Morning to everyone, welcome to the 2019 interim results. I'll start with the operational and strategic updates for the half year. Pete, as usual, will cover the detailed financials, and we'll take your questions at the end of the presentation. The first half has seen an improving operational performance on a number of fronts, a set of results that underpins our guidance for the full year, and continued progress on a number of strategic areas. In our key markets, the position is broadly unchanged. The U.S. business further enhanced the outlook with the order backlog increasing by $1 billion. The recent 2-year agreement to lift the U.S. budget caps is encouraging, adding near-term fiscal clarity, and is in line with our planning assumptions. We remain well-aligned with customer priorities and growth areas. In the U.K., we are focused on delivering our long-term contracted positions in air and maritime.
In Saudi Arabia, we continue to provide equipment, support, and training under government-to-government agreements. Following the updates in March from the German government regarding export licenses, we continue to work closely with industry partners and the U.K. government to fulfill our contractual support arrangements in the kingdom. We noted the judgment in June from the Court of Appeal directing the Secretary of State for International Trade to revisit the process for granting licenses for the sale of military equipment to Saudi Arabia. We will assess the result of this reconsideration once it has been made. Whilst the geopolitical environment does remain challenging, the group has a strong order backlog and balance sheet, a well-positioned portfolio, and long-term positions on key programs. These are foundations for us to deliver growth and sustainable cash flow.
Reflecting this outlook for the business and performance to date, the interim dividend has been increased by 4.4%. Our priority is the delivery of consistent and strong operational performance for our customers and shareholders. Appropriate actions have been taken to tackle operational challenges, and we are ramping activity across a number of our businesses. Future growth is underpinned by performance on our big programs. I'll run through an update of how they're progressing, just as we did at the Capital Markets Day. On F-35, the 2019 production ramp-up progresses well towards 140 sets, with full rate production levels targeted in 2020. We achieved 67 in the first half. The Qatar Typhoon and Hawk contract is meeting its contractual milestones, and we have recently signed a contract amendment that accelerates the delivery of Typhoon aircraft.
Typhoon support continues to perform strongly, with the Centurion standard having been declared, the U.K. Tornado fleet successfully retired from service on schedule. In our U.K. maritime business, work continues on the manufacture of the remaining Astute-class submarines, with Boat 4 due to exit Barrow later this year. Activity on the Dreadnought program is ramping up, along with the associated major program of building works at the Barrow site. Progress is being made on the offshore patrol vessels with the second ship of five, HMS Medway, accepted by the customer in February, and the third ship, HMS Trent, being very close to acceptance. This five-ship program will be completed in 2020. On the aircraft carriers, HMS Prince of Wales remains on track for sea trials later this year. The Type 26 program is progressing towards its first-of-class contractual acceptance in the mid-2020s.
In Australia, the Hunter-class frigate program is in the early stages of mobilization under the initial four-year design and development phase. In addition to the management changes made, investment in automation and processes has continued in the first half in our U.S. combat vehicle business to support the ramp. We are making slow but steady progress on Paladin, remaining on track to achieve production of eight vehicles per month by year-end. AMPV and ACV are progressing, with the first ACV undergoing acceptance testing and benefits being seen from the robotic welding lines now installed. With the final commercial ship constructed and delivered, the ship repair business is focused on its core mission of ship repair and maintenance for the U.S. Navy. There is no change to the provision on the Radford subcontractor performance issue taken last year.
As you've seen from the results, the performance in Electronic Systems remains strong as production ramps on F-35, APKWS, and a number of classified programs. To summarize our operational status, steady progress is being made to address our challenging programs, with Paladin remaining a clear focus, and a continued strong performance across many of our big programs underpins our full-year guidance and covers the restructuring charge taken in Applied Intelligence, which I'll come to shortly. We are very focused on driving our three strategic priorities of operational excellence, improving competitiveness, and advancing technology as we look to shape the business for the future. The Air Capital Markets Day laid out our strong credentials and performance in current programs, diverse geographical footprint, and exciting future opportunities.
The next phase of the U.K.'s Future Combat Air program has commenced between industry partners and the U.K. government, and we are delighted to welcome Sweden to the program, as recently announced. In our Applied Intelligence business, government services is performing well, and financial services remain a core offering. Following a strategic review of commercial cyber, we've commenced a process for the disposal of the X SilverSky business. We've also decided to exit the U.K.-based managed security services business. This has led to a rationalization charge at the half year. Cybersecurity is, however, an increasingly important part of government security and a core element of stewardship for companies in a sophisticated and persistent threat environment. The services and products we offer in our remaining core business of around GBP 450 million per annum are expected to drive growth and improve returns.
In the U.S., aligned with our strategy of bolt-on technology acquisitions, we acquired Riptide Autonomous Solutions, a provider of innovative unmanned underwater vehicles. We shall continue to look for further opportunities to enhance our electronic systems portfolio. In July, following regulatory clearances, the new U.K.-based land vehicle joint venture with Rheinmetall was formed. In Saudi Arabia, in support of the kingdom's priorities, as part of our ongoing dialogue with Saudi Arabian Military Industries, we continue to restructure the group's portfolio of interests with the completed sale of our stake in AACC and expected sale of our stake in AEC. Finally, as Pete will outline, we further strengthen the balance sheet by repaying the $1 billion maturing bond from cash and reached agreement in respect of certain overseas tax matters.
In conclusion, we are maintaining group-level underlying earnings guidance and driving program performance while continuing to take actions around the portfolio in line with our strategy to enhance performance. The group has a strong balance sheet combined with a large order backlog, long-term program visibility, and an evolving pipeline of opportunities, which all provide the basis to deliver growth and sustainable cash flow. I will now hand over to Pete to run through the financials. Over to you, Pete.
Well, thanks, Charles, and good morning to everybody. Just before I get into the numbers, I would like to remind everyone that these are our first results to be prepared under IFRS 16 lease accounting. The adoption of that standard increases EBITR by circa GBP 50 million on a full-year basis, and that is then matched by a higher finance cost. There is no restatement to the 2018 numbers. In terms of exchange translation, there has been a benefit from the stronger US dollar. For reference, the dollar rate averaged 129 in the first half of this year, compared to 138 last half year. The headline numbers and compared to the first half of 2018, our sales increased to GBP 9.4 billion. That is up 4% on a constant currency basis.
Underlying EBITR of GBP 999 million was 14% higher than last year. That equates to a 9% increase on a constant currency basis and after removing the IFRS 16 change. This increase largely reflects the absence in this half year of any material program-related charges. Underlying finance costs in the first half were GBP 29 million higher. That includes GBP 25 million for the IFRS 16 impact and GBP 6 million on the stronger USD. Underlying earnings per share were up 11% at GBP 0.219. That's 8.4% on a like-for-like basis. That's with an effective first half tax rate of 17%, consistent with last year's.
In addition, as announced on July the 18th, there was 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 against an exposure arising from the EU's decision on the U.K.'s Controlled Foreign Company Regime. There is a bridge chart highlighting all the major movements from the first half of 2018 attached to the presentation materials. There was an operating cash outflow in the first half of GBP 309 million, and net debt at June the 30th stood at GBP 1.9 billion. I will cover the cash position on subsequent charts. Order backlog is reduced marginally over the six months to GBP 47.4 billion, with trading on multi-year long-term contracts in the air sector partly offset by further growth in the U.S. businesses.
Finally, the interim dividend has been increased to GBP 0.094 per share, and that's up 4.4% on the 2018 interim. There were a limited number of items impacting the balance sheet in the first half. Firstly, with the adoption of IFRS 16, GBP 1.3 billion now appears both within fixed assets and lease liabilities. On working capital, there's a number of moving parts, which I'll come back to when I cover the cash by sector. On pensions, the accounting deficit at the half year has increased to GBP 4.3 billion. Discount rates have reduced by 60 basis points in the U.K. and by 70 basis points in the U.S.
However, increased mortality assumptions following the latest actuarial tables have reduced liabilities, and investment returns were at 9% in the first six months. As you all know, the accounting changes have limited impact on the funding position of our schemes, and that funding position is currently estimated at some £2 billion lower than the reported accounting number. Of our nine UK schemes, three of the smaller ones are now fully funded, and on the other six, funding levels range between 88% and 98%. One other point on the balance sheet, the assets held for sale contain our UK vehicle support business going into the joint venture with Rheinmetall and our interest in the AEC company in Saudi Arabia, where disposal is expected by the end of the year.
Moving on to cash, this slide sets out the movement from our net debt position of GBP 904 million at the beginning of the year. There was the operating business cash outflow of GBP 309 million. Interest and tax payments were GBP 265 million. 2018's final dividend, paid in June, plus dividends paid to minority interests totaled GBP 449 million. All the other cash flow movements totaled GBP 38 million. In June, as planned, we repaid a maturing $1 billion bond from cash held, so we closed at June 30th with gross debt of GBP 3.4 billion and cash of GBP 1.5 billion. That net debt number of GBP 1.9 billion is better than expectations, that is due to timing of cash flows on the Qatar program, both in terms of an accelerated receipt and later payments to subcontractors.
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. Just to note, the total cash outflow for pension deficit funding in the period reported through the head office numbers was GBP 160 million. Moving now to the sectors. I'll cover the year-to-date performance here and back to the full-year outlook a little later. The first of the sectors is electronic systems and the numbers in U.S. dollars. The sector sales of $2.8 billion are 11% up over last year, albeit with some first-half bias. Growth in the defense businesses was at 10% as the F-35 and APKWS programs continue to ramp up and classified activity expands.
Commercial sales of engine and flight controls and hybrid drive units also grew by some 14%. Commercial sales were more than $600 million in the first half. The return on sales achieved was at 14.8%. First half conversion of EBITDA reflects the usual second-half bias. We would therefore expect an improved conversion level over the full year. Order backlog grew again to a new record of $7.6 billion. That follows further awards on F-35 and APKWS. The cyber intelligence sector comprises the U.S. intelligence security business together with BAE Systems Applied Intelligence. The numbers again here in dollars. In aggregate, the sales of $1.1 billion were broadly unchanged. Sales in the U.S. business were down marginally. In Applied Intelligence, sales were up by 6%, all coming from the government business line.
Following our decision to dispose of the ex-SilverSky business within Applied Intelligence and to exit from U.K.-based Managed Security Services, a restructuring charge of GBP 25 million has been booked in the first half. Whilst the U.S. business delivered a 9% margin, the aggregate for the sector was at 2.9%, reflecting that charge at AI. The planned exit by the end of the year from those areas of Applied Intelligence should be margin enhancing into 2020 and beyond. Cash flow is expected to improve in the second half, although the GBP 25 million restructuring is largely a cash cost. As expected, the order backlog was stable at $2.4 billion. In the platforms and services sector, sales were up 4% to just under $2 billion. As expected, there is a second half bias in the ramp-up of U.S. combat vehicle production activity.
Margin performance for the first half improved to 8.9%, absent the charges taken last year on Radford facilities construction and commercial shipbuilding. The return on sales for the full year is expected to be slightly lower as combat vehicle volumes of lower margin sales increase in the second half. First half cash flow, while slightly better than last year, reflects the significant working capital held in the combat vehicles business. We continue to expect to see this converted into cash flow as we move through the last quarter of this year and into 2020 on the increased production deliveries. Order backlog has further increased to $7.2 billion, mainly on award of low rate initial production for AMPV. In the air sector, sales were at GBP 3.4 billion, slightly ahead of last year.
Activity on the Typhoon and Hawk program for Qatar and sales from MBDA are expected to ramp in the second half. Given the very early stages of the Qatar program, and therefore the lower margin recognized, those second half sales on Qatar will be dilutive to the full year return. There is a second half weighting of the self-funded R&D spend on the Tempest Future Combat Air program. The cash outflow in the period reflects timing of receipts on international Typhoon programs and utilization of advances on the Saudi support contract. There has been utilization of the advance held on the Qatar program, albeit that is now more weighted to the second half year. There was a pull forward in customer funding to the first half of some GBP 80 million following the contract amendment to accelerate aircraft deliveries.
I'll talk a little bit more about that when I get to the cash guidance. As expected, order backlog reduced to GBP 25.9 billion, primarily for the trading on multi-year orders received in prior years for Saudi support. Sales in the maritime businesses for the first six months of GBP 1.5 billion are 5% up on 2018, with a slight first-half bias for higher activity levels on the carrier program and in Portsmouth naval base support. EBITDA in the first half was at 8.7%, back within our guidance range. There was an operating cash outflow of GBP 92 million, which includes utilization of the naval ships provision created last year and timing across a number of programs. The annual funding on the U.K. munition supply contract continues to be scheduled for December.
Order backlog is little changed at GBP 8.7 billion, with further awards for funding on the Dreadnought program being received, less the sales trading on Astute, Carrier, and Type 26. For reference, there is a chart providing a summary of the trading performance of all five sectors and the numbers for HQ appended to the presentation posted on the web. Whilst I wouldn't normally reference the HQ numbers, there is one point to note. Within HQ, we have taken a charge relating to a claim following the fire at our Holston munitions facility, of which GBP 10 million was self-insured. Moving to guidance, this chart is the same as presented at the Capital Markets Day back in May. It provides the year's guidance as we set out back at the February results announcement for each of the sectors, adjusted for the impact of IFRS 16.
Whilst we expect no changes to the overall group earnings guidance, the first half restructuring charge taken at Applied Intelligence, together with the charge at HQ that I referred to a moment ago, are expected to be covered by improved operational performance and a slightly lower effective tax rate. We continue to assume an exchange rate for the US dollar at an average of 130, and as a sensitivity, a $0.10 movement in that average rate equates to GBP 0.015 of earnings. In aggregate, we continue to target mid-single-digit growth in the group's 2019 underlying earnings per share, and clearly that excludes the GBP 0.05 one-off tax benefit. This penultimate chart highlights the cash utilization we expect in 2019. The first column shows the position at the half year. The second column provides the full year guidance.
In respect of operating cash flow, we continue to expect capital expenditures to be above depreciation levels, with a peak in near-term spend required to support the growing U.S. business. On working capital, there are two items of note. Firstly, under the contract amendment for the accelerated Qatar aircraft deliveries, we will pull forward some further receipts into the current year. We remain in negotiation with our major subcontractors as to their funding profiles. Secondly, on the Paladin program, we are in negotiations on a new delivery schedule, which will push some further cash collection into 2020. The final operating cash flow item is the year's pension deficit funding, which will be, as expected, around GBP 200 million.
Moving on to the non-operating cash flow items, outflows for interest and tax are expected to total around GBP 0.5 billion, and dividend payments to shareholders and minority interests will be around GBP 800 million. Overall, we now expect net debt to be broadly unchanged from 2018's closing position, and that's a slight improvement to the year's guidance. This does not include the potential disposal proceeds from the sales of our interest in the Saudi Advanced Electronics Company and the ex-SilverSky business in Applied Intelligence. I'd also reiterate our three-year target of generating free cash flow across 2019 to 2021 in excess of GBP 3 billion. Just before we go to Q&A, I'd like to summarize the key points.
Firstly, in terms of cash, the net debt at June was better than expectations, but that's mainly down to timing of both receipts and payments on the Qatar program. We have slightly improved full-year cash guidance, with timing mix expected on both Qatar and Paladin. That guidance excludes potential proceeds from the disposal of the AEC and SilverSky. After the first six months of 2019, our three-year free cash flow target is reconfirmed. Secondly, on earnings, the first half performance clearly underpins our guidance for the full year. Finally, we've increased the interim dividend by 4.4%, reflecting our confidence in the outlook for the business. On that point, we'll turn it over to Q&A.
As a reminder, ladies and gentlemen, please press star one if you wish to ask a question. Our first question for today is from Robert Stallard from Vertical Research. Please go ahead.
Thanks so much. Good morning. A couple of questions from me. First of all, on the M109. I was wondering if you could give us an idea of where you are currently in the production per month, and what some of the practical challenges are for ramping it up to eight per month by the end of the year. Secondly, on the Eurofighter, you mentioned that the Qatar deliveries have been accelerated. Does this, unfortunately, as a consequence, also increase the pressure to get a follow-on order from Saudi Arabia to backfill production? Thank you.
Robert, I'll just do the last one, and then maybe we've got Jerry here from the Inc. business, who will say a few words on M109. For Eurofighter, it's more a phasing issue. The actual delivery and total time of deliveries is consistent. I would say it doesn't change our position. Obviously, we've got a number of opportunities that we're pursuing at the moment with respect to, for example, the German tranche one replacement, Finland, and others for Typhoon. I think we've got a number of good opportunities that we are working through at the moment. The change in the acceleration doesn't actually affect the overall, and indeed, the last deliveries of the Typhoon. It remains unchanged from that perspective. What it does do is just bring forward the peak production.
Jerry, do you want to just say a few words on M109?
Sure. Good morning, Rob. Thanks for the question. Regarding the M109 and production quantities, we are still targeting to get to 8 per month by December. We're working closely with the U.S. Army. Senior executives in the U.S. Army just had a program review last week. We're making excellent progress. We've completed deliveries of the option year 2 configuration, and we are beginning deliveries of option 3 configuration, which is a new tech data package. We have in total about 80 hulls in process in combat vehicles of different types. Of those, about 50 are the M109, and of those 50, well over 40 are already through weld and fabrication, which is the most complex issue. We have growing confidence in our ability to meet 8 by the end of the year. In fact, as of last Friday, we had about five available for testing and acceptance by the government.
Now the key will be refining our inspection, acceptance, and delivery process with the government to meet the accelerated production schedule. We're pretty confident. We have enough inventory in process, high quality, the volume is there. Now we got to refine the acceptance and inspection process.
That's great. Thanks, Jerry and Charles.
Thank you.
Next question.
Our next question for today is from Andrew Gollan from Berenberg. Please go ahead.
Hi, thanks for taking my questions. Two for me, please. You mentioned in the script about the Secretary of State review on export licenses for Saudi. Can you just maybe outline how you assess the risk around that and what it could mean for the business, depending on the decisions there? Secondly, back to armored vehicles, actually. The JV with Rheinmetall, can you just maybe expand on what the opportunities are there in the U.K.? I know we had the Boxer, various other contracts that Rheinmetall is involved in, how does this enhance the longer-term outlook in your opinion?
I'll probably do the second one first. For the JV with Rheinmetall, the two obvious opportunities are the MIV, the 8x8 program initially, and then potentially longer term around the Challenger life extension program. There's two obvious U.K. significant procurements for that JV to be working through. With respect to what I said from the Secretary of State, we'll just have to see how that plays out. We were not party to the judicial review process. Once we noted the outcome, as you saw in the outcome, CAAT were not asking for the cessation of current licenses. It's more looking at the process, and I think, U.K. government will do the review, and once they've done the review, we'll have to understand the impacts of that.
At the moment, we are meeting our contractual commitments and obviously we intend to work with U.K. government to do our best to do that for the future.
Okay, great. Thanks very much.
Thank you very much. Our next question for today is from Jamie Rowbotham from Deutsche Bank. Please go ahead.
Morning, gentlemen. Two questions, please. One for Pete on the Air division and one for Charles, I think on Platforms and Services U.S. Pete, in Air, keeping in mind your comments about the utilization of last year's Qatari advances being more second half-weighted, as well as the GBP 18 million of accelerated receipts from Qatar in H1, I feel as though the cash conversion in Air ought to have been a bit better this year than it was last year when you had the GBP 300 million outflow on Saudi support or SBDCP. Are there basically non-Qatar related outflows in Air in the first half of 2019, similar to the ones in first half 2018, and should we expect these to continue going forward, please? Then the second one in Platforms and Services U.S., more specifically ship repair.
Have you been able to make any progress, Charles, on the dual docking that you wanted to do to better maximize the utilization of your shipyards? Thanks.
Jamie, I'll take the first one. In terms of Air in the first half, I did sort of touch on it in the script. There are two other items that we've got this year. One is, we have burnt up about GBP 130 million of Saudi support advances. That was in our previous guidance, probably within the overall guidance but not visible as a line item. That's no change. The other one I referred to timing on international Typhoon payments. That's really around in Oman where we have long-term support, delivery ongoing for about a five, six-year period. There's always going to be timing of when we get the receipts versus when we're putting support, particularly inventory and the like, into country. Those two items, between them come to GBP 200 million.
I think that probably fills the gap that you got in your model.
Then, with respect to dual docking, I'm just looking to Jerry here for confirmation, but the last time I spoke to him a couple of weeks ago on the topic was that was the plan. There were two ready to go in. Jerry, have we actually done that yet? Correct. We have been selected in San Diego to do the first dual docking in the Pride of California, which is a significant investment that we made to improve the assets that are out there and the capacity in San Diego. We're in negotiation with the Department of the Navy to begin that docking here in just a couple of months.
Very good. Thank you, Jerry. Next question.
Thank you. Our next question for today is from Sandy Morris from Jefferies. Please go ahead.
Yep. Top of the morning, gentlemen. Hope all is well. Picking up on ship repair, as kind of a sort of ABC, I'll be devastated if you shut down Pearl Harbor because that's always been the obvious place for an analyst visit. I wouldn't mind understanding what the Navy was doing to the contractual terms that has made you think about that. Just following on, the order intake in ship repair in the first half was actually relatively subdued compared to last year. That may be because you're out of capacity. Despite the dual docking thing, you still kind of say you are looking to increase capacity in ship repairs. I'm a bit sort of confused as to quite what's going on.
I mean, generally speaking, the trend for the business is good. I will hand over to Gerry just to say a couple of words on Hawaii and why we can't invite too many analysts there in the future. Gerry, do you want to just say a little bit about the situation there?
With respect to ship repair bookings, for instance, the dual docking is not in the order book because the order hasn't been placed yet. We're negotiating with the Department of the Navy. With respect to capacity, we are working with the Navy on a revised business model to improve not only at our shipyard, but the other repair shipyards and overhaul yards, the throughput, so the Navy can get more capacity from the infrastructure that exists today. The Navy's coming out with a revised acquisition strategy. It was due out this month, probably not going to be out until about September. As we look forward, we're going to get better utilization of the existing capacity through things like the dual docking. Secondly, the revised model will allow more ships to move through a little bit more quickly.
Yeah. On Hawaii.
Hawaii. The Hawaii situation is a little bit different. We're going to continue. We have obligations for the next couple of years. We're going to fulfill those obligations as the Navy is exploring an opportunity to perhaps get more small business participation in there, where they would look for us to either mobilize or demobilize on a ship-by-ship basis. They're also changing the nature of the work that will be done there to less complicated work, more straightforward. We do not see an opportunity to get sufficient return on our assets if that model continues. There's no guarantee the Navy's going to go that route, if they do, we have told them that we would not bid on that structure of the work.
A lot of that more complex work will be moving to the San Diego yard, where we think we can add greater value and have greater discriminators. The volume will shift a little bit under the current plan from Hawaii to San Diego. We would invite you. The weather in San Diego is not terrible. Come on out and visit there and see the ships going through.
It'll be Warton again, we know that. It was sunny. A quick follow-up. I know we paid $235 million for Silver Sky, but I hate to say it like this, does it have any significant residual value?
Sandy, we're just launching a sales process next week, so we're not going to say anything on that one at all.
Okay. All right. Well, I may not be bidding then. Then last but not least, in the U.S. intelligence business, which we've all slightly taken our eye off, I get that there was large consolidation around you a couple of years ago, but it's gone a bit quiet. You speak about the thing continuing, market being competitive and evolving. Are we actually okay to be able to hang on in here at around the current level of sales and returns without somebody sort of stealing our lunch?
I think, Sandy, the evidence shows that, yes, I think that business has been performing well. There is always a trade-off of either going for growth at the expense of margin or holding your position and maintaining margin. I think that the strategy that the business has been on and under the leadership of Al Whitmore, I think the business is performing very well. Certainly in terms of margin performance compares well with its peers. I think we're pretty satisfied with the performance of that business.
Yeah, Sandy, I'd just add, the way we look at that business is one, the backlog. That's ultimately from a book-to-bill perspective, the backlog was stable. We look at the recompete wins and competitive wins, and the business has been hitting its targets now for the last 12 to 18 months. Yeah, we're holding our own.
I mean, I don't mean to be mean, but obviously the consolidation that took place around us looked quite intimidating in terms of the scale of competitors. I suppose it's just like, are we unique enough in what we do, whereas they are just much more broadly based is the sort of sense or understanding I'm trying to get.
We have some good positions on certain contracts and good positions with certain of the agencies.
Yeah, I would also, just to add to that, say that where do you get the scale benefits? How much scale do you need? Our view is that at that size, we are able to win the recompetes and win new business. I think we've been quite effectively demonstrating that. I think we're pretty pleased with the performance of that business. Indeed, what we see in the backlog and the opportunities, I think we remain content.
Okey-dokey. I had to go and Google what an active inceptor was. It does look like you're doing jolly well in that market.
Yeah, it's a control stick.
Yes. Yeah, very impressive thing. Thanks ever so much, gentlemen.
Cheers, Andy.
As a reminder, ladies and gentlemen, it is star one for questions via the telephone. Our next question is from Nick Cunningham from Agency Partners. Please go ahead.
Morning. Thank you. Another couple for Jerry, and then perhaps a more general one. It is good to see the FY 2021 budget settlement, but it is effectively flat on FY 2019, which implies perhaps outlays flat from 2022 onwards. I wanted to ask Jerry what he thought BAE's positioning was in terms of continuing to grow BAE's portfolio, if you like, within that flat environment. Second one, we are seeing more no bids, NOC on T-X, Boeing on GBSD, and now BAE on OMFV. I wonder what we are to make of that. Is there a systemic issue with the terms of business, or is there something specific? In which case, what is specific about OMFV? Finally, much more general question, your cash flow guidance through 2021 implies maybe GBP 500 million a year left over after the dividend next year and the year after.
Do you have any more thoughts about what's best thing to do with that net cash flow? Thank you.
Yeah. I'll hand over to Jerry to do the first couple, but when it comes to OMFV and no bidding, I think it's fair to say that in a business that's growing, you really have to pick your battles and make sure the resources are placed where we feel we can get the best and most effective return. There are a number of opportunities in the combat vehicles that we're both executing and programs of record that we're working on and the number that are coming down, and we are going to obviously have to be selective of where we place our bets. Jerry, do you want to just add to that and then whilst you're up, say a little bit about the U.S. budget outlook?
Sure. Let's take the budget first. Actually, the budget has gone up from $717, $719. The agreement that was struck was at $738, 3% or 4%. That's consistent with our planning assumptions. In the out years, just adjusted for inflation, again, consistent with our planning assumptions. The stability and the growth we're very happy with. In particular, when you examine the individual programs that are in the budget, the platforms and other key programs are very well supported, in the two-year budget in both the House and the Senate markup. We're very encouraged about that. We are in some of the fast currents in the electronic combat world and certainly in the platform world, and those portions of the budget will continue to grow in the out years. We're very encouraged by the budget.
With respect to OMFV, it is one of four or five programs that make up the Army's Next Generation Combat Vehicle program. We are participating currently in three of the five. The Mobile Protected Firepower, we are heavily engaged in investing in the robotic programs, both the medium and heavyweight. OMFV, when we looked at the requirements, the investment, and the acquisition model, we have obviously limitations on human capital and financial capital, and we thought the best opportunities for us were MPF and in the robotic areas, as well as focusing on the backlog that we have in AMPV will also play a role in the future combat vehicle family for the Army. We're in there with currently three of five, and we'll see how the OMFV program goes.
There may be an opportunity to come back and engage in that a little bit later as well, given the acquisition model.
Thank you, Jerry. In terms of cash, capital allocation policy remains unchanged. What I would say is that we have a number of these technology bolt-ons like Riptide in the hopper, and I'd like to be doing a few more of those as cash allows. I'll hand over to Pete maybe just to fill in any further details on that.
Yeah, sure. We're reconfirming that GBP 3 billion of free cash flow. You've seen the amount of dividend we pay. We've signposted today that we will, as earnings grow, our coverage of dividend by earnings will remain the same. You should expect dividend to grow in line with earnings. Clearly, if we've got free cash flow, then as Charles says, we'll be looking at small transactions. There's no major deals in the hopper. It'll be small bolt-on acquisitions. As always, we never rule out buyback. That's part of the capital allocation policy, we always look at, what can we do to grow the business first? No change.
Dividends, bolt-ons, and buyback potentially.
Yeah.
Thank you. Could I just briefly follow up with Jerry on the no bid? Why choose OMFV to not bid on? Back to that question, is there anything general going on in terms of DoD's terms of business which is leading you and others to no bid?
Broadly across the market, I think what you're seeing is DoD is in a period of reinvesting in a couple of areas, applying a lot of capital in combat vehicles in particular, and some other places, and it's putting pressure on the resources that we have within the industry. I think you're seeing industry be selective where they think they can best apply those resources and get a return. Instead of betting all the numbers on the roulette table, all of the numbers in a single color, we're being selective and identifying where we think we can really add value for the Army and value for the shareholder. I think individually, each company's making those decisions, which set of requirements and investment decisions best match their portfolio.
Just to add to that, it really plays to the operational performance that we're trying to drive in the business, which means the programs that we do take, we've got to deliver, keep our customers happy, and offer flawless execution on them. That's a real driver for us. I think we set the bar pretty high on that front.
Thank you very much. Our next question for today is from Ben Heelan from Bank of America. Please go ahead.
Hi, morning. Thank you for taking my question. I had two. First one on UTC-Raytheon. Obviously, that came out prior, just around the Paris Air Show. Has that created a discussion, particularly around the U.S. business, about scale and your ability to invest in and compete in the U.S. going forward? Back to Andrew's question on Rheinmetall and the land JV. What was it that you felt that you couldn't do alone, and what drove you to get into that joint venture with Rheinmetall? Alongside that, are there any other areas of potential consolidation across the business? Thank you.
For the U.S. business, it's really around, as Jerry said, I think the swim lanes that we're in. We feel that we're in some good places of the business, the electronic warfare segment, combat vehicles and programs of record that we've won there. We feel that we're in a strong position, that's really not changed by the UTC-Raytheon merger. We compete with Raytheon. We partner with them on various programs. Clearly, long term, the question is, what do they do on R&D and making the best use of that space? That really is a long-term evolving one. Right now, when I look at our U.S. business and the places that we are strong and how that aligns to the U.S. budgets for the next few years, I think we're very well-placed within our U.S. business.
When it comes to the Rheinmetall joint venture, I think that there, the initial program really was around the MIV, which we knew, in a sense, was coming, and Boxer was effectively the preferred choice. Rheinmetall is a company that we respect, we work with, and they were looking for a U.K. footprint for that. I think we just started talking about the range of opportunities that that would then give us, and it looked like a very good fit, both for us, for the workforce, and for the capitalizing on the opportunities that were coming. Those are the driving factors that made us do that. I don't think that it presages a next phase of consolidation. From our perspective, we'll be selective. Where there's good opportunities like that, we'll take them.
I don't see a big further wave of consolidations coming on the back of that.
Great. Thank you.
Thank you very much. As a reminder, it is star one for questions on the phone. The next question is from Charlotte Keyworth from Barclays. Please go ahead.
Morning, chaps. I've just got one question for Jerry. Back to the M109, I'm afraid. Just at the beginning of the year, I think we'd agreed the rescheduled run rate of eight vehicles per month by autumn, and it looks obviously to have slipped two or three months now by the end of the year. I just wondered if you could give us a bit more color on as to why, and whether this is supply chain related or execution on our part. Also, could you quantify the inventory WIP build that we're expecting on this here, please?
Did Pete, would you want to do the WIP?
Whilst you're approaching the mic, I'll cover the WIP. Work in progress has increased. You heard me in the guidance talk about further cash movement into 2020. That's around $150 million of cash will move into 2020 out of 2019.
The reason for the shift, I mentioned that we are delivering to a new technical data package. That's one of the reasons the Army and BAE working together have tried to de-risk that plan with the supply chain. The supply chain, as I mentioned, has now, I think, come to life and is producing at the rate that we need, as evidenced by the number of hulls that I mentioned, over 50 of which are now in WIP on just the M109 program. We're feeling very comfortable about that. There was an element of de-risking our ability to deliver.
As well, sitting with the Army, we looked at their out-year fielding plans and their funding plans, and when we selected when we would move to the rate of 8 per month in lieu of going to 12 or 14 or moving to 8 sooner, we wanted to preclude a break in production in supply chain two years down the road, given their funding profile as it's currently in the POM and the suggested budgets. It's a combination of reasons, including de-risk. As I mentioned, a lot of inventory now moving through. It's about getting our inspection, acceptance, and fielding process and delivery process able to meet the same rate as production. I think that's gonna be another 30-60 days until we get there. That's why the late fall.
Just to summarize, we're getting the quality now.
We're getting the quality.
It's can we get the rate.
We're getting the production rate that we need at that quality. Now we have to get the inspection, acceptance, and delivery process to meet that production rate. We'll be working through those issues over the next 60 days, but we've got plenty of inventory to meet that demand schedule.
Great. Thank you.
Our next question for today is from Andrew Humphrey from Morgan Stanley. Please go ahead.
Hi. Thank you. Thanks for taking my question. On Qatar, obviously, the unwind on the prepayment has been a bit less aggressive than we thought it might be so far this year, but the three-year guidance is obviously unchanged. I wanted to try and get an impression for how much visibility you have on the profile of how that works out over the next couple of years, i.e., should we expect a bit of lumpiness over the next couple of years? How much visibility do you have on that at the moment? The second one is just on electronic systems. Obviously, we're kind of getting up towards rates on the F-35. That business has been performing extremely well from a growth and margin point of view.
Should we sort of expect to get more towards your guided range for revenue growth next year as the F-35 kind of tops off in terms of the rate? Is it that simple, or is there kind of other stuff we need to be factoring in looking into 2020 and beyond?
Okay. Do you want me to pick them up? Let me have a go. I'll talk about Qatar first. We have signed, as we said, a contract amendment for the acceleration of some aircraft into 2022. With that comes a change in the cash profile. I spoke earlier, it's GBP 80 million has been dragged forward into the first half of this year, and there will be some more in the second half. As you all know, a huge amount of what we do on the Typhoon goes through the subcontract supply chain. We are still in negotiations with the supply chain as to what their funding profiles will be from us. At the moment, we absolutely know what the new receipts profile looks like, and the money being dragged forward into 2019 has no impact on 2020. It's not coming out of 2020.
We still got to go through, in terms of the outflows, as to what our exact position will be with the subcontractors. As you know, under IFRS 15 now, we trade sales based on when cost comes through. That profile will also determine where we end up with on the sales and revenue recognition on Qatar as well. On the electronic systems, Joe, if you want to add on, I mean, F-35, you need to remember, yes, it is a big program, but it's only 8% of the total business within electronic systems. Whilst that may be coming towards a max rate, it's not the big program. It hasn't got that much of a weight that a slowdown in that program will remove growth from the business. We've still got things like APKWS. You've seen the commercial businesses, 14% growth in the first half.
We've got classified activity continuing to ramp up. I wouldn't be too concerned about the business going ex-growth as we go into future years. There's a big portfolio of programs in that business, and there's a lot of growth still to come.
Very good. Jerry, do you want to?
Yeah, I'm happy to add. I think Pete is absolutely right. F-35 is not the only EW program that is ramping up. We're also gonna be ramping, starting next year with production deliveries for the F-15 upgrades. That's the EPAWSS program. There are a number of classified programs. If you look at that classified line, that continues to grow. We're also growing in precision-guided munitions, not just in APKWS, but we do the seekers on the THAAD and a number of other precision-guided munitions things. The precision-guided munitions business will continue to grow, as well as the classified business. Thirdly, we're getting heavily involved in space resilience. Some of that's in classified, some of that will be reported separately. We've got a couple of other significant vectors for growth beyond F-35, which will meet roughly the 150 production rate next year. Lots of opportunity there.
Very helpful. Thank you.
Next question, please.
Our next question for today is from Olivier Brochet from Credit Suisse. Please go ahead.
Yes. Good morning, gentlemen. I will have three very quick ones. The first one on Qatar, if I may. Can you remind us when the first delivery is scheduled and when the peak will be now that you've changed the contract? Second question on AMPV, the modifications to the contract that you've done, when will we see that coming through in revenues? Third, on the U.K. munition comment that you make in maritime, what if the contract is not finalized by your end, please?
Okay. Qatar first delivery is in 2022.
Same change.
Final delivery is in 2024, and peak deliveries are in 2023. Whilst the contract has accelerated some into 2022, it's not a huge shift. From a revenue recognition perspective, you just need to remember, it's not about aircraft deliveries, it's about the spend profile on the program. I'll answer the third one as well. UK Munitions, we have that contract. It's a 15-year-long contract. The advanced funding from the customer comes on December each year. This isn't a question about needing to win the program to bring that cash in. We have the program in the backlog today.
This AMPV, can you just repeat the question for us, please?
Very simple. There was a modification to the contract with the extension of LRIP volumes. When will that flow through in terms of the revenue?
For AMPV, we've got starter deliveries in the second half of this year. Clearly, that will ramp through into 2020 and beyond. It doesn't have a 2019 impact.
Does it have a 2020 impact already?
Yes, it does.
Okay. Thank you.
Just as a final reminder, it's star one for any questions on the telephone.
Okay, well, it seems that we have no more questions. Thank you all for joining. I look forward to the full year results early next year. Thank you.