Well, good morning, everybody. Just a few words from me before we get into the meat of the presentation this morning. Without doubt, 2016 was a successful and indeed a pivotal year for BAE Systems with long term positions on submarines, on surface ships, military air support and U. S. Land vehicle programs, all underpinning the long term future of these businesses over many decades.
The geopolitical uncertainty, which we all see, continued to ensure defense remained high on the agenda of governments throughout the world, which, in turn, was reflected in strong demand for our advanced defense platforms, electronic products, cybersecurity capabilities and, of course, our long standing service arrangements. Now Iain will obviously give you greater insight into the performance of the business in the next few minutes. For my part, during the course of the year, I visited businesses in The United States, The Kingdom Of Saudi Arabia, India, Australia and, of course, The UK. Wherever I have gone, our people are consistently enthusiastic. They're appreciative of the opportunities and very aware of the responsibilities to our customers, the need to continually hone our competitive edge and deliver products and services of the highest quality.
In each country, I've also spent time with senior government leaders to reinforce the strength of the partnerships that we have and enjoy, which are at the heart of our business model. Without exception, I have found the relationships to be strong with a clear appreciation of our considerable skills and capabilities, matched by our own recognition that closer cooperation in supporting industrialization of their countries will be essential to our joint success in the years ahead. We have had considerable success in our export activities and in securing future opportunities, as seen most recently, of course, in India and Turkey. And we continue to receive unstinting support from government in all our principal markets. The Kingdom Of Saudi Arabia remains an important market for the group, where we work as a prime contractor for the UK government to fulfill its obligations under government to government agreements on defense and security cooperation.
Judicial review proceedings into the processes followed by the UK government in granting defense export licenses to the Kingdom Of Saudi Arabia are underway, with a judgment expected in the near future. Now as you know, BAE Systems is not party to these proceedings. And as you would expect, we cannot comment on the potential outcome in advance of that judgment. The future of our business, of course, rests on our ability to recruit, train, develop and retain the best people and invest in the next generation of technologies. The strength of our order book enables us to plan and invest in the businesses, R and D, our people, whilst the cutting edge nature of the work that we do continues to offer a magnetic appeal to engineers, scientists and technologists of the highest caliber.
This year, we have over 2,000 apprentices in The UK, more than ever before, providing the finest training available, And no better example, let me say, than the GBP 16,000,000 investment we've made in new state of the art training at our center in Salisbury. Ensuring we have a continued supply of talent is an essential element of long term business planning, as is the need to manage organized succession at all levels of the business. In this respect, since becoming Chairman, it's been necessary to plan for the retirement of Ian King, who became Chief Executive over eight years ago. As we announced yesterday, Ian will retire from the company on the June 30 after a long and distinguished career of some forty years in the defense industry. To this end, last year, we recruited Charles Woodburn, a man with impeccable credentials and international experience, bringing with him a fresh perspective to work alongside Ian as Chief Operating Officer in preparation for such a transition.
Now having successfully completed a period of learning, doing and proving his capabilities, the Board has decided that Charles will succeed Ian as CEO with effect from July 1, and this was well covered in the newspapers this morning. I said that Ian inherited a business with a troubled past, a variable history of program execution and a challenging market environment. And those of you that were in the industry when Ian was made Chief Executive, I'm sure, will remember that. He will retire leaving a legacy of disciplined operational and financial performance, ethical behavior, a burgeoning order book, a track record of delivering shareholder value and a strong leadership team, including fellow directors, Peter and Gerry particularly, without whom this would not have been possible. To be very clear, however, Ian remains the Chief Executive for the next four months, and he will be responsible for both the business performance and the passing of the baton to Charles in that period.
Now while Charles will have an enviable inheritance, there will, of course, be much to do: delivering on our existing commitments and new projects increasing our international competitiveness developing our technology growing our talent pool and deepening our customer relationships. I believe that evolution rather than revolution lies ahead, and I know that Charles will want to share his thoughts with you later in the year. As ever, much has been achieved, but there is always more to do. The purpose of this morning, however, is to look more closely at our performance in 2016 and examine in more detail the prospects for the year ahead. To that end, I will now hand over to you, Iain.
Thank you. Good morning, everyone. So as Roger says, four months to go. Most of it you're to spend in here as I go through forty years of my career. Anyway, good morning to all of you.
I will spend a few minutes on the group's business environment before handing over to Pete to address our 2016 financial performance and 2017 guidance. 2016 was a good year for BA Systems. The company has performed well, delivering sales and order backlog growth in spite of economic and political uncertainties. Governments in our major markets continue to prioritize defense and security with strong demand for our capabilities. BA Systems' strategy is well defined.
In 2016, we maintained our focus on operational excellence for our customers, invested in technology and talent, secured long term positions on defense programs and strengthened our core franchises. The company benefits from a large order book with established positions on long term programs. Many programs such as F-thirty five, Type 26, AMPV, M777 and Dreadnought are in the early stages, and consequently, the full value is not yet recorded in order backlog. The business has a broad geographic reach and a strong and sustainable split of platform electronics and support revenues. In The U.
S, following the two year Bipartisan Budget Act signed in 2015, we are seeing encouraging signs of a return to growth in defense budgets and improved prospects for our core franchises. In addition, we are well positioned for the ramp up of production on a number of the group's long term programs such as F-thirty five, AMPV, Paladin and the F-fifteen electronic warfare suite. Only limited trading disruption is expected from the continuing resolution, and we are well positioned to benefit from the potential supplementals to the current budget. BA Systems U. S.
Electronics business is performing well with strong program execution and good order intake, enhancing our positions in the high technology areas of electronic warfare, electro optics and intelligence surveillance and reconnaissance. As a major supplier on the F-thirty five program, we will increase production output over the coming years to meet requirements of U. S. And international customers. Performance in the commercial electronics business continued to be good.
The group's U. S.-based combat vehicles business is underpinned by the armored multipurpose vehicle and the Paladin contracts. The business is also experiencing domestic and international demand on amphibious programs. These long term contracts are strong franchise in tracked vehicles and opportunities in international markets position the Land business for a return to growth in the medium term. Our U.
S. Ship repair business is a leading supplier to the U. S. Navy and continues to adjust its workforce and facilities to meet evolving demand. Our San Diego operations are expected to benefit from enhanced Asia Pacific deployments over the midterm, mitigating the anticipated reduction in activity in the East Coast facilities.
The additional dry dock capacity for this San Diego operations will be operational in March. The U. S. Commercial shipbuilding contracts have continued to be challenging. Six ships have now been accepted and the remaining two are due for customer acceptance in 2017.
As stated at the half year, The U. S. Business has not contracted for any more commercial shipbuild. Our UK based businesses performed strongly in the year, benefiting from good program execution and stability in customer requirements. Whilst the result of the twenty sixteen EU referendum continues to create an economic uncertainty, good progress has been achieved in implementing the strategic defense and security review through long term contract awards and commitments.
In the air domain, Typhoon aircraft deliveries for the Royal Air Force and the Royal Saudi Air Force continued and deliveries on the Oman program will commence this year. The contract to supply 28 aircraft sets for the Kuwaiti Air Force is consistent with the medium term production planning assumptions announced at the 2015. We have now received £1,000,000,000 of order intake on this program. Export activity continues to be supported by the UK government. And although there can be no certainty as to the timing of orders, discussions with current and prospective operators of the Typhoon aircraft support the group's expectations for additional contract awards.
Typhoon's capabilities continue to expand with the integration of the to Rescan radar, Meteor, Storm Shadow and Brimstone two missiles. Our strong track record of working with our customers to deliver innovative and cost effective sustainment solutions were demonstrated with the Typhoon support arrangement signed in July expected to be worth £2,100,000,000 over a ten year period. And in November, the F-thirty five Joint Program Office announced that it was chosen The UK and Australia as repair hubs for the maintenance, repair and overhaul and upgrade of F-thirty five avionics and components. The Hawk franchise continues with contracted deliveries to Saudi Arabia and India. Our manned aircraft deliveries will commence in 2017 and long term Hawk support contracts in The UK were announced in the period.
The unmanned air systems activity benefited from the announcement by The UK and French governments of a new €2,000,000,000 project to develop a demonstrator air vehicle following on from the successful joint feasibility study. In the maritime domain, submarine activity is increasing with the Astute and Dreadnought class now both in production. On Dreadnought, we are forming an alliance with Rolls Royce and the UK Ministry of Defense to align all parties' interests into an integrated program. The Queen Elizabeth class aircraft carrier program progresses with assembly of the second ship well underway. Preparations for sea trials on the first of class in 2017 are maturing and activity to support entry into service is expanding.
On Type 26, BA Systems and Ministry of Defense reached agreement on the intention to build eight Type 26 ships on the Clyde with a cut steel date in 2017. Two additional River Class offshore patrol vessels were also contracted for in December. Build of the first three is progressing well. Moving to our other markets and starting with Saudi. In the fiftieth year of our presence in Saudi Arabia, BA Systems is progressing current and potential new requirements as part of the long standing agreements between the UK government and the Kingdom.
Our in kingdom industrial participation also continues apace. An agreement has been reached with the Saudi Arabian government for BA Systems to continue to provide support services until 2021 under the Saudi British Defense Corporation program. On the Salam Typhoon program, 11 aircraft were delivered with the remaining four of 72 to be delivered in 2017. Deliveries commenced under the Hawk contract signed in 2012 with 14 aircraft delivered in year. In Australia, the business is stable.
The rationalization of the Williamstown shipbuilding facility and cost reduction actions taken across the wider business in 2015 are complete. Moving forward, the business is underpinned by ongoing sustainment activities with long term support contracts received in year for the ANZAC frigates and F-thirty five. The MBDA joint venture won significant order intake on air, land and naval platforms in the year, including a number of contracts supporting The UK's complex weapons requirements and significant export awards. Building on its already large order book, good growth in MBDA is expected over the medium term. In India, negotiations are underway to agree a third batch of Hawk aircraft.
And in January, we've received a contract to supply 145 M777 Howitzers for the Indian Army. Mahindra will be our supplier to establish an assembly integration and test facility in India. Both programs support the Indian government's Make in India initiative. In Turkey, we have signed a heads of agreement with Turkish Aerospace Industries to collaborate on the design and development phase of an indigenous next generation fighter for the Turkish Air Force. The initial contract will have a value in excess of £100,000,000 This deepens our defense positions with Turkey, where we already have a land systems joint venture, FNSS, which is performing strongly underpinned by a growing order backlog.
Turning to Cyber. While market conditions remain highly competitive and continue to evolve, our U. S.-based intelligence and security business has performed well, securing good order intake, including a number of new multiyear service contracts. Applied Intelligence saw double digit order intake and sales growth in the year. Profitability was impacted as investment continued in engineering capabilities and product development along with a new business defense marketing campaign to increase brand We have increased the product set and strengthened the underlying business fundamentals for the future.
Sales growth is expected to continue along with a return to profitability and future margin improvement as the new products come to market and as cybersecurity becomes an increasingly important part of government security and a core element of stewardship for commercial enterprises. I will now hand over to Pete to take you through the financials. Pete?
Thanks, Ian, and good morning, everybody. As usual, I'll step through the results for 2016 and then move on to guidance for 2017. There has been considerable volatility in exchange rates year over year. So for reference, the U. S.
Dollar rate averaged at $1.35 in 2016 compared to $1.53 in 2015. So the headline numbers and compared to 2015. Sales increased by £1,100,000,000 to 19,000,000,000 almost all of which was due to exchange translation. Underlying earnings per interest, tax and amortization increased by two twenty two million pounds to £1,905,000,000 Year over year, EBITDA benefited by £96,000,000 on exchange translation. Growth on a constant currency basis was at 7%.
Underlying finance costs in the year increased by £63,000,000 to £257,000,000 Of that increase, exchange translation was 19,000,000 twenty sixteen's costs also include an incremental £14,000,000 charge relating to net present value adjustments on the discounting of our long term liability provisions. The balance of the increase arises on the incremental borrowings under December bond issue. Underlying earnings per share were at 40.3p. And as you'll recall, last year's number of 40.2p included two tax provision releases, which in aggregate contributed 4.3p to twenty fifteen's earnings. And recognizing the number of moving parts here year over year within underlying earnings per share, there is a bridge chart showing those major movements attached to your packs.
There was an operating cash inflow of £1,000,000,000 and net debt at the end of the year closed slightly better than guidance at £1,500,000,000 Order backlog has increased to £42,000,000,000 Major awards in the year included £2,100,000,000 on the ten year U. K. Typhoon support contract and initial order intake on the five year Saudi support renewal. Exchange translation benefit amounted to £2,600,000,000 The dividend for the year has been increased to 21.3p, up 2% on 2015. And at that level, the dividend is covered 1.9x by underlying earnings per share.
In addition to the impacts from exchange translation, where the U. S. Dollar closed at $1.24 compared to the opening $1.47 there were a number of items within working capital along with the mark to market pension accounting that impacted the closing balance sheet. Major advances received in 2012 on the Omani Typhoon and Hawk order and the Saudi training aircraft contract were consumed. Advances were also utilized in the year on the European Typhoon production contracts.
Costs are being incurred against provisions created in previous years, primarily on The U. S. Commercial shipbuild programs. In aggregate, working capital increased by some £300,000,000 The IAS nineteen accounting pension deficit has increased over the year to 6,100,000,000 and that is unchanged from where we were at the half year. The pension deficit also drives the deferred tax asset, and I'll move straight on to the pension deficit position on the next slide.
The value of the scheme's assets has increased over the year to £25,900,000,000 and that's after pensions paid out of some £1,100,000,000 Return on assets in the year was at 17%. In aggregate, across all the group's pension plans, equity investments now stand at 47% of scheme assets. At the end of the year, reported liabilities had increased by £5,600,000,000 to £32,500,000,000 In 2016, the closing bond yields that determine the discount rate had moved adversely by 120 basis points in The U. K. And by 30 basis points in The U.
S. Long term inflation assumptions are unchanged. These discount rate movements have increased reported liabilities by around £5,000,000,000 The year's discount unwind and service cost, less pensions paid, account for the rest of the movement in liabilities. Exchange translation has also affected both the reported assets and liabilities of The U. S.
Schemes. The net impact is an increase of the deficit of £135,000,000 In total then, the impact of all of these movements over the year is a £1,600,000,000 increase in the group share of the pretax accounting pension deficit. More importantly, in April, the group will enter the triennial funding valuations on all its U. K. Schemes.
In conjunction with the scheme's trustees, we will be looking at various options but always with a focus on the longer term view. Moving on to cash. And this slide sets out the movement from our net debt position of £1,422,000,000 at the beginning of the year. The operating business cash flow was £1,040,000,000 slightly ahead of guidance. Receipts aggregating some £250,000,000 expected in 2017 on the Omani program, KSA support and MBDA's Qatar contract were received in 2016.
Interest and tax payments were £387,000,000 Payment of twenty fifteen's final and twenty sixteen's interim dividend totaled £670,000,000 Exchange translation and all other movements totaled £67,000,000 So we closed the year with gross debt of £4,300,000,000 cash of £2,800,000,000 and net debt of £1,500,000,000 Having repaid a $350,000,000 bond in October, we have no further material debt maturities now before 2019. The cash flow performance of the five sectors is shown here, and I'll return to this when I cover the results of each of the sectors. But just to note, the total cash outflow for pension deficit funding made in 2016 was £253,000,000 and the cash outflow at head office contains £164,000,000 of that. So I'll move now on to the sectors, and I'll cover the in year performance here and the guidance a little later. So the first of those sectors, Electronic Systems and figures shown here are in U.
S. Dollars. Sales compared to 2015 were almost unchanged at $4,445,000,000 The commercial areas of the business now amount to 24%, having seen sales growth in the year of 11%, primarily in hybrid drive systems. On the defense side, sales were slightly down on timing of production deliveries on the dues and other EW programs. The return on sales achieved of 15.1% was at the top end of our guidance range, largely from continued strong program execution and risk retirement.
Cash conversion of EBITDA for the year was at 97%, excluding pension deficit funding. Order backlog was sustained at $6,500,000,000 benefiting from awards for F-thirty five EW systems, the F-15E Pause program and for advanced precision cure weapon systems. The Cyber and 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 in line with guidance, sales were marginally higher at 2,408 billion dollars The U. S. Business saw a 2% increase, largely in the area of provision of managed services to the intelligence community. Growth in the Applied Intelligence business was at 11%, benefiting from increases in The U. K.
Government services and commercial divisions. However, the margin achieved of 5.1% was below our guidance. Higher level of cost expense in the Applied Intelligence business, together with delays in securing software license sales, meant that there was a loss recorded in the business of some $25,000,000 To put that in perspective, in the year, the business' total cost base amounted to more than $650,000,000 all of which was expensed through the P and L. Cash conversion of EBITDA for the year was in excess of 100%, excluding pension deficit funding. And in aggregate, order backlog reduced to $3,000,000,000 Backlog in The U.
S. Business was 5% lower on continued trading out of certain longer term contracts. In the Applied Intelligence business, backlog increased by 9% over the year, driven mainly by U. K. Government services and commercial awards.
Moving to The U. S. Platforms and services sector, with again the numbers here in dollars. Sales in the year were marginally better than guidance, declining by 8% to $3,900,000,000 The sales reduction in the naval ship repair business was less than expected with stronger volumes through our Norfolk yard. In line with guidance, the business delivered an improved margin of 7.3%.
Whilst further charges had to be taken in the year on the commercial shipbuild programs, these were partly offset by provision releases primarily on the Radford munitions contract. The net impact of these charges and releases was 130 basis points on margin. As expected, cash conversion of EBITDA was impacted by the use of provisions on those commercial ship programs and of customer advances on the CV90 Norway contract, along with the investment now completed on the new floating drydock facilities at San Diego. Order backlog was almost unchanged at $5,700,000,000 The trading out of the five year MISMO contracts in the ship repair business and the CV90 Norway program were largely offset by multiple domestic and international land vehicle awards along with the gun contract for The U. K.
Type 26. The Indian award for N777 Ultra lightweight howitzers valued at $542,000,000 was not contracted until January. K. Platforms and services sector, the year's sales of £7,800,000,000 were 5% higher than in 2015 and ahead of our guidance.
The increase came from the expected ramp up on F-thirty five deliveries and Saudi trainer aircraft. Activity and milestone performance on the submarines programs were ahead of plan. There was also a higher level of intercompany activity under the Saudi support contracts, and those sales were eliminated at the group level. As per guidance, the return on sales moved back above 10%. Cash performance was better than expected with an inflow of £199,000,000 Consumption of customer advances did occur on the Omani, Saudi and European Typhoon contracts, albeit some early receipts on the Omani contract mitigated that to a limited extent.
Order backlog was stable at £17,800,000,000 Sales trading of Typhoon aircraft and on the carrier are being replaced by the ten year U. K. Typhoon Support Award and Q8 Typhoon subcontract. Sales in the international sector of 3,900,000,000 were 5% up over 2015. The trading increase comes from the high levels of support to the Salam Typhoon aircraft now in service and weapons volumes from MBDA.
EBITDA of £400,000,000 has moved the return on sales back above 10%. And you'll recall that the 2015 results included charges totaling £53,000,000 in respect of the impairment and rationalization taken in the Australian business. Operating cash flow was strong at £435,000,000 although accelerated receipts from 2017 on KSA support and MBDA Qatar program were major factors. Order backlog increased to £13,100,000,000 as initial order intake was booked under the renewal of the five year support contract in Saudi Arabia. For reference, there's a chart providing a summary of the trading performance of all five sectors along with the headquarters numbers appended to your presentation packs.
So this next chart gives six to give guidance as to how we see the performance of each sector developing from 2016 through into 2017. And for reference, our exchange rate planning assumption on the U. S. Dollar is 1.25 So firstly, Electronic Systems. And overall, we expect 2017 sales in dollar terms to show mid single digit growth, driven by a number of electronic warfare contracts.
In aggregate, of twenty seventeen's projected sales, some 75% are in the 2016 closing order backlog, and that's broadly consistent with last year's starting point. On margins, our guidance range is unchanged at 13% to 15%, but we would again expect 2017 performance to be close to the top end of that range. Next, Cyber Intelligence. And in aggregate, we expect low single digit sales growth again in 2017. The U.
S. Business, which was 70% of the sector in 'sixteen, is expected to remain stable. In the Applied Intelligence business, we again expect to see double digit growth coming from across each of the three divisions: U. K. Government Services, International Services and Commercial.
Margins in 2017 are expected to improve to be within a range of 6% to 8%. And following the high level of product development investment in the Applied Intelligence business over the last two years, all of which has been expensed to the P and L, we expect the business to deliver profitable growth going forward. Moving to Platforms and Services in The U. S. And here, we expect sales to be stable with the completion of CV90 deliveries to Norway being offset by increasing volumes from The U.
S. Vehicles and munitions businesses. Of this sales guidance, some 75% is within backlog. At the margin level, we expect another year of improvement, absent further charges on the commercial ship contracts, moving up into an 8% to 9% range. Turning next to Platforms and Services UK.
Sales are expected to be around 5% lower. On Typhoon, European and Saudi deliveries are largely complete, and this is only partly offset by trading on the contracts to Oman and Kuwait along with the increased F-thirty five volumes. Almost 95% of this guidance is within the 2016 closing order backlog. Margins in the sector are again expected to be at the lower end of our 10% to 12% range, but that's having absorbed the impact of increased pension service costs. And the last of the sectors, Platforms and Services International, here we expect a further year of sales growth of around 5% with increased levels of support to the Salaam Typhoon aircraft now in service and higher delivery volumes from MBDA.
Close to 90% of this guidance is within backlog. Margin levels are expected to be similar to those in 'sixteen. And just to complete your models, headquarters costs are expected to be much the same as in 'sixteen. Underlying finance costs are expected to be slightly lower, absent the incremental net present value charges that we saw in 'sixteen. And the effective tax rate is expected to increase slightly from 21% to around 22%.
And of course, the final number there is dependent upon the geographic mix of profits. So with the assumptions of a dollar rate of $1.25 and no further commercial shipbuild charges, in aggregate, we expect the group's 2017 underlying earnings per share to be some 5% to 10% higher. This final chart highlights our cash utilization. In the left hand column are the numbers for 2016 and to the right are those we expect in 2017. In respect of operating cash flow, firstly, we're expecting capital expenditure to be marginally above depreciation levels, reflecting investment in a number of areas, including capability insertion in our Saudi partner companies and expanded production facilities in electronic systems.
Provisions on The U. S. Commercial shipbuild programs will be utilized as those contracts complete during 2017. As previously indicated, we expect that our working capital volatility will be much reduced as historic export customer advances have now been largely utilized. The residual advances on the European Typhoon production contract will be consumed in 2017.
The accelerated receipts that I mentioned that we saw in 2016 will reverse through 2017, and these flow both through advances and other working capital movements. The final operating cash flow item is the year's pension deficit funding, and that's expected to be around £200,000,000 The non operating cash flow items are predictable. Outflows for interest and tax are expected to total around £400,000,000 and dividend payments to shareholders will be around 700,000,000.0 So in aggregate, 2017 is expected to see a small reduction to net debt. And with that, I'll pass it back to Iain.
Okay. Thank you. So before I summarize 2016 for the group, I would like to comment on our core capabilities and technology positions. Our strong franchises and good program execution are underpinned by the quality of our technology and engineering capability. As many of our long term programs ramp up, we are ensuring we attract, train and retain the skills required to deliver our strategy.
Our customers use our advanced technology to protect people in national security. We are constantly looking to advance our technology, and it is vital that we stay ahead of the curve. To do this, we embrace disruptive technology, drive innovation and invest appropriately in research and development, both on a self funded basis and in conjunction with our customers. Company funded research and development is particularly focused in areas such as defense and commercial electronics, military aircraft and cybersecurity. Additionally, we continue to focus investment in technology through acquisition.
Building on the investment last year in Reaction Engines, this year, we have made another technology insertion, the acquisition of IAP Research, Inc. This enhances our position in the electromagnetic railgun domain as we look to progress that advanced weapon system. So in summary, 2016 was a good year for BA Systems delivering both sales and order backlog growth, and we closed the year with good momentum across the group. BA Systems strategy is well defined. We have a large order backlog, long term program positions, strong program execution and a well balanced portfolio.
Our commitment to and clarity of our dividend and capital allocation policies remain, with this the thirteenth year in succession we have increased dividends. With the expected improvement in defense budget outlook in a number of our markets, the group is well placed to continue to generate attractive returns for shareholders. Thank you. So I'll now turn to questions. But given, as you know, that this is my last results presentation, we are going to have a slight change in format.
You're going to ask the questions, and I'm going to then pick randomly somebody from the audience to answer the questions. So questions? He doesn't know whether I'm joking or not.
Thank you. Christian Lachlan from Bernstein. My question is around Saudi Arabia, and I guess it's kind of a multipart question in the sense that I wanted to look at it or get your view from a couple of angles. One, just if you could sort of walk us through what's happened since last year with respect to negotiations around an additional order for typhoons. And then also, if you've seen any sort of developments or sort of movement in the customers' priority list maybe for looking at ground vehicle recapitalization or other opportunities in Saudi?
And then the other angle, over the same time period or really over the last six months or so, any changes or concerns you may have on Downing Street's position with respect to high profile defense contracts with Saudi Arabia and that sort of relationship?
Well, you've seen that the Prime Minister has been particularly strong in terms of her commitment to Saudi Arabia and Saudi being an ally in the region, strategic ally and fundamental to the safety and security of the nation of The U. K. So there's absolutely no change in that position with respect to Saudi Arabia. In terms of the key for the group, we talked about the need to ensure that the support revenues continued post the sort of natural expiry of the five year term in 2016. We can confirm and there was a royal decree in quarter four, which extended that to 2021, and that program is up and running.
So in terms of that was the key for us in 2016 and the key for the Saudis because of the nature of those services and the importance of them to their activity space. And then we always talked about once you've done that, then they will start to talk about new requirements. We've been in Saudi for fifty years. It's a long term relationship, been through many hues of government and many hues of support of the program, and it will continue going forward. So we're very comfortable in terms of how Saudi is going forward.
And the key for us was absolutely getting the support up and running from 01/2017, which it is. In terms of the programs on the land, Gerry, do you want to come because these are all U. S. Programs as far as we're concerned, the Bradleys and the M109s. Have we seen any demonstrable change?
Well, we've had some recent discussion. We know that they remain high on the priority list for the Saudi Army, and we expect one of the two cases, either the 109 or the Bradley to move forward, in the second half of this year. So we're seeing progress. There are some, bids being submitted and work done with U. S.
Government on the FMS case. Which one will come first? Don't really know for sure.
Great. Thank you.
Nick? Nick Cunningham from Agency Partners. Perhaps it's sort of testimony to the stability that Iain's brought and maybe a better environment as well that one wants to look a little bit further forward. And one of the things that one can see in 2018 is that the direct U. K.
Exports and production of Typhoon do come to an end. And also the big, QE programs will be effectively running down. So question one is, is there necessarily a step down in U. K. Revenue recognition in 2018?
And is that a new level going forward, if so? And then the other question is on F-thirty five with the sort of heavily advertised lower price levels, which I'm not sure are actually different than what was already planned anyway, but which have definitely been heavily advertised. Is there going to need to be another round of investment on the part of you and your partners to achieve those prices?
Let's take F-thirty five then QE and then Typhoon. So in terms of F-thirty five, no, is not the need for the investment. We have the capacity and the facilities to deal with the ramp up in rate. And you're quite right that in terms of the projected prices, they were all to do with the ramp up in rates and were well advertised about what we intended to do. And actually then getting LRIP 10 with the increased quantities, we could confirm then the pricing structure going forward.
So it's nothing that was not inconsistent with what we've been saying previously. But if somebody wants to take credit for that finalization negotiation, then they can take credit for that negotiation if they wish. But it's not a change to our business model. In terms of the activity in Maritime in The UK, you've to remember as QE is coming down, Type 26 is going up into a manufacturing phase and Dreadnought is going on into a manufacturing phase as well, which is why we've always talked about stability across the Maritime sector. What was the specific question on Typhoon?
Was
I think as far as I can see, the production for The U. K. And the direct exports finishes. So does that drive a step down in revenue?
Well, you've got to remember our support revenues are now higher than our manufacturing revenues on Typhoon and support.
Yes. In terms of absolute production terms, you're right, Nick. It doesn't stop, by the way, we've got the Kuwait subcontract, so that carries on. So we're not talking about cessation here. This is continuation.
But there will be a step down because we're coming off the high volumes of Saudi. The Omani contract will complete. But to Ian's point, support revenues are continued to increase, we've and got the F-thirty five volumes ramping up significantly. Even this year to next year, we're going, I think, from 55 set deliveries to 82, and it ramps up even further the year after. So we run the portfolio here.
We're always going to see some programs reducing and we'll see others increasing. And I think that's consistent with what we've been saying for some time now about if you look at the overall U. K. Business, which includes a mix of all those programs, it's stable. Thank you.
Is this one in the middle there?
Gordon Hunting of Fisk. An accounting question. Since I remember and having worked for them, KPMG have been your auditors. When are you going to have a competition to change? And are you expecting any new auditors to take a different attitude to how you account for IFRS 15?
Do want to take that one, Ian?
I'll take it. So we need someone randomly for that
one. No, I can do that one.
So Alan Gowan, our group business development, I think.
KPMG, I mean, tenure is coming to an end. I think, as you know, we've disclosed in the annual report last year that we're running competition. I think the last audit for KPMG is 2018. So we'll have new orders in place by then. Am I right, Peter?
2017 is last year end.
Last year end. So 2018 is the final sign off. So we're running that competition. In terms of IFRS 15, hopefully none of the auditors take different views on how they treat accounting standards. If the question really was what does IFRS 15 mean for us, and this is about revenue recognition, the issue will be one and we haven't sort of got to an absolute determined position yet, but the potential is for acceleration of revenue recognition.
One of the things around IFRS 15, it says that there is as you do work on long term contracts, it's a continuous transfer to your customer. And therefore, you should recognize work in progress as a sale. In other words, you cannot have work in progress on long term contracts.
You can.
So revenue recognition is likely to be accelerated, it will make no difference to profit. It will make no difference to cash and it will make no difference to in terms of anything on the balance sheet.
When do you anticipate that all typhoons will have an up to date electronically scannable radar instead of the hybrid at the moment?
Well, that's up to the UK government and the RAF when they want to operationally fit the which type of aircraft they want to fit with these radars. What we've got is a development program going at this moment in time, and then we will negotiate and debate with them at what point in time they want to implement and integrate these onto the aircraft. So it's not something that we could discuss with this audience. What about export? That will then be for the various export customers as to what variant of the radars that we supply to them.
So you should view that positive because it's going to mean that there will be more capability insertion on existing aircraft going forward.
Morning. Rami Myerson from Three questions. First on SSRO, I was quite surprised that in the equipment plan, they talked about the consultation with the SSRO around Astute Boat five. I think in the past, we've assumed maybe wrongly, that the submarine contracts were not subject to SSRO consultationregulation. The second question is on the shipbuilding strategy.
We have seen a paper published recently, and I appreciate your thoughts on The U. K. Shipbuilding strategy. And possibly within that question, when do you expect to sign a contract on TALF '26? And for how many ships?
And lastly, just on the working capital, netting out the guidance for 2017 and thinking about 2018, is 300 to $400,000,000 outflow something that is sustainable going forward? Or do we think that actually we can move to cash inflows in twenty eighteen, nineteen? Thanks.
So taking Astute, I mean, so Astute Profile was a qualifying defense contract as I claimed because the way it was contracted, you've got initial limits of liability and there's a substantive change to the contract to agree the final price. But you shouldn't worry about because it's always a target cost incentivized program, and we get the ability to earn profit above the minimum rate because of the risk adjustments that you get from hitting the milestones going forward. So there's no impact on our future projections because of that. What was the other question?
Shipbuilding strategy.
Shipbuilding strategy, yes. So the John Parker report was published, and then the U. K. Government is then going to publish its national shipbuilding strategy later this year. And then we will respond to that national shipbuilding strategy.
And the key thing for us is to get as last year was to get the OPVs on contracts. We had continuity of manufacturing leading into the contract for Type 26 so that we can cut steel in the 2017, which then protects manufacturing in the yards going into the 2030s. The initial contract will be for three, the first three of the Class of eight, and we will get that on contract in time for cutting steel in the summer.
In terms of the question on working capital, clearly, you'll have seen the closing position at 16,000,000 If you strip out FX, where the net debt position is almost unchanged from where we were in 2015, so we've beaten our own guidance. As I said in my narrative earlier on, there's about £250,000,000 that we got accelerated out of 2017 into 2016. But despite that, again, we're still guiding for 2017 that we'll see a reduction in net debt. And your question about the group's operating cash flow model, are we saying there's any change to it? No, we're not.
So we would still expect to see inflows in every year. That's our planning assumption.
One in front, Celine, and then there's one, I think, slightly put their hand up just in front of you, Celine. If you've got the microphone, go.
Celine Fornaro from UBS. So I've got three questions, if I may. So the first one would be regarding BAE in The U. S. And if you could just remind us as far as BAE Inc.
Is concerned, what is the special relationship to The U. S? And you know, where does BA Inc. Sits, you know, with the Pentagon meetings, etcetera, alongside the other top US primes? And where has been so far the interaction with the new administration?
The second question is regarding the comments on the commercial shipbuilding charges. If you could just remind us where are we on the last two ships and why there's so much of a note of caution on those? And finally, be on the cyber divisional performance, which has been, as you said, disappointing. And if there, you're probably reviewing the way you assess the business maybe more regularly or if there's anything that you want to change in the way you keep track on the performance of the business? Thanks.
In terms of Cyber First, I mean, we have invested in all the new product sets, the new marketing and the new sales activities to deliver on those new products. And they launched. We are seeing good signs in terms of the attractiveness of those products. And so we are not changing our plans in terms of that way forward. We've made the investments.
As Pete says, we expense it all, some $650,000,000 a year of their cost base gets expensed, and nothing sits on the balance sheet. And there's just a timing of when they turn into orders going forward. So we're very comfortable with the way the business is going. We also got to remind ourselves that there are is another twothree of that business. One is the work that we do for The UK agencies and the UK government, and that is performing very strongly.
And then we have the business that we do internationally as well, sponsoring largely from the relationship with the UK government, which is also doing well. But the big investment is going into the commercial side, and we just have a point in time where the products are launched, so we just have to trade those through and then the activity space will come back through. In terms of BA Systems, Inc, and then I'll ask Peter to go we operate under a special security arrangement. We have extended that arrangement. So it's not something that we're facing a cliff edge in terms of arrangement.
So we are treated in exactly the same way in The U. S. As if we were a U. S. Prime.
And so we are not excluded from anything. And you've seen that we just closed another small technology acquisition, which, as you might imagine, is in quite a sensitive area in terms going forward. So it shows you that, that relationship is vibrant. So Gerry, are you being invited to sort of participate with the new administration in terms of as all the other primes are?
Yes. As Ian mentioned, we have had, I think, twenty five years now of a special security agreement that we operate under. We just renewed it for another five years. This is the first year of that five year extension. I sit on the Executive Committee of the Aerospace Industries Association.
I've been invited to join the White House Trade Council on Manufacturing. So our standing is just the same as any other major contractor over there. And as Ian said, evidence of awards in the classified areas, major platforms, both with the Marines and the Army on combat vehicles. We're the largest provider of ship repair services to the U. S.
Navy fleet with about $1,000,000,000 in orders, I think, last year. So we're outstanding like anyone else. We have our own independent board. We're incorporated in Delaware even though we're a wholly owned subsidiary, and that gives the U. S.
Government great comfort.
Thanks, Teddy. So commercial vessels, Pete?
In of the ships, we had four contracts for eight ships. Six ships are now delivered off contract. We have two to go. They will be done around the middle of the year. We took $73,000,000 of charges in 2016.
I think the split was $49,000,000 in the first half, 24,000,000 in the second half. And clearly, you're seeing today is our guidance saying we don't expect any further charges in respect to those ship contracts.
It's Harry Breach from Raymond James. Just I think a couple of questions. Firstly, actually, mainly first one for Peter perhaps. Peter, just Platforms and Services International. Is it reasonable to assume that the backlog increase year on year was predominantly or entirely about the SBDCP extension?
Or if not, can you give us a bit of color about what the big blocks of that were? Second question really was that I used to be really excited about the potential for Tx. And then a few weeks ago, it looks like your team leader decided it wasn't really for them. And just wondering if you can give us any color about whether you might have any possible participation in that program in any way going forward.
Thank you. I'll take the first one.
Yes.
Yes. I mean in terms of the SFA2, as it's called, or the salary support contract, five year contract, as Ian said, we've had a continuation agreement signed, which takes you through to 2021. We've recognized initial order backlog. The customer does not want us to disclose that number. But to your point, Harry, if you look at the growth in the backlog, that gives you a clear steer as to what sort of numbers we're talking about here.
In terms of Tx, so at the end of last year, the detailed RFP came out. And when we looked at the terms of it, in terms of the cash profiling, how it's going to be assessed and the initial order placement, we both decided as a team that this was not a sensible thing to take forward and going in terms of the returns that we generate for our shareholders. Now the benefit we've had as a company is the money that we've invested in what was going to be bid into there is we've generated a new wing for Hawk and a new advanced cockpit with new avionic suite on that as well. So and that we displayed in Bangalore last week. So Alan and the team were over there.
And I think it was extremely well received, wasn't it, Alan? So we have got value from the work that we've embedded in that bid. Like all things, it's disappointing to withdraw, but it would not be a sensible thing for our shareholders to continue with that bid.
Can I ask a supplementary sorry to Peter? Peter, can you give us the company funded R and D expense number
for '20 Yes. We grew by 23%. So we went it was £168,000,000 in 2015. It was $2.00 £6,000,000 in 2016. And if you take the customer funded as well, then we're at 7% of sales, which is consistent with where we were in 2016.
David? David Perry at JPMorgan. Two questions, please. The first one, I know it's a sensitive negotiation, but it is a massive issue for investors. So you alluded to various options in the pension discussions and the triennial review.
If there's any color you can give at all, it would be helpful. And maybe just let us know when we might get some update. And the second one, at a group level, you already have a very low tax rate. But do you think there is any potential for that to come down if The U. S.
Corporate tax rates are overhauled?
Okay. In terms of pension discussions, clearly, that's going to be a discussion multiple discussions, multiple negotiations. We have nine U. K. Pension funds.
We're going to be dealing with them all in at the same time. In terms of time scales, we would hope to get that done by the 2017. I think you know that statutorily, it's fifteen months you have to complete, which would take you right the way through to July 17 sorry, July 18, but we anticipate getting this done by the 2017. On U. S.
Tax rate, I mean, clearly, there's a lot of noise, a lot of discussion. We've done our own sensitivity analysis. If the federal rate was to drop from 35% to 20%, that would be pretty neutral to us. And the reason for that is because also interest cost will become disallowable for tax calculation purposes, and the group has most of its long term debt and borrowings in The U. S.
In dollars. So we'd lose the tax break that we get on that interest. So it will be neutral.
Morning, Sandy.
You know what's coming. Sorry, I've got loads of questions, but there's just something more important to deal with. We were chatting before this about you leaving us. And just coming up for thirty years since I started looking at BAE in earnest. And for most of the first twenty two years, BAE could have ended my career every six months.
The last eight years have been an absolute joy. And before the compliance rules changed, I could have stood up and said, performance has been brilliant. I've hung on your every word and worshipped at your feet. Luckily, the compliance rules have changed. However, when we think about it, and I was trying to pick a word, on the sort of sell side in particular, but probably in the investment community at large of late.
I think the word trust has been scarce. I would like to say that personally, I trusted you. And I think that is probably the highest accolade it's possible to get from an old cynical sell side analyst. Having said that, I am firmly convinced that MiFID II is a BAE cyber warfare program. However, can I, on behalf of everyone, just say thanks very much and wish you all the best for the future?
It's been a pleasure, Ian. Thanks.
Thank you. Perhaps it's just worthy of me saying something. The highlight of my year are always these meetings. Believe it or not, I do I have enjoyed the relationship we've had and the support that we've given because in the main, what is written is very valid about the company. So thank you for all your support and all you've helped me and all you've done for the company.
So thank you very much.
Any more questions?
I'll take it. Very good.
Thanks Thank very you.