Excellent that so many have come to the preliminary results presentation. I just want to say a few words on sort of the background to the company before we get into the meat of it obviously with Ian and Peter. I've now been the Chairman here for just a little over twelve months. And during the time, I visited virtually everywhere in the business. I've been to clearly all The U.
K. Sites in The U. S. A, Kingdom Of Saudi Arabia and Australia. I've met a lot of our shareholders and spent time with customers in all of the domains.
In my career, I've had the sort of privilege to be involved with a lot of different companies, But I have to say twelve months in, none more engaging or indeed some ways more stimulating than BAE Systems. In the travels I've done, it's become very clear that whilst we do operate in very diverse markets with a very wide range of products and services, this company is absolutely unified by its commitment to excellence, the quality of its people, pride in its achievements and a real belief in the role we have, which is obviously protecting and serving those that protect us. So a year on and it's exactly a year on since I stood here in my first early days of taking this job, I'm very pleased to say that I'm delighted to have taken the appointment and I feel very positive about the future of the business. The Board that I chair has proved to be what is really legacy. It is populated by individuals who have got a proven record of diverse experience.
There's a good mix of gender, although we're looking to further strengthen that mix. There's a good range of age and also of nationality. So there's also, I think, within the group of people a real collective desire to contribute to the development of the business. Now during the first year, we decided to look pretty systematically at a full review in some detail of the business to ensure that we all share within the boardroom a clear understanding of the business priorities, the management bench strength at a number of levels in the organization, the market requirements and the strategic opportunities that we have. And we concluded as a Board that we are indeed very fortunate to have the sort of strong geographic balance that you're all very familiar with, the very healthy mix of product and services and the fact that we do serve our forces and our allies right across the globe.
Now our Applied Intelligence business capitalizes clearly on the deep intelligence roots that we have. It does benefit from the commercial reach that we've indeed expanded and it continues to offer pretty attractive growth dynamics for the future. In the electronics business, we have without doubt leading edge capabilities in military areas. And in commercial avionics sector, we have an adjacent market with some real growth potential. Looking back, the naming of the Queen Elizabeth aircraft carrier in Scotland in July, it absolutely showcased the remarkable engineering capabilities that exist within this company.
And we hope to deploy those capabilities in building a new range of frigates for the Royal Navy. In the air, the strengthening of the radar and weapons capability of the Typhoon combined to improve the export potential of the aircraft. And the performance of that aircraft, I think a lot of you saw, indeed I did on a couple of occasions at the Pharma Air Show, truly a terrific performance. I think looking in the broad, we ended 2014 in a more a much more uncertain and dangerous world than we've seen for some time, but we did so in the company with a strong order book and a really good sound experienced management team. Looking forward, I think prospects for the business are promising.
We won a pivotal contract for the armored personnel vehicles at the end of last year in The United States and with the potential for naval and aircraft orders from domestic and international markets in the future. None of us, however, can be certain that the good prospects that exist will always convert into firm orders, given the budget controls, the volatility of oil prices and the changing leadership movements that we see both at home and abroad. And it's against this background that whilst we are optimistic about our future growth, we're also realistic on risk. Our commitment as a Board and a company to driving shareholder shareholder value, I think, has been demonstrated very clearly through the performance we've done, the infill acquisitions that we've made and the share buyback and indeed our progressive policy. And we've already committed just under about £500,000,000 in buying back our stock.
And we announced three acquisitions during the year to add technologies and capabilities to the existing business. The largest, of course, was SilverSky and that strengthened our Applied Intelligence business and in particular its future prospects in the fast growing commercial cybersecurity market. When we look forward, our policy remains pretty much unchanged and we will continue to use our cash resources in the best interest of shareholder value creation. In the meantime, we focused on driving down the costs, preserving the quality, which our reputation is firmly based, honing the competitive edge, which we continue to need to do to ensure we are in the best position to compete in what are very challenging and demanding marketplace conditions. So looking back, I think so far so good.
Clearly, there's always more to do and the people to do it are now going to tell you about the performance of the last twelve months. And with that, I'll hand over to Ian. Thank you. Good morning, everyone. Thank you, Roger.
So I will spend a few minutes on our trading environment before handing over to Pete for the financial details. We'll then take questions as we normally do. We delivered another solid performance in 2014. Through several years of budget constraints in our U. S.
And U. K. Markets, we have consistently performed and demonstrated agility to address volume and cost challenges. We have met customers' affordability challenges and delivered value to the bottom line. We now believe we are seeing signs of greater stability and improving clarity.
Defence spending continues as a high priority in international markets, particularly in The Kingdom Of Saudi Arabia and we have continued to win significant new business. Order intake of £4,300,000,000 was achieved from international markets outside The U. S. And U. K.
It should also be noted that for the third year running, have achieved in excess of £10,000,000,000 of order intake in The U. K. And U. S. This is protection of our core franchises that are key to supporting future services and international revenues.
Our large order backlog of £40,500,000,000 provides good multi year visibility across many of our businesses. In addition to the improving outlook for our defense businesses, we have continued to deliver growth in our commercial adjacencies of cyber and avionics. This overall consistent performance has enabled us to generate good returns with a further £925,000,000 of capital returned to shareholders through dividends and share repurchases in 2014. So starting with The U. S.
Last January's bipartisan budget agreement provided a two year window of defense funding visibility and some emerging stability. The continuing resolution operating across the last quarter had only minor trading disruption for us. Disruption may appear in 2015, but we believe budgets are now relatively stable with some early indicators of a modest improvement for 2016. There will always be a continuous need for competitiveness, efficiency and agility and Gerry has streamlined The U. S.
Organizations into three operating sectors with reduced administrative overhead. The stabilizing budget environment in The U. S. Resulted in an improving level of procurement activity in the electronic systems and platforms and services businesses. Notably, we saw encouraging developments in our land business.
The award of the armored multi purpose vehicle contract was a key win, a new long term franchise for the company. The group's intelligence and security business and some other government services activities continue to trade in a challenging environment. However, margin and cash performance in this business area remains good. Commercial avionics continued to perform strongly and the selection to supply the integrated flight control system for Boeing's new 777X program was a notable win, generating significant new business in future years. The group also continued to perform well on delivery of ship repair capability to the U.
S. Navy. Given the U. S. Navy's increased focus on Asia Pacific operations, we committed investment to install a new floating dry dock facility in our San Diego shipyard.
The U. S. Commercial shipbuild contracts for which charges were announced last year are making operational progress. Gerry has strengthened the team in this business following a detailed review by our U. K.
Naval business. The U. S. Team have also made good progress towards a much improved Radford ammunition facility contract. It was disappointing that the Korean and U.
S. Governments wanted to terminate the KF-sixteen contract for their convenience, but this was a market takeaway and not a core franchise. We have moved protected our existing relationships. Turning now to The U. K.
We continue to benefit from long term contracts in the maritime and military air domains. The UK defense and security environment has been stable notwithstanding the continued pressure on public spending. We have also continued to deliver good program execution and cost control and a consistently strong operating performance. We do however recognize that the economic environment in The UK remains challenging, placing further pressure on many areas of public spend, including The UK defense budget. We are working to deliver continued improvement in affordability and to deliver both value and world class capability through the large long term contracts that comprise much of our UK program workload.
In the air domain, Typhoon production on our extensive in service support and upgrade business provides a strong core of high performing business. 2014 has also acceleration of capability expansion on Typhoon with activity underway to clear additional weapons and sensor capabilities for the four partner nations and international customers. In November, the contract for the electronically scanned radar was a key milestone in the Typhoon platform's evolution. Alongside Typhoon, the F-thirty five program is commencing what is expected to be a significant growth in production with the acceleration of volumes of both The UK manufactured rear fuselage assemblies and the electronic systems content from our U. S.-based operations.
We have also recently been selected as the regional hub in Australia on F -thirty five support. We also continue to develop a way forward in unmanned air systems building on the successful Tyrannis flight demonstrations we now have both U. K. National funded activity and an agreement for a collaborative way forward with France. The outlook for our UK Maritime businesses is robust.
The build of two Queen Elizabeth class aircraft carriers is progressing well. The first class was named in a formal ceremony by Her Majesty the Queen and was subsequently floated out of the dock in which she was assembled. This has enabled assembly of blocks for the second vessel to commence. The first vessel continues beside us with outfitting. We welcome the decision announced by the Prime Minister of The U.
K. NATO Summit in October committing to the operation of both vessels. In August, we were awarded a contract for the build of three offshore patrol vessels for the Royal Navy. This contract provides both additional naval capability and sustainment of key shipbuilding skills leading up to the start of manufacture for the anticipated Type 26 frigate program. We are working on the Type 26 assessment phase and commercial discussions for the future phase of the program are well advanced.
Type 26 will provide long term clarity for complex warship manufacture at our facilities on the River Clyde in Glasgow. We are also providing significant support services to the Royal Navy. In October, we were awarded a support contract for the operation of the Royal Naval Base at Portsmouth. We have also since signed the Type 45 support extension contract. In the submarines business, Artful the third of the seven Astute class submarines was launched in May.
Engineering work also continues to accelerate on the success of submarine program. We now employ over 6,000 BA Systems people in the submarines business. At the end of the year, we were awarded a contract for the upgrade of The UK's Spearfish heavyweight torpedoes. This contract will ensure the sustainment of UK torpedo capability for the foreseeable future. 2014 has been a successful year for The UK business.
We do however now enter a period of UK elections and the strategic defense and securities review, but we do have the benefit of a large order backlog of long term committed programs with many of the decisions now addressed for several years to come. Our business is performing well and we continue to take the actions necessary to address costs and to meet the customers' affordability challenge. In Saudi Arabia, you will recall that in February, we reached agreement on the Typhoon price escalation discussions under the current 72 aircraft contract. We have continued to progress the provision of capabilities to Royal Saudi Air Force, including delivery of a further 11 Typhoon aircraft. We made good progress in developing our position as a key part of the kingdom's defense industrial base.
In June, we announced the reorganization of our portfolio of interests in a number of industrial companies in Saudi Arabia and an enhancement of our existing relationship with Riyadh Wings. The reorganization is expected to enhance the growth prospects of this portfolio of businesses and reinforce an ongoing commitment to support increasing local employment and capability. We also saw further significant order awards in the year, including additional equipment and capability for the RSAF's Typhoon and Tornado aircraft. Turning to some of our other markets and starting with Australia. The Australian government approved in May a commitment to grow defense spending within a decade to 2% of GDP.
The group's Australian operations performing well. We delivered the first of two landing helicopter dock vessels for the Royal Australian Navy. The second ship is also progressing well. We are now moving off the high level of activity on this program with currently no material follow on workload contracted. We are in discussions with the government about options to sustain industrial capabilities, as well as to meet the potentially substantial future naval requirements.
The MBDA guided weapons joint venture is also seeing high demand benefiting from a wide range of air and naval platforms across European and wider international markets. MBDA also received a £234,000,000 contract to supply the air to air missiles for India's Jaguar aircraft fleet. The business has also seen increased bidding interest on ground based air defense systems in some regions. Work progresses on the Omani Hawk and Typhoon contract and we continue to pursue other international prospects for these platforms. The financial performance of implied intelligence was strong, all metrics advancing nicely, particularly order backlog growth.
2014 was significant year in our strategy to develop and grow our position in the expanding commercial cyber market, building on our government credentials. We have seen both a commercial cyber strategy through both organic investment and acquisitions to fast track growth. The SilverSky acquisition provides a well established channel to The U. S. Commercial cyber market and existing large base of customers, a high quality team and a cloud based delivery mechanism.
A highly complementary fit with our existing portfolio and an accelerant for the strategy. This is a small part of BA Systems today, but we have ambitious aspirations for growth and returns from our commercial cyber business in the medium term. I will now ask Pete to take you through the financials.
Thanks, Ian, and good morning. As usual, I'll step through the results for 2014 and then I'll move on to guidance for 2015. There has been considerable volatility in exchange rates through the year. And so for reference, the U. S.
Dollar rate has averaged at $1.65 compared to $1.56 in 2013. And so the headline numbers and compared to 2013. Sales reduced by some £1,500,000,000 to 16,600,000,000.0 Around £600,000,000 of that reduction was due to exchange translation. The volume reductions in Land and Armaments of £400,000,000 were as expected. And last year sales included the retrospective benefit of around £300,000,000 from the price escalation settlement on the Salaam program.
Underlying EBITDA decreased by £223,000,000 to £1,702,000,000 giving a return on sales of 10.2%. Of that reduction, 49,000,000 was due to exchange translation and £183,000,000 for that retrospective benefit traded in 2013 from the Salaam price escalation. Underlying finance costs in the year increased by £25,000,000 to $2.00 £4,000,000 and this arose primarily from a higher level of net present value charges in line with a reduction in the group's weighted average cost of capital. On underlying earnings per share, last year's reported figure of 42p benefited by a little over 4p from the Salaam price escalation settlement. And excluding that, underlying earnings per share in '14 of 38p was marginally higher than in '13.
The tax rate for the year was at 19%. Now recognizing the number of moving parts year over year within underlying EPS, there is a bridge chart showing the major movements appended to your packs. There was an operating cash inflow of £1,200,000,000 benefiting from the sale and leaseback in the first half year of our two residential compounds in Saudi Arabia. Net debt at the end of the year was better than guidance at £1,032,000,000 Order backlog at £40,500,000,000 has reduced following awards in 2013 for long term support contracts in Saudi Arabia, which are now being traded out. The dividend for the year has increased to 20.5p, up 2% on dividend.
And at this level, the dividend is covered 1.85 times by underlying earnings per share. In addition to the effect of exchange translation, there are a number of other items materially impacting the balance sheet in the year. Intangible fixed assets increased on the year's acquisitions. There were two goodwill impairment charges, the first taken in relation to the South African Land and Armaments business disposal and the second as a result of The U. S.
Commercial shipbuild performance. Tangible fixed assets reduced on the Saudi residential and office compound sale and leaseback transaction completed back in April. And within working capital, there were several significant movements. The major advances received in 2012 on the Omani Typhoon and Hawk order and the Saudi training aircraft contract are being consumed. Advances were also utilized in the year on the European Typhoon Tranche two and Indian Hawk programs.
Provisions created in previous years were utilized on the Omani offshore patrol vessel contract, rationalization costs and settlement of a U. S. Contract pricing dispute. And the first of the two payments under the Salaam price escalation settlement was received. In aggregate, capital increased by some £500,000,000 The IAS 19 accounting pension deficit has increased over the year to £5,400,000,000 and I'll come to that on the next slide.
And finally, we closed the year with net debt of 1,000,000,000 This slide shows the pension scheme assets, liabilities and deficit as accounted for under IAS 2019. The value of the scheme assets has increased over the year by £2,300,000,000 to £23,800,000,000 And in aggregate across all of the group's pension schemes, equity investments remain close to half of scheme assets. Over the year, liabilities increased by £4,600,000,000 to £30,600,000,000 Real discount rates reduced by 70 basis points in The U. K. And by 80 basis points in The U.
S, driven by the further falls in bond yields. These discount rate movements have increased reported liabilities by around £3,700,000,000 As regards mortality, we have early adopted recently issued U. S. Mortality tables and taken a more prudent approach on U. Longevity.
These have led to an increase in reported liabilities of £600,000,000 The year's discount unwind and the service cost less pensions paid account for the rest of liabilities. So in total, the impact of all these movements over the year is an increase to the group share of the pretax accounting pension deficit of £1,900,000,000 As you know, the mark to market pension accounting does not determine the contributions we make to our schemes. It's the funding position that's relevant there. 2014 was a significant year for triennial funding valuations with all nine of the group's U. K.
Schemes falling due. The company and the trustees of each of those schemes have reached agreement on the funding valuations and revised deficit recovery plans and those agreements have also been cleared by The U. K. Pensions regulator. This chart shows the assets and liabilities of The U.
K. Schemes under those newly agreed valuations compared to the position last time around. Total liabilities shown here in red have increased by £2,100,000,000 to 21,300,000,000.0 Total assets shown in blue have increased by £3,400,000,000 to £18,600,000,000 Overall then, a reduction to the funding deficit from £4,000,000,000 to 2,700,000,000.0 It is this funding deficit which determines the cash injections to be made by the group over the next three years not the accounting deficit. Based on these newly agreed deficit recovery plans, there will be little change in deficit funding to be made in 2015 compared to the circa £400,000,000 that we made in 2014. Moving on to cash.
This slide sets out the movement from our net debt position of £699,000,000 at the beginning of the year. The operating business cash flow was $1,191,000,000 pounds Interest and tax payments were £237,000,000 Payment of twenty thirteen's final and twenty fourteen's interim dividend totaled $642,000,000 Under the three year share repurchase program of up to $1,000,000,000 that we announced in February 2013, we have bought back 119,000,000 shares at an average price including costs of $4.16 pence. The combination of dividend and share repurchases gave a total cash return to shareholders in the year of £925,000,000 Acquisition costs, primarily for SilverSky and transactions relating to the reorganization of our holdings in our companies in Saudi Arabia amounted to £230,000,000 Exchange translation and all other movements totaled £132,000,000 So we closed the year with gross debt of £3,300,000,000 cash of £2,300,000,000 This grossing up includes £700,000,000 of pre financing that we took in October against debt that matures in 2015 and 2016. The cash flow performance of five secondtors is shown here, but I'll return to that when I cover the results of each of the sectors. Just to note, the total cash outflow for pension deficit funding made in 2014 was £391,000,000 The cash outflow at head office contains $275,000,000 that.
So moving on to the sectors. Again, I'll cover the in year performance here and then return to the outlooks a little later. So the first of the sectors Electronic Systems and the figures shown in U. S. Dollars.
Ahead of previous guidance, sales compared to 2013 increased by 3% to just under $4,000,000,000 The commercial areas of the business now amount to 21% having seen sales growth in the year of 7%. On the defense side, sales increased by 2% in the year largely from the F-thirty five program in the electronic warfare area. The return on sales achieved of more than 15% was well ahead of guidance largely for continued strong program execution and risk retirement. There was a 50 basis points nonrecurring gain from a contract pricing settlement. Cash conversion of EBITDA for the year was at 66%, but excluding pension deficit funding, that conversion rate was at 80%.
Despite The U. S. Budget pressures, order backlog was sustained at $6,100,000,000 The contract award for the enhanced night vision goggles program protested again and is therefore not included within the reported backlog. The Cyber and Intelligence sector comprises The U. S.
Intelligence and Security business together with BA Systems Applied Intelligence. The numbers here again in dollars. In aggregate, sales in the year reduced by 8%. The U. S.
Business saw a 17% decrease driven largely by reduced budgets at the sector's two largest customers along with further reductions in analysis support in theater. Organic growth in the BA Systems Applied Intelligence business was at 10%, almost all of which was from commercial customers. Completion of the SilverSky transaction occurred in mid December and therefore only $4,000,000 of sales trading has been recognized from that transaction. Despite the top line performance, the margin achieved of 11.3% was ahead of our guidance range with profitability in the Applied Intelligence business increasing ahead of plan. Cash conversion of EBITDA for the year was at 58% due to the capital cost of the replacement ERP system and stand up of our Malaysian operating center in the Applied Intelligence business.
In aggregate, order backlog increased by one increased to $1,400,000,000 And despite the top line pressures, backlog in The U. S. Business grew by 7%, largely on the imagery analysis and cyber support awards. In the Applied Intelligence business, backlog increased by 37% over the year, 22% organically and 15% from the SilverSky acquisition. And that clearly builds on the 60% growth that we saw in 2013.
For 2014 reporting, The U. S. Platforms and Services sector aggregates the Land and Armaments and the Support Solutions business. As we announced earlier this month, following The U. S.
Rationalization made last July when Support Solutions was disbanded and the various businesses reassigned, 2014 is the final year where we will report below The U. S. Platforms and Services sector level. The numbers again in U. S.
Dollars. And so for the last time, I'm going move straight on to the performance of Land and Armaments. Sales in the year declined to $2,300,000,000 in line with previous guidance. Bradley reset activity has more than halved. The medium mine protected vehicles production contract has completed and deliveries under the USM777 lightweight howitzer contracts have largely traded out.
Despite the expected top line reductions and in line with guidance, the business has delivered an improved margin of 10.3% through good program execution and cost reduction. Cash flow generation was again strong with good conversion of working capital. Order backlog reduced to $4,400,000,000 largely from the trading out of deliveries on MMPV and N777. And we haven't recognized within backlog the circa $800,000,000 under the LRIP options on the December's AMPV program award. In the Support Solutions business and again in line with guidance, sales were just 1% lower than in 2013.
However, the year's margin has been materially impacted by cost overruns on the commercial shipbuild programs. Charges taken in the first and second half years totaled $122,000,000 The Radford munitions contract has now been stabilized with no additional provisioning necessary. Order backlog decreased to $4,600,000,000 on the sales trading out under our five year U. S. Navy ship repair contracts.
The recompetes for the Hawaiian and San Diego contracts were both successfully secured in the year. In the Platforms and Services U. K. Sector, the year sales of £6,600,000,000 were 8% lower than in 2013 or 4% excluding last year's retrospective trading of price escalation on Salam Typhoon. This reduction is largely due to a lower level of intergroup trading in 2014 and therefore has no impact on the group's As expected, the return on sales was at 11.7%.
Cash performance was better than expected with a cash inflow of £173,000,000 Consumption of customer advances was at a lower level in the year than anticipated. Provisions were utilized against costs incurred on rationalization and on the Oman OPV program. Order backlog reduced to £20,100,000,000 primarily from trading of Typhoon Aircraft, Indian Hawks and Carrier. This does mask the key order awards that were secured for long term contracts on Spearfish torpedo upgrades and Portsmouth Naval Base support. Sales in the International sector of £3,600,000,000 were lower than guidance, mainly for timing of deliveries on Saudi support contracts.
The reduction against 2013 includes £143,000,000 in respect to exchange translation arising on the Australian dollar and euro. The trading reductions were in the Australian business as the landing helicopter dock program ramps down, last year's sales trading arising from Salaam price escalation and the higher level of support Saudi equipment deliveries made in 2013. EBITDA of £366,000,000 generated a return on sales of 10.2% remaining within our guidance range. There was an operating cash inflow of £881,000,000 which includes a net £349,000,000 from the sale and leaseback and initial rentals of the two Saudi residential compounds. Some £200,000,000 of receivables were collected in December earlier than expected and there were further down payments received on Saudi equipment awards.
Order backlog has reduced from last year end high following in 2013 of the five year support contracts and equipment packages in Saudi Arabia. Now for reference, there is a chart providing a summary of the trading performance of all five sectors along with the numbers for headquarters appended to your presentation packs. This penultimate chart seeks to give guidance as to how we see the performance of each sector developing from 2014 into 2015. And for reference, our exchange rate planning assumption for 2015 for the U. S.
Dollar is $1.55 to the pound. As we advised in our February '2 RNS, we have restated here the 2014 numbers to recognize the reallocation of a line of business from The U. S. Platforms and Services sector across into Cyber Intelligence. And this guidance for 2015 is therefore provided on the new basis.
So firstly, Electronic Systems. Overall, we expect 2015 sales in dollar terms to be similar to those in 2014. More than 20% of the business is now in Commercial Markets where we expect continued growth and this should offset small reductions on the defense side of the business. In aggregate, at twenty fifteen's projected sales, close to 80% are in the 2014 closing order backlog. This is a broadly consistent starting point with what we saw last year.
On margins, we would expect to see performance again at the top end of our guidance range of 12% to 14%. Next, Cyber Intelligence. And in aggregate, we expect mid single digit sales growth in 2015. The U. S.
Business, which was 79% of the sector in 2014, is expected to be only marginally lower having seen those sharp reductions in 2014. Sales growth in the Applied Intelligence business is planned at around 30%, benefiting from both the SilverSky acquisition and organic growth from the continued expansion in commercial markets. Such growth is clearly supported by that 37% increase in backlog seen last year. Margins in 2015 are expected to be within an 8% to 10% range, but at the lower end after expensing both the integration costs of SilverSky and continued investment being made in support of further growth. Moving to Platforms and Services U.
S. Here we expect sales to be some 10% lower or 8% on a like for like basis recognizing the South African land business disposal. We expect to see the bottoming out of land related reductions on completion of the ground combat vehicle and Bradley reset activity. Initial engineering work on the new AMPV award has a relatively small impact to 2015 trading. Almost 90% of the sales guidance is within order backlog.
As to the margin level, we expect improvements given the $122,000,000 of charges taken in 2014 on the commercial ship contracts. However, due to the charges taken in the last two years on commercial shipbuilding and taken in 2013 on the Radford contract, there is a dilution from the sales trading through on those contracts in future years. We therefore anticipate a margin in the 6% to 8% range for 2015. Turning next to Platforms and Services U. K.
And sales are expected to increase by around 5% on a higher level of Salaam Typhoon deliveries. Against the 11 aircraft delivered in 2014, there are 13 planned for 2015. In the naval domain, we expect higher sales levels from activity on the Astute and Successor submarine programs, which will more than offset the reduced carrier trading. Again, more than 90% of this sales guidance is within twenty fourteen's closing order backlog. Margins in the sector again expected to be within our 10% to 12% range.
However, an impact from the lower pension discount rates is that service costs charged to P and L do increase. In 2015, this amounts to some £35,000,000 compared to the 2014 level. And therefore, whilst margins will remain within our guidance range, we expect them to be towards the lower end. To the last of the sectors, Platforms and Services International, here we expect sales in 2015 to be around some 10% higher than in 2014 with increased levels of support to the Salaam Typhoon aircraft now in service and higher volumes of Weapon Systems. Again, more than 90% of the guidance here is within backlog.
Margin levels are expected to be similar to 2014 at the lower end of our 10% to 12% range. To complete your 2015 models, the headquarters charge expected to be a little higher than in 2014. Underlying finance costs are expected to be similar. The cost of carry on the bond pre financing is expected to be offset by a lower level of net present value charges. Effective tax rate is expected to move back up to around 20% and the final number is of course dependent upon the geographic mix of profits.
In aggregate, we expect the group's reported earnings per share to be marginally higher than in 2014 with some reliance on anticipated naval and aircraft orders. This final chart highlights our cash utilization. In the left hand column are the numbers for 2014. To the right are those we expect in 2015. In respect of operating cash flow, firstly, we are expecting capital expenditure to be slightly above depreciation levels, reflecting the investment being made on a new floating drydock facility in our U.
S. Ship repair business. Within working capital, we expect to incur costs around £200,000,000 against provisions created in previous years that we hold in the balance sheet. And as always, the most volatile area remains the level of customer advances. Against the advances we received in 2012 on the Saudi trainer aircraft contract and the Omani program, we will see a high level of utilization.
You'll recall that under the terms of that Omani contract, no further cash will received until deliveries commence in 2017. There will also be advances consumed on the European Typhoon production contract. The guidance here does anticipate the remaining cash inflow from the Salaam price escalation settlement. The early receipt of our from our Saudi customers seen in 2014 is expected to reverse in 2015. The final operating cash flow item is the year's pension deficit funding, which will again be close to 400,000,000 The non operating cash flow items are more predictable.
Outflows for interest and tax are expected to total around £300,000,000 Dividend payments and the share buyback program should deliver a further £1,000,000,000 of cash returns to shareholders. Under the transactions announced last year, we expect receipts from the disposal of the land business in South Africa and under the restructuring of our Saudi partner companies. And so in aggregate, 2015 is expected to see an increase in net debt post those shareholder returns. In summary then, in 2014, on the downside, we have encountered operational issues and further charges on the commercial shipbuilding contracts in The U. S.
And the accounting pension deficit has increased significantly on lower bond yields. As positives, we delivered on the group's earning guidance, exceeded cash expectations and increased the dividend. Total returns to shareholders in the year were more than £900,000,000 And in addition, we've closed out the pension funding valuations plans providing certainty as to those material deficit funding cash flows over the next three years. For 2015, we expect to see top line and earnings growth and further material returns to shareholders. And with that, I'll pass it back to Iain.
Thanks, Pete. So before taking questions, I just want to touch on the group strategy. Each year we review and refresh our strategy. Roger's appointment as Chairman last year added focus and detail to the strategic review. We begin 2015 with a robust strategy, which has five areas of focus.
Maintaining and growing our defense businesses remains the core. We continue to pursue growth in our existing adjacent markets of cybersecurity and commercial avionics and we will continue to explore others. We are a trusted partner to a number of countries around the world and we look to further expand our international business. We will continue to support the development of our people, and we will continue to enhance competitiveness to drive success. Our strategic objectives set the near term goal to help everybody align their personal objectives to the company's strategy.
This year, we have added a six strategic objectives: to find new ways to create greater value from our technology and engineering capabilities. This will be a key theme for the year ahead. I do not believe we get full recognition for the strength and depth of our technology and engineering. Our strategy has guided us through challenging market conditions in recent years. We have demonstrated our commitment to efficiency and improvement, rationalizing the business to more than keep pace with the challenge from the market.
We have continued to drive value from platforms and services positions with good program execution and cost reduction. This should benefit both customers and shareholders as stability returns in key markets. We are generating good growth from commercial cyber expect the SilverSky acquisition to accelerate that drive. We are already seeing margins rise as growth outpaces the initial organic investments. International business continues to be a great strength of this company, representing circa 35% of sales.
Our Electronic Systems business is a technology powerhouse with strong program positions such as the F-thirty five electronic warfare and increasing commercial avionics activity. We have delivered strong margin performance in this sector. We have not only sustained our position from the R and D generated by customer funded programs, but we have also driven company funded investment in those areas with the greatest potential and to address adjacent commercial growth markets. A good track record of delivery. These are competitive times and we will continue to invest and develop the technology, skills and market positions we need to drive the business forward.
So if we summarize, BA Systems continues to benefit from a large order backlog across a wide base of high technology programs and capabilities. We will manage The U. K. Market and the recent 2016 budget request in The U. S.
Supports our view of stable U. S. Budgets. The group continues to address customers' needs across a broad international market footprint. In Saudi Arabia, have seen no reduction in defense as a priority for the kingdom.
Similarly in Oman, the Hawk and Typhoon programs are well established and we have already received significant proportion of the program payment. The key is matching the national agendas of your core customers sustaining positions for the long term. We have also established a fifty-fifty balance of business across both advanced products and capabilities and high technology support services. The group is well positioned to continue delivering shareholder value by addressing customers' continuing defense and security needs as economies recover markets and as defense requirements continue to evolve. So thank you.
We'll now take questions. First question?
Morning. Good morning, gents. Jamie Robofan from Morgan Stanley. I've got three to kick off please. Just to pick up on the earnings guidance for 2015.
You've mentioned this reliance on potential ship and aircraft orders. Could you provide a bit more color there at all please? Secondly on cash generation, obviously much stronger than you'd guided. Peter, can we read positively into that at all? Or is it really mainly just timing?
And thirdly and finally, at the nine month IMS, the inference was the outperformance in other divisions would offset the shipbuilding issues in The U. S. And clearly that's what's happened. So that's good. But just to be clear to what extent do you now feel you're on top of those issues in U.
S. Support Solutions? Thanks.
Okay. Well, we'll deal with this. I'll answer the first. Pete will answer the second and we'll give Gerry notice on answering the third. So on the first one, mean the two areas you raised are covered in what I talked about in the script.
In Australia, in naval, we have had a high workload on the landing helicopter dock, which has been a very successful program in Australia. You need to characterize this program. This is the carrier program of Australia, their most complex capital ship in which we have now delivered into their service, which they're extremely happy with. And what we're now in discussion with is, if you look at their future requirements that they have for naval expansion and replacement of vessels, how do we protect that capability going from where we are today to where we need to get to. And we're just in that point of discontinuity between the programs.
And so what we want to flag is that we are in that discussion. We haven't got a solution at this stage, but we are in active discussion on that activity. Second is a similar position in Air. We've always said that there's an optimum program that we have going through our factories of circa 30 typhoons a year. And if you had change the planning of that because of the timing of contract awards then there would be some dislocation and cost impact of that.
And that's the position we're in.
Cash?
Yes. Yes.
I mean, I think we've beaten our own guidance on cash. I have to confess to that probably by around 5,000,000 to £600,000,000 To your point Jamie, does it stick or does it not? There's really three elements to it. We've got the early receipts that we had as we mentioned in Saudi Arabia. Mean that was a couple of 100,000,000 that was actually dragged forward by a month.
So that is purely timing. On the advances, there's two issues. One is with those extra order rules we've got out of Saudi Arabia, they came with advances. So that's good news. There were extra orders and that's extra advances.
And then in terms of the burn on the existing advances, it was a lower run rate than we had in than we expected that we actually got in 2014. So again most of that is timing. So two elements of timing and one piece which is sort of incremental.
Jeremy?
Leon? I believe the question was to what extent do we think we have our arms around the issues that were presented in S2. There were a variety of those. And I would give you a couple of reasons why we're reasonably confident. Number one, you'll note that we reorganized last year and part of that rationale for the reorganization was so that we could put those challenged programs into organizations that had additional managerial experience, technical expertise, particularly in building platforms and airframe avionics and those sorts of things which were spread around
So the result of that was we were able to not only bring the expertise within Inc. To bear and organizations that had an infrastructure to support major programs to bear on those programs, but we were also able to reach out across the enterprise. Ian noted that we reached into Nigel's organization and naval ships and along with our platform expertise in The United States brought them to bear. A couple of teams went down and looked at that and came up with some process improvements. We added a number of staff on shipbuilding.
And over the last couple of months here, we think that we are finally in a position where we're comfortable that we're getting consistent performance. You have to recognize in particular shipbuilding not only is it a complex systems engineering program, but it's also a very complex construction program. And a number of these ships had already started and we're well along towards completion. So the ability to impact performance on those ships was limited. Since that time, over the course of the year, we've delivered one ship.
We have another ship, which we believe we will sell off here in the first quarter. And we're now beginning to see very consistent performance out of those organizations that indicate that the process improvements that were recommended from some of our experts over here as well as our platform guys in The United States are having an impact. So we're seeing stable performance and actual improvement on the second and third class in some of these shipbuilding programs. I think Ian and Pete mentioned also that Radford we've performance throughout the year in fact marginally ahead of the performance that we have projected. We've added some staff to that as well by putting that into platforms and systems platforms and services organization.
So we think that we have our arms reasonably around that. We have about two years on both shipbuilding and on Radford to trade out at essentially zero margin. So we're hopeful that as we move towards the end of that we can actually improve on that. Subject to any further question that's really the answer.
Thanks, Gerry. Thanks. There's a whole host of questions. We'll take something on the side. It's first.
Thank you. Christian Lachlan from Bernstein. Gents just a couple of questions about Typhoon sales campaigns particularly relating to potential further order from your Middle East customers. Could you provide some color on how those campaigns progressing? And what you think about timing, especially how that relates to where you need to internally take decision points around what to do with the line in 2018 and beyond?
I think I've already answered the issue on timing in terms of the line. And we're not specifically going to talk through every campaign that we've got. That would be prejudicial both to our customers' national interests and our own commercial interests. You said we have a number of active campaigns. The important thing about Typhoon was what the core customers did last year in terms of enhancing the capability both in terms of the weapons on it, the radar on it, our supportability of it has been exceptional.
When people have flying this they absolutely see the quality of the capability they get. That's the important thing we're doing at this moment where everybody who has these assets are highly stressed in their usage. And that's what we're focused on at this moment in time. But we've been very clear about what the issue that we're dealing with in terms of those orders and the continuity of the line.
Okay. Well, I guess just one small follow on then qualitatively would you describe any change from your sentiment or I guess positive outlook for these campaigns since we last talked about this around Farnborough?
We are we have the same confidence.
Okay. Great. Thanks.
All right. Just one straight behind you and go master back and then you can pass it forward.
Hi. Good morning. Selene Fornaro, Bank of America Merrill Lynch. My first question would be first Pete on the timing of the different customer advances. So just to be clear, we're still expecting some Oman Oaks advances in 2016?
Or what did you say about 2017 from the Oman side?
On the Omani contract, if you remember we got when we got the contract back in 2012, we had a 40% down payment. There is no further cash until we deliver aircraft in 2017, which is why the cash that we've got as we build those aircraft and utilize those advances you're seeing the cash being burned.
That's for Hawks and Typhoons?
Both, yes.
Okay. Thank you. And my second question would be more looking at what happened in the shipbuilding business, what actually are the lesson learned from that as you've been hitting some commercial areas actually that you were exploring? So more from a group level, what did you take out of that?
Yes. It's a great question. I mean, we bid into these commercial shipbuild contracts, They were described as being very mature designs and it was built to print manufacture. As we entered into the contracts, did not turn out that those were the relationships with the customers and some these designs were not fit for our manufacturing processes. And in fact the metrics, which the people said that they could build and we could not meet.
So in terms of that sector as an adjacency, it is not something that we'll be pursuing newbuild going forward. That said, where we do repair and upgrades of commercial vessels, we make extremely good margins when we put them into our yards. And we've got a growing business in Australia around that as we service the oil and gas fields around there and some of their demands, but that's repair and upgrade rather than design and new build.
And my last question would be on The U. S. Cyber business where so the performance remains relatively weak.
Our performance matches all of the peers in this sector. We study this in some great depth in terms of the volumes. There is we're not losing business. We make good margin from this business. In fact, the cash performance and margin performance in this business is extremely strong.
But we're matching our peers in this activity. It's not as though we got services which are not in line, but it's a highly competitive marketplace.
Sorry, when you say the margin is strong, it's above the average that you reported in the division?
Yes. If I can just add Selena two things on that. I mean, one particular area that we had in that business was providing analysis support in the theater. That obviously has ramped down considerably. That's one of the biggest drivers as to why we've seen that reduction in sales.
On the margin, Diet and the team there have done a great job in despite the top line coming down, the margin is at the top end. I think we'd be well compared against any of our peers.
Bear in mind, what we have is analysts. It's people we're providing. It's not like our Applied Intelligence Services with software tools, hardware tools and some people. It's a very different style of business.
But so sorry, which one is most profitable?
In terms of what will be the most profitable business Applied Intelligence when we burn through the organic investment absolutely.
But at the moment it's The U. S. One?
It must be similar. At the moment, it's slightly higher. Just slightly higher at the moment.
Trust me on that one.
Rami Myerson from Investec. Questions. Feels like order intake in 2014 was about 0.9 times. And what are your expectations for order intake? I appreciate there's some campaigns ongoing in 2015.
The second question is on shareholder returns. So on the guidance for cash, it's €400,000,000 and you've done €500,000,000 So does that suggest that the at the end of share buyback it will be 900,000,000 rather than 1,000,000,000 And the on that dividends we're at 1.85 times covered. The guidance or what you said in the past is around two times. Is the new normal 1.8 times, 1.9 times? Or how do you define around two times?
A small technical question. Assuming FX rates stay where we are at the moment, where do you expect that? How will that impact EPS? Thanks.
I mean on orders, mean what you've seen is over the last three years, we've had a consistent level of order intake through our U. K. And U. S. Businesses, which is hugely important for protecting the franchises, the intellectual property which develops the support services and then the international set.
So we've done extremely well. In the international business, it's very lumpy. If you get a major procurement of assets in any year, they get an extremely high order intake. I mean, and you remember in the previous year, we had all of the extensions of our support arrangements in Saudi as well for five years. So we were not going to get that level of order intake going through in any given year.
So we don't focus so much on the book to bill ratio. It's about the long term visibility that we have. And if you sat with in excess of a $40,000,000,000 order book, then we have very good visibility loading through our factories and facilities and that's what we focus on.
On your other questions, Ravi, on the buyback, what we said was a program up to £1,000,000,000 over three years. We started it in February 13, so that runs through till February of the year beyond 15. And on dividends, I mean, we've the policy is to have the dividend covered around two times by underlying earnings. We've been if you look over a ten year, we've been as high as 2.6 times and we've been as low as 1.5 times. So it's what your definition is around two times, but 1.85 times we're comfortable with the cover.
And on the FX rate, the guidance we've used is 1.55. So that's already built into the guidance you've just seen within the forecast that I put up there for the dollar rate.
38% includes the benefit
from We said marginal growth against one against 38% and that marginal growth would include the FX benefit. It's also got of course, you need to remember the impact from as I said in the script about the pension cost, which is effectively $00 of earnings, which is a headwind.
Okay. Those just two questions at the side and then one on that side. So why don't you take one up in the middle side there because they've had their arms up for they've got aching arms at this moment in time.
Yes. Hello. It's Ben from Deutsche here.
Hello, Ben.
I'll ask three if I could.
You always ask 3.
I always ask 3. A man of tradition. So Platforms and Services U. K. Your guidance is circa 150 type of basis point reduction in the margin.
It looks to me like that pension assuming all of that pension effect the £35,000,000 comes in that division that's about 50 basis point margin impact there. Just wondering what drives the rest of that down and whether that's a temporary effect and whether it should be moving upwards? The second question was just around picking up on Jamie's question on some of the caveat risks for your 2015 guidance. And just trying to understand the potential scale of those if they go against you. Is it a big issue?
Should we be concerned about it? Or is that just put in there as a kind of just be aware it's a small piece around the edge? Know it's hard to be precise, but any color you could give on that? And the third question was, I know this is looking some way ahead, but just the Board's view, maybe if Roger Carr wanted to speak on this, don't know, but capital allocation plans after February 16 when the current buyback program ends, how you think about that? And particularly M and A in the context of a defense world that now looks maybe a bit more certain than it did when you launched the buyback?
Thank you.
Shall I take the first one? Yes. Okay. First one, so P and S U. K.
The margins. I mean, you're right Ben £35,000,000 is about 50 basis We've always given that range on P and S U. K. Of 10% to 12% and that's clearly dependent upon the mix of programs you've got going through. You'll have noticed in the guidance I talked about an increasing level coming through on Astute and Successor.
The margins on those programs are less than we've got on the mature Typhoon production. So you are seeing a bit of a mix change as well. So there's two things going on there. Does that give you what you need?
So if you look at the two you call them sort of deal words caveats the sort of two issues we raised in the guidance or put in the guidance. I mean all the issues that we believe that we can manage, of course, are issues that we believe we can manage because we've dealt with workload issues in The U. K. Environment of what you've got to do to sustain capability. And we're just at that point in time of that discussion with the Australian government.
And as you know with government sometimes you need a cliff edge to have a sort of sensible discussion on activity base. And we just started at that point in time. Always we're going to be at that point in time because we've met all of the targets on LHD. In terms of the timing of export programs, it's something that we've had to deal with optimize lines to cope with the timing of those things. So are there things that destroy the fabric of this company?
No. We will manage our way through them, but we just need to sort of point out that in the guidance. Roger, do you want to comment on capital allocation?
Thank
you. I mean, we sort of start with first principles about the way the business considers the use of its capital. As a balance sheet, we run and want to run an efficient balance sheet. Secondly, this is clearly a shareholder value model. And when you look at the allocation of capital, you can see that the way it is used.
And we have commitments to shareholders with the dividend policy. We have commitments clearly to our pension fund, which is an ongoing commitment. And the value of capital that is left, we wish to allocate in the most effective way. And we do see opportunities and have seen opportunities as you've seen in the recent presentation of areas of growth where we have the skill set and where we can employ that skill and capability expanding our geographic footprint or increasing the range of service we offer. And we've applied that capital I think sensibly and wisely in doing that this year in the Applied Intelligence.
So we will continue to look for those opportunities as part of the way we run the business. But balance sheet efficiency, shareholder reward and building on the strength of this business are the ways in which we will continue to use the capital that we have. We want to deliver the highest return from the use of capital we generate. And that of course includes investing in the business on a long term basis. Okay.
We've got three questions on the wire. Should we take the first question from Edward Stacy? This is where it goes on Yes.
It's Stacy here at Just one question left for me and it's about retained earnings distributable reserves on the balance sheet because I can never remember which bit's distributable or not. And I can see compared to last year, the retained earnings deficit at the bottom of the balance sheet is a higher negative number. So just wondering if in order to keep doing the buyback and to keep paying dividends, you need to do any kind of engineering with the balance sheet to be allowed to continue distributing? That's all. Thank you.
I think this is one for our Group Business Development Director.
Ed, it's a good question. One of the things that moves that number is the pension deficit movements. Those pension deficit movements don't fall into distributable reserves. When we do publish our accounts, you'll be able to see better disclosure this year in terms of what we say about distributable reserves. We have no requirement to do any financial engineering as you described it in terms of being able to create distributable reserves.
We've got plenty of cover for both dividend and buyback.
Thank you.
We'll take one in the middle there. One gentleman just down there and then we'll take another one off the wire.
Yes. Good morning. Thank you very much. Olivier Brochet with Credit Suisse. I will go for first with the AMPV to have a sense of what the export market could be for this platform going forward.
And second, going to the Celine's question about Applied Intelligence investment in the business. How long will it be continuing, please? Is this just an issue for 2015 or is this going to be going further than that? And final question on Type 26 timing. When do you think we should see something going forward?
Okay. Well, there's three questions there and we'll get Gerry to do AMBV. On Applied Intelligence, I mean, the issue always was at the start as we said is that we will organically invest and then we will program at a point in time when the growth overtakes the organic investment. But we were not going to be reducing the level of investment. It's just that the growth will overtake that.
And we're just about at that point in cusp at the moment. The fact that the order grew by 60% in 2013, further 37% in 2014. Sales were just under 10 growth. We're very pleased with the SilverSky acquisition as an accelerant of that growth. So we are on that accelerated plan.
And we're not as you might say then cutting back all investment and we will continue to grow that business. Tie 26, we have an ongoing contract at this stage to continue the design of that. As I said, the negotiations commercial negotiations are well advanced. I'm not worried that we will not get continuity on that program. Gerry, AMPV, how many are you going to sell around the world globally?
Do you want to why don't you scale The U. S. Program? Because it's sometimes we just look at the small bookings so far.
Yes. The just to review the AMPV program, we have just started on the development that's roughly a 300 to $400,000,000 development program. There is another $1,000,000,000 in low rate initial production as Pete alluded to, which would take us through probably the twenty twenty, twenty twenty one time frame. As to the overall value of that program in The United States, the recent budget documents show anywhere between 6,000,000,000 to $12,000,000,000 as you go through production and sustainment and support over the next decade, decade and a half. With respect to international opportunities, I would point to the M113, which is this AMPV is the replacement for that's been around for five decades, except for Roger and I probably longer than almost anybody in this room.
So and in addition, one of the other programs that you would point to is the Bradley, which has also been around for three or four decades and is spread around the world. So I think that's an indicator of the value proposition that the international customers see once a product is developed here in The United States. But I would add that we also have a portfolio of offerings in this space including the CV90 as an armored personnel carrier out of Sweden, which a number of customers want. So we're very comfortable that with at the higher end of the combat vehicle world, armored combat vehicle world that we're very well positioned not only in the near term, but the longer term. And I would add we have a couple of pursuits coming up in the armored amphib world with U.
S. Navy that also have similar characteristics in that what the U. S. Navy adopts. We have customers around the world, Japan and many others that use those same products.
So we have a couple of programs running with the U. S. Marines to do that as well.
That's it. Thank you very much. Thanks, John. David, David Perry on over the wire.
Two sort of small questions for Peter and then a third on Saudi, please. Peter, just for the models. First one, can you give us the self funded R and D for 'fourteen, please? The second one is just tax. I mean, you've just given others in your guidance a single number, 20%.
Last year, you guided to 20% to 22% initially. You came in at 19%. So I just wondered if there was a range of sensitivity you could give on tax. And then thirdly, on Saudi and the issue around your guidance, sorry to come back to this. The price escalation discussions took three years.
It seems to me a discussion on a new order is a vastly more complex thing, plus any decision to lower rates is not only a BAE or a UK decision, it's a pan European decision. So it seems a much more complicated decision and an issue that might several years to resolve. I accept your comment about not prejudicing negotiations, but can you give us any color about what the European governments are thinking right now about rates, please?
I don't agree that it's a more complex decision at all. I think the VOP discussion was the most complex contractual discussion that both countries have either entered into because of the timing that it covered. And actually it didn't stop the delivery of aircraft. So I don't agree with that analysis at all. In terms of the European, yes, we'd have to have a discussion, but it's something that's been dealt with many times in the past if you have to do it.
And we're very good at doing it by the way as you've seen from the results that we made from that business. David on the R and
D, total R and D, as you know we have a mix between customer funded and company funded. Total R and D this year was just over 1,300,000,000.0 We saw a significant shift in terms of eScan radar funding, which we have been funding previously, clearly is now being funded by the customer. So our self funded R and D in 2014 was around 140,000,000 And on the tax, the biggest swinger for us on tax is the geographic mix of profits. In The U. K, the great corporation tax rate now is down at 20%.
In The U. S, we're still up 35% plus. So what you saw in 2014, where we took those $122,000,000 of charges on the commercial shipbuild programs, of course, what you actually get is 38% tax relief on those. So you see the tax rate sort of fell compared to our guidance. We're not planning on any further losses in 2015.
So therefore, you don't get that relief in 2015 and the tax rate moves back up. So we guided to 20%, but it is subject to geographic mix of profits.
Okay. And just a quick follow-up on the R and D. So that was $31,000,000 lower year on year. Any guidance on 15,000,000
No, I mean 15,000,000 will be about the same levels. What we've seen is, as I mentioned, the eScan radar program is now being funded by the customer. And we've also got further weapons integration funding coming from the customer in terms of giving Typhoon additional capability as well. So the way we look at it, and as we've always discussed, you've got to look at the aggregate.
So what's the percentage when you look
at the eight IGF
8% of group's revenues? Yes. Yes. Okay. On the side there, then we'll take there's one further on the wire and then in the middle there.
It's Nick Cunningham from Agency Partners. I've got three rather nerdy financial questions I'm afraid. Following up on tax rate, the 19% was really quite surprisingly low and even 20% for 2015% is still at the low end of if you like a weighted average group tax rate. And it sort of it goes a bit against the zeitgeist of governments trying to reduce deficit. So when we look further forward, should we think about the tax rate moving up?
And what's the sort of natural rate of tax for BAE on a forward basis? Shall I ask the others at the same time?
Yes.
Cost of debt should be falling as you retire your more expensive debt and get cheaper debt in. So again, how should we think going forward over the medium term about what your average interest rate costs will do? And finally, bit of a hobby horse, but to what degree can you mitigate the impact of lower discount rates and pushing up your pension costs by recovery from customers? And on what sort of time scale if it's all possible?
Right. Okay.
I think they're all for you, Pete. I think they
are here. I was waiting for the one on pension, but I haven't got one. Natural tax rate, interesting question. I mean, clearly operate in a number of tax domains. The U.
K. Has now got the most competitive tax rate in the G20. So that's come down again to 20%. So while you might think the tax rate will be going up, it's come down. U.
S. Is around the 35% mark. So it's really where are we going to earn the profits. 20% is where we are today or sorry, where we guided to 15%. I wouldn't anticipate anything in 2016.
If you're looking for a long term rate, that's what you believe government policy is going be on corporation tax. I mean, I'm not going to make a second call on that one. In terms of cost of debt, you're right. We are and have been locking in lower rates on the financing we've been taking out in the last two or three issues that we've made. One of the things that does go through the interest rate line is the net present value charges, which is driven by a WACC.
We took a £25,000,000 charge in 'fourteen as a result of a lower WACC rate. So that tends to be almost the biggest driver of in year or year over year interest rates or reported interest rather than underlying interest. And then the third issue on the lower discount rates, well, clearly, there's nothing we can do about where the bond yields might be. We're strong believers in equities in terms of where we're investing on pensions. As I said, we got nearly 50% of our assets still in equities and 14% sort of stonking return on the assets more than double what was built into our planning valuations.
So we mitigate through where we put where we invest. We've entered into longevity transactions to pass longevity risk into the markets. We're looking at more of that. So we do whatever we can, but we can't control the bond deals.
The reason why these guys are smiling is because Philip took a bet that Pope Peter couldn't get stonking into his return and he'd £500 to charity for doing so. We've got one on the phone. Tristan?
Yes. Good morning, gentlemen. Thank you for taking my question. So it's Tristan from Exane. I have two questions, one on Saudi Arabia, one on the 16 contracts in Korea.
So on Saudi Arabia, actually, I'm interested in the non Typhoon OE business. We have normalization of volumes in 2014 after an exceptional 13. How would you define today the quality of the relationship between UK and Saudi Arabia? And how do you think that the changing geopolitics there are offering a good environment for volume growth for BEE going forward? And second, on the Df-sixteen in Korea.
Can you tell us is the story here totally over for BEE? And is the two big retrofit programs in Taiwan and Korea are going to look in Martin? Is there any room left for BEE on the BS16 upgrade market?
Okay. Right. So two questions there. I'll answer both of So we operate in The Kingdom Of Saudi Arabia under two relationships. One is the government to government relationship between the U.
K. Government and the Kingdom Of Saudi Arabia, which is extremely strong. And we provide a whole host of services across a series of platforms and a very good relationship. And we're very confident that that will continue as a good relationship. We also because as you know we have 40% of our business in The U.
S. Produce foreign military sales from the U. S. Government through to the Kingdom Of Saudi Arabia and we also do a lot of land equipment there. And through our Turkish joint venture we also support that land equipment there.
And there are a number of campaigns there where they need to replace and upgrade Bradleys for instance and other M109s things like that where it's quite an active country for us as well. So we address it between those two governments. So the relationships we foresee are very strong between the two of them. In terms of F-sixteen upgrades where the program was terminated at the convenience of both the countries involved, it was a market takeaway for us. It's not a core franchise.
We have lots of other equipments on F-16s, which we continue to supply. In fact, we just booked an order which was announced this week, which is to continue to supply equipment and ground support equipment for foreign military sales of F-16s. So in terms of the upgrade program, we had a go at it. It didn't work out. We moved on.
And all the relationships that we had with Lockheed and all the other customers are protected and we're still booking business.
Thank you. If I may just add a follow-up on Saudi Arabia. Is it fair to assume according to your comment that there might be a shift in your activity to Saudi from The U. K. Driven one to The U.
S. Driven one as a consequence of the strengthening of the geopolitical relationship between The U. S. And Saudi Arabia? And if I understood and you correctly, is it fair to say that there shouldn't be any impact in the transition in the management of the kingdom and the recent change King at Saudi Arabia and the evolution of fairly complex geopolitics in the area?
In terms of the succession to the new King, we do not believe it will change the two pivotal relationships that exist in the Kingdom Of Saudi Arabia.
And so you don't believe either in the shift from The U. K. To The U. S.
You're terms of making an assumption, which is wrong. Saudi Arabia does not put all of its requirements in one country. It has a mix of equipment. If you look at the structure of its Air Force, it's a mix between The U. S.
And The U. K. We benefit from both those programs. So the F-15s that get supplied to Saudi, which have a brand new electronic warfare kit on it is our electronic warfare supply through Boeing. So those are the two important relationships.
They do not defer to just one relationship in their defense requirements.
Okay. Thank you. Okay.
Sorry, Andy Chambers from Cantor. Just in 2010, obviously, had the last strategic defense review and your new guidance changed quite significantly despite the fact we knew the makeup of the incoming government pretty much is going to be conservative. We're clearly in a much less certain political environment here going into this election this year. How secure the you've made the comment saying you felt relatively robust on your U. Business.
Do you see anything being at significant risk? Have you taken that into account in your guidance for the current year? Maybe you could just quantify what changes you might see between political parties?
Think that as we said there will be some pressure on defense spending as there's going to be all elements of spending. I think the one fundamental difference is that when the last strategic defense review was undertaken there wasn't a balanced budget. And so the thing that Philip Hammond and Bernard Gray and the people who was getting a balance between those programs that we committed and the available budget and they do now have a balanced budget against those programs. So we both have clarity in terms of the programs clarity that they've got the funding, whereas I think you know is that at that time they were just moving things backwards and forward and we had all the noise about the carrier program, rescheduling and the capability changes which were just driving budgets. So that's why we feel that there's more stability because we know that there's a balanced budget and we know that they're not releasing new programs until they've defined that they have the availability within the budget.
So that's why the position is more stable. You then have to make the judgment as to in this political environment with all that's going on in the world and the new government coming in and they're really going to decide to take us some of the pivotal capability out when you've got all of the service chiefs saying we've been squeezed to the pips. Yes. And as Roger says, the strength of the order book the £40,000,000,000 that we have as you know they have to terminate for their convenience on that activity. Well, when Scotland gets independence whenever you can have as many typhoons as you want Sandip.
Any other questions?
Okay. Thank you very much everyone.