramp-up of vehicle deliveries, particularly on AMPV, together with trading of the Mobile Protected Firepower development program, will continue to be at initial low margin levels. Turning next to air, we expect mid-single-digit growth in sales for increased activity on the Qatar Typhoon and Hawk program and on F-35 as full rate production levels are achieved. Close to 90% of this guidance is within the closing backlog. Margins in the sector are expected to be lower than in 2019, towards the bottom end of our 11%-13% range. There is a headwind from higher pension service costs, as well as the further increase in self-funded R&D on the Tempest program. Partly offsetting those will be an expected step-up in the Qatar margin recognition. The last of the sectors, maritime, and here we expect sales to be stable overall.
Activity on carrier and the OPVs is almost complete, these are offset by increases on the Dreadnought submarine and Type 26 programs. 80% of this guidance is within backlog, and margin levels are expected to be at the top end of the 8%-9% guidance range. To complete your models, the HQ numbers should be slightly lower than those in 2019. Underlying finance costs are expected to be around 10% less, and there will be a full-year benefit from that repaid high coupon GBP 1 billion bond. Net present value charges will also be lower, and these will be partially offset by the cost of the term debt to support the GBP 1 billion of accelerated pension deficit funding. The effective tax rate is expected to increase from 19% to around 20%, including the impact of an increase in U.S. dollar profit mix.
The final number is, of course, dependent upon the geographic mix of profits. Minority interests are expected to increase as we complete further sell-downs in our Saudi partner companies. Overall and with the assumption of a U.S. dollar rate at 130, we are targeting mid-single-digit growth in the group's 2020 underlying earnings per share. Now moving on to cash guidance. As you recall, last year, we moved to a three-year guidance model. Having delivered marginally ahead of the first year of that guidance, we're now providing a rolling three-year target. This final chart sets out a simple model of what we delivered in 2019 and our target for years 2020 to 2022. The starting point is our EBITDA, that excludes the contribution from our joint ventures. Clearly, we're not providing a profit forecast here, hence the ranging.
Dividend receipts from those joint ventures are expected at around GBP 300 million. In support of the group's future growth, we currently expect GBP 300 million-GBP 400 million of CapEx above depreciation levels and around GBP 500 million to fund working capital. Pension deficit funding is shown based on the new U.K. deficit recovery plan, plus the contributions to our U.S. schemes. Just to be really clear here, and solely for simplicity of presentation, I've not included the GBP 1 billion one-off pension contribution on the chart. Interest and tax payments are both fairly predictable at GBP 1.5 billion. As you can see, that gives a targeted free cash flow over the next three years of GBP 3.5 billion-GBP 3.8 billion. Of that, we'd expect around GBP 1 billion in 2020. We hope that rolling three-year approach proves helpful.
With that, we'll be happy to move on to questions.
Yeah. Its Andrew.
Thanks very much. If I may, maybe one for Brad Greve and one for Charles Woodburn. Brad Greve, you've been in the business six months now, seen a couple of fairly substantial balance sheet changes over that time. Clearly, there are parts of the business that are also in an investment phase. What do you see as your priorities for the balance sheet over the next two to three years? One for Charles Woodburn, maybe, Charles Woodburn, what should we be expecting on a potential German Typhoon order this year?
Brad Greve, do you want me just to go first on the German Typhoon? Airbus, as you're aware, have been talking. The expectation is that something will happen this year. Timing's still to be determined and depending on the political cycle. Really, Airbus are the ones that are managing that bid, and they've been very consistent with their messaging. They're expecting it this year, and so do we. Brad Greve, over to you.
Yeah, thanks. Really, the first few months that I've been in the company, it's been really just about learning about the business. Traveling around to locations and seeing where we work and what we do and more importantly, the employees that do that. That's really been phase one of what I've been up to. Then phase two was really the sort of planning of what we do. I got involved in the planning process. The numbers that Peter Lynas presented today, the guidance, I was part of that, I signed off on that, and I own those numbers. Third phase was really about, and getting to your question about what we've done a little bit with the balance sheet. It was two projects that I think were very important to the value story.
I think you all know that the pension deficit's been a cloud that's hung over the company for a long time. I think what we've done here with the deficit funding is really important to get those clouds clearing. I think the end is in sight for that. I was very excited to be part of that. The second one was the acquisitions that we did. I think you saw two very high-quality assets that were brought into the portfolio. I think those are going to be adding value for the long term for the company. Those were two very important things that we've done with the balance sheet. Going forward, I think it's all about sort of managing our performance, driving the cash flow growth that will come from that, and the natural de-leveraging that will happen.
We'll focus on that. I think the last thing I wanted to say, since I have the opportunity, is just to really acknowledge the job that Peter Lynas' done. He's been fantastic in just helping me understand the business. Everywhere I've gone to and all the people I've talked to, there's just this consistent high level of respect that came across for the job that Peter Lynas' done. I certainly understand why that is, and I've seen that firsthand for myself. I'd like to just really thank Peter Lynas for that, and also just to say I'm really looking forward to taking over for him.
Thank you, Brad Greve. Charlotte, then Jaime Rowbotham on the other side.
Morning, gents. I'm Charlotte from Barclays. I've got three questions. The first one's probably for Jerry DeMuro, actually. It's around the U.S. budget. Obviously, we had the 2021 presidential request. There was some, in dollar terms, some reasonable step-downs on the AMPV and Paladin production, sorry, levels for 2021. I guess, how would you look to think about smoothing volumes longer term, and how should we think now about the potential margin inflection on land vehicles looking forward? Secondly, just more broadly, how do you see this latest DoD spending round panning out across the portfolio for you? The final one's really just, I guess, on your technology roadmap and cash.
Obviously, with the pension payments stepping down to zero, and then we've got M&A overlay on that from the U.S., we've got really quite a nice place to be in two or three years' time in terms of cash. You touched on Tempest R&D increases. What else in the portfolio do you see in terms of cash calls from an R&D perspective, looking at your organic growth profile? Thank you.
I'll get Jerry DeMuro to jump up on the combat vehicles, but on the R&D, if I just take that last one, I think we've been fairly consistent with our priorities. The increase in self-funded R&D is going in two areas. One is Tempest funding, and that steps up, but it steps up and then sort of stabilizes at a level for some time. Electronic systems has proven to be a very fertile ground for self-funded R&D, and that will continue to be an area where we invest. Areas like space, underwater, and precision-guided munitions are the three areas that we've been ramping up, and the success of things like APKWS is built on that. Obviously, we want more of that kind of highly successful high-growth programs in the portfolio. Electronic systems, as I said, has been a very fertile ground for that.
Jerry DeMuro, can I just ask you just to jump up on the combat vehicles and then the broader U.S. budgets generally?
Well, let's start with the large scale. The U.S. budget, we're very comfortable. The president's request for 2021 is consistent with the two-year agreement. As Charles Woodburn alluded to, we had the 2020 budget funded at roughly, what, $ 738. The 2021 request is at $ 740, it's consistent with that agreement. It's consistent with our planning, as we talked about and has been reported in the press. Our expectation was that that was going to level off. We're very comfortable with that. We're also comfortable with the alignment of our portfolio, our key programs, electronic warfare programs, our countermeasure programs, and the investments that we made. Thank you, board, for the investments in the two high-quality acquisitions, very relevant to not only our portfolio but to the National Defense strategies. We're very comfortable at the top line. We're also very comfortable with where our portfolio is.
You had a question, which I am happy to answer, some confusion over what the Army is doing with their funding on combat vehicles. We are funded on those Army combat vehicles for production. We have in funded backlog already enough to carry us into 2023 on PIM, on AMPV. Bradley is funded through, I think, 2024. What you see the Army doing in close coordination with us is aligning their funding for what it needs to be in each given year to continue those consistent production rates. As has been reported in the press over the last year, starting with PIM and then with AMPV, we are working with the Army to ensure that we hit production rates that meet their fielding and delivery schedules. As you know, the Army fields in brigade combat sets.
There's been very close coordination with that and making sure that there's no disruption to the production rates that are in our plan. I'll give you some totals in a moment. Also with the supply chain, if you recall, the AMPV, the PIM, each of them have over, I think, 4,000 parts, 200-plus suppliers. It's been a careful examination of that supplier base and what do we need to maintain continuity now that we're building that supplier base up through the LRIP phases of those programs. As you know, under the DoD standard, LRIP, Low-Rate Initial Production, is intended to do three or four things. One, verify the manufacturing processes and the supply chain. Verify that those designs are producible, and then produce units for operational test. We've done that on PIM.
We're working through that on ACV with the Marine Corps and working through that with AMPV. Those funding levels will continue deliveries consistent with our plan. We're very comfortable with that. There's no real material change, onesie, twosies in each account. This year, I think we delivered something like 120-plus combat vehicles out of our network of production facilities. That was 2019. 2020, we're going to hit about 340 or so. 2021, we're going to hit the mid 400s and then stabilize just below 500. Those funding platforms or those funding lines will support that projection. You asked a question about margin rates. As Peter Lynas said, we're trading prudently. As I've alluded to before, as we come through LRIP and we validate the manufacturing processes, we will then raise those funding rates.
What you see in these projections, it's wholly consistent with also those delivery schedules. This year, we'll deliver roughly 19 AMPVs for operational test. Last year, we delivered 13 ACVs. We hit the production rates on PIM, we're stable there. ACV, 13 last year, 50 this year. They're going into test. AMPV in the second half of the year, we'll be delivering 19 units roughly, for test. We're on plan. A lot of hard work by a lot of people. We're very comfortable with the funding levels. That program is stable and in backlog through 2023, really.
Very good, Jerry DeMuro. Thank you for that.
Charles Woodburn, can I just add one thing? I hate to raise the accounting in IFRS 15. That's one of my least favorite topics. We are selling as costs are incurred. As Jerry DeMuro talks about those volume of deliveries, that's not representative of the sales that are going through. When I talked about taking sales at initial low margin or very low margin on those programs, if you're just incurring costs without delivering, that's why you take really low margins. You've got deliveries later, sales early, but as you deliver and retire risk, that's when you take the profit.
Yeah. Jaime Rowbotham, you had a question.
Just one from me. Jaime Rowbotham from Deutsche Bank. For Peter Lynas, on the cash guidance. Obviously, the boost to the rolling three-year from the proactivity on the pensions is very welcome. If there's a line item in that guidance that looks like it might be going slightly the other way, it'd be CapEx to depreciation. Could you tell us what you're going to be investing in there, and perhaps a bit about the phasing of that over the three years?
Okay. You're right, Jaime Rowbotham. The guidance, we have moved CapEx up a little bit. What we're seeing, and it's a quality problem to have, in support of the growth in the U.S., particularly in electronic systems, we're having to put some investment into new facilities. It's increasing classified activity. You can't house classified activity on unclassified sites, we're having to create new facilities to take that work and house the people. We've got a new facility that we're building, will be built down in Austin. We've got one in Huntsville. We're also doing some redevelopment of the existing, Canal Street site at Nashua.
It's really around the facilities, and a lot of that is going to be, of those three years, it's going to be front-end loaded, which is why when we talked about around GBP 1 billion of that free cash flow, you're going to see a lot of that CapEx appearing in 2020.
Largely electronic systems and as you said, a high quality problem to have.
Yeah.
Nick Cunningham .
Thanks. Nick Cunningham, Agency Partners. First of all, could I say thanks to Peter Lynas and Jerry DeMuro for being so patient over the years. I'm probably going to test that again.
Okay.
Your biggest division, Air, is actually the hardest one to forecast because it's got so many big moving pieces to it, I know you don't give medium term guidance, but I wonder if perhaps you could draw some type of picture, if you like, as to those big pieces in terms of both the revenue top line and the margin mix impact as things like Qatar, U.K. upgrades. I had a list of other things, and particularly the one that certainly I don't feel I understand at all, which is the movement of Saudi support into the JVs, how that actually works mechanically in terms of what it does to the top line, the minority cash flows. Do you get paid for passing that equity value over? Is it just
How long have you got?
Well, yes.
Well, no. I was going to say at our capital markets day, if you recall last year, we did give some. I think that we're largely consistent with that. I'll hand over to you to talk, but it ends up being a rather boringly stable story. Do you want to add?
Yeah, in terms of top line, what's building up? Clearly, we've got Qatar sort of rolling on and rolling up, and whilst that drives the top line, it's the bottom line that's more important. As we move into the risk retirement, as we start deliveries, and first deliveries are not till 2022, you start seeing that delivering more margin. F-35, we delivered 142 sets in 2019. We're going to 160 this year, in 2020. Lucky to talk about going beyond that. We could if we needed to. You've got growth there and sustainability. On the support side, we've got what we do in the U.K., we've got what we do in Saudi Arabia, that's sort of fairly steady state, and rolls on for several years. We've got some growth coming off the two big programs.
I think what's probably causing a little bit of more difficult to predict is the margin levels, because once you get above the top line, you've also then got to think about the R&D investment we're putting in. G&A's pretty stable. It's really the R&D, if you look at Tempest. I think you know because of the nature of the program and security, we can't even talk about the numbers on it. Tempest R&D is stepping up. It steps up quite a lot in 2020, compared to 2019, which is why you've got that slight margin pressure. I think, as Charles Woodburn said earlier, that'll then hold for sort of two to three years before it then comes back down again. Who knows what we'll be spending on R&D investment back into sort of 2024, 2025.
We are going to see a high level of R&D going through. The other impact we've got, of course, is the pension service cost, which is driven by the accounting pension deficit. As that comes down over time, then the service cost should come down over time, so we should see margins moving back up. We've held that 11%-13% guidance range for many years now, and we've always been within it. We've guided today that we're going to be towards the bottom end of that for 2020. As you move back out, with hopefully lower pension cost burden, improving Qatar margins, then you'd expect to see us move back up through that range.
Right. The self-funded Tempest R&D for several years, do you have visibility of that transitioning into a funded R&D program?
The way we are handling it, we are getting funding today from U.K. government. We are also putting in some money ourselves. When I talk about self-funded R&D, that's purely the bit of ours that falls to the P&L. I'm not talking about the government funding, but if you took the gross number, it's a big number.
Yeah. Government committed at the outset to GBP 2 billion, and they've been funding their share of the program as we go through, so we've been seeing that.
I'll go back and reread my notes on the Saudi JVs from the CMD.
The basic direction on Saudi JVs is, we have been selling down some of our. We're not selling outward, clearly. In line with the Saudi Vision 2030, we've been investing in country, we're bringing partners in, into some of those joint ventures. As they come into those joint ventures, you get a higher minority interest building up. What we've not built into our cash guidance is anything in terms of the further sell downs to those partners as we go through 2020 and into 2021. Once we've got those numbers in clarity, obviously we can share that with you. That's the sort of direction of travel.
Thank you.
David Perry .
Hi, David Perry from JPMorgan. I've got some fairly dry technical questions. I think they're important, though.
First one is very simple. The GBP 1.5 billion you're putting into the pension, would that just come off the IFRS deficit as well? If everything stayed the same on interest rates and assets, GBP 4.5 billion would go to GBP 3 billion?
Yes.
Okay. Second question follows from that, is slightly theoretical. Imagine you were buying a company tomorrow, and it had the same pension situation as you, so a GBP 3 billion IFRS pension deficit, zero actuarial that required no funding whatsoever. As a CFO, how would you think about that in terms of valuing the company? Is it in a fiction? It doesn't exist, or does it exist? Just help me think about how I would value BAE.
Yeah. I'd always look at what's the underlying economics, what's the cash flow requirements. If you look at where we could be, to your point, if asset returns stay the same, deliver everything they said, we could have no funding deficit at the end of 2021 and still have an accounting deficit. The accounting deficit is meaningless if it doesn't require a cash injection. If I was looking at value of business, I'd be looking on a cash flow basis, not on the account.
To all intents and purposes, GBP 3 billion doesn't exist.
That's why I've always-
esoteric accounts
always stressed the point that our funding obligation is around GBP 2.5 billion less than the accounting deficit.
Mm-hmm, okay.
That's the way we look at it.
I'll ponder it. The third one is, customer advances, the amount of money you had, you used to report that very precisely, and I think with the IFRS 15, it gets bundled into this contract liability number.
Yeah.
Do you know what the actual amount of customer cash you have on balance sheet today is?
It's around the GBP 3 billion mark, is the accounting number. As you know, David Perry, when we talk about being neutrally funded by our customers, clearly, neutrally funded to customers is at selling price, which includes profit and G&A which we've expensed. There's always going to be a degree of that number which relates to money we've already expended and written off. That's not a sort of GBP 3 billion that we owe the customers, it's just the way the accounting works.
Okay, great. The last one, on the new three-year cash flow guidance, are you willing to share an annual cadence on that?
I think you can work out the annual-.
It's that hard.
It's not. This is how I do it, okay? If you think of what we guided when we sat here this time last year, we talked about sort of in excess of GBP 3 billion. Well, you can see we delivered GBP 850 million this year. I've just said in this year's guidance we'll be around the GBP 1 billion mark in 2020. Clearly you could've got to a number of around GBP 1.2 billion-ish for 2021. If you then roll into this year, we've given you a range, clearly, but you've got GBP 1 billion for 2020, you've got that GBP 1.2 billion-ish for 2021, and therefore, by inference, 2022 has got to be, even if you just added the benefit of-
Even better.
You'd be at GBP 1.4 billion, GBP 1.5 billion. That's the run rate. Working capital is always going to be volatile. If we get big advance payments or anything like that, all those numbers could shift, which is why we think looking at a 3-year model is better than just looking at in year. If you want to break it down into each of those years, that's the way I'd look at it.
Thank you.
Pleasure.
Can I maybe just ask Sandy? I think you were wanting to say a word.
Ready.
Good God.
Questions first. Yes, we do.
You may have a question first, by the way. By all means.
We do come to this. Sorry, folks. Jerry DeMuro escapes. I would like to attribute it to the special relationship, but it's just I haven't got any dirt on Jerry DeMuro. Peter Lynas does not escape. I think we all forget that when Peter Lynas became FD, he had to step into some fairly big shoes when George Rose retired. He did that, and then some. Peter Lynas' ability with numbers and depth of knowledge of the numbers has never been in question. However, competent finance directors tend to bring out the worst in me. I still have fond memories of just a moment's hesitation when I suggested to him he may just have revealed the 2013 results when we were supposed to be reporting 2012. Only once, however, did I ever see Peter Lynas taken completely aback by something.
My wonderful saleslady, Sonal, and myself were in the States years ago. We were hooking up with Peter Lynas, Ian King, and Andy Rathmell to have dinner. It was Peter Lynas' birthday. Sonal dutifully bought him a tie. I didn't like it. It didn't matter. Thought that counts. Off we went to this dinner. The conversation bubbled away, as you can imagine, with Ian King. Ultimately, Sonal politely inquired what Ian King and Peter Lynas were doing that weekend. The answer was they were going to watch Portsmouth play. "Play what?" said Sonal. "Well, football, of course." Sonal was incredulous. "Does Portsmouth have a football team?" Peter Lynas and Ian King embarked on a precis of the sporting prowess of Portsmouth Football Club. After two or three hours, we escaped. Now, this is where I sort of out myself, I suppose. Careful, don't leap to conclusions.
I am standing here well aware that Portsmouth beat Exeter 3-2 on Tuesday evening, are on their way to Wembley, where they hope to retain the Leasing.com Trophy against the mighty City, that's Salford City, by the way. Here we are, I was mulling over this and thinking it shows what respect we've all had for Peter Lynas that we remember his birthday, or Sonal does, you buy him a tie, and that I've come out of the closet as a Portsmouth FC follower. I was thinking, well, the penny kind of dropped, and I thought, "Well, it's respect. Yes, of course there's respect." Actually that's the sort of thing that you would only do for a friend.
I hope you will all join me in wishing my friend Peter Lynas, in fact, I honestly believe all our friends, Peter Lynas, the very best in the future, and thank you for everything you've done for us while you've been doing in the job. Really much appreciated. Good luck. Want to say a word?
No. I've offered him the mic, but I'm not sure he wants it. I'm not sure I can. Thanks for the kind words. It's been a privilege to be up here, and I've enjoyed working with you. It's been a pleasure most of the time, but always a privilege. Thank you all. Thanks for the support, and thanks for the words, Sandy.
No, thank you. Oh, yeah, on the line. I'm sorry about that.
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. We will give everybody time to signal for questions. 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.
That's it.
Your first question comes to the line of Ben Heelan from Bank of America. Please go ahead, the line is open.
Hi, everyone. Yeah, thank you for taking my question. I'm sorry to have a relatively boring question after what Sandy just said, and, yeah, Peter Lynas, thank you for all the help over the years as well. My question was around Tempest. We saw from Airbus last week more and more charges on the A400M, which I think goes to highlight some of the issues companies can have when they get locked into long-term contracts on some of these very significant technology, new technology programs. How are you guys thinking about the contracting, the negotiations with the customers and managing the risk of getting locked into contracts long term? Thank you.
That's a very good question, Ben Heelan. We are very mindful of contractual issues elsewhere and are obviously trying to protect our commercial position going forward. It's still very early days on a program such as Tempest, and plenty of time for the commercial model, with international partners to evolve. We've seen across the patch some that have worked more successfully than others, and you can just absolutely be assured that we're looking to make sure that we find the right model that works with international partnerships and also gives us surety of outcome.
Okay, great. Thank you.
That's it. I think that was it for questions. Thank you all for joining, and thanks again to Peter Lynas.