Earnings Transcript for BA.L - Q4 Fiscal Year 2020

Martin Cooper: Thank you, and good morning, everyone. Welcome to the BAE Systems 2020 preliminary results. Today, we have a refreshed presentation in look, feel and format, with focus very much at the BAE Systems group level and an aim to give greater clarity and sharpness to our results and investment case. All previous sector level information where not shown in the main presentation is included in the supplementary slides and all, including our detailed programs presentation in November can be found on the Investor Relations website. So in all, we have provided additional disclosure. In expected format, which will start with the Chairman's opening remarks, including our company purpose, Charles will cover the 2020 performance and sustainability, Brad will cover the financials and 2021 guidance. And then Charles and Brad will cover the business evolution in recent years and where and how they are looking to take the business in the coming years, they will then take your questions. With that, I'm delighted to hand over to our Chairman, Sir Roger Carr.

Roger Carr: Well, good morning, everybody. It's clearly been a challenging year for everyone. But the defense industry in general, and BAE Systems, in particular, showed admirable resilience based on strong business fundamentals. Operationally, there is no doubt the business has shown itself to be robust, agile and flexible in the most turbulent of times. Self-help has been our watchword throughout. We have neither borrowed money nor taken advantage of the furloughing scheme made available by the U.K. Government to address the COVID challenge. We have worked closely with our suppliers, provided advice when helpful and practical support when necessary. We have deepened our relationship with our customers, managing their priorities about our endeavors, caring for our people, forging partnerships in adversity that will be maintained in better times. From the Board's perspective, there are three points I would like to emphasize that underline the transition of the business managerially, directionally and culturally. First, management. The pandemic has tested the top team in their first year together as Executive Board members. Charles, now almost four years in post, has materially changed the pace, performance and vision of the company as a high technology, cash generative, customer-focused, growth-oriented business model. Brad, one year as CFO, hit the ground running and proved to be an excellent addition, bringing a greater focus on the use of IT and data analytics to fundamentally underpin the core strength of our financial structure. And Tom, a seasoned and highly respected leader in the U.S. defense industry, stepped seamlessly into his new role, delivered two significant acquisitions and produced a remarkable outturn in the most challenging of circumstances. It is this team, together with an ExCo with a healthy mix of seasoned managers and recently recruited members that is now driving the business with greater ambition, vigor and determination than we have seen for some time. Talent of this quality is at a premium, and our commitment to retention, development and succession planning is a clearly vital ingredient of our business plan. Directionally, the leadership has demonstrated this year more than ever, our focus on delivering shareholder value, generating more cash, allocating capital wisely, acquiring new businesses that fit the growth strategy sensibly, investing in our own research and development and people to ensure the order book we enjoy today, is replenished with the products and services of tomorrow. And most importantly, respecting the reward expectations of those that own our stock, keeping our dividend promises in the face of a pandemic, building on our 17-year history of unbroken dividend growth, making it clear that when surplus cash is available, and the math is appropriate, buybacks are also possible in the future. Culturally, in many ways, we have seen our business at its best in the worst of times. Our actions have reinforced our long-held purpose to protect and serve those that protect us, by being performance driven and values led. We are aligned with the increasing demands of society for conducting our business with a clear focus on setting and meeting a high bar in our environmental, societal and governance standards. We are committed to good governance in what we do and how we do it, adhering to the strict rules and regulations of the defense industry in the way we do business, observing rigorous ethical standards in how we do business. Within the company, D&I is firmly baked into the DNA of the business, a meritocracy, whether it's both a welcome and an opportunity for all. Understandably, COVID has reinforced the message that being a well-run business is not enough. It has shown how we contribute to the safety and welfare of our people and our planet is vital if we are all to enjoy the benefits of the fruits of our labors. In this regard, the hurdles we are setting for environmental performance, in the carbon emissions we reduce, the water we conserve, the waste that we manage, are challenging but necessary as we increasingly focus on how we make money, not only how much money we make. These standards are viewed by the Board not as optional extras, but mandatory requirements of BAE as a sustainable business. They will be rigorously measured, monitored and managed. To oversee our performance in all of these areas, we are fortunate in having a Board with great experience, deep convictions and firm opinions who are united in their belief in both the importance of the business and our role in society. Over the past year, we've been pleased to strengthen, refresh our Board with four excellent people, who have impeccable credentials. Dr. Jane Griffiths, a scientist with a successful International Executive Career at Johnson & Johnson, who will now chair the CR Committee with an innate passion and commitment that she brings to this task; Nick Anderson, a professional engineer and the CEO of Spirax-Sarco plc, who has successfully transformed the fortunes and value of this business over the last decade; Dr. Ewan Kirk, a specialist in artificial intelligence, who having enjoyed a strong career at Goldman Sachs, became a highly successful entrepreneur, building DeepTech Labs and GAM Systematic, of which he is now Chairman and President, respectively; and finally, Dame Carolyn Fairbairn, the recently retired Director General of the CBI with a long history of success as a business leader, a McKinsey partner, a Number 10 policy adviser and a PLC nonexecutive director, a strong team to oversee the conduct of our business and support our growth in the years to come. In conclusion, I would say this. I have never been more proud of the company, never more pleased with the performance, never more sure of the management and never more confident of our future prospects. And with that, I will hand over to Charles.

Charles Woodburn: Thank you, Sir Roger, and good morning, everyone. We've delivered a strong set of results against the challenging backdrop of this terrible pandemic, achieving year-on-year growth in our key financials, with cash generation, the highlight. Our second half performance was particularly notable, reflecting the strength of the business with excellent operational performance in air, maritime, electronic systems and an improving contribution from applied intelligence. Like all businesses, we've experienced challenges during this pandemic. We've had to be agile and adapt, make difficult decisions. But thanks to the early actions we took to enhance the resilience of our business and the remarkable fortitude of our people, we've continued to deliver on our customer priorities whilst keeping our people safe. This has also continued into 2021 with the reintroduction of lockdown measures in many of our locations. I would like to thank all of our employees for their outstanding contribution in a difficult year. COVID has clearly dominated the headlines, but I'm hugely proud of how we are continuing to respond to the day-to-day challenges. The strength of the relationships and collaborative working with our customers, suppliers and trade unions has been exceptional and a huge testament to all. We have a clear strategy, and it is delivering. Aside from the day-to-day operations, we have kept momentum on our strategic progression. Notably, we took action in shaping our portfolio. Firstly, we completed the acquisition of two high-end defense technology businesses in the U.S., both of which are performing well. Secondly, we offloaded elements of our underperforming commercial cyber operations, and finally, we continued the reorganization of our Saudi portfolio of interests. The other key strategic action taken was on advancing our U.K. pension deficit funding. I won't steal Brad's thunder, but we achieved a good result for all stakeholders that should create increased strategic and capital allocation flexibility as we look forward. As outlined in July and again in November, the fundamentals of the defense business remain robust, and the outlook is positive for sustained top and bottom line growth. This confidence has only been increased by orders that exceeded our own expectations. So a strong and resilient set of results and the foundation set for a continued positive evolution of the business. As the Chairman outlined, it's vital to all of us that we drive our business in the right way. The sustainability agenda isn't new for us and is actually something we've been pursuing for a while, with some excellent examples like our development of hybrid buses or our enhanced apprentice recruitment levels. However, we must increase our ambition and accelerate our progress in this area. We are committed to building a sustainable future by having a clear sustainability agenda focused on valuing and developing our people, making a positive social and economic contribution to our communities, developing innovative technology and collaborating with our supply chains and reducing the environmental impacts of our operations and products. We've set ourselves the target of achieving net zero greenhouse gas emissions across our operations by 2030. We will continue to review ways to integrate sustainability practices into our business driven through and aligned with our strategic objectives as we look to meet ever-evolving customer requirements. Our sustainability agenda is fundamental to business performance and align stakeholder priorities with the group's environmental, societal and governance risks and opportunities so that we can drive the success of the business for the benefit of all of our stakeholders. I'll now hand over to Brad to take you through the financials. Over to you, Brad.

Brad Greve: Thanks, Charles, and good morning. I'll start with a summary of the financial points and then cover results at the group level before moving to guidance and our three-year cash outlook. Across all the metrics, you'll see a strong set of results despite some unprecedented circumstances. I would like to take the opportunity to thank our teams for the remarkable job they've done. There continues to be buoyant demand for our products and services clearly reflected in the double-digit increase in orders. The strong demand helped us to maintain a healthy backlog of £45 billion, which supports top line growth. We continue to build operational momentum through the second half of the year and with a stronger-than-expected fourth quarter, our full year sales increased by nearly 4%. The higher velocity in the fourth quarter contributed to improved profits, and for the full year, we posted gains despite the significant challenges. Our sharp focus on liquidity drove exceptional performance on free cash flow, which came in at £1.4 billion, putting us firmly on track to deliver our three-year rolling cash targets. This result includes the final lump sum payment in our current U.K. deficit funding program – pension deficit funding program, which we're able to pay down early. With our improved results and confidence in our outlook, we are proposing a dividend of £0.0237, up in line with earnings growth and covered approximately two times by underlying earnings. The detailed year-on-year financials are listed here. I'll cover the key operational metrics in the coming slides. But for reference, the dollar rate averaged $1.28, unchanged from last year. The tax rate was at 17% compared with 19% last year, and this clearly had some benefit to EPS. Order backlog was stable year-on-year. On pension, the group's share of the accounting deficit is in-line with last year and was improved since the half year, driven by the discount rate moves. On a funding basis, the U.K. schemes are now 96% funded, and we have completed all of our current committed lump sum U.K. deficit payments. Moving to our key group financials, starting with orders where we booked £20.9 billion of new business, up 13% over last year. Our U.S. business posted a book-to-bill ratio of 1.1, making it the third consecutive year this metric has been greater than 1. Key orders were received on F-35, Precision Strike and C4ISR programs in electronic systems. Combat vehicle orders were around $2.7 billion on multiple programs and ship repair signed over $1 billion in new work. In the air sector, notable orders included our share of the German Typhoon award orders for radar upgrades and further awards on F-35, along with continued good demand through MBDA. Our maritime business received ongoing Dreadnought funding. Our U.K. land business received two significant awards, including next-generation munitions and the flow down of work on the RBSL JV for the Boxer program. Sales for the year at £20.9 billion were up nearly 4%, including 80 basis points of growth relating to the acquisitions. Our defense business grew by 7%, more than offsetting the impact of the pandemic on our commercial business. Air led the group, up over 6% on F-35, Typhoon support activity and the continued ramp in production on the Qatar programs. In Electronic Systems, our defense business grew by 12%, with almost half of the gains coming from the new acquisitions. Our commercial operations within the U.S were impacted by COVID and were down over $300 million on the year, reducing overall sector growth to 3%. Our Maritime business grew by over 4%, driven by the continued ramp in Dreadnought activity, which is now over £1 billion per annum. The Platforms & Services business expanded by 5% as the ramp and combat vehicles continued, and we nearly tripled the number of deliveries compared with 2019. U.S. ship repair and M777 sales to India were particularly challenged due to COVID and volumes were down year-on-year. Sovereign Intelligence improved by just under 5%. Applied Intelligence in the U.K. was stable with over 10% growth in the Government Services division, offset by weaker demand in commercial. Our U.S. Intelligence & Security division rose by over 7% with growth in all three divisions. For completeness, our headquarter sales, where we report our share of Air Astana dropped by around £190 million. Group EBITA at £2.132 billion was slightly up on last year. And Electronic Systems, profits were stable, but the return on sales was down on sales mix, reflecting the drop in higher-margin commercial revenues. Profit in Platforms & Services was lower, primarily due to the impacts of COVID to ship repair and on the AMPV program, where immature supply chains were particularly affected. The air sector delivered a very strong second half, overcoming a significant amount of the Q2 under recoveries and continued to save cost and retire risk on the back of good program execution. Maritime benefited from improved program performance and year-on-year, Cyber & Intelligence posted gains as Applied Intelligence returned to profitability following the action taken on restructuring. All the detailed sector slides are in the backup. The key moving parts for earnings per share are detailed here. Strong operational performance contributed £0.023, and that includes the net COVID impacts to our defense business. We did take a £0.036 hit from the COVID impact to our Commercial Aerospace portfolio. The acquisitions delivered £0.011 after associated integration on finance costs. Tax at 17% benefited from one-off credits in the U.S. relating to R&D. Operating cash flow at £1.8 billion improved significantly over 2019, with improving conversion levels across the sectors, reflecting our sharp focus on liquidity. Electronic Systems continued to deliver high conversion levels. P&S delivered higher cash flow on improved working capital in combat vehicles, an advanced payment on the CV90 program for Switzerland and lower customer cash retention levels and ship repair. Air benefited from advances received on German Typhoon and enhanced funding on F-35. Sovereign Intelligence cash benefited throughout the year on accelerated collections on a number of government contracts. As demonstrated, the nature of our business will always have some variability in cash flow, and we did see several inflows in 2020 that were not expected until 2021. Free cash flow of £1.4 billion was over 60% higher than last year. This was also higher than the previous guidance, and the key reasons for the variance included increased profits, which converted to cash, advances on German Typhoon, CV90 for Switzerland and accelerated receipts on F-35, which collectively totaled £400 million. And we also had general working capital improvements across the divisions, which allowed us to make our March 2021 U.K. deficit payment ahead of schedule. While our free cash flow was significantly higher, we will see these advances that were received at the end of 2020 largely unwind in 2021. The movements in net debt are shown here, starting with the opening balance of £743 million. Free cash flow added £1.4 billion. We made some key strategic allocations of capital, including the two acquisitions in the U.S. amounting to £1.7 billion and the payment to sharply reduce the pension deficit with £1 billion paid into the scheme. Dividend payments, including those to minority interest, totaled £765 million. We, therefore, closed the year with net debt of £2.7 billion. Moving now to 2021 guidance, with a strong year behind us, we look forward to another year of top line growth with margin expansion and good cash delivery, all reflected in our group guidance. We recognize continued volatility in foreign exchange, and this guidance is based on $1.35, with a sensitivity of around £0.02 for every $0.10 movement. As a reminder, our 2020 average rate was $1.28. We expect sales for the group to increase in the 3% to 5% range. On a constant currency basis, that growth is in the region of 5% to 7%. We expect solid gains from Air and Electronic Systems, including the full year impact from the acquisitions, partially offset by continued weakness in commercial aerospace revenues. We entered the year with over 80% of sales already in backlog. We expect EBITA to improve by 6% to 8%. On a constant currency basis, the gains will be around 10%, featuring an improved performance in Platforms & Services, continued expansion in Applied Intelligence and a full year of contribution from the acquisitions in ES. We expect underlying EPS to increase by 3% to 5%, with improved profit partially offset by higher tax and interest costs. Free cash flow is expected to exceed £1 billion in 2021, with the 2020 advances unwinding and an increase in CapEx over depreciation, reflecting continued investments in our ES business, including the new facility in Cedar Rapids for our GPS acquisition. And our new rolling three-year cash target out to 2023 is expected to exceed £4 billion. And then to help with modeling, the other below the line items are listed here and the sales and margin expectations per sector to reach the group guidance are all listed in the back. I'll also take this opportunity to advise you that moving forward, we'll be using underlying EBIT as the group's principal profitability measure, as we think it's more reflective of our underlying profitability. EPS will be recalculated for consistency, and we will provide all the reconciling updates in due course. Rest assured, this change has no impact on cash targets or the underlying business performance. On our rolling three-year cash targets, you'll recall that guidance for 2019 to 2021 called for £3 billion of free cash flow. We are now at £2.2 billion with one-year to go. And with this year's guidance, we are firmly on track to beat that target. Against the 2020 to 2022 guide, a £3.5 million to £3.8 billion, we have delivered £1.4 billion in 2020 and guided to at least another £1 billion for 2021. So we're firmly on track to deliver this target as well. For the next three-year rolling period, covering 2021 to 2023, we expect to exceed £4 billion. End year cash can have some variabilities as we've seen, but we're clearly delivering the rolling targets, and we continue to step up our long-term cash conversion levels, which is now a critical area of focus for us. This focus is evident in the chart where you can clearly see the steady ramp of improved cash delivery. These improvements will come from several key factors. There will be a gradual convergence of CapEx to depreciation after this year's investments; interest and tax should collectively remain broadly stable; pension funding should be limited to just the U.S. contributions; working capital will continue to neutralize as we work through Middle East and European advances in the coming years and as we continue to push cash generation within the business. We have also elevated cash delivery as a key component of our long-term incentive program to ensure alignment. So to summarize, with good visibility of our backlog and order book, we continue to see a growing business on the top line, coupled with margin expansion through our focus on operational excellence. Ultimately, this leads to steadily improving long-term cash generation, helping us to invest for future growth and increase our returns to shareholders. With that, back to you, Charles.

Charles Woodburn: Thank you, Brad. As I said back in November's presentation, I feel more confident, I feel more positive about the outlook for the business than this time last year, given the strategic progress made, the customer relationships which have strengthened and – which have strengthened further during these difficult times, and the agility and adaptability shown by our employees. What I want to do now is add some more color to that confidence by explaining the evolution journey we're on and the progress since I became Chief Executive, I will frame this in three sections. What we've achieved since 2017, where the business is today and the competitive advantages we hold and what we're looking to achieve in the coming years. I've always said it was going to be an evolution of the business, pushing some areas harder such as technology, group-wide collaboration and efficiency. Crucially, we needed to put legacy contract issues behind us, learn those lessons and move forward with greater clarity and bottom-to-top transparency, so we have an unrelenting focus on improving operational performance. Program execution has definitely improved with legacy problem programs now completed. On the newer programs in their early stages, the AMPV in our U.S. combat vehicles portfolio remains the focus, as it works through its initial low rate production. The overall risk profile at our early-stage maritime contracts is sensible, with cost-plus or target cost incentive models for those traditionally difficult design and development phases. We shall continue to be relentless in our pursuit of program performance, but we are making progress across the portfolio. Through the significant contract wins in the last three years and a strong book-to-bill in the U.S., we have broadened and derisked the portfolio in both contract and geographic terms. A decade ago, we were heavily reliant on three to four programs and franchises. That is not the case now, as we highlighted in our November presentation, with no one program over 10% of the group, and a continued balance between production and aftermarket services. Strategically, we have also moved the group forward through tactical and opportunistic acquisitions, R&D investments and shaping the portfolio with disposals and JVs, all with the aim to generate the best long-term value and leverage core technology capabilities to position the portfolio for customer priorities and future growth areas. We also took the opportunity to tackle the U.K. pension funding deficit head on and accelerated future year payments. We've been evolving our working practices with a focus on competitiveness and cultural behaviors and many lessons have been learned from this past year and will be taken forward to improve our productivity. Finally, we have refreshed management with a blend of internal promotions and external hires, whilst continuing to address our long-term workforce planning and maintaining record numbers of apprentice hires. Our people and the environment they work in, is critical for the future, so while there are plenty of opportunities for further improvement, we have come a long way, and our ambition is built on strong foundations. Moving now to where the group is today and the key competitive advantages we hold. I would characterize these into five main themes

Brad Greve: Thanks, Charles. Many of you will already have heard me talk about my focus on margin expansion. I see several opportunities to drive our group margin. First, program performance, we need to continue to push this in all divisions and especially those that are currently below benchmark. We see scope to materially expand margins by several percentage points in P&S and Applied Intelligence through stronger program performance in the coming years. Second, operating leverage as programs ramp up and recent high levels of investment in CapEx and IT systems drive the expected benefits from enhanced throughput and higher returns on capital. Third, overall business mix, Electronic Systems our highest margin division, is an increasingly important part of the portfolio and a relatively higher growth rate for this business naturally lifts group margin. Additionally, we will continue to shape the portfolio for value creation with self-funded R&D and M&A with a particular focus on high-end technologies that deliver accretive revenue streams. Finally, supply chain optimization, flattening of our org structures and simplification of processes assisted by analytics to drive our competitiveness, should all help overall margins. Additionally, we will not forget the lessons learned during COVID around ways of working, efficiency and reducing discretionary costs. On cash, we absolutely recognized the importance of improving cash conversion, and this is now an important part of our long-term incentive plans. As we've outlined today, we see margin expansion, gradual reduction in CapEx, lower pension requirements and working capital in advances continuing to normalize, all contributing to steady growth in cash. Finally, then turning to capital allocation. As you have seen in our rolling three-year cash progression, we have a business that is delivering increasingly higher cash conversion from operations. Our top line is well set for continued growth, which will fall through to cash. And now that we have completed our lump sum committed contributions to the U.K. pension fund, and with only modest contributions to come in the U.S., the free cash flow outlook is significantly improved. Through investment in R&D, we continue to prioritize growing our business. We recognize the importance of the dividend, and I note that this year marks the 17th year in a row that we've increased our dividend. We will also continue to grow our business through value-enhancing M&A, as we've recently done with our acquisitions in 2020. When there are surplus cash, we'll make additional shareholder returns, if appropriate. The determining factor will be what we see as driving the greatest shareholder value, all within the perimeter of a strong balance sheet with an investment-grade credit rating. Back to you, Charles.

Charles Woodburn: Thank you, Brad. So in summary, we've delivered a strong and resilient 2020 performance. Our large order backlog, incumbent program positions and pipeline of opportunities, together with our focus on program execution, should position us to grow our sales profitably and increase cash conversion in the coming years. We're evolving this business to have an appropriate sustainability agenda embedded at its core with a constant focus on consistent operational performance and value creation. Generation of higher cash gives us increased strategic flexibility, focused on technology aligned to our customer priorities and well placed to deliver appropriate shareholder returns. Thank you for listening. I look forward to speaking with and hopefully seeing many of you in the not-too-distant future. With that, we shall turn it over to questions. Thank you.

Operator: [Operator Instructions] Your question comes from the line of Robert Stallard of Vertical Research. Please go ahead and ask your question.

Robert Stallard: Thanks so much and good morning. I've got a couple. First of all, I do see several mentions of cash deployment throughout the presentation. And I was wondering specifically on potential buybacks in the future – will you be looking at the way you calculate whether you're going to do a buyback or not differently from what you have done historically? And then secondly, on the U.S. side of the business, the new Biden administration is cracking down on offensive system sales into the Middle East. I was wondering if there had been any impact from that in terms of your sales or orders?

Charles Woodburn: Well, I'll pass the first one over to Brad here. And then the second, we've got Tom on the line, so I'll hand over to Tom on that. But I think the answer to the second is simple at the high level, no. But I'll get Brad to do cash.

Brad Greve: Yes. I think on the buyback point. I think the calculation is largely going to be the same. We would do it if it's value accretive. That's how we look at all investment decisions, they need to be NPV positive. And the buyback is no different.

Charles Woodburn: Very good. Tom, are you able to just pick up on that last part of the question on the new administrations?

Tom Arseneault: Certainly. Thank you, Charles. We would expect, as it has been the case with just about every change in administration, that there's a review of policies like this. As Charles pointed it out, our portfolio would not present a material impact related to any of these changes there. We're already starting to see some loosening across the board and in respect to specific offensive weapons that's not a material of each of our portfolio.

Charles Woodburn: Thanks, Tom.

Robert Stallard: Okay. Just a quick follow-up, if I may. Brad, when you talk about NPV positive, is that looking at whether you would pay the dividend on those shares retired? Or are you looking at something different? Like, is it EPS accretive or something like that?

Brad Greve: No. It's really a function of the dividend that you take out by buying back those shares that you'd be paying dividends on, and of course, the assumption you have on long-term dividend growth rates and then looking at against the cost of the buyback itself in terms of current share price, and then making sure that's all NPV positive. It's a fairly simple calculation. And so we would pull the trigger, looking at making sure that it's NPV positive.

Charles Woodburn: But I would just say that as we generate more cash – as we expect to generate more cash, we're looking at more ways or other ways to return that cash to our shareholder base.

Robert Stallard: Yes, that’s great. Thank you very much.

Operator: The next question comes from the line of George Zhao of Bernstein. Please ask your questions.

George Zhao: Hi guys good morning everyone. So in the U.K. defense investment plan, advanced technologies was really highlighted as a strategic area for the investment. So how will be look to participate in these areas, whether it's space, cyber, AI? And importantly, what type of investments will that entail? We've seen BAE expand the portfolio of advanced technologies in the U.S. But I guess arguably one of the consequence of that has been continued investments and margin pressures in the Electronics System. So could we see something like that for the U.K. portfolio? And then the second quick one is just could you comment on what has lead to delays in delivering the MPF prototypes?

Charles Woodburn: Yes. So – yes. Yes, I mean, when it comes to the U.K., in terms of those advanced technology areas, I mean, just to assure you, George, we're already heavily involved in all of those areas. So we've been growing self-funded R&D in two main areas

Tom Arseneault: Thank you, Charles. Not much to add on the ES side. I mean, certainly, ES is a technology-driven bit. I'd expect continued investments in some of those key technologies well aligned to the National Defense Strategy there. MPF ours – the Mobile Protected Firepower program, ours is a bespoke design that's based on, of course, the armored gun that we've done from a couple of decades ago, but it is a truly bespoke light in design, we think, well aligned with our customers' requirements. That said, new design work, ramping up production of those prototypes ran into COVID impacts in the workforce there as well as several key supply chains, so that led to some delay. We have delivered the blast holes, as I'm sure you will have read, and we are on track to deliver the balance of the prototypes here starting in the coming months. And so we're optimistic about our offering there and we're working through the COVID impact in order to deliver those parts. Thanks for the question.

George Zhao: Great. Thank you.

Operator: Your next question comes from the line of Chris Hallam Goldman Sachs. Please ask your question.

Chris Hallam: Yes, good morning everybody. Just a couple from me. So I suppose, first of all, we're quite close to the publication of the integrated review. So could you just touch on any risks you see within that? It does seem like it's going to be focusing on cuts in land. But historically, we've also seen some of the bigger non-land programs be slowed down. And I suppose as part of that, is there any scope to slow down Type 26 further? Because if I compare it to Type 45, it doesn't seem like there is really much scope for the customer to make that move more slowly. And then secondly, in the U.S., you've clearly got a lot of favorable exposure in ES and in the acquisitions, but is there a risk purely from the timing perspective that as a budget rebalances that perhaps we see some of the headwinds manifest in the land domain before we see the structural growth pick up in those better position segments? And then finally, you referenced this earlier, and I should know the answer, but what's the technology you have in the U.K. that contributes to carbon-neutral aviation?

Charles Woodburn: Yes. I'll pick up the first and the last, and then hand over to Tom on the U.S. risk. I think on the U.K., I mean obviously, every integrated review, SDSR, there's a lot of speculation in the press. And frankly, we'll wait and see when it comes, it's not far away. My expectation has always been that the big long-term programs would continue through. I mean governments understand very clearly that you can't, in a sense, change funding profile, some of the big programs, without having significant impacts on both timing and budget. So to your earlier point on Type 26, I don't see much risk there. And the big – these big long-term programs that underpin 90% of our business, I think will – my anticipation is that they will be strongly supported through the integrated review. And the other important one for us was the Tempest program, as you're aware, and the fact that whilst we haven't seen the details of the integrated review yet, the fact that when the Prime Minister announced the increase in defense spending, he specifically mentioned that program is obviously good news for us. So my personal view is that the integrated review is when it comes it's – generally speaking, it should be a positive thing for the outlook for our business, certainly in the U.K. and underpin our sort of long-term sort of stable outlook in the U.K. that we've been expecting for some years. On the U.K., with respect to carbon-neutral aviation, we have a number of projects that we're looking at that. I mean they are at early stages yet. There's some self-funded R&D, and there's also a couple of partnerships that we're involved in. And it's certainly something that I think in the coming months, we'll be talking more about. But at this stage, they're fairly early efforts as I said, largely through self-funded R&D investments. But given the strong position that we've developed globally with hybrid drivetrains largely in the bus market, we've got real expertise. And you'll be aware that, that business spun out of the engine control electronics and has now been sort of perfected in a very reliable hybrid system that's now used in buses. But the real brains of that system, how to manage a drivetrain that has multiple inputs and get the best out of it in the most efficient way, I think, is something that we have some really unique capabilities in that lend themselves into other transport sectors, including back in aviation. Tom, when it comes to U.S. risk on combat vehicles, do you want to just pick that one up?

Tom Arseneault: Yes. Thank you, Charles, and good morning. Clearly, we've been tracking the U.S. DoD budget profile very closely. We've worked in recent years to align our portfolio and our investments around the National Defense Strategy. With respect to the combat vehicles, in particular, we expect even in a flattening and modestly declining, that the Army's modernization priorities will roughly see the call. That includes their – the family of next-generation combat vehicles, of which the AMPV is one, in fact, the only one currently in production. That said, also on – let's not forget the amphibious combat vehicle, which is a Marine Corps program. That vehicle figures prominently in the Marine Corps evolving strategy around, as they call it, island hopping operations in the Pacific. We're in full rate production on that program, and we expect some continued additions to that of backlog over time, as we build out and design some new variants. And so we feel confident that between Army modernization priorities and the marine course mission evolution that we stand in good stead for combat vehicle production in the years to come.

Charles Woodburn: Yes, I'd also add to that, Chris, we – I think there's over 1,200 vehicles in contracted backlog in combat vehicles, so it just points to pretty insulated growth.

Chris Hallam: Helpful. And thanks.

Operator: Your next question comes from the line of Nick Cunningham of Agency Partners. Please go ahead and ask you question. Nick Cunningham, please ask your question. Your next question comes from the line of Ben Heelan of Bank of America. Please ask your question.

Ben Heelan: Yes, good morning. Thank you taking my question. My first was on team Tempest, I mean, you gave some – made some remarks in the prepared statements. Could you maybe go into those a little bit more detail? Where exactly are we? What are the next steps? How are you thinking about funding? Are there any more partners that can be brought into that program? And also, how are you seeing it compared to the future combat assets in Europe. Obviously, there's been some headlines about issues with funding or debates around funding of that program. Is that something that you could see potentially down the line for the Tempest? And then secondly, on Cyber, how are you thinking about this business strategically now? Thank you.

Charles Woodburn: Thanks, Ben. So on Tempest, I think we're making actually really good progress. It's still early days in the program of that scale and magnitude, but I've been very pleased with the progress that we're making. And indeed, the teammates that we have with both Saab and Leonardo from an industrial perspective and the, obviously, respective countries behind it, I think it gives us a really strong team. Obviously, it's a political decision on future partnerships, and I think that there is potential for additional partners to come in, and it's something that we're obviously having some conversations with the government about. But having said that, the group that we have already is a very, very strong partnership, and I think we're working very well together and we look forward to continuing that. So obviously keen to see the details in the integrated review, but per my earlier comments, I mean it does appear to be getting good support politically, and I think we've got great momentum in the program and lots to look forward to that. And it really does underpin our Air business for decades to come. So I think making good progress. I won't necessarily comment on others. I mean I read, as you do, what's going on in the press there. I mean having said all of that, my priority, of course, is to focus on our program and make sure that progresses as efficiently and as effectively as possible, and I've been very pleased with the progress on that. When it comes to Cyber, we've, I think, really realigned that portfolio now around areas of great strength. And the national security customer continues to grow. Both the work we do here in the U.K., but also with the U.K. allies, and I think on the commercial side, in financial services, we've been making progress within that. But we're basically focused on the government customer and financial services. And I think the government customer being the – obviously, by far, the biggest within that – and it's really looking in the cyber area, where are the parts of the cyber world that are either prepared to pay for defense grade product? Or where those large data set analysis – I mean the things that make us so strong in the national security space, where they can lend themselves into a – into the commercial world, and indeed where you've got commercial customers who were prepared to pay a premium for a defense grade product. And I think we have taken steps to make sure that we are aligning ourselves in those areas where we feel that we have customers who are prepared to do that. And that's really the steps that we've been taking. And I think it's great to see that the Applied Intelligence, as a business, the progress they've made in the last 12 months with – coming into profitability. And I think the outlook for that business continues to look positive, particularly with the national security customer as that – the requirements for our services in that space continue to grow.

Ben Heelan: Okay. Great, thank you.

Operator: Thank you. Your next question comes from the line of Nick Cunningham of Agency Partners. Please ask your question.

Nick Cunningham: Thank you. Trying again, I am sorry about that. That was my fault. Two questions really. One on F-35 franchise and the other on the Bradley franchise. F-35, just in the short term, it obviously missed its production plans in 2020, and I think we'll be below the original plan in 2021. Does this have any material impact on BAE? I suspect not. And are you expecting any catch-up? And then perhaps more importantly, looking forward as F-35 levels off, growth is going to come more from aftermarket and from upgrades looking forward. Can BAE get the same share of those as it's had of the original equipment program to date? Or is Lockheed going to try and hang on to that? And then second franchise, Bradley. I mean, obviously, all the other programs are going really well. The question, I suppose is really given the Army's modernization priorities, is Bradley replacement going to end up slipping down again and so Bradley has to go through another iteration of upgrades, which is obviously not bad for you. Just perhaps your view on what the Army would do with the brigade combat teams. Thank you.

Charles Woodburn: If I may, just hand over, while it's all fresh in our mind is the Bradley question to Tom, and then I'll come back on the F-35 after Tom has done the Bradley. Is that okay, Tom?

Tom Arseneault: Sure. Thank you, Charles. And good morning Nick. Nick, you pointed out a scenario that we have been considering as well. I mean, first and foremost, I mean Bradley, as it currently stands, is a bridge program, that Bradley A4 upgrade that we're presently performing as a bridge program to the OMFV program or the next generation vehicles on the optionally manned fighting vehicle. We intend to compete vociferously for that program. But in the case that your budgets do not allow that program to proceed, we had a Bradley A5 on the drawing board for some time, and we stand ready to pursue that avenue, could it come in the past. I mean it's still our belief the armies will press for OMFV, and we stand ready for that as well.

Charles Woodburn: Thank you, Tom. And on F-35. I mean this year, we expect to be back at the full rate production of 150 to 160, where it will stay, as you know, for quite some years to come. I mean there has been talk of potentially some catch-up this year. I mean if need be we could handle more than that, but we'll just have to wait and see the demand driver from Lockheed on that front. And when it comes to sustainment, you're absolutely right, this is a huge opportunity for all of us. The sustainment model, I think, is evolving. And it's fair to say that we're working very closely with both Lockheed and Northrop Grumman on the futures sustainment model for that, both for the domestic U.S. portfolio, but also for the international operators of that, and it is a topic that's getting a lot of attention at the moment. But I think we're well placed, given our already, as I said, strong position with the availability models that we've offered elsewhere in the world to our customers. And I think they see real cost-saving benefits from that. I think we have real capability to bring to bear on the sustainment of the F-35 fleet.

Nick Cunningham: And just a very brief follow-up, our ES' share of the electronic content, as F-35 goes through its next iteration of upgrade, do you see opportunity there for perhaps you to take a little bit more share on the program?

Charles Woodburn: Tom, do you want to take that one?

Tom Arseneault: Thank you, Charles. So Nick, you're probably aware, as the electronic warfare dimension of the portfolio has evolved, we are already executing on what's called the Block 4 upgrade for that part of the avionics and the electronic warfare system. That will also include a series of retrofit production requirements that will spin back and retrofit aircraft that had already been produced. And so there is upside in our growth trajectory on that [indiscernible] along those lines. More broadly beyond that, I mean we always look for opportunities to take the excellent performance that we've demonstrated in the sort of driving down the cost curve performance that the program has enjoyed, we would be open to take them into other areas that Lockheed Martin and the Air Force be fit.

Nick Cunningham: Thank you.

Charles Woodburn: Thanks Nick.

Operator: Your next question comes from Sandy Morris of Jefferies. Please ask your question.

Sandy Morris: Yes, good morning. Yes. Actually a fairly sort of bland one to start with, yes, – which is very simply, what is the right balance sheet for BAE now that pensions are done, the programs are more balanced and all the rest of it? We've been referring to buybacks, which always makes me twitchy. But it is £1.2 billion, £2 billion net debt, actually the right balance sheet. And then if I was just being a bit cheeky because I know we probably won't want to go into too much detail, but where have we got to now in terms of the evolution towards a joint venture sort of partnership-type situation with SAMI in Saudi Arabia. The closet question being, will the next step depend on Eurofighter coming through? And then just a quick one, what was Oman up to? Were they just trying to save money? That's it.

Charles Woodburn: So on the balance sheet, I'll hand over to Brad. So do you want to...

Brad Greve: Yes. Yes. Thanks, Sandy. Well, I think just to kind of set the context, you're seeing a business that's growing on the top line, that's expanding margins and is growing free cash flow and cash conversion. So that gives us some really good optionality. In terms of our balance sheet, if you look at EBITA, it's pretty much in line with net debt. So a very conservative balance sheet to be sure. And I think we – the way the credit agencies look at it is, of course, as they look at pension debt as well on an IAS 2019 basis, and that, of course, ratchets up the debt a little bit in their calculations. And so we want to make sure that we're firmly investment-grade. So we're operating within those parameters. But I think we have flexibility to do the things we need to do. And so I think the optionality we have, I think, is apparent. And I think we've got a balance sheet that gives us good flexibility, and that's exactly where we need to be.

Charles Woodburn: Thanks, Brad. On KSA, I'm sure you're aware, that was created a couple of years ago now, I think, really to support the Kingdom's ambitions around Vision 2030 an indigenization of capabilities. And frankly, since its creation, we've had, I think, a very strong and collaborative working relationship with SAMI. And obviously we do a lot in the Kingdom. SAMI have acquired some of our portfolio companies and positions in our portfolio companies. And I think they continue to be a strong partner and will be for many years to come. So it's one of, I think, very positive engagement there. And with respect to Oman, I mean, I come to too many more – much more about this than there was a requirement for, I think, a temporary period to reduce some of the costs, and we obviously have to respond to that with an important long-term customer for us.

Sandy Morris: All right. Okay. Well, that's perfect. I'm still just a bit focused on the balance sheet. I mean if I interpret what Brad was saying correctly, the current level of net debt is perfectly comfortable, one times EBITDA. The rating agencies have this way of looking at pension deficits. But does that rating agency way off looking at IAS 19 stop us for a while? Or – if we won them over, would we then really have the optionality that Brad referred to?

Brad Greve: Yes. I think the answer is yes. We've got a – what the pension does on IAS 19 basis is what it is. It's conservatively calculated using AA bond yields, and we look at more of a funding methodology, which is an asset-led discount rate. And actually, as I sit today, that funding does have now less than £700 million which is stark contrast to the IAS 19 balance, and I think the credit agencies understand those differences. They're going to have to be driven by standard dimensions that they use. But I think they do understand that difference and the real implications of the funding perhaps as opposed to IAS 19. So I think we have possibility in that sense because that pitched us is really doing a wing and going away to nothing in the horizon that we needed to do, which is why 2026. So I think with the really strong cash flow growth that we've got over the horizon, the increasing conversion level on the back of top line growth, it means leverage only improves. This improves our flexibility. And if we needed to do something – some kind of M&A or some other transaction where we might need to increase our leverage to grow our business, I think we have the flexibility to do that.

Sandy Morris: Well, that’s great. Thank you very much everyone. Please take good care.

Brad Greve: Thanks Sandy.

Operator: Thank you. Your next question comes from Jeremy Bragg of Redbird[ph].

Jeremy Bragg: Good morning guys. Hopefully, this won't break up. I've had some technology issues. Two questions, please. Firstly, Brad, you talked about margin upside in many of the divisions, and I wondered if you could elaborate a bit. So I guess land expectations and ability to close gap to GD DASS. I'm guessing that's held back by the commercial stuff? And then Air, which is obviously the biggest division, how should we think about margins going forward there, please? And then the second point is really one for you, Charles, which is a kind of qualitative one. So cash is clearly – the generation of is clearly of increased importance to you. And that's evidenced by the reweighting of the KPIs for your remuneration. Can you talk about how it permeates through the rest of the business, this focus on cash? And also, you hinted about looking at return on invested capital more. So same question on that as well, please. Thanks.

Charles Woodburn: Do you want to do the margins, Brad?

Brad Greve: Yes. Yes. So yes, margin expansion cuts across several different categories. It's – everything is really predicated, first and foremost, on operational excellence. So that is the single biggest factor in protecting margins and growing margins. So we have to continue delivering according to our program, scheduled cost and delivery. So that's first and foremost. Then you have the mix effect that I mentioned, so Electronic Systems is positioned for really good growth rates. They have higher margins across the sectors relative to the others. So as that business grows, it has a lifting effect on group margins. And then also, keep in mind that in 2021, we have a full year of acquisition benefits, and those acquisitions are really performing well, meeting or beating expectations. And so those options are high-growth revenue streams, and they are high-margin revenue streams, and that has a nice accretive effect. And then in P&S, we do see margin expansion happening there. As our combat vehicle programs mature, we'll get margin improvements from that. You have the learning curve effects, you have the repricing events, and all those are going to continue to help us improve margins in P&S. And in ship repair, certainly, we had some COVID effects from just either quarantines and the things that limited the people out in the shipyards and then that, of course, limits our productivity and utilization on a fixed price environment. So that certainly will dissipate. And I think as we drive that business through utilization and very scientific scheduling, I think we'll get a much better performance in that business as well, which will have a lift. I think we'll continue to improve in Applied Intelligence in our margins there. And you've seen a really good performance in 2020 on that score. And I think we still have a view of further expansion opportunities in our margins. So across the whole group, in addition to those things, we are really focused on efficiency, really driving cost efficiencies and resource efficiencies to also help us drive margins. So all those things, I think, will lead to a good track on margin expansion.

Jeremy Bragg: And the air question, please?

Brad Greve: Sorry? I'm sorry.

Jeremy Bragg: The air division?

Brad Greve: Oh, Air. Yes, sorry, I apologize. You had a question on Air. So we had a really good performance in 2020, as you've seen there with a 11.9% ROS, stable with 2020. Where we're sitting in Q2, we weren't sure we were going to get there. But the sector did a remarkable job in catching up and really delivered a strong year. And I think going forward in 2021, you've got a couple of things happening. You've got the Hunter class program in Australia, which is a new program, and so trading at very low margins. And you have the German Typhoon order where we're starting to get revenue growth coming from that. And again, because it's early days in that program, very prudently low margins. So you've got some growth coming from the sector, but at low margins. And then you have the basic mix of risk retirement across the existing portfolio. So we still expect to see really nice margins for Air guiding in between 10% to 12%. You got the Tempest investment also that starts to ratchet up, too. So I think the sector is performing extremely well, had a great year in 2020 and a couple of growth vectors in 2021 that are at low margin, bring the margin down a little bit, coupled with the Tempest investment. I think those are the main parts.

Charles Woodburn: And on the incentive piece, which we alluded to a little bit earlier, as you said, I mean that's we've always had cash in our annual plan and delivery of cash as part of our financial objectives for the annual plan. But historically, the LTIP that we've been on to date, but now changing going forward, has been equally weighted between earnings and TSR. And it's now been split into equally weighted four categories of earnings, cash, TSR and strategic objectives. And the cash, going into the LTIP – the important point of that is to obviously make sure that the three-year guidance that we give now on cash is aligned to the – that LTIP delivery. And that's – now that we're giving three-year guidance, making sure that, that's aligned in the LTIP is obviously important for us in driving that overall longer-term cash generation performance. So that's important. And then when it comes to the strategic objectives, I mean, obviously, strategic objectives are aligned to the three elements of our strategy around operational performance, competitiveness and technology. And when it comes to sort of competitiveness and efficiency, we see return on invested capital as an important measure that supports our drive towards improving our competitiveness and efficiency. And that is why it's going to get, I think, the stronger focus looking forward. Anything I missed on that, Brad?

Brad Greve: Yes. I think Lockheed is such a great metric because obviously, it incentivizes margin expansion on the numerator and asset efficiency on the denominator. So – and it also allows you to cascade specific metrics along that formula across the business. So things like working capital efficiency, days – sales outstanding, days payable, inventory days. You can all create metrics around those that dovetail into the Lockheed forma. So it's a great way of driving and getting alignment across the group on the business performance. Thank you.

Jeremy Bragg: Thank you.

Operator: Thank you. Your next question comes from Christophe Menard of Deutsche Bank. Please ask your question.

Christophe Menard: Yes. I had three quick questions. First, on M&A. Considering the cash guidance you have now in mind, could you refresh us on your priorities, the time line, the size of potential acquisitions and regard – I mean, this in terms of the technologies and also the geographies. That was the first one. The second one is on the environment for prepayments, I mean is it – I mean you have a good performance, I understand in 2020. Is it something that is sustainable? Are you seeing customers willing to prepay more of their contracts? Or was it just a one-off in 2020? And the last question is on the – your recent acquisitions. You – got – I mean the lion's share of the advanced GPS receiver contract from the U.S. space force, and it's a very nice performance. Does it mean that your acquisitions are actually performing better than what you expected in that M-Code business?

Charles Woodburn: Yes. So in terms of – I'll tackle that, but I'll – maybe I'll get Tom to comment on the recent acquisition performance. On M&A, we've consistently said the areas of M&A activity are actually the areas that we're investing in additional self-funded R&D. So around the ES portfolios and adjacencies to that, things like precision guiding munitions, space resiliency and the underwater space, I mean these are some of the years, as you know, that we've been making investments. And clearly, those two fantastic deals that we secured last year really sort of underpin that strategy. And frankly, we'd look for more in those spaces. And on top of that, obviously, with the investment that's going on in Tempest, again we did the solar hail and the support that we did there with prismatic. I think that those are other areas that we are interested in. The electrification of the air domain, for example, I mean, that may drive us into certain areas there. So we are certainly interested in those spaces. When it comes to prepayments, the general trend, as you're aware, has been that we're expecting less of the sort of larger prepayments that occurred from our Middle Eastern customers back when oil was well over $100 a barrel. And so sort of going forward, we generally expect less of the large down payments. We'd certainly – if customers are prepared to give us the cash up-front, we're not going to say no to it, obviously. But generally speaking, our objective is to make sure was it mutually funded or better on most of our big programs, and that's what we've been able to achieve. But sometimes, like towards the back end of last year, we may get some payments – or down payments coming in. And that's part of the reason, that's sort of lumpiness, whilst it's trending down and there's a normalization of normal returns from profit into cash, we're seeing, I think that normalization continue. That is also the reason, as Brad explains, very well why we give three-year cash guidance because you do get some lumpiness on an annualized basis. In terms of the performance of the two recent acquisitions, which, again, we were absolutely delighted to bring into the group and welcome those employees, I'll maybe just hand over to Tom just to update you on that, Tom.

Tom Arseneault: Thank you, Charles. Good morning Christophe, We remain delighted with the two acquisitions. Of course, when we announced them, the very first part of last year, none of us knew, we'd be integrating them into VA systems in the midst of a raging pandemic, it's a real tribute to the teams that these two businesses are now integrated and not skip a beat. But to your specific question, the win on the military GPS upgrade, and this is a next-generation M-Code, I'll say, M-Code for military code, the more resilient GPS hardware. This is reflective of the leading technology that this business holds. We have some very, very good people there. We expect that will translate to, again, more downstream growth. By the way, alongside that, radio business is performing very well also. We received another full rate production award for more than 1,000 of their new ARC-231A radios. And so the net of that is, specifically to your question, they are contributing ahead of our initial expectations, and we expect that will translate well for us downstream. So very happy with the two. Thank you, Christophe.

Christophe Menard: Thank you very much.

Operator: And your final question comes from Charlotte Keyworth of Barclays. Please go ahead.

Charlotte Keyworth: Good morning, gents.

Charles Woodburn: Hi, Charlotte.

Charlotte Keyworth: Hi. Last and hopefully not least. So just one – couple from me actually. One on Maritime. You had a very strong operational performance this year. And I guess that was even after profitability impact in Q2 from COVID. So I'm just wondering, is the line cost decent margin business sustainable longer term in terms of COVID mitigation factors you paid for the COVID and mixed effects on program phasing. And then just secondly, on the free cash flow, you delivered £1.4 billion today. You've got guidance of an excess of £1 billion this year. That's about £400 million higher than the prior guidance in 2020-2021. And given that today is largely been driven by early receipts was to unwind this year, can you just give a bit more color on the driver to this?

Charles Woodburn: Yes, I'll let Brad comment on cash. I mean Maritime, those circa of 9% is – a lot of the work that goes through that is SSRO in terms of profit rate limited or set by SSRO profit rates plus some risk adjustments within that. I think if we can continue to perform, and that's very much our objective, we can continue to deliver those sort of margins in the Maritime. I think the important step for us was to – some of the margin dilutive programs, like the OPV program or like Carrier, make sure that the finish those and having delivered the – in difficult circumstances in the early days of COVID, delivered the last of the OPVs, putting behind us some of those challenging programs, which we're always going to be challenging in the sense that you were getting back into building whole ships. But now we've got the team on the glide that through the OPV, we've experienced absolutely match fit and working hard on Type 26, and indeed on submarines. Some of the early day challenges of astute, we're now well through that program and making sure all of those learnings go into Dreadnought. So our objective is to certainly make sure that we can sustain those sort of margins going forward. And in fact, I believe we can. When it comes to cash, I know there was a fair bit of commentary already on it, Brad. Brad do you want to just take that question a little bit more?

Brad Greve: Yes. I mean I think the – just to Charlotte to go back to the three-year rolling forecast horizon. So you remember back from the 2019 to 2021 target that was the £3 billion that we set forth. And so with what we've done to date and what we're guiding, we're obviously going to – on track to exceed that original target. And then the 2020 to 2022, we said we do somewhere between £3.5 billion and £3.8 billion. So with that £1.4 billion that we delivered in 2020, that really puts us in good shape for that target. And then we ramp up yet again, when we go to the 2021 to 2023 target, to exceed £4 billion. So you're seeing that really steady upward progression and cash delivery over those three-year horizons, which as Charles mentioned, because the end year variability, it's really what I think is the most important to focus on. And on that end year variability, I think your question was about that £1.4 billion in 2020, and that did include some phasing events that we thought might come in 2021, but actually came ahead to the things that we mentioned, like the German Typhoon advance, F-35 funding from Lockheed came in pretty aggressively in December. And then the CV90, those advance events kind of came in a little bit ahead of schedule, but they were firmly in our assumptions in our guide. Those will unwind largely in 2021, so that's why it goes down a little bit. But draw your attention back to that ratcheting up across those three-year horizons, and then you just see that steady ramp-up, showing our real focus on conversion and cash generation.

Charlotte Keyworth: Okay. Thank you.

Charles Woodburn: Thank you, Charlotte.

Operator: [Operator Instructions] No final questions coming through, sir.

Charles Woodburn: Well, thank you very much, and thanks all for the questions. And as I said, I look forward to talking with you or hopefully meeting you in the not-too-distant future, but thank you very much for joining the call.