Okay. Well, good morning, everybody. Just a few introductory remarks before we go over to the main part of the results presentation. 2018 was an important period for the company. It was under the first full year of Charles, of course, as Chief Executive.
The challenges and opportunities were both substantial and I'm pleased to report that the management team under Charles' leadership navigated through pretty testing geopolitical conditions to deliver a modest growth in earnings, strong cash flows and a record defense order book. In parallel with building our order book, however, the team has also faced with stepping up the pace of deliveries in land, sea and air for the immediate demands of all our customers. And I'm pleased to say that after initial teething problems, considerable progress was made by a refreshed and reinvigorated management team. The focus of our customers is, of course, to increasingly develop a sovereign capability for many of the products that they have traditionally imported. The order for the Hunter class frigates by the Australian government is an excellent example, drawing together the design and engineering capabilities of BAE Systems with a skilled Australian workforce on a new world class shipyard in Adelaide.
The Type 26 has become recognized as a leader in its class and this was of course furthered when the Canadian government selected the design in November and awarded the contract in February. Our ability to successfully build our products in customer locations has also been demonstrated through the assembly of Hawk in The Kingdom Of Saudi Arabia. And Charles and I will be attending the official opening of the facility a little later in the year in Duran. The short and medium term future offers attractive prospects for organic growth in all domains, alongside long term value that may be created from our investment in future combat aircraft development with the United Kingdom government. Now to meet these demands, we have continued to invest in our people and we plan to recruit up to 300 apprentices and correction, 700 apprentices and 300 graduates in the coming year.
And this is developing the young talent within the organization as well as importing fresh perspectives from outside the company. Recognizing the long term nature of our contracts, it's interesting to think that many of those contracts will be completed by individuals, some of whom are yet to be born. Succession planning is also important at the Board level. It is against this background that we have recruited two new first class non executives. Stephen Pierce, a seasoned CFO at Anglo American and Nicole Piasecki, who recently retired from a twenty five year career as a top executive in Boeing, and both of those will be joining the Board in June.
The business model is strong, but the geopolitical environment remains uncertain. Brexit has limited near term impact on our company with established positions on long term contracts in The UK, The United States, and Australia. The Middle East, however, remains unstable. Whilst the British government has been robust in their dialogue with Saudi Arabia, our government and our company continue to work with the kingdom respecting the importance of the defense and security relationships and the strength and depth of our economic ties. To that end, agreement was reached at the end of the year with the Kingdom for us to extend the provision of Typhoon support services and in parallel, we continue to pursue the sale of additional aircraft for their fleet.
It should be recognized, that the company is reliant on the approval of export licenses by a number of governments in order to continue supplies to the country. And in this context, the current position on export licenses adopted by the German government may affect our ability to provide the required capability to the kingdom. We are therefore working very closely with the UK government to minimize the risk of any such occurrence and the impact it would have on financial performance, the supply chain and of course relationships. I think in summary, 2018 was a successful year for the company. There are few businesses with such strong order books and program visibility extending out several decades, few defense companies that enjoy such wide geographic spread and even fewer technology company and engineering businesses that have the depth and expertise that is embedded in BAE Systems.
As we enter 2019, we have a clear and unchanged strategy, a focus on operational excellence, a policy of prudent capital allocation and a determination to achieve profitable growth in an uncertain world. I'll now hand over to Charles, who will review the business in more detail. Thank you. Charles?
Thank you, Sir Roger, and good morning to everyone here in the room and those joining us via the webcast. I'll start with a summary of the results and a focus on our record defense order backlog and key programs. Pete, as usual, will cover the detailed financial results and provide forward guidance, and I will give a strategy and market update. As usual, we'll take your questions at the end of the presentation. Today, we've announced results consistent with our earnings and cash guidance in what was a transition year for the group.
The standout performance has been in business winning with a record annual order intake leading to an all time high for our defense order backlog. This provides excellent visibility for sales growth in the coming years with more on that shortly. As outlined at the half year, there were a number of program performance issues which we addressed. Of these, only the offshore patrol vessel program required a further provision. Positively, our U.
S. Business again delivered growth and is well set to maintain that momentum. Operationally, the Electronic Systems and Air sectors performed strongly and Applied Intelligence achieved its breakeven target. It is a testament to the resilience and strength of the group that these challenges were dealt with and we still hit our earnings and cash guidance at the group level. Looking back at my first full year as CEO, I'm pleased to say we've made good progress in delivering our strategy, embedding our key strategic objectives and maintaining a strong balance sheet.
Turning now to our order backlog and key programs. It's been a very successful year in pursuing new business, which has led to a 25% increase in the order backlog. Key business wins were secured globally. In The U. S.
On the amphibious combat vehicle and on the development phase of the mobile protective firepower program. In Australia, for the design and build of nine ships for the Future Frigate program in Qatar, for the provision of 24 Typhoon and nine Hawk aircraft in KSA, with a multiyear extension to provide support services for Typhoon aircraft and in Canada, where the Type 26 was selected for their Surface Combatant program. These wins have further strengthened the outlook and geographic base of the group, giving the business great visibility over the coming years, whilst maintaining the positive and well balanced mix of Platforms, Services and Electronics. At the last two of these presentations, we 've given directional arrows for the midterm sales outlook for our major programs and franchises. Those are updated for our recent business wins and appended to your packs.
However, as you know, our order backlog in some cases represents just a proportion of the expected through life value of the program. This chart highlighting our major programs breaks down in duration what is in the order backlog, what is expected in future awards on existing contracts and where we have new business winning opportunities. Pulling out some key examples. On F-thirty five, where we currently contract annually, we are moving towards full rate production in 2020 and expect that to continue through the next decade. Typhoon manufacturing activity at the current levels has been secured through to the early 2020s and further orders would extend or enhance that production profile.
Furthermore, on Typhoon support, incumbent positions are expected to extend beyond the current contractual horizons. On Dreadnought, we are funded until early twenty twenty one, but 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, which will extend through the 2030s. And on the Australian Hunter class program, we have booked the initial order, which covers the next four years with the build program then extending into future decades. In The U.
S, where contracting tends to be based on annual funding, combat vehicle programs such as the AMPV and ACV could yield close to $10,000,000,000 over ten years in combination with additional export potential. In U. S. Ship Repair, we remain a leading player and our Electronic Systems portfolio again closed with a record order backlog. This illustrates that whilst the order backlog is strong, the longevity of our programs is even stronger.
This is why my number one priority is strong program execution to ensure we 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. I'll now hand over to Pete to run through the financials. Pete?
Well, thanks, Charles, and good morning, everybody. Before I step through the detail, I'd like to draw out some key points. Firstly, in terms of 2018, underlying EPS was delivered in line with guidance. The performance issues that we highlighted back at the interim results were matched by outperformance elsewhere in the portfolio. And Applied Intelligence delivered a breakeven year end as targeted.
Cash performance was as expected delivering a cumulative £2,000,000,000 of free cash flow across 2017 and 2018. The forty eight billion pounds order backlog is at a record high, providing the platform for our future growth. The dividend was grown for the fifteenth consecutive year with earnings cover sustained. And despite the accounting pension deficit being only marginally down over the year, the funding valuation assumptions to date are on track. And looking ahead, we are targeting mid single digit growth for underlying earnings in 2019.
And in terms of free cash flow generation, we continue to target in excess of £3,000,000,000 in aggregate over the next three year period, albeit that will not be linear, and I'll talk more about that when I get to the guidance. So with those key messages said, I'll move into the detailed results for 2018. And just for reference, the U. S. Dollar rate averaged at £1.33 in 2018 compared to 1.29 in the prior year.
And so the headline numbers and compared to 2017, sales were little changed at £18,400,000,000 The expected reduction in Typhoon production activity was largely offset by growth in our U. S. Businesses. Underlying earnings before interest tax and amortization reduced by £46,000,000 to 1,000,000,009 and £28,000,000 and that's less than 1% down on a constant currency basis. Underlying finance costs in the year decreased to £215,000,000 on reduced charges from our share of equity accounted investments and lower net present value adjustments.
Underlying earnings per share were at 42.9p, that's up 2% compared to 2017 and that's with an effective tax rate of 18%. And there is a bridge chart which highlights the major year over year movements in EPS attached to the presentation materials. There was an operating cash inflow of £1,000,000,000 and net debt at the end of the year closed broadly in line with our guidance at 900,000,000.0 Order backlog at the end of the year was £48,400,000,000 a record high for our defense businesses. And the dividend for the year has been increased to 22.2p per share, up 2%. And at this level, the dividend remains covered at 1.9x by underlying earnings per share.
So moving to the balance sheet. In addition to the impacts from exchange translation, where the dollar closed at $1.27 compared to the opening $1.35 there are a number of items of note. As planned, CapEx was made in support of the production ramp up in our U. S. Electronic Systems business.
And within working capital, firstly, as anticipated, the £400,000,000 of timing benefits that we saw in 2017 on the salary support contract and U. K. VAT payment both reversed in 2018. Secondly, in The U. S.
Platforms and Services business, there has been working capital growth on the utilization of some international advance payments as well as on delivery timings and new business ramp up. Conversely, on the Qatar contract, there was a net inflow of some £400,000,000 all of which will be utilized in 2019. So in aggregate, working capital has increased by some 300,000,000 The group share of the IAS nineteen accounting pension deficit is little changed over the year at £3,900,000,000 And assets held for sale contain the AACC subsidiary in Saudi Arabia, where disposal was completed in January, and the assets of our U. K. Vehicle support business going into the announced joint venture with Ryan Mattel.
And just before I leave the balance sheet, I should note that with the adoption of IFRS 16 in 2019, a £1,300,000,000 capitalized value of our leases will in future appear in the balance sheet both as assets and creditors. But just to reassure you, this is a noncash item and will have no material impact on earnings. So covering off the pensions position, there are a number of moving parts here, but the combined impact of them all is around a £100,000,000 reduction in the group share of the pretax deficit. The value of the scheme assets has decreased over the year to £25,700,000,000 but that's after pension benefits paid out of some £1,400,000,000 At the end of the year, reported liabilities had fallen by £1,300,000,000 to 29,900,000,000.0 Discount rates in The UK increased by 30 basis points over the year and by 50 basis points in The US. The impact of the recent High Court ruling requiring the equalization of guaranteed minimum pension has increased liabilities by some £121,000,000 So overall then, a small reduction to the accounting deficit from last year end's position.
But as we've always said, it's the funding deficit which is of economic importance to the company. And as I highlighted at the results last year, key to The UK funding position is delivery of assumed asset returns. And from the last funding valuation to date, we are on track. Of our nine U. K.
Schemes, three of the smaller ones are now fully funded and funding on the other six ranges between 86% to 98%. Moving on to cash. And this slide sets out the movement from our net debt position of £752,000,000 at the beginning of the year. Operating business cash flow of just under £1,000,000,000 was in line with guidance. Interest and tax payments were £378,000,000 Our dividend payments totaled £731,000,000 and exchange translation was an adverse £86,000,000 movement.
All others were £50,000,000 So we closed the year with gross debt of 4,100,000,000 cash of £3,200,000,000 and net debt of 900,000,000.0 We do have a $1,000,000,000 bond maturing in June 2019, and that is to be repaid from existing cash held. The cash flow performance of the five secondtors is shown here, and I'll return to this when I cover the results of each of the sectors. But just to note, the total cash outflow for pension deficit funding made in 2018 was GBP $330,000,000, and the head office number contains GBP 138,000,000 of that. And just before we leave the cash, I'd reiterate what I said at the outset. The in year cash performance means we have delivered £2,000,000,000 of free cash flow, that's cash flow before dividend, over the last two years in aggregate.
So moving on to the sectors, and the first of those is Electronic Systems and the numbers here in U. S. Dollars. Sales compared to 2017 were up 14% at $5,293,000,000 The growth came in the electronic warfare business from the F-thirty five program as well as ever increasing classified activity. As expected, sales of the APKWS product doubled over the year and now represent one of the top three sales lines in the sector.
Commercial sales of engine and flight controls and hybrid drive units also grew and now amount to some 22% of the sector. Underlying EBITDA was up to $8.00 $9,000,000 delivering a return on sales of 15.3% within our guidance range. As expected, cash conversion of EBITDA improved in the second half and was at 81% for the full year, excluding pension deficit funding. CapEx investment in the business amounted to some $200,000,000 Order backlog was secured at a record high of $6,900,000,000 following awards for further F-thirty five systems, classified EW activity and APKWS units. The Cyber Intelligence sector comprises the U.
S. Intelligence and Security business together with BA Systems Applied Intelligence, and numbers here again in dollars. In aggregate and on a constant currency basis, sales were 5% lower at £2,240,000,000 The U. S. Business saw a 4% decrease.
As we said at the half year, the customer's decision to end the Desktop Environment Service contract has had an impact. In the Applied Intelligence business, sales declined by 9% with pursuit of top line growth being reined in to enhance bottom line performance. And despite the top line reduction, the aggregate margin for the sector was improved to 6.6%. Margins in The U. S.
Business was similar to last year at 9%, and the Applied Intelligence business was returned to breakeven following last year's £55,000,000 loss as the cost reduction activities under the 2017 restructuring program delivered to plan. Cash conversion of EBITDA for the year was at 95% excluding pension deficit funding. In aggregate, order backlog reduced to £2,400,000,000 in The U. S. Intelligence security sector.
The backlog was adjusted for that closed out services contract. Moving to The U. S. Platforms and Services sector and the numbers again in dollars. And while sales in the year were up 5% to £4,011,000,000 that growth was behind our guidance.
And this is primarily due to two issues. Firstly, the delayed production award on Paladin. And secondly, in ship repair, the customers' desire to compete each ship availability individually means we have not been able to maximize the utilization of our yards to the same extent we did previously under multi ship awards. But that said, I just add that despite this issue, there was growth in 2018 of more than 10% in our ship repair business. Margin performance for the year was at 7% following the charges taken in the first half year on the remaining commercial shipbuild contract and for the contractual dispute on the Radford facilities construction program.
Those charges impacted the reported margin for the year by 150 basis points. Cash flow performance in the year reflects advanced payment utilization on international programs, some late customer receipts, delivery delays to be recovered near term and the new business ramp up. Order backlog was increased to $6,800,000,000 supportive of future growth expectations. Key awards in the year included low rate initial production for the amphibious combat vehicle for the U. S.
Marine Corps and the AMPV and Paladin programs for the army as well as the mobile protected firepower EMD phase. In addition, the book to bill in the ship repair business was at 1.1. In the air sector, sales were down 7% at £6,700,000,000. As expected, production activity on Typhoon for the European, Saudi and Oman contracts has largely completed. The F-thirty five program continues to ramp up to plan and Middle East support volumes continue to grow.
The return on sales of 12.8% was at the top end of our guidance. However, there has been profit traded on the completing Typhoon Oman contract with minimal sales, and that's generated a 70 basis points benefit within the reported return on sales percentage. The £666,000,000 of cash inflow in the period reflects full consumption of the £300,000,000 early receipts seen in 2017 on the Saudi support program, utilization of advances on the residual typhoon export contracts and the net advance now held on the Qatar program. Order backlog stands at GBP 27,400,000,000.0, significantly higher following the awards for the GBP 5,100,000,000.0 Qatar Typhoon and Halt program, pounds 1,100,000,000.0 for the initial contract under the Australian Hunter class program, and we've also booked £3,200,000,000 for continuation of Typhoon support through 2022 in The Kingdom Of Saudi Arabia. Sales in the Maritime businesses of just under £3,000,000,000 are marginally higher than last year.
As expected, whilst the Dreadnought submarine and Type 26 programs continue to ramp up, activity levels on the Carrier program are reducing. Margin performance for the year was at 7%. We have taken charges of £47,000,000 over the year on the five ship offshore patrol vessels contract, where the first ship has now been accepted and the second will be handed over next month. And as we said at the interims, we are trading the carrier program at a more conservative level. Partly offsetting these was performance in the submarines business, which was ahead of plan on improved milestone achievement and risk retirement.
There was an operating cash inflow of £67,000,000 and reported performance reflects the reversal of the £100,000,000 VAT timing benefits seen last year. Order backlog has increased to £9,000,000,000 following the first half year awards for both the Stoop Boat seven pricing and further funding under the Dreadnought program. And for reference, there's a chart providing a summary of the trading performance of all five sectors and the numbers for HQ appended to the presentation packs. So moving on to guidance. And whilst the group is always subject to geopolitical uncertainties, we continue to provide guidance on a business as usual basis.
This chart seems to give our view as to how we see the performance of each sector developing from 2018 through into 2019. And for reference, our exchange rate planning assumption for the dollar is at 1.3 pounds and sensitivity to a zero one zero pounds movement in the dollar is now approximately 1.5p of earnings per share. So firstly, Electronic Systems. And overall, we expect 2019 sales in dollar terms to show mid single digit growth driven by a number of EW contracts and the APKWS volumes. In aggregate, of twenty nineteen's projected sales, some 70% are in the 2018 closing order book and that's similar to last year's starting point.
On margins, the guidance range remains at 14% to 16%. Next, Cyber and Intelligence. In aggregate, we expect sales to be little changed. The U. S.
Business, which was 70% of the sector in 2018, is expected to be largely unchanged. And the Applied Intelligence business, we expect to see some top line growth coming from both the government and financial services areas. Margins in 2019 are expected to be around 7%. The U. S.
Business is expected to contribute around the 8% to 9% mark. And at Applied Intelligence, we'd expect the business now to move back into profitability, albeit at an initial low margin. Moving to Platforms and Services U. S, and here we expect sales growth to be mid to high single digit with increasing volumes from The U. S.
Combat vehicles and weapon systems businesses as well as higher ship repair activity. Of this sales guidance, some, sorry, more than 80% is now within order backlog, and that's a much stronger starting point coming into the year than at this time last year. At the margin level and after the charges taken in 2018, we expect a year of improvement moving
back
into the 8% to 9% range. Turning next to Air, and sales are expected to be some 10% higher for activity on the new Qatar Typhoon and HAWT program and the continued ramp up on F-thirty five. More than 85% of this guidance is within the backlog. And margins in the sector are expected to be lower than in 2019 and towards the bottom end of our 11% to 13% range. There will be minimal profit recognition on the Qatar sales given the early stages of the program, and self funded R and D moves up for the Tempest Future Combat Air program.
And the last of the sectors is Maritime, and here we expect sales to be stable. Activity levels on Carrier will decline as the program moves towards completion, but this is largely offset by increases on Dreadnought and Type 26. 95% of the sales guidance is within backlog. Following the charges taken on the offshore patrols vessel offshore patrol vessels program in 2018, margin levels are expected to improve back into the 8% to 9% range. And to complete your models, the HQ numbers will be slightly up on those in 2018.
Underlying finance costs are expected to be slightly lower with six months of benefit from the maturing $1,000,000,000 bond, which carries a 6.3% coupon. The effective tax rate is expected to increase from 18% to around 20%, primarily for the increase in U. S. Profit mix. The final number, of course, is always dependent upon the geographic mix of profits.
And for the first time, I've added to this chart some guidance covering minority interests. As Charles will outline, we expect an increase in both in kingdom ownership and work share into our Saudi partner companies, and that will lead to an increasing minority interest share of our earnings there. Overall, and with the assumption of a U. S. Dollar rate at 1.3 dollars we are targeting mid single digit growth in the group's 2019 underlying earnings per share.
Now I mentioned earlier that there is no material impact to earnings per share from the adoption in 2019 of IFRS 16, but we have added an appendix to your PACS to show the expected matching increases in both EBITDA and finance costs. Now in previous results sessions, we've talked about the group's cash conversion model and the historic volatility brought about by cash flow profiles on our large export contracts. And as you've now seen, we've delivered the £2,000,000,000 of free cash flow that we guided to over the last two years. And with the record order backlog giving us increased confidence, we can now target in excess of £3,000,000,000 over the next three years. And this final chart sets out a simple model of our expectations for that free cash flow generation.
The starting point is our EBITA, and that excludes the contribution from our joint ventures. Clearly, we're not providing a profit forecast here, hence the ranging. We expect around £300,000,000 of capital investment above depreciation levels and a similar amount to fund the working capital growth. The pension deficit funding is based on the agreements reached on the last U. K.
Triennial valuation plus contributions to our U. S. Schemes. Interest and tax are both reasonably predictable, and that leaves a targeted free cash flow over the next three years in excess of £3,000,000,000 However, I do need to highlight that this cash flow generation will not be linear. The cash flow profile of the new Qatar contract plus the peak in near term CapEx required to support our growing U.
S. Business will mean that in 2019, we'd expect net debt to increase slightly. I'm sure there'll be some questions, but I hope the three year view proves helpful. And with that, I'll pass it back to Charles. Thanks, Pete.
Having covered the 2018 results and forward guidance and before we move to take your questions, I'd like to address our key markets and our alignment to their national defense strategies along with progress made against our strategic priorities. In The U. S, now over 40% of group sales, we expect continued growth from both the strong technology positions we have in Electronic Systems, including increased levels of classified work and our combat vehicle programs, which run for years to come. Recent budget increases will underpin our growth in the coming years, and we see positive momentum in support of military readiness and modernization. The group's U.
S. Portfolio is very well positioned to meet customer priorities. And this chart shows how the FY 2018 and 2019 budgets align with those growth areas underpinned by the National Defense Strategy and the stated priorities of the military services. The growth of APKWS from a development program to nearly $400,000,000 of orders in 2018 is a great example of our positioning. In The UK, currently around 25 of group sales, the modernizing defense program announced in 2018 reemphasizes The UK's commitment to strong defense and security with a 2% GDP spend.
The UK remains Europe's largest defense budget. Additionally, the successful launch of The UK Combat Air Strategy represents a significant milestone for the air sector. It sends a strong signal of intent on The UK's commitment to retaining a leading position in combat air, giving clear direction and focus. Overall, our business in The UK has a stable outlook based on the long term contracted programs in both Air and Maritime. We employ over 30,000 highly skilled employees across The UK with many more in our supply chains.
We continue to execute on the customers' critical programs while working closely with them to address their affordability challenges. Saudi Arabia represents around 14% of group sales. And as outlined by Sir Roger, we continue to address current and potential new requirements as part of long standing agreements between The UK and The Kingdom. Our existing support business of around £2,500,000,000 per year now has order backlog until 2022, and we are working closely with the UK government to minimize the risk around export licenses. Our long standing strategy aligned with Vision 2030 has been to promote in kingdom industrialization, technology and local skills.
In support of the kingdom's priorities and working closely with their recently formed Saudi Arabian Military Industries Organization, we continue to restructure the group's portfolio of interests in a number of our partner companies, as shown by January's sale of our stake in AACC. In addition and over time, the volume of activity through these companies will increase. These expected changes will lead to an increasing minority interest share of our earnings from those companies. Turning to 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 with major recapitalization programs in Air, Maritime and Land.
As part of this commitment, the government has made clear its objective to build a more sustainable domestic defense industry. We support this through our established business with more than 25 sites across the country. Through the award of the Hunter Class frigate program to be built in Adelaide, our Australian business should double in size over the next five years. In our accessible markets, 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 aging equipment. In Qatar, our relationship started a new chapter through the Typhoon, Hawk, and MBDA programs and will be a key market for us over the coming years.
In Europe, a number of countries are looking to increase their defense spending and move closer to meeting their NATO spending commitments. The group is well positioned to benefit through potential typhoon opportunities, our holding an MBDA and our Swedish based land vehicle business. Moving to an update on the strategic priorities. We have a clearly defined and consistent strategy. In 2018, we continued to step up our focus on my three strategic priorities of operational excellence, competitiveness and technology.
These have been embedded throughout the group and provide the link between strategy and near term business objectives for all our employees. Operational excellence must be at the forefront of everything we do to ensure successful and predictable delivery of our order backlog. In 2018, we had some standout performances, but also some performance issues that needed to be addressed. In UK naval ships and U. S.
Combat vehicles, we strengthened management and are investing in operational processes and training to position the business to meet the ramp up in new programs. The restructuring actions taken in Applied Intelligence have already delivered a significant performance improvement. The group continues to take the necessary steps to be more competitive. The new organizational structure put in place at the start of the year has settled down well. Within procurement, global and national category managers are now in place, and we're obtaining efficiencies through supply chain rationalization and the use of enhanced data analytics.
Importantly, we're also starting to see the benefits of increasing competitiveness and collaboration across the group and with our industry partners. Winning the competitive amphibious combat vehicle program, along with the Australian and Canadian frigate awards are standout successes. The proposed formation of The UK land joint venture with Rheinmetall and the sale of our stake in AACC were small but positive strategic actions for the long term. Through the Chief Technology Officer, the group is increasing technology collaboration across the business as well as with our industry partners and academia. Technology plans are now in place that support the sector strategies as we focus on the future priorities of our customers.
In 2018, we announced a collaboration with Prismatic to invest in the development of a new solar electric UAV, made an additional investment in reaction engines and in The U. S. Continue to work closely with DARPA. Over time, we will be increasing R and D funding through a pipeline of investment opportunities. The focus areas will be in electronic systems on precision weaponry, autonomy, advanced electronics and space resiliency, and in our air sector through the Tempest program.
The UK Combat Air strategy provides a great example of the role we must play in understanding our customers' current and future needs. 2019 will see a step up in funding alongside our customer and industry partners. The capabilities and technologies of Typhoon will continue to be developed and deployed and will ultimately transition to a new future system. The investment will deliver world leading capabilities, help to support and attract talent and ensure The UK maintains its sovereign capability in the combat air sector. So in conclusion, our clear and consistent strategy is delivering results, and we have the right focus areas which we're driving hard.
Growth is underpinned by our record defense order backlog and an evolving pipeline of opportunities. The group is diverse with a wide geographic reach and a well positioned portfolio with long term positions on key programs. We have strong customer relationships and a track record of successful partnering and collaborations in overseas markets. Investment in technology and our people will continue to position us for the long term. The balance sheet is strong and the pension position is stable and well managed and free cash flow generation over the coming years supports shareholder rewards and sustainable value creation through our clear capital allocation policy.
Thank you. Pete and I will now take your questions.
Thank
you. So it's Nick Cunningham from Agency Partners. It's good to hear about the multiyear contract for Saudi. But and I apologize, this is probably a bit sensitive, but is possible to pass out the potential German impact on Saudi and in particular to look at what impact that might have on the, support business as to whether it's it could be genuinely disruptive to that. What you can do to mitigate that and whether given that that presumably put Germany and German based supplies in breach of contract, whether you can pursue them for damages?
Thank you.
Well, I think just to set the scene, I mean, it's worth reflecting on the fact that Saudi represents around 15% of group earnings, just to put it in perspective. And you'll recall that the Saudi operations are conducted under G2G, government to government agreements, where we're the prime contractor. The issue of the German licenses is a political issue and therefore needs political resolution. And to that end, we're working very closely, as I'm sure you would imagine, with the U. K.
Government, and you've seen that's also a concern for our German industry partners. We can't specifically comment on customer operations. These are obviously classified and sensitive matters, as I'm sure you'll understand. But we are taking a number of planning and supply chain activities to minimize the disruption. And to date, the impact has been minimal, but it could become more difficult over time.
It's not a cliff edge scenario. That's what I want to make clear is it's not a cliff edge, but we're working on a number of various mitigation plans to handle it. And what we presented today, as Pete already stated, is very much our business as usual assumptions. So we'll, of course, update you as soon as we have more information on that particular topic.
Just from a narrow financial analyst point of view, is is the it's not a cliff edge, understand. But, is it material for FY 2019, or is it more of a is it somewhere out there in in terms of potential impacts, particularly on the support business?
I can't actually comment much beyond what I've already said other than the fact that these are sort of sensitive topics, we're working on a number of mitigation activities. And obviously, we've the UK government heavily engaged on the political level.
Thank you.
The row behind. Yes, please.
Good morning. Charlotte Keyworth from Barclays. Three questions from me. The first is on U. S.
Combat vehicles. It kind of feels like on a like for like basis to competitors, you should be achieving around 12% margins. I just wondered in terms of the current delta, how much you'd attribute purely to execution versus program phasing and volumes? And then really over the next two to three years, could you comment on the likely margin evolution on that business? And same question for cash.
Second question is on working capital. We've seen quite significant negative working capital in the past on air combat prepayments. When we think about the ramp on the F-thirty five and Land Vehicles, perhaps you could comment on when we're through that, the right level of working capital would be for the business given the shifting emphasis on the portfolio? And then finally, just a few questions really around Project Tempest and incremental R and D. I know, obviously, the project is in its infancy, but maybe just some comments around when we might likely see some upgrades on platforms, leveraging technology across the portfolio.
Just general thoughts around that would be very helpful. I
was going say on the first one, Gerry, do want to we've got Gerry, Head of our, U. S. Business to maybe make a few comments on combat vehicles working cap for you, Pete, and I'll do the, Project Tempest.
So the first question is, believe, around combat vehicles and the ramp up. There are a combination of factors that have to be considered ultimately to get to the profit rates that you're talking about. And some of that is the mix of programs that we have. A number of them, you'll see, are still in the development phase. AMPV has just made a production decision.
So it's a mix of those things. I've been asked before when we will hit double digit in that business. I think we're about a year behind our schedule. I think it's still a couple of years away for us. We are making great progress.
Customer is working very closely with us on the ramp to rate. Most people are familiar with the Paladin improvement program, the M109 being behind schedule. But there are about half a dozen other programs that we're making progress. I think we're hitting the quality statistics that we want. We're delivering defect free vehicles on a regular basis now.
Now it's getting the production flow with ourselves and our customer across all of those programs up to the level where we're in full production and can get double digit. But I think we're a couple of years from that. Right. Pete, do want to take the working capital or do want me to
Yes. No, that's fine. I mean on working capital, there are sort of three things, sort of tying to what Gerry has just said. First of all, we did have some deliveries on AAVs to Japan and Brazil. They had some, advanced payments.
There's about £50,000,000 we burnt off in 2018 on advanced payments. But then that impact of programs running late, we've got a big work in progress buildup. I mean under IFRS 15, that's now called unbilled receivables. But for calling it what it really is, it's work in progress in inventory. So we've seen quite a buildup there, which as we then get into that delivery cycle that Gerry is talking about, will unwind.
But that the biggest two drivers in terms of the cash flow performance in P and S, it's those. You moved on to, I think, next one was advanced payments in Air. So yes, we've all this is where we have our volatility on the export contracts. It has been reducing. And I think when we met the last time we were in this room at the interims, we hadn't had the Qatar contract.
We were still waiting to get funding agreements. You've seen that we've, I mentioned earlier, 400,000,000 of net advance payment at the end of last year. There is very, very little cash that we actually get in on that contract in 2019. So we're going to see all of that money utilized in work in progress build and supply chain funding and some. So it's going be more than that.
If you sort of move below the surface of international programs on our U. K. Programs, it's steady state. On our support business, it's steady state. It really is that volatility.
So whilst I've always said about our planning assumption is no big advance payments, if we get them, we're going to take them and explain it to you afterwards. It sort of leads to another question, I guess, about the three year cash guidance. We are assuming no big advance payments in that three year guidance. And I know that there are some models out there that have got bigger export contracts built in with advanced payments. That's not the assumptions that you've seen just now.
And then the last question on 10%
technology? Yes. Mean basically, it's sort of a steady increase. Mean this year, it's a lot around establishing partnerships and we've got a lot of interest from international partnerships and obviously from a government to government level conversations ongoing around that front with a view to second half of the year starting to establish sort of the partnerships that we would have. But this is a very long term program, as I'm sure you're aware.
Some of the avionic upgrades, things like radars, avionics that we're developing for, obviously, Typhoon anyway will be dovetailed into the program. So I think we'll be keeping you updated on this as the year progresses. But I think certainly, we're off to a good start here. And again, I'm very encouraged by the level of international interest that we've had in this program. Just to add on the R
and D front, we are increasing investment in 2019 in support of the Tempers program compared to 2018. As I said in the guidance for the air sector, part the step down towards the bottom end of our guidance is because we are putting our money into the P and L. We don't suspend anything on the balance sheet. It's straight charged through to the P and L.
Maybe on the left at the Celine. Celine. Celine, please.
Good morning. Celine Fornaro from UBS. Two questions, if I may. The first one would be still on U. S.
Platforms and on your 2019 guidance where have operational gearing and organic growth coming through, but your margin guidance only seems to recover for the one offs basically effect of the 150 basis points. So if you could just comment on that. And the second question is on the F-thirty five program. So Lockheed Martin seems to be very upbeat getting to 161 deliveries in 2021, which I think you're going to get to in 2020 as you kind of alluded to, just to confirm this. And did you get any advance payments on the F-thirty five given that we have some international wins in 2018?
And also Lockheed has been talking about margin improvement on their side on the F-thirty five given the new volumes upgrades they're seeing? Is there something that you're also seeing in 2019, 2020? Thanks.
Okay. Want Do start? U. S. Platforms guidance.
I mean you're right, Salim. We took about 150 basis points impact in 2017. So the guidance we've given would sort of say, yes, we're just removing those. I think Gerry's point about we're getting through the quality issues and we're starting to ramp to rate, We're going to see that in the back end of next year in terms of production volumes starting to pick up significantly. So that leverage effect, we're not going to get much of a benefit of that in 2019.
Most of that is going to come through in 2020 and beyond. In terms of the F-thirty five program, I mean, we are ramping up. We delivered 110 last year. We're going to 140 this year. And our peak rate is 160, and we'll be there the year after.
So we're on track. And in terms of advances, no, we haven't seen any advances on any international programs on F-thirty five. We contract directly with Lockheed Martin, and we get flow down on it's basically still pretty much cost reimbursement, so it's cost neutral. And in terms of F-thirty five margin upgrade, I mean we reprice every single production batch of F-thirty five. So it's
So we've been maintaining
that margin. We're getting good margins. It's double digit margin. We're happy with it, and it's been consistent now for, well, some years.
Next row back. Thank
you. Christian Laughlin from Bernstein. Just two questions on The U. S. Ground combat vehicles business.
Firstly, in thinking about not just 2019 but even ahead, how do you think about managing investment risk that is that you may find you need to invest in additional CapEx for physical capacity or find that as you go through stages of growing some of these programs and they evolve into full production that you might need to invest in modernization and other tooling upgrades? And then secondly, presumably, with respect to US ground vehicle opportunities in Saudi Arabia, there hasn't been any, government level, interference in the sense of that that would slow down any progress around that. Could you just comment, I I suppose, on any progress or the status of how, discussions around Bradleys and additional m one o nines in in Saudi Arabia, how that's changed versus, when we were here last year?
Okay. Mean on the first one, in terms of the investment risk, any CapEx that we need. I mean we look at the planning. Clearly, we've now got everything in the order backlog on those Ores Mojji programs, so our planning is fairly clear. We have got some CapEx in that guidance you've seen for the three years, including significant amounts for not significant amounts, material amounts for robotics, particularly on the welding side.
So we've got that covered. And Gerry can probably add a comment.
Specifically, the CapEx for the robotic welding and some automatic grinding machines, tooling machines, that's in the plan. It peaks this year and begins to come down next year. The volume forecast, we've got about 25% margin against all of the combined programs that you hear about, the ACV, the M88, the M109. So we think we're pretty comfortable with that. So from a tooling perspective, we're in good shape.
It's now about people in process and getting the battle rhythm to get consistent production flow across all of the programs. With respect to the Saudi programs for ground combat vehicles, There is a letter of offer and acceptance on the m one zero nine that sits with the Saudis. When and if they sign it, that's already gone through congressional approval. That will come back and start the normal negotiation process. The Bradley would presumably be a year or two behind that, but the planning assumptions you see here, don't include any volume for any Saudi programs related to 01/2009 or, new purchase of Bradleys.
Maybe Nick. I was gonna say go back a row. It Dave no. Is it blue shirt? Is that David?
David. It is David. Yeah. I couldn't quite see his face, but David, sorry.
Morning. David Perry at JPMorgan. I'm going to labor the cash a bit. Apologies, I've got three questions. The first one is just on the CapEx.
I think it's a good thing you're increasing R and D and CapEx as well. I just wonder if it's enough because it looks like it's still only going to be 2% of sales. And I just wonder whether you think there could be upward creep there over the coming years. The second one is just looking backwards to 2018. I think I'm right in saying, and apologies if I'm wrong, but it looks like the Qatar inflow was quite significantly bigger on a net basis than you guided to.
So I was just wondering what offset that to come in where you did on the cash. And then the third one for you, Pete. I know you said op leases in your view is noncash, but it is a debt item that's come on balance sheet. Some of the other companies in the sector including it in net debt. I just wonder whether it changes the way you or the Board think at all about capital allocation.
All right. So
I'll just do the R and D and then hand over to you for the other. I think on the R and D, we feel that on self funded R and D, those are the right sort of levels. In fact, I probably have a concern the other way, David, that we won't actually ramp it up as quickly as we think we're going to ramp it up simply because when it comes to self funded R and D, the ability to actually spend it in the in year basis, it will be interesting to see, but I more share a concern that we won't ramp it up as quickly as we think we're going to ramp it up. And I think we're at the right levels because you've to remember our self funded R and D historically has been at quite a low level sort of £200,000,000 a year, we've said that we'd increase by 50,000,000 to 100,000,000 over a sort of two to three year period. And those are the kind of numbers that we're still working towards in the areas that we've said around ES and then Tempest in The U.
K. But I think there's probably more of a risk that we ramp it up slower than that.
On the CapEx point, David, I think it's worth just remembering that a lot of the CapEx that we have is actually customer funded. So things in the submarines business, for example, 90% of that is actually funded by the customer. So we can be pretty clear with against the order backlog we've got, the capital requirements we have. And most of that growth is in has been in Electronic Systems. I mentioned we spent $200,000,000 in 2018.
We're headed for the similar amount again in 2019, and we talked about the CapEx that we need in The U. S. In the Combat Vehicles business. So will that number be exactly right? There's always going to be some movement, but it's right enough.
And then in the 2018 cash flows, yes, I mean, Qatar, we ended up with a £400,000,000 net advance. So yes, you're right, David, that was better than we expected. But what we had on the downside was what we talked about in, again, on the Combat Vehicles position in The U. S. If you look to that cash conversion, we had I can't remember what the numbers were, but it's almost a sort of $300,000,000 gap between profit generation and cash flow as we built up on WIP and burned off some of those international advances that they had.
So you've got a mix within 2018. And then on IFRS, the treatment that IFRS really brings in is pretty consistent with the way that the credit rating agencies look at the rating of the company, effectively treating it almost as debt. It makes no difference to any of the covenants we have. We haven't we've got no covenants that are affected by that. And in terms of the way the Board look at the capital allocation policy, this is a noncash issue.
So the Board looks at capital allocation based on real cash, not accounting treatments.
I was going say Sandy at the back there. Can we do that? I'll come to you next. Sorry. Yes.
It is Sandy from Jefferies. Well, I actually have three questions, but I know you won't answer one. Very quickly, just on how the Hawks are getting on in Kingdom, it would be lovely to know that Sammy is actually genuinely doing this itself without a whole lot of BAE help. And so, you know, just as we build up to getting Typhoon into country, anything warm and fluffy you could say about that would be lovely. And the other one, you think David had done cash to death, but here I come.
If we're looking for a slight increase in net debt in 2019, we need then to generate £1,100,000,000 just to cover the dividend and the pension deficit funding. Yeah? 400,000,000 reversal in Qatar takes us to 1 and a half billion. Tax and interest takes us to 1.9. Do we
need a chalkboard here, Sandy?
Versus EBIT of two. And therefore, 2019 would be one of the best cash conversion years we've had for ages.
No? If you strip out what we talked about, if you strip out the cash that is going to go out of the group on the Qatar contract, and to scale it, the Qatar program is a £5,000,000,000 program. So we're going have about 10% of cash outflow on that program next year, broadly speaking. We've got the CapEx going in Electronic Systems. Then if to your point, the cash flow conversion excluding those two is still good.
And the Qatar is purely a timing, which is why we're trying to give you a three year view to look through some of the volatility on these long term programs. So we will get receipts in excess of cash outflows in 2020 and 2021 on that program. So the three year model that we've given you holds and should be in line with what we said previously. The EBITDA doesn't include the joint ventures because the joint ventures, they pay their own tax bills, they pay their own interest bills, they've got their own working capital requirements, their own CapEx requirements, so you get a relatively small amount of dividend from those. So if anybody is thinking that the numbers they're looking up there on EBITA are not in line with consensus, Just remember that they exclude the JVs.
And as I mentioned before, we're not assuming any large down payments. And I know there are certain analysts here that do have big down payments built into their models. This guidance does not assume that. So other than the Qatar timing and the CapEx in Electronic Systems in 2019, this should be pretty much in line with expectations.
And on Hawk, actually I can talk about that element of Hawke. I mean, the Hawke final assembly facility is our facility in The Kingdom. And we've completed the first couple of Hawkes through there, which is why, as the Chairman alluded to in his comments that we'd be going to Doran in a sense for the official unveiling of the first, couple of Hawks that have gone through that facility. So I think we've made very good progress on that front in the kingdom. Well, it's an important very important first step.
I mean, to do the final assembly of a trainer is obviously in terms of developing the workforce. Many of those workers have trained alongside our people here in The U. K. And are now back over there, I mean, Saudi workforce. And they're successfully building Hawk aircraft, so it positions them very well for in kingdom final assembly of Typhoon.
So good progress on that front. Sorry, now at the front. You've been waiting a while.
I'm sorry for that. Rob
Stallow from Vertical Research. Pete, first of all, on the 2019 guidance. There's a pretty significant slowdown you're projecting in Electronics for this year, which should seem contradictory to the prevailing trends that we see, particularly in The U. S. Defense budget.
So was wondering if you could comment on what's going on there. Obviously, electronics perhaps did better than you expected in 2018, but I'm sure you have more to say. And then to belabor the cash issue again. As we look to 2020 and 2021, are there any items in 2019 that won't be there in 2020 and 2021 that should give you better cash growth in those years? Thank you.
Okay. I'll take the second one first. I keep coming back to the Qatar program. We've got around £500,000,000 outflow in 2019 on Qatar. We will then have inflows in 2021 as under the funding profiles that we got agreed with the customer.
So that is the biggest single issue. In addition, 2019 is the peak year for capital expenditure. So if you think of what I said about Electronic Systems, you saw the number of about £300,000,000 in there. 200,000,000 of that will be in 2019. So it then sort of steps down into 2021.
So you should have, just taking those two into account, a good view as to what we can deliver on in those two years, '20 and 2021. And then in terms of the Electronic Systems slowdown in growth, I mean it's a 14% growth in 2018 we're and sort of saying mid single digit in 2019. We're always going to have a slight, again because of IFRS 15, where you get working projects coming through that you now treat as sales. You don't treat it on delivery anymore. But I think at a 5% growth rate against budgets, then we're not we won't be adrift from budgetary growth.
I mean we'll probably have another issue, another question in terms of where we're headed to for next year's budget on The U. S. But our planning assumptions around where the budget may end up is inflationary growth only.
Gerry, do you want to add to that at all?
Yes. I would just add, Rob, to what Pete said. In 2018, there were a couple of specific things that happened that accelerated out of 2019. Specifically, we're turned on all the way through Lot 14, LRIP on F-thirty five, and we'll hit something like 140 shipsets plus spares. So that was one issue.
Another one was the acceleration of some of the APKWS orders that we thought were going to come in this year. There's quite a bit of international interest. Some of that was accelerated in. And we hit in the classified EW area, we kind of hit our production rate. We're up at about $05,000,000,000 a year, and that will be about steady state.
So that leveled off a little bit sooner. So you had three things that accelerated really from 2019 into 2018.
Yes, question right in you, yes, sorry, with the big hand.
Big hands, big gloves. Charles Armitage, Citi. I'm just still thinking about cash. You had a mismatch of $550,000,000 in Electronic Systems and P and S U. S.
Between profits and cash. You say a lot of that was due to delays, etcetera, etcetera. Surely, of that's going to unwind if you catch up on, 109 updates and so forth.
Charles, on on electronic systems, you know, the mismatch there, there's two things. You've the pension deficit funding going through there. The pension deficit funding in The US goes through the individual sectors, which is why I give you the sort of the conversion rate. You can you should be able to work out the percentage we put up on the screen versus the absolute numbers. So that's one thing.
And you've got the CapEx going through there. We spent £200,000,000 of CapEx in ES last year. So there's no issue in ES around mismatch at all. It's pension funding and it's CapEx. The issue is in P and S U.
S, which is what we talked about earlier. And yes, that should come back over time.
But £200,000,000 £233,000,000 mismatch, 200,000,000 of CapEx, presumably there's some depreciation in there as well.
Yes. But if you look at the pension deficit funding, remember we accelerated from 2019 into 2018, dollars 80,000,000 of of deficit funding to take to take benefits. Most of that goes into the ES line.
I'll give you that one.
So you give me that one. A very good answer that. But what about I mean,
you know, as I say, 100 and something million mismatch in P And S U. S, you're not growing very much. A lot of it was delayed. Surely, of that's going to unwind and reverse at some stage.
It will unwind over time. As we get, as Gerry said, as we get the production volumes ramping up, the quality issues went through, but we need to get the production ramping up on a consistent basis, then you'll start to see that unwind towards the back end of this year and into 2020. You won't get it. It's not going to all unwind in the first six months.
But that's a I can understand the profit coming through slowly, but it seems odd. It okay. I'm just you're looking at the £1,000,000,000 normal of free cash flow, let's say. Knock off £700,000,000 of dividends gets you $250,000,300 million pounds Knock off £400,000,000 from Qatar gets you minus £100,000,000 is a slight increase in debt, it seems
to me.
In 2019. 2019. That's the model.
It seems that none of the lousy cash flow in 'eighteen unwinds in 'nineteen.
Some of
it will. I mean we're talking just remember, Charles, we've got £35,000,000,000 worth of cash flow running through this business in any one year. If we could get a 1% accuracy rate, we'd be talking about £350,000,000 and we get we're better we're more accurate than that. So if we're going to get down to 0.1s here and 0.1s there, we could be here all day going through each of the sectors. Yeah.
But we value on what
you actually produce, not what We goes to incentivized are to generate cash. It's part of our incentivization arrangements. So we are very focused on getting that cash back. Trust me.
Rami Myerson from Investec. Three questions. Yes, classified programs. Can you talk about approximately what the share is of total revenues in 2018 and how that compares to 2019? The second one is you talked about European typhoon opportunities.
I understand that from MT that Germany are planning on ordering about 33 this year. We've heard Spain may be ordering. Is there any chance that The U. K. And Italy may order over what time frame?
And is Brexit having an impact on the German orders? And the last one around revenue growth. So midpoint of guidance is around 5% growth in 2019. Given you have talked about a three year outlook, is that what is the sustainability of that mid single digit growth level in 2020 and 2021? So
on do I start on the ES classified? I can't tell you because it's classified. As Gerry said, it's about half it was $500,000,000 in the air sector in 2018, and that was
It was total. Yes.
And that was at least 10% up over the previous year. So and that's probably about as much as we can say on I'm being stared at by my U. S. Colleagues.
European typhoon is really, as you've already alluded to, you know very well, Germany and Spain are the real opportunities there. And we don't see I mean, generally speaking for the group, we don't see much impact from Brexit and not certainly not in respect to those particular orders. And the third question
was Brexit. Brexit and revenue growth. Sustainability of revenue growth. I mean you'll see from today that's going to get you to probably a bit better than mid single digit. And as we've said on our all our communications with investors, we see that sustainable certainly into 2020 and 2021.
Just if you just think of the £48,000,000,000 of backlog we've just got and those percentages I talked about of how much is already covered, you know, and on the duration of these programs, that runs through into many years. So, you know, we're we're pretty confident.
No. I I mean, this is I don't this is not not impacted by Brexit at all. I mean, they've got a decision making process that has to run its course, but I I don't see Brexit having an impact on that. Just behind Rami, your question.
Olivier Boucher with Credit Suisse. I would have two questions. The first one on Cyber and Intelligence. If you could update us on your strategic thinking about this business. Is it managed for basically for cash and profit?
Or is it an area where you will be investing in the future? And the second question is on ship repair. The U. S. Navy seems to be looking at incentives for the industry to increase the capacity and the ability to maintain more ships and provide therefore incentives there.
What does it mean for the group in terms of potential revenue growth in the future and CapEx?
I think in I'll take ship repair and I'll happily let Gerry come up and say a few words on that. But I mean the fact that we have positions in five of the six U. S. Home ports means that we're very well positioned to benefit from the increase and obviously looking at increasing fleet availability. I think that footprint and where we are means that we are well placed for that.
Gerry, is there anything you want to add to that with respect to the question on that?
I'll just add something. I mean we've been anticipating growth in ship repair for some time. And if you remember the year before last, we spent $100,000,000 just over $100,000,000 in CapEx on the new floating dry dock facility, which went into San Diego. So we're positioned for the growth. We had a 10% growth in 2018 over 2017.
The book to bill is at 1.1. What we need to get to a position is in terms of the way we contract with the U. S. Navy is to move into not competing every single ship availability, so we actually load the facilities better. So we have the facilities ready.
We but that's something we're working with The U. S. Navy to resolve.
Yes. On Cyber and Intelligence, I think it's fair to say that we challenged the team, I mean, the Applied Intelligence and then I and S business in The U. S. I mean we're content with the portfolio there. It's really getting the best out of that portfolio.
So I mean going forward, we have some clear plans as to what we want to do with that and returning that to profitability. We've seen good steps in 2018 and obviously we're now targeting increasing profitability from that group. And really it's making the best use of what we have. I think we're well positioned within the portfolio. Question just behind Sir Roger there, sorry.
Nick?
It's Nick Cunningham again. I realize that notionally The U. S. Never has more than one year of visibility. And obviously FY 2020 is subject to considerable uncertainty in particular.
But on the other hand, 2019 was passed with some good growth and cash flow lags the budget. So I was wondering what the practical visibility is for The U. S. Domestic businesses overall in terms of how many years you can reasonably look forward? Thank you.
So the current portfolio, we have about a $15,000,000,000 backlog and that's what's funded. As you alluded to, many of the major programs like F-thirty five or the combat vehicle programs, the funding actually comes in annual increments and the exercise of options. Even on programs like APKWS, we have a backlog of about one years. Point So we have pretty good visibility and confidence in the predictions that Pete has offered today or the forecasts that Pete has offered today through 2021, early twenty twenty two. In terms of The U.
S. Budget, our planning assumptions are basically somewhere above the floor that was established in 2019 adjusted for inflation. In all likelihood, we'll probably see some drama around a continuing resolution and a negotiation of that, but we think that the pressure of the twenty twenty elections also provides a lot of leverage for a two year agreement on the budget caps as we've seen before. So planning assumptions are fairly conservative just for inflationary growth. Backlog should carry us pretty strongly through 2021, early twenty twenty two, thus high degree of confidence in the numbers.
David, do you want to
David?
Sorry, I hope you don't mind me following up. I've got two please. One, Pete, just on your Slide 19, which is helpful, the three years of free cash flow, it's just a small technical point. You leave out equity I think EAI is equity accounted associates, you leave that out of EBIT, which is fine. But don't you then get about 300,000,000 back in dividends from those associates over the period?
Where is that on the slide?
No. The that was my point about the joint ventures. So they pay their tax and interest. The biggest contributor for dividend normally that we would expect out would be MBDA. But in terms of cash flows, MBDA also have issues around Qatar in terms of timing.
They've got big down payments on their advances, so they have cash flows going out. They've got CapEx that they're spending in MBDA. The other big joint ventures we've are FNSS. We've got AEC in Saudi Arabia. So it's not a natural, well, here's your EBITDA.
You get less tax, less interest. Here's your dividend. They've also got their own working capital to manage and CapEx to manage. It's not a big it's not a huge number. It really depends on their working capital volatility as well, particularly MBDA.
Alright. I have to think about that, maybe chat to Martin. And then just one either of you might want to take. I mean, the share price is £4.70. EPS is 45.
That's a very low PE. Why why not be aggressively buying back stock? What is what is stopping you here?
Well, hopefully, the share price isn't gonna stay where it is. Yeah. We're bound to say that we think it's it's massively underpriced. You know, the market has reacted as it has today. We'll be on the road, for the next three weeks talking to investors, and we'll see what their what their views are.
But what what's your view in terms of doing a buyback?
Well, I I think at the moment, we the share price reaction is is is beyond where it should be. I would say that. We'll see where we get to. But the you know, any buyback will be a decision for the board.
Looks like we've, exhausted the questions.
Got one on the phone.
We've one on the phone.
We have a question on the phone. It comes from the line of Andrew Humphrey from Morgan Stanley. Please go ahead.
Hi. Thanks for taking the question. I've got a couple, if I may. One, I think, is a reworking of an earlier question on cash, so apologies for that. If I look at the three year guide, so between three and three point three, basically, difference between the top end and the bottom end of that range is the difference between getting some of the working capital back in The US platforms business and and getting none of it back.
So I guess the the first question is, you know, is that right? Is that is that what's baked in? And and therefore, kind of where where else might there be variability in that cash number over three years, positively or negatively? And then the second one would be, you're obviously talking about air margins towards the low end of the range this year, which I think you flagged pretty well previously given the ramp in Gutter work. On Electronic Systems, the range, the margin range of 14% to 16 is as it's been for a while.
You've the midpoint or slightly better in 2018. That business continues to grow. Is there anything around mix there that should make us think the margin shouldn't continue to grow in Electronic Systems?
Right. I'll start with cash variability. Mean, as I said before, the biggest single issue for variability would be any advance on a new export contract. We are not assuming big advances here. That clearly would could be a big swinger based on whatever the timing might be.
And equally, you need to start at the top of this chart. Whilst we're not giving a profit forecast here, there is a range of numbers here, and that very much depends on the underlying performance of the business. If we outperform and we're incentivized to outperform, then clearly the top line will be better as well. So we're trying to give you a model, but we're not trying to get ourselves into a straight jacket of a precise number. But the biggest variability would be around export programs.
In terms of the air margins, yes, I mean there's just to try and give you a step down from or a walk down from 2018 to 2019, we had 12.8% in 2018. I said to you that the Oman contract where we trade profit on retirement of risk, not necessarily when we take sales, that was a 70 basis points impact in 2018. So take the 12.8% to 12.1 Then in terms of the Qatar contract, taking sales without margin, that's around another 40 basis points. And the step up in R and D we talked about is about the same again. So the big three items are those, and that should get you to what I said about the bottom end of the range on Air.
And then in ES, whilst we've you said we've been growing the margins. If you look at the delivery we've had, I think the last five years, we've been around the 15 mark. We upped the guidance range, I think, last year for the first time, recognizing our consistent delivery of 15%. We could continue to increase the margin should we choose, but we'd rather keep developing the business by R and D investment. I think as we said before, around onethree of the group's R and D, self funded R and D goes into electronic systems.
It is the high technology piece in our U. S. Portfolio, and we're continuing to look at growing the R and D in electronic systems. Does that answer your questions, Andrew? We've lost him.
Very good. Thanks very much.
I think we're, looks like we're done for questions. So thanks, everyone, for coming.
Thank you.
We'll see many of you on the road.