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Good day, and thank you for standing by. Welcome to the BAE Systems 2025 Preliminary Results Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Paul Checketts. Please go ahead.

Welcome to BAE Systems 2025 Full Year Results. I'm Paul Checketts, Director of Investor Relations. And with me, I have Charles Woodburn, our Group Chief Executive; Tom Arseneault, Chief Executive Officer of BAE Systems, Inc.; and Brad Greve, our Chief Financial Officer. Charles, over to you.

Hello, everyone, and thank you for joining us this morning. Before we begin, I want to thank our employees, trade unions and supply chain partners for the tireless work they do to ensure we deliver on our commitments to our customers. Delivering reliably on our mission to protect those who protect us is vitally important given the increased threats to security around the world. There are 3 key messages I'd like to leave you with today. First, 2025 was another year of strong performance. We delivered solid growth in revenue, profit, earnings per share and order intake and once again, cash flow was high. Second, the breadth of our business across air, land, sea, cyber and space and across multiple geographies puts us in an exceptionally strong position for both current and future opportunities in defense.

And third, we are confident in the future growth we can deliver and the duration of that growth. We delivered strong outcomes in 2025. Sales and EBIT both grew at double-digit rates. Cash generation was high, and we secured GBP 37 billion of new order intake, demonstrating strong demand for our products. Our order backlog increased to a new record of GBP 84 billion, around 3x our annual sales. At the same time as focusing on delivery today, we're preparing for our future. Part of this is investing in research and development and CapEx. Our collective spending on these in 2025 was our highest ever. These results extend the track record we've built over multiple years of strong financial and operational performance and demonstrate our value compounding model in action.

If we step back and look at our performance over the last 5 years, the story is compelling. At constant currency, our sales are up more than 50%. That's around 8% compound growth each year. We've also steadily expanded our margins, adding around 100 basis points or roughly 20 basis points a year. And because of that, our EBIT has grown even faster than sales, up by more than 60%. Earnings per share have been even stronger, increasing by over 70%, which equates to a 12% compound growth rate. Importantly, we continue to convert earnings into cash at a very high level. Across these 5 years, we've generated more than GBP 11 billion of free cash flow. And that cash gives us real strategic flexibility. It's allowed us to reinvest in the business to support further organic growth and to make targeted value-enhancing acquisitions. It's also supported increasing shareholder returns with dividends per share growth at around 9% a year.

So overall, we're delivering strongly and consistently across the key financial metrics, and we see a very clear path for further progress. Our business has an outstanding geographic footprint. We have established positions in some of the largest defense markets in the world. This gives us an excellent breadth of opportunity and reduces the risk and volatility that comes with being more concentrated. Across all our key regions, defense spending is increasing because of the growing threats to national security. In each of our markets, the work we've done to invest in and position our business means our existing proven portfolio of capabilities aligns well to customer priorities. We'll look at Europe and the U.S. in more depth shortly.

Here in the U.K., the government has committed to the largest sustained increase in defense spending since the end of the cold war. The U.K. Strategic Defense Review set out its vision for defense to move to greater warfighting readiness and to act as an engine of U.K. economic growth. It committed to invest in both our long-term programs and new disruptive technologies. We formed a new joint venture with industrial partners in Japan and Italy to design and develop the next-generation combat aircraft under the Global Combat Air Program, or GCAP. More broadly, Japan is on a path to double its defense spending by 2027, and we're exploring how we can support the country in other areas of defense capability. Australia is also increasing its defense spending. We're already the largest defense contractor in Australia and through the Hunter class frigate program and SSN-AUKUS, where we'll deliver state-of-the-art nuclear-powered submarines, we expect strong long-term growth.

The geopolitical situation in the Middle East is likely to drive higher defense spending in the region. The largest defense market there is the Kingdom of Saudi Arabia, where we have a 60-year track record of partnership. Their 2026 military budget is expected to increase by 5% and areas of long-term focus include combat aircraft, missile defense systems, naval vessels and further increasing the localization of defense spend. Across the globe, our growth opportunities are significant, and we're focused on consistently executing our long-term strategy to deliver strong top line growth, margin expansion and cash generation. Over the past 12 months, there have been 3 consistent themes that have come up in our discussions with investors.

First is our exposure to Europe, considering the rising threat posed by Russia, which is now driving increased defense expenditures in the region. The second is our shareholding in MBDA, given the growing significance of this business as Europe's preeminent manufacturer of missile systems. The third is the evolution of modern warfare and why we feel so confident in the continued and indeed increasing relevance of our portfolio, particularly in the light of new opportunities such as Golden Dome. As a result, we wanted to spend a few minutes focusing on each of these areas in turn, bringing Tom in to cover our U.S. business.

The last year has seen a profound change in Europe security situation with the continent facing an acute and growing threat. In response, most countries are now significantly increasing the amount they spend on defense, underpinned by their commitment to meet NATO's target by 2035 of 3.5% of GDP being spent annually on core defense requirements and 5% in total. We're one of the leading defense companies in Europe, and our business is going from strength to strength. When you look across the continent, our equipment and services are integral to the defense of more than 25 countries. We have great capabilities across multiple areas, including combat air, land vehicles and missile systems.

Growth for us in Europe is higher than the overall group. And at the same time, our order backlog has increased materially, now representing 32% of our total compared with 11% of our current annual sales in this region. To support our customers as they look to rebuild defense readiness, we're investing to support increased capacity, efficiencies and enhanced capabilities. An excellent example of our critical role in the defense of Europe, both today and in the future, is MBDA. As a reminder, MBDA provides sovereign capabilities to Europe and is a shining example of European defense collaboration. It's a joint venture between BAE Systems, Airbus and Leonardo with our shareholding totaling 37.5%. MBDA is a world leader in missile systems and the #1 player in Europe. Their portfolio has excellent breadth with products in service with more than 90 armed forces around the world.

When you look at the critical areas where Europe and its allies are looking to rapidly improve defense readiness, MBDA has proven products. Areas of strength include air dominance since MBDA provides weapons for more than 10 different combat aircraft, including Typhoon, Rafale, Gripen and KF21. In air defense, they have capabilities across land and sea, including counterdrone, short-range air defense and medium range, including antiballistic missile threats. For longer ranges, they have a complete array of deep strike precision products, all of which makes MBDA extremely well positioned to benefit from increased defense spending as European and other nations focus on growing their weapons capabilities and inventories.

You can see the high demand for MBDA's products and their momentum since 2021. Since Russia invaded Ukraine, order intake has stepped up from a cadence of around EUR 4 billion per year to EUR 13 billion. The order backlog has increased by 150% to EUR 44 billion or 7.5x annual revenue. And over that 4-year period, revenue has increased by 37%, a compound average growth of 8% to EUR 5.8 billion with improving momentum in recent years.

MBDA is investing to fulfill orders and support customers' urgent needs. Significant funds are already committed over the medium term. They're renewing sites, accelerating digitalization, significantly increasing production capacity, investing in their supply chain and developing new products and technology. The combination of investing in the business, the high order backlog and the alignment of the portfolio with customer needs mean MBDA is positioned for continued strong revenue growth in the coming years.

I'll now hand over to Tom, who will explain why we are confident about the outlook for our business in the U.S.

Thank you, Charles. Across the U.S. business, our strong performance in 2025 reflects our continuing efforts to align our portfolio strategy with evolving U.S. government defense and intelligence priorities. This enables us to support a broad range of programs and deliver for our customers with speed and at scale. We remain well positioned in areas the U.S. administration is clearly focused on. National security space and missile defense capabilities will play critical roles in the Golden Dome architecture, and we support a number of the key mission solutions, which underpin it. For example, as a result of emerging demand for the Terminal High Altitude Area Defense or THAAD interceptor, we expect a fourfold increase in production of our THAAD Seeker over the life of the 7-year contract.

Our critical electronics and sophisticated apertures will also factor into the production ramps of other key munitions such as the long-range anti-ship missile or LRASM. Production of these additional key munitions will at least double in the coming years. Our teams are also rapidly developing and delivering cost-effective counter-UAS capabilities. Last year, we were awarded a new 5-year IDIQ contract worth up to $1.7 billion from the U.S. Navy to produce additional APKWS kits. This precision munition is combat proven for both surface-to-air and air-to-air engagements against hostile drones. And our platforms and services team has expanded its maritime business, allowing us to apply our highly skilled workforce and industrial capacity to contribute to the U.S. submarine and surface ship industrial base in addition to ongoing ship repair and modernization support for the U.S. Navy and commercial customers.

While we have been investing in capacity and innovation for many years, the current market environment and long-term demand signals present additional opportunity. Since 2020, the businesses across our U.S. portfolio have invested more than $4 billion to expand production capacity and advance our research and development to deliver growth. To further support that growth, our workforce has increased by nearly 14%, and we've expanded our footprint by more than 2 million square feet. While there has been considerable focus on supporting the record production rates associated with key munitions demand, we have also been leveraging investments in a number of other important areas. In our Electronic Systems business, we have been investing to modernize and expand our microelectronics center to triple our production capacity for critical electronic components, supporting electronic warfare and other applications.

Our Space and Mission Systems team has invested to develop Elevation, a new series of cost-effective modular spacecraft that will deliver world-class reliability and performance. An Elevation spacecraft has already been selected for the $1.2 billion resilient missile warning and tracking program we won last year. Supported by previous investments in combat vehicle manufacturing and robotic welding, we anticipate more than doubling our vehicle production compared to 2024 levels. In the maritime domain, our new state-of-the-art Shiplift in Jacksonville, Florida is now operational and will increase the capacity of that shipyard threefold. These are but a few examples of our investments in capacity and key technologies to support growth and ensure we deliver to our customers at speed and at scale.

With that, Charles, I'll hand it back over to you.

Thanks, Tom. Technology and innovation sit right at the heart of our strategy and have done for many years. In 2025, we took that commitment further, increasing our self-funded research and development to a new record level. Let's look at how we develop the next generation of defense capabilities and our competitive advantages in technology. Areas of the defense market are developing at a rapid pace. Technology is being embraced and a number of companies are competing, including new entrants who often don't come from a purely defense background. This includes in drones, counter-drone systems and autonomy more generally. While it's a competitive market, solving the complex problems involved in producing equipment that works in a warfighting domain is extremely difficult. We bring together an understanding of our customers' operational needs with an understanding of the operating environment, agile software capability, differentiated hardware and an ability to successfully integrate the various elements rapidly and crucially the capability to scale up production quickly.

I'll give you some examples to bring this to life. First, our platforms and products are deployed on the battlefield today, which gives us firsthand understanding of our customers' operating environments in real time. For example, our Callen-Lenz drones have proven themselves to be resilient and capable in extremely contested electronic warfare environments, and we take all these learnings into other products across our portfolio. A second highlight is our agile software capability. We are actively using generative AI to allow drones to understand the commander's intent and then configure their own software to best deliver that mission need. And we wrap these capabilities within well-understood assurance methodologies, which means the drones are only able to operate within the parameters set by their human operators. This enables rapid introduction of new behavior models and allows the drone to perform missions that were not originally envisaged.

Next, consider our differentiated hardware. While software can define the optimal tactics for deploying artillery, being able to implement these tactics still requires a platform. Our mobile artillery system, ARCHER, can deploy fire 4 rounds and leave the location before the first round has reached its target. Now to integration. Bringing together the APKWS precision guiding munition from our U.S. business, heavy lift quadcopter technology from our Malloy acquisition and expertise in weapons integration from FalconWorks, a major step was achieved when we successfully used the drone to shoot down another drone. In just 4 months, we moved from concept to successful live firing trials.

Finally, our APKWS technology more generally is a great example of how we can scale up quickly. It has brought down the cost of counter drone technology by so much that it's similar to the cost of the drones it targets. We've now produced over 100,000 units in total. And by the end of this year, we anticipate more than doubling our production rate compared to 2024. Our combination of established multi-domain expertise, decades of delivery and agile software capability gives us an advantage that many of our competitors simply can't match. It provides our customers trusted, differentiated solutions that have proven to work on the battlefield, and these provide us with a competitive advantage.

And now over to Brad for the financials.

Thanks, Charles. It's been a really strong year for the business. We delivered a record year in sales for the group with a 10% increase while building our backlog to an all-time high of GBP 84 billion. Our focus on efficient delivery contributed to a 12% increase in underlying EBIT, and we posted a double-digit increase as well in earnings per share. Free cash flow at GBP 2.2 billion was above our guidance with the benefit of strong delivery and material customer advances. This free cash was after double-digit increases in R&D and continued high levels of capital expenditure. And after all of these increased internal investments, we returned GBP 1.5 billion to shareholders, in line with our disciplined capital allocation policy. All of these numbers highlight the health and effectiveness of our value compounding model.

I'll now break these results down in more detail. And as usual, when comparing results to prior periods, I will use a constant currency basis. With orders of GBP 37 billion, the book-to-bill was 1.2 and reflected the continued relevance of our broad technical and geographical reach. Key orders in the year featured close to GBP 9 billion in electronic systems orders. This included GBP 2 billion from our space business, featuring the missile warning and tracking satellite systems for the U.S. Space Force. GBP 6 billion in our P&S business, including significant orders in Europe for Hägglunds and Bofors and over GBP 2 billion for U.S. combat vehicles. The air sector recorded GBP 15 billion, including the Typhoon win in Turkey and GBP 4.2 billion in MBDA.

Our Maritime business recorded GBP 5 billion of orders, including increased funding for submarines. And finally, the Cyber and Intelligence sector recorded a further GBP 2.7 billion. Our record backlog, together with the pipeline of incumbencies sets us up well for continued growth over the medium term. We grew sales by 10% to reach GBP 30.7 billion with growth across all sectors. Organic growth was 9%. Platforms & Services led the group with a 17% increase, hitting GBP 5 billion for the year. European growth in Hägglunds and Bofors was over 30%, while our U.S. combat vehicle business grew by 15%. Maritime continued to grow in double digits, up 11% to GBP 6.8 billion, with strong growth in design work for the SSN-AUKUS submarine and double-digit growth in Australia. The air sector rose by 9% to reach GBP 9.3 billion with 17% growth in MBDA, GCAP ramp and continued growth in drone sales and FalconWorks.

Electronic Systems sales rose by 8%, paced by double-digit gains in EW sales, strong contributions from our precision strike and sensing activities and the full year contribution from the space business. Finally, Cyber and Intelligence was up 2%, predominantly on gains in counter-drone sales. Group EBIT of GBP 3.3 billion was up 12%, and our margin of 10.8% represented 20 basis points of expansion. This means over the last 5 years, we have delivered 100 basis points of expansion. The largest gain in EBIT came from P&S with 30% growth to reach GBP 576 million. Margin climbed to 110 basis points to 11.4%, with accretion on higher full rate production volumes from AMPV and growth in our European businesses. Electronic Systems EBIT rose by 12%, with margins growing by 50 basis points to 15.4%, including a strong contribution from SMS. The air sector EBIT grew by 10% with margins of 11.9% at the high end of our guidance range. Maritime margins reflected the early-stage maturity of the portfolio with several first-in-class programs trading at relatively low margins.

We expect margins to improve in 2026 and beyond as these programs mature and as key milestones are achieved, allowing for risk release. Cyber and Intelligence EBIT was up 15% with a full year of Kirintec included. Organic growth for the sector was 10%. The group delivered operating cash flow of GBP 2.8 billion, significantly higher than our expectations as large customer advances were received very late in the year. With close to GBP 1 billion of CapEx, we once again invested at levels substantially higher than depreciation with capacity expansion and efficiency investments across the portfolio.

There was a reduction in net advanced inflows in 2025 compared with 2024 in P&S and Air, which is the primary driver for the reduction in operating cash flow. Our free cash flow after netting tax and finance costs was GBP 2.2 billion. The strong performance contributed to a 22% reduction in net debt, which landed at GBP 3.8 billion. Excluding lease liabilities, the net debt to EBITDA was 0.9x. Our strong balance sheet provides excellent optionality to support our growth ambitions, and it was good to see this month's rating upgrade from Moody's, taking us up to A3.

Turning now to guidance. We anticipate another strong year of sales with a 7% to 9% growth range, supported by the record backlog. Strong sales in air and continued growth in Europe for P&S should drive both sectors up in the 9% to 11% range, while growth in space and EW should drive growth in ES in the 6% to 8% range. Growth in maritime and cyber are expected to be in mid-single digits. EBIT should grow above sales with more margin expansion expected. Our guidance is for a 9% to 11% growth in profitability across the group. Earnings per share should grow in line with EBIT at 9% to 11% despite a higher tax rate anticipated in 2026.

Regarding free cash, we do not include material advance receipts in our guidance. As you have seen in 2025, this can result in large positive variances. But given the difficulty in predicting these, we exclude them from guidance. We do include the anticipated unwind of existing advances. For 2026, we expect free cash flow to exceed GBP 1.3 billion, reflecting advanced unwinds and continued high levels of CapEx investment planned. So with the strong 2025 delivered, our guidance for 2026 demonstrates our confidence in the continued high performance of our business across all key measures. I'd like to discuss the 3-year cash delivery in a little bit more detail. Our consistency in hitting our 3-year guides continued in 2025, where we recorded GBP 7.3 billion over these last 3 years. For the next 3-year period covering '26 to '28, the target we are setting today is to exceed GBP 6 billion, including an assumed unwind of advances and high levels of investment to support growth.

I'll end my section of the presentation with a quick reminder of our consistent value-creating capital allocation model. The first rung on our ladder is investing in the business, specifically in our people, facilities and technology. From the skills academies we opened to our commitment to early careers programs and a constant focus on building strong teams and leaders, investment in our people is essential to delivering our strategy. We have invested over GBP 1 billion since 2020 on education and skills. Our investments in CapEx to increase the efficiency in how we deliver to our customers as well as expanding the capacity of what we deliver continues to be maintained at very high levels, helping us to drive growth.

Our investments in CapEx are over GBP 4 billion since 2020 and are now averaging close to GBP 1 billion a year. And our higher investments in self-funded R&D help to increase differentiation and open new revenue streams. These investments have increased by 70% since 2020 and programs like the APKWS illustrate how these convert to value. The second rung of the ladder is our dividend, which is covered approximately 2x by underlying earnings. Our dividends have increased for 22 consecutive years. And today, we have announced a 10% increase for our full year 2025 dividend. While maintaining our strong balance sheet with a focus on preserving investment grading, we have strong optionality to use M&A to grow the portfolio as we have done successfully over the last several years with over GBP 6 billion invested since 2020.

And finally, when there is surplus cash after all of these allocations, buying back our shares has proven to be another important way we return cash to our shareholders, and we have retired 9% of our ordinary share count since the program started in the summer of 2021.

So handing over to Charles with a final comment that our value compounding model has led to a high compound annual growth rate in both sales and underlying EBIT over the last several years, significantly enabled by this consistent approach in the allocation of capital. Over this time, we have also converted cash at very high levels. With our record backlog and pipeline, we are very well positioned for continued strong delivery across the medium term.

Over to you, Charles.

Thanks, Brad. Looking ahead, we're well positioned to keep building on our momentum. A key strength of BAE Systems is not just our near-term growth, but the visibility we have over the long term. Our order backlog and incumbent program positions total around GBP 260 billion, nearly 9x our annual sales. This includes both shorter-cycle products such as drones, counter-drones and munitions, where we're currently experiencing high growth but also critical multi-decade programs such as frigates and submarines with long-term embedded value. Some of our biggest programs like the Global Combat Air program and SSN-AUKUS submarines don't come into full production until the mid-2030s and beyond. The combination of our order backlog, incumbent positions and a strong new business opportunity pipeline due to rising defense spending gives us the visibility and confidence that we can deliver strong growth for an extended period.

Bringing this all together, what should it mean for investors? The combination of our exceptional breadth of world-class defense products and capabilities, strong positions in some of the largest defense markets in the world, a continued focus on execution while increasing our investments in technology and innovation and a large backlog of long-term work with significant new business opportunities means we're confident we can deliver strong revenue growth that is both visible and sustainable over multiple years with higher margins and strong cash generation, all of which will be amplified by our disciplined capital allocation, giving us enhanced visibility on our value compounding model.

Many thanks. And with that, we're ready for your questions.

[Operator Instructions] And now we'll go and take our first question and it comes from the line of Ross Law from Morgan Stanley.

The first is just on the U.S. budget and the potential upside there for fiscal '27. Are you actually planning for a GBP 1.5 trillion (sic) GBP 1.5 billion scenario? And when would this increase flow through to your P&L? Second question, just on Europe. You highlighted that it's 11% of sales, but 32% of the backlog. And what do you expect the mix of European sales contribution to trend to midterm, please? And then lastly, just on MBDA, how should I think for the growth outlook there in terms of CAGR?

The first one, U.S. budget upside. Tom, do you want to take that one?

Yes, sure. I think we're very encouraged by the trajectory of the budget. I mean how that -- how the 2027 top line ends up remains to be seen, but it certainly is heading in the right direction. It is not part of our current guidance. And so we do see upside in there. And to the extent we've worked to align ourselves well with the National Defense strategy and various priorities that fall out of that, I think we are well positioned.

The Golden Dome, for example, we talk about the recent wins in the base layer and our involvement in the interceptors, FAD and others. And so I think you'll see some of the budget applied there as well as shipbuilding. We've recently pivoted some of our maritime solutions to be the better part, as I mentioned earlier, of the shipbuilding, the submarine and surface ship industrial base. And so I think we are well positioned to the extent that budget heads in that direction, we're all encouraged by that.

So on the European composition, I mean, clearly, it's going to grow quite significantly with that 11% European ex U.K. in our current sales and 32% in the order backlog. Quite what the final number ends up being, I think it's a bit hard to tell a lot depends back on things like U.S. budgets as to the rate at which they grow, the relative rate of other areas. So I think it's a bit hard to judge, but we are looking at significant growth over the next 5 years as we build out that backlog.

On MBDA, Brad I mean we've had already a pretty rapid growth. I think it was 17% year-on-year growth last year to the year before. But do you want to comment a little bit on the outlook for that business?

Yes, I'll just echo too, on Europe. We -- GBP 3.6 billion of sales in Europe in 2025. That is against GBP 2.8 billion in 2024. So you can already see how our European revenue growth is really accelerating. And actually, our European business is bigger than our KSA business now. So I think that's worth reflecting on and positioned for continued growth.

I think MBDA has been a really strong 2025 with over 17% growth. And Charles laid out some of that backlog that they've got. So sometimes revenue there can be a bit choppy because it's point on delivery revenue recognition. So some of that revenue growth may not be even. But with that backlog they've got, we expect really continued high levels of growth for a long time to come here.

And also, Charles mentioned the production capacity investments that they're making, that will allow us to accelerate growth over the medium term once those get online. So I think all of this points to a really strong outlook for MBDA on the back of what's already on a pretty strong run for that business.

And the question comes from the line of Robert Stallard from Vertical Research.

I've got a couple for you this morning. First of all, this might be for Tom and Charles. Given the broader industry trends, are you expecting much higher CapEx in your U.S. business going forward? And in relation to that, are there any limits you potentially see on your flexibility on returning cash to shareholders? And then secondly, you highlighted the growth potential in MBDA and the rapid growth you've seen already. We've seen one of your peers in the U.S. announcing plans to spin a minority stake in its missile business. Is there any chance of a similar move for MBDA?

I think on the MBDA, I think we're very happy with the business. We don't see any particular need to change the structure or the holding system at the moment. We're just pleased to see the performance and keep supporting it. On CapEx, I'll maybe leave that to both of you, Brad and Tom to say a couple of words on it.

But I would come back to the fact that we have because of the good performance of the business, ample capacity to invest as we have been at record levels. If we needed to increase, we can still do it and still maintain our very disciplined capital allocation strategy. But if you want to just say a couple of words on U.S. in particular CapEx growth, maybe...

Rob. So in the U.S., I mean, clearly, we're focused on -- and as we've all been encouraged by the executive order to make sure we are positioning and applying our capital resources in a way to help grow capacity and focus in areas of technology investments, some of which I mentioned earlier. We are on the verge. We're part of the FAD program. We do the -- we make the interceptor. We anticipate signing our own head of agreement with the Department of War here in the coming weeks in order to secure that quadrupling of demand over the 7-year multiyear program.

As part of that, we would look to invest appropriately and it's quite a bit easier to close the business case on a multiyear demand like that, but to ensure that we can produce at that level. So that's just one very near-term example. But we continue to focus and make sure we're applying our resources to the benefit of the Department of War and their priorities. CapEx will generally impact to you.

Yes. At a higher level, Rob, we -- as we've laid out in the scripts in the prepared remarks today, you've seen us talk about a lot more investment. And over the last 3 years, we've been averaging sort of GBP 1 billion a year. I would expect in the next 3, it's likely to go up as we see this increasing growth environment that we're in. And a lot of that, as Tom has laid out, is in the U.S. But overall, this is embedded in our 3-year cash guide where we said we're going to have 6 -- over GBP 6 billion in the next 3 years of free cash. That is reflective of higher CapEx investments.

And now we're going to take our next question from the line of David Perry from JPMorgan.

Two questions. First one, just an update on AUKUS, please. I think the last few days, there's been quite a lot of press reporting out of Australia that the government there is about to commit AUD 30 billion to a new production facility. So just any info you have on that?

And then secondly for Tom, I think one of the surprises for me in the results was U.S. land vehicles, where both sales and margin were better than expected, because that's a business that you've been less bullish on recently. Have you changed your view on that? And any thoughts on the outlook? I mean, could there be more margin upside from where you are at the moment?

Thanks, David. So on AUKUS, I think as you already alluded to, there was some announcements over the weekend about infrastructure investments in the Osborne precinct around for the long-term build of SSN AUKUS, which I think is excellent progress and just underlines the strength of the program longer term.

From a U.K. perspective as well has been continued investments in the design work that's going on the SSN AUKUS submarine. So I think whilst we've always said this is a long-cycle program, much of it doesn't really bear fruit until well into the 2030s. These are early days, laying the -- literally the foundations for the success of the program. And I think we're making good progress on that. On U.S. land vehicles, I think Tom, as you said, is best place to answer that one.

Yes. Thank you, Charles. And David, yes, no, thank you for pointing that out. I mean I think the team and Platforms & Services has done an excellent job playing out the backlog that we've been reporting in recent years. And programs like the amphibious combat vehicle, for example, which is a Marine Corps program, factors well into the Pacific deterrent dimension of the National Defense Strategy an important vehicle for Marine Corps as well as the armored multipurpose vehicle, AMPV, which is the highest volume vehicle running through the factories there.

Some of the -- and the margin improvement, excellent performance, coupled with some of the investments we've made in recent years, robotic welding, et cetera, that helped drive a little bit of automation, allowing for better throughput in some of those higher markets. And so we continue to focus on delivering for our customer and ensuring that we can return to the shareholders at the same time.

I won't point out, I mean, we do -- our combat vehicle portfolio also includes the business in Hägglunds in Sweden, and that business is growing quite strongly. We are -- it was in the press late last year, working on a 6 nation agreement for CV90s. That will likely result in orders for additional vehicles in the hundreds. The 6 nations, Finland, Sweden, Norway, the Netherlands, Lithuania and Estonia, and the team is working with all 6 nations now in order to hammer out an agreement for a common vehicle platform across those nations. I hope that's helpful.

Which I might say is a great example of European partnership.

Now we're going to take our next question and it comes in of Christophe Menard from Deutsche Bank.

I had 3. The first one is still on the U.S. Can you comment on the drive for affordability in the U.S.? How -- and does it impact you? Is it in technology programs or in -- for instance, I don't know, the Radford rebid that's coming up? Second question is on capital allocation, share buyback. The GBP 1.5 trillion (sic) [GBP 1.5 billion] is coming to an end, I think, around June. What are the clients plans beyond? And the last one is on order intake. I'm still -- I'm always surprised -- I mean, always very positively surprised by your order intake. Any guidance for 2026 of book-to-bill or any key orders we should be watching in terms of influencing the order intake in '26?

Well, Christophe. So drive for affordability, I will let Tom say a few words on that, but we are fully supportive of the intent of the executive order to improve production rates and make sure that we deliver on the programs. Capital allocation, I may correct you there, is GBP 1.5 billion, not GBP 1.5 trillion. And -- but I'll hand over to Brad to do that one. And then order intake guidance, as you know, we don't guide on order intake. They tend to be quite lumpy. But if Brad, as you're answering capital allocation, do you want to expand on that by all means do.

So maybe, Tom, over to you on the drive for affordability.

Yes. No, that's a great question. Thank you, Christophe. We -- the focus on affordability is highly enabled by volume production, right? And so some of these investments in capacity, I mentioned robotic welding a little bit earlier, brings automation to bear, drives for the economies of scale and economies of labor and automation that allow us to create a more affordable situation.

Investments in technology around how we're driving, for example, as I mentioned earlier, the microelectronics position, right? As the microelectronics get denser and denser, we're able to get more capability into smaller space, drive down the material -- the builds of material on some of these items and again, helps with affordability. So we're looking at it in every dimension from the way we work all the way through to the technology we apply. I hope that's helpful.

Brad, do you want to talk about capital allocation?

Yes. I think it's healthy just going to look back to our capital allocation hierarchy again. And the first rung in that ladder, as we said, was investment in the business. And so this takes the shape and investment in our people, the GBP 1 billion that we spent over the last several years on skills academies and early careers programs, self-funded R&D. We've been making meaningful increases in those investments and CapEx. We've talked a lot in this presentation about how much we're increasing our investments there in CapEx. And all of this, I think, is very much aligned to a growing business and a growing backdrop. And our customers all want capability faster and our investments are designed to do that.

So that is our very first priority, and that's completely aligned with our customers' view on this. And after that, of course, we have a dividend policy that's very established and clear covered 2x by underlying earnings. And we've then looked at M&A as sort of another wrong and using a strong balance sheet to increase and enhance our portfolio. And finally, if there's cash left over after all of this, that's when the buyback program kicks in. And we're in a situation with the business that across all these increases of internal investments and dividends and the M&A we've been doing, we still have had cash left over. And so I think that's been a useful tool to deploy that surplus cash.

Then on order intake guidance, as I said, we don't give guidance, but Tom alluded to, for example, more CV90 potential orders translating. The Type 26 selection by the Norwegians is not yet in order backlog. We've got a number of additional opportunities for Eurofighter, both support and new aircraft sales. Electronic systems, there's opportunities with Compass Call. I mean there's a wide hopper of opportunities. But as you always know, the -- some of these big programs, quite what year they fall from an order intake perspective can be a little hard to predict, which is why we are cautious around giving specific guidance on that.

And yes, indeed it was GBP 1.5 billion.

I was joking to be honest, Christophe, I knew you have -- anyway, thank you, Christophe.

The question comes from the line of Ian Douglas-Pennant from UBS.

I have 3, at least one of which is quite quick. Firstly, on the free cash flow. So your free cash flow guidance 2025, '27 implies GBP 2 billion of free cash flow in 2027, which is a decline on what we've seen recently. Like can you talk about why that's the case beyond -- and obviously, I hear what you're saying on the advanced payments, but anything else beyond that, we should be considering?

Secondly, could you talk about the outlook for tax rates? I think your communication there has changed? And thirdly, on the Eurofighter, can you talk about the long-term production rate plans there given some of the recent demand we've seen coming in? And related to that, could you talk about progress on FCAS and when you now think that will be ready for use for our customers?

So maybe the first couple for you there, Brad, free cash flow and...

Free cash flow, really the story on the variability is not a new story. It's just really down to how advances move and how we guide on the basis of a conservative outlook on advances where we always model the burn of advances. And in 2026, we expect to have a circa GBP 600 million burn down of advances. We haven't guided to any material advanced receipts. So to the extent those come in, that would be upside to what we've guided. And that also is true of the forward guidance ranges in those 3-year increments that we've outlined. So none of those include material receipts for new advances, but all of those new ranges looking ahead include burn down.

So that -- I think that's really the simple explanation of your question on that one. And on tax rates, we did see an increase, we're expecting to increase rather in 2026, and that's mainly coming from '25. We did have some prior year releases from some retired tax issues. Those obviously don't recur in '26. And the France tax regime has carried forward what was meant to be a 1-year surplus and tax rates. They've now taken those into a second year. So the France tax rate is 36% compared to what we expect it to be sort of in the mid-20s. So I think I really explains the tax movements and a 22% guidance for ETR for '26, that's probably a range that's likely to endure for a little bit longer.

Thanks, Brad. On Eurofighter, I mean, we've talked before about sort of the pathway to doubling production rates, and I think we're well on that. Having secured Turkey and there are other opportunities. I mean, obviously, some European buys that you're well aware of. We'll look to adjust that. But I think that we said at the time at the Capital Markets Day last year that it was sort of a couple of year trajectory to get to the new production rates, and we're well on that journey. And we will adjust, if needed, upwards if we are successful in securing further orders.

And of course, the good news is that we now have production requirements all the way through to when we start doing final assembly of a GCAP capability, which is important. And I think to your final question, GCAP is making really good progress. We have a really strong team, moving well and are delighted with the partnership that we have and moving at pace.

And now we're going to take our next question. And the question comes from the line of Olivier Brochet from Rothschild & Co.

I would have a couple of things to ask. The first one is on the operating cash flow in H2, it doubled in electronic system. Do you have any areas that you would like to point to explain the move? On the same vein, did you have any cash payment catch-up on the F-35 after the release from inventory aircraft last year? And the second question would be on the space exposure. Can you maybe size how big it is across the group, maybe in terms of backlog and sales as you very hopefully did for the European business?

On cash OCF, do you want to do that, Brad, and then maybe over to you for space, Tom?

I'll simply say, Olivier, we tend to have a very back weighted cash flow profile. So '25 is no exception to that. We did see some advances come through in our space business from SMS into the ES cash flow. So that was a contributing factor in that. But we always have a very H2-weighted cash profile, and that continued into 2025. Tom?

Yes. I think I mean backlogs in the former Ball Aerospace, now our Space & Mission Systems business are at record levels. I mean, after some delay in the early part of the year as the administration was settling in and working through its priorities, there were some pivots on their part early in the year. Although as we moved to the half and beyond, we spoke at the half, and I mentioned earlier, the big win on missile warning and tracking.

We won a ground systems award called FORGE C2 that will -- is a ground systems for this missile warning and tracking kind of mission in our national and military space businesses grew and won a number of other programs. And so record levels. I think Brad, just check me if I'm wrong, GBP 8-ish billion for SMS. And so a really good performance there, and 1 that will play out through sales growth here. We're projecting double-digit sales growth in 2026.

We're going to take our next question and it comes from the line of Alessandro Pozzi from Mediobanca.

The first one is referring to your opening remarks about the outlook, very strong pipeline as well. I was wondering, can we have any color on the medium-term growth? A lot of your peers have given 2030 targets. We don't guide to 2030. But I was wondering, is it the right time maybe to factor in an acceleration in top line and maybe growth of double digit rather than high single digit, also in line of defense spending in the U.S. going up?

And the second question on the GCAP. There's a lot of speculation that Germany and France may not go ahead with the FCAS any longer. Would you be able to accommodate Airbus as a new partner in the GCAP and what the implication could have for the program? And maybe a last one. Any update on the Eurofighter potential opportunity in Saudi Arabia? And any thoughts on that?

So outlook, thanks for the question, Alessandro. We don't, as you know, give medium-term outlook, but we've been on a strong temper of growth, and we do see that continuing. As you probably are aware, everyone on this call much debate around the U.K., for example, and the defense investment plan and will there be more funding around that. And I don't know any more to add to that other than has been in the press already. But none of that is in a sense, assumptions around that further upside would be in our guidance and indeed -- but it would affect our medium-term outlook, but we just have to wait and see how that plays through. So there is further upside, we think, to the medium-term outlook, depending on how things play through.

And indeed, as Tom alluded to already, with the U.S. budgets as we see how that plays through, but that's not a '26 impact. That would be a '27, '28 and beyond impact. On GCAP, I mean, really the decisions around expanding the partnership are entirely down to the 3 governments of Italy, Japan and the U.K. that are partners already. So there's not really not much more I can comment on that apart from the fact that we have a really strong partnership that is making great progress and moving at pace.

And on Eurofighter, again, there's a little I can really add apart from we have a large portfolio of additional opportunities for the Eurofighter platform. It's a superb fighter aircraft. And with the latest missile systems from MBDA has extremely good capabilities. So we do see a range of additional opportunities, both from existing customers and new customers as we see with like Turkey coming into the Eurofighter family. That's really all I can say at this point.

And the question comes from the line of Sam Burgess from Goldman Sachs.

Three, if I may. Firstly, just back on Europe. If there is movement in the rules on U.K. company participation in future European defense funds, just in big picture terms, how material could this be for BAE Systems? Secondly, can you give us just any directional indication of the expected magnitude of advanced payments expected in 2026 relative to '25? I mean given quite a lot fell in Q4 '25, might we assume it's a slightly slower year in terms of prepayments?

And then thirdly, maybe one for Tom. Just following on from Ross' question about potential U.S. budget increases. I know there's been a lot of kind of CapEx going in for Jacksonville and Louisville, but that was obviously in advance of some of the latest messaging from the U.S. President on budget. So what's your sense on the areas that incremental budget spend may be directed? And might you need to accelerate CapEx to capture some of that demand if it's not in your base case?

Thanks. Good set of questions. On Europe, I would just come back to -- we already have -- we're well positioned within Europe. So our position with MBDA, Eurofighter, our Swedish businesses mean that we are very well positioned, and we can happily partner with companies like PGZ in Poland, who are recipients. So for example, say funding we can work with them. So we see, as you've already seen in our order outlook, we're expecting significant growth in Europe, and it's a combination of selling in from our U.K. business, but very importantly, strongly enhanced by our footprint already within the Europe and specifically EU.

So -- and then in terms of advanced payments, I mean, we don't guide around that. It's very hard to predict, which is why we specifically exclude them from our cash guidance. And I think that's probably the prudent place to be. And I think we're very clear around our position there.

Tom areas for CapEx -- in the U.S., do you want to say a little bit about that?

Yes. I'm happy to it. Thank you for the question, Sam. I mean if I had to point to one area and again, as I mentioned earlier, we're very encouraged by the administration's move toward multiyear contracts, particularly in and around munitions. So if you look at the 2026 National Defense Authorization Act, the budget has outlined, particularly Section 804, that really outlined these multiyear procurements where they create effectively 7 years of demand for some of these munitions.

Our 8-ish munitions sort of called out there as key munitions. We play a role on 6 of those. FAD I mentioned earlier has one. And so as we look to the sorts of volume increases associated with those anywhere from doubling in production to quadrupling there will definitely be some CapEx expected in those areas across the portfolio. By the way, that's both ES and SMS, those 2 businesses will contribute. So I'd call that out as probably the dominant area, although there would be others.

We're going to take our next question comes the line of Chloe Lemarie from Jefferies.

I have a first question, please, on the 2026 to '28 cash outlook. You helpfully said the GBP 600 million advances burn in '26. Could you maybe share how much over the total period you're factoring in for this?

The second question is on P&S. Obviously, quite a strong performance in '25. We touched on the U.S. platform performance. But I think a 30% growth in both for Hägglunds was mentioned. So could you maybe touch on capacity utilization now in those businesses and the expansion phasing going forward?

Over to you, Brad, for cash guidance and then, Tom, for the excellent performance in P&S.

Yes. I think the GBP 600 million burn down is probably a fair average to use across the medium term. So the '26 to '28 cash guide. Again, we don't assume any advances coming in, so any prepayments coming in. We do have a slightly higher CapEx across the next 3 years and then there's the normal working capital movements, but we will have higher profits, which will fall to cash.

So all that weighted in is kind of what colors in that GBP 6 billion -- greater than GBP 6 billion cash guide over the next 3 years. I mean it's going to be timing on programs that will dictate the cash burn on advances. It may not be evenly distributed GBP 600 million each year. But I wouldn't be surprised if it's a number like that over the next 3.

Yes. And then on Adrien (sic) [Chloe], on vehicle performance and production. I mean P&S, again, thank you for highlighting that a really excellent performance on the part of that business. Remember, P&S includes both the U.S. portfolio as well as Hägglunds and Bofors in Sweden. We expect that we would focus -- again, we don't see additional capacity necessary in the U.S., for example, we are -- we have built that up over the course of the last 5 or 6 years. And so now we're sort of running at rate, focusing on good performance there and that you can see in the bottom line in that business.

So over in Hägglunds, I mentioned earlier, the 6-nation opportunity that would likely require some additional CapEx in Sweden, but we do, as we've reported in the past, spread that capacity work out into the countries to which those vehicles would be delivered and in industrial cooperation. And so a modest investment there, we expect. But here's a business that was maybe 50 vehicles a year, only a handful of years ago, now looking at maybe somewhere between 200, 300 vehicles a year. So really good opportunity there, and business has done well to scale. I hope that is helpful.

We'll go and take our next question and it comes from the line of Adrien Rabier from Bernstein.

I also have 2, please. Sorry to ask again about the U.S. budget, but if you don't ask -- if you don't mind me asking in a more basic manner, if we have anywhere near 50% growth in U.S. budget in 2027, what would that mean for you? How much you expect to participate? And how long will it take to flow into your P&L?

And the second question on your 2026 guidance, please. Your sales growth target implies some sequential slowdown from 2025. But as you said, budgets are growing in your key regions and backlog is great and you've been expanding capacity. So should we see this as a reasonable caution? Or is there a reason to actually expect a slowdown this year?

Well, on the second one, the answer is no. But do you want to explain that a little bit guidance? You're saying it's slowing down compared to this year. But

On top line?

Yes, on top line.

Yes. The growth that we printed for 2025, the 10% included a full year of SMS, our space business, former Ball Aerospace. So that compares to a partial year in 2024. If you look at our organic growth rate in 2025, it was 9%. So again, if you put that in the context of our go-forward guidance, where we're saying 7% to 9% for 2026, we're continuing to grow at these very high levels on a higher 2025 base. So hopefully, that helps you understand a little bit that we're continuing to grow in pretty high levels here.

Yes, we still see strong momentum in the business. And maybe over to you, Tom, on U.S. budgets.

So there is so much that has to play out here before we understand where the top line for 2027 will settle. I mean it's -- again, we're very encouraged by the directionality of the discussions around the budget. You'd have to imagine that the way that would translate into portfolios would be sort of relative to how well aligned we are around the demand signals. And we feel very well aligned, as I mentioned earlier. And so we would hope we would get a reasonably proportionate share.

The focus on the national defense strategy, deterrence in the Pacific, our electronic warfare, our space portfolio, the work we're doing to help with the submarine and shipbuilding industrial base. When it comes to defend the Homeland, we spoke about Golden Dome, Clearly, the space and the munitions side of that, Counter-UAS, with our APKWS solution. So we've worked to align as best as we can with the national defense strategy. I think that's paying dividends for us, and we would hope to earn our fair share of that budget when it settles out.

But this would really play out in '28, '29.

Right. It will be some time before we know exactly where that is, but the directionality is clearly encouraging.

And the next question comes from the line of George Mcwhirter from Berenberg.

Maybe on R&D, going back to the comments that Charles you made about self-funded R&D reaching a record high this year. Do you expect self-funded R&D to continue to account for the minority of R&D? Or could you see that the self-funded share grows a bit faster than customer funded as government shift to a greater company, that innovation to reduce the time it takes for products to come to market? That's the first question.

Okay. Is that the only question? Or do you want to ask...

Sure, I can ask the second one. Maybe on margins. You talked about 20 basis points of margin expansion a year for the past 5 years. Do you think this is a reasonable level that you can achieve in the next 5 years?

So on margins, I'll let you answer that one, Brad. On R&D, I mean, as you said, we have been increasing self-funded R&D. The most intensive area of self-funded R&D is the electronic systems portfolio in the U.S., and that's been really good investments, things like APKWS is -- was a self-funded R&D program that is now doing extremely well and a huge commercial success for us. So we are encouraged to keep investing in R&D. The balance between that and customer-funded R&D, I mean, it largely depends as well as to the amount that we get through customer funding on R&D programs.

So I'm not sure it's going to change dramatically, but we will keep investing in self-funded R&D. We've had some great success there. The other area that we've invested and continue to invest heavily in self-funded R&D is in the U.K. air sector, specifically around drones, counter drones some of those capabilities is making sure that we really build out that what is already a market-leading portfolio and develop that further.

On margins and the margin progression, do you want to say a bit about that, Brad?

Yes. Last several years, our mantra here has been top line growth, margin expansion and cash conversion. And we were pleased to generate those 100 basis points of expansion over the last 5 years. And when we look forward, we'll continue to focus on these things. And where we have opportunity for more improvement is really everywhere. Operational efficiency is a key lever of expansion. The extent that we deliver our programs and retire risk to the bottom line rather than consume it. That's a really important part of how we're going to grow margins from here.

We'll have some operating leverage with top line growth, where we can keep indirect costs flat. That's another key lever. And our supply chain function continues to make size our scale advantage so we can get procurement volumes to drop down into bottom line margin expansion. I mean across the entire business, we look at these margin levers to really drive improved delivery, and we've seen that over the last several years.

Now looking at where we're going to go from here and where you're going to expect more margins. Obviously, the maritime sector is one that is below the range that we expect from that sector. And so I would look at that sector as being the one that will drive the biggest gains over the next 3 years. But we're already pretty top range and a lot of our delivery across the sector. We look at ES at 15.4% and P&S at 11.4%. There's still room to go on those. So I wouldn't just extrapolate a 20 basis point a year over the next 5 years to come, but we certainly are focused on it. And we continue to think that we can drive margins up from already these high levels in 2025.

And the next question comes from the line of Nick Cunningham from Agency Partners.

Yes, so the -- a few details on the U.S...

Yes, we can hear you, Nick.

Can you hear me?

We hear you loud and clear. We are hearing you.

So the administration is Good. So the U.S. administration is not very happy about NOAA and NASA budget. And it's obviously engaged in a big fight with Congress. But in the meantime, it's been holding out signing checks. And is that an issue for BAE? Or are you assuming that those delayed payments will get caught up later in the year?

And also, of course, will it be more than offset by the growth in military space anyway? Secondly, on the P&S shipbuilding move, is this into something new like building modules? Or is it more of the surface ships fit out that you did in earlier years? And how big could it get?

And then a final high-level question for Brad. Debt reduction wasn't mentioned as an option in capital allocation. Some of your U.S. peers are looking at retiring debt instead of buybacks. And in that context, what is the right level of debt?

Okay. So Tom, I mean, you already alluded to the pivot early in the year from civil space to military and where you think that's going. So I think you maybe say a bit on that and also the shipbuilding and maybe the pivot to submarines.

All right, Nick. What was the first one again?

The question was about civil space -- [ NASA ].

Yes. No, you're right. And that has played out a bit in the press of late. -- our current trajectory is depending only on the contracts that we have in hand. There is potential upside in this debate around NASA NOAA priorities. But you are exactly right, and that is our -- the growth we've seen has really been driven by military and national space. And that backlog I mentioned earlier, was built around that. And so to the extent the NASA NOAA debate settles in the direction we would like and that is to reinstitute some of the capability in like the GeoXO that program, for example, that would be beneficial to us. But our focus has been on ensuring we're well positioned to deliver on that military and national space.

And then second question around shipbuilding. And here, let me be very clear. We are not intending to build full ships, and we had gotten ourselves in trouble in the middle of the last decade or so off on a commercial shipbuilding venture. That is not our intent here. We are contributing components and working to earn our way in to be a reliable supplier. We do the Virginia payload module, for example, for the Virginia class submarines today. We're looking to expand on some of that work. But we are just trying to be a good, healthy and reliable supplier in this submarine and shipbuilding industrial base but in the supply chain. I hope that's clear.

Would you, Brad, on the sort of debt reduction and debt levels?

Yes. We're not looking at doing any accelerated reductions in our debt. We're already at 0.9x net debt to EBITDA. So pretty healthy balance sheet. And I do believe that constructive debt can help grow the business. And that's what we've done with the acquisitions of Ball Aerospace. And I'm really comfortable with where we are with the balance sheet, and that gives us really strong optionality, which really is what you want as a business. So we don't have any plans to accelerate any early maturities of debt.

Thanks very much, Nick. So I think over to you, Ben, for the last question.

And now we're going to take our last question for today. And it comes from the line of Benjamin Heelan from Bank of America.

Thank you for holding it for me. So the first question I had was on M&A, Charles, can you talk about the M&A pipeline? It feels as though buyback has been somewhat kind of deemphasized the potential to kind of grow that medium term, a lot of focus on CapEx, a lot of focus on self-funded R&D. But how are you seeing M&A within that? And if you could talk about the pipeline, how are you thinking about where you want to deploy capital geographically technology-wise, over the next couple of years? That would be great.

And then the second question, I guess one for Tom. If I look at Electronic Solutions, I would have -- I would have assumed it would have grown a little bit better organically in '25 than the 5%. And when I look at the guide, the '26, the 6% to 8%, I kind of feel it would be more towards the top end and high single digit given the program mix that you have there. So first question on that, is there anything in there that is slower that we need to that we need to be thinking about?

And then you've had a lot of questions on the budget in the U.S. I mean, obviously, we don't know what is going to happen. But I guess one way to ask it is, if you do see the budget moving to the kind of GBP 1.2 trillion to GBP 1.3 trillion range over the next couple of years, do you think the U.S. exposure that the BAE has will be able to outgrow that budget over the medium term? Is that what we should be thinking about?

M&A I'll take first. I mean really, it's much of similar focus areas as before, bolt-on opportunities adding to our Electronic Systems portfolio has been a good hunting ground for us in the past, and we'd continue if we found the right opportunities to look at that. Europe is presenting more opportunities given the growth rates there, although being careful and prudent with our valuations and making sure that we're not paying for opportunities -- we just announced our intention to move forward with an acquisition of a relatively small business in Sweden, which supplies barrels and castings to our Swedish businesses.

I think will be a great addition to the portfolio. I've identified before Nordics as being an area that we'd be looking at. And then you'll have seen, and again, very much in the bolt-on category over the last couple of years, we've done some very interesting acquisitions in the drone and counterdrone space, things like Malloy, Callen-Lenz, Kirintec capabilities. And again, we'd look for those kind of opportunities to add to the portfolio. So very much in the bolt-on space and in the kind of areas that we've looked at in the past.

ES growth, do you want to say a little bit more on that Tom?

Yes. Sure. So ES, as you know, it includes SMS, the Space & Mission Systems business. And as we were discussing a little bit earlier, we saw a slowing of growth in the Space & Missions Systems over what we had originally expected in 2025 driven by some of this uncertainty, some of the delays in the -- again, as the administration settled in and they work through their various priorities, we saw some decisions and awards being delayed through the year. And so that resulted in a little bit of lower ES growth overall at the reporting segment level. As mentioned earlier though, the wins that eventually came here in the latter part of 2025, position us for double-digit growth here in 2026 that backlog translates. And so really good growth that will recover in the coming year.

And then the other question around budget growth. And again, here we are with our crystal ball trying to get a sense of whether what that trajectory, what the slope of that budget growth will be. Our strategy all along as we -- as we've said, is we are working to pivot and align our portfolio as accurately as we can with the demand signals of the Department of are where is that budget likely to be spent? It's in the areas we've mentioned munitions the Secretary that maybe came out the other day saying that with the higher budget, they could potentially double the shipbuilding budget for the Navy.

Marine Corps and ACV, so an additional award there. So we've done quite a bit to get that alignment right. And so again, we would hope to earn our way into a proportional benefit from that growth when it comes. Thank you for the question, Ben.

I think that actually brings us to an end now on the questions. But thank you all for joining. I think I'll see many of you out on the road over the next couple of weeks and beyond. But thanks for joining and -- thanks for joining.

This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.

Good day, and thank you for standing by. Welcome to BAE Systems 2025 Half Year Results Conference Call and webcast. [Operator Instructions] Please note that today's conference is being recorded. I would now like to turn the conference over to your speaker, Charles Woodburn, Chief Executive Officer. Please go ahead.

Hello, everyone, and thank you for joining us this morning. The business has had a busy first 6 months of the year and delivered another strong set of results. Before I go further, I'd like to thank our employees, trade unions and supply chain partners for all they do to ensure we deliver on our commitments to our customers. Delivering reliably on our mission to protect those who protect us is increasingly important in the light of escalating global threats.

I'd like to leave you with 3 important messages today. First, we've delivered strong results in the first 6 months with good growth in both revenue and profit, and we're upgrading our full year guidance, second, our business is exceptionally well positioned for the global opportunities we are seeing, and third, the performance of our business, the positions we have and the backdrop of increased defense spending across our regions has further increased our confidence in rate of growth we can deliver and the duration of that growth.

These results continue the excellent momentum we've built over successive years of strong financial and operational performance and demonstrate our value compounding model in action. We delivered double-digit growth in both sales and EBIT. Demand for our products remain strong. You can see this in our GBP 13 billion order intake in the first half and the contract order backlog of GBP 75 billion. This backlog is largely driven by our incumbent positions on existing long-term programs, it therefore gives us exceptional visibility and supports our confidence in the growth outlook over the medium term.

And as we'll go on to explain, we're also at the forefront of new technologies that will drive new earnings streams and help deliver on our customers' immediate needs. We've maintained a strong balance sheet, enabling the same disciplined capital allocation approach that we've taken for the past several years. Growth continued to be strong in the first half, and the business performed well. Looking further ahead, we are well positioned to continue driving the positive momentum of the business well into the future.

Together, our confirmed order backlog and programs on which we have incumbent positions is approaching GBP 260 billion or more than 8x our annual sales. This includes both shorter-cycle products where we're experiencing high growth right now, such as drones and munitions and critical multi-decade programs such as frigates and submarines with long-term embedded value. Some of our big programs like the Global Combat Air Programme and SSN-AUKUS submarines don't come into full production until the mid-2030s and beyond.

This combination of our order backlog incumbent positions and a strong new business opportunity pipeline due to rising defense spending, gives us the visibility and confidence that we can deliver strong growth for an extended period. Looking at the macro environment, the outlook for global defense spending continues to strengthen in 2025, reflecting the elevated threat environment. We have well-established positions in some of the largest defense markets in the world. In all our key regions, defense spending is set to increase, and our existing portfolio of capabilities aligns well to the priorities of our government customers.

In the U.K., the government has pledged to increase defense spending over the next decade so that by 2035, it will meet the NATO commitment of 5% of GDP annually on national security with 3.5% allocated to core defense requirements and 1.5% to improving resilience and security. The U.K.'s recent strategic defense review set out his vision for defense to move to a greater war fighting readiness and act as an engine of U.K. economic growth. It committed to invest in both our long-term programs and new disruptive technologies.

In the Indo Pacific, we formed a new joint venture with industrial partners in Japan as well as Italy to design and develop next-generation combat aircraft under the Global Combat Air Programme. Japan is on a path to double defense spending by 2027, and we're exploring how we can support them in other areas of defense capability. Australia is also increasing its defense spending. We are already the largest defense contractor in Australia and through the Hunter Class Frigate Program and SSN-AUKUS, where we'll build state-of-the-art nuclear-powered submarines in Australia. We expect strong long-term growth. The situation in the Middle East is likely to drive higher defense spending in the region. The largest defense market there is the Kingdom of Saudi Arabia, where we have a long-established position.

Their 2025 military budget is expected to increase by 5% and areas of longer-term focus include combat aircraft, missile defense systems, naval vessels and further increasing the localization of defense spend. Across the globe, our growth opportunities are significant, and we're focused on consistently executing our long-term strategy to deliver top line growth margin expansion and solid cash generation.

Turning now to the U.S. business. Our strong performance in the first 6 months reflects the tight alignment we have with the U.S. defense and intelligence priorities, as well as those of the new administration. The U.S. defense budget request of $961 billion, including reconciliation funds of $113 billion represents a 13% increase over the prior fiscal year and supports the numerous high-level programs and technologies where we have expertise.

With a continued focus on the Indo Pacific theater, as well as on homeland defense under the Golden Dome concept, we are well positioned to continue to benefit from strong funding in critical areas such as national security, space, missile defense, munitions, counter drone and maritime modernization to include surface ships and submarines, all of which align with key U.S. priorities. In addition to these areas, good order intake over the last couple of years mean we will continue to execute on our U.S. franchise positions in electronic warfare and combat vehicles.

Europe has seen a seismic change in its security situation, and most countries are now on the path to higher defense spending. We are already deeply embedded in European defense, a fact, I think, is sometimes underappreciated because of our strong positions in other parts of the world. We are actively investing to help European governments meet the challenge of rearming. If you look at the 7 priority areas the EU has identified is critical to build a robust European defense, 5 of which are shown here. We have long-standing proven capabilities in each of them.

With Eurofighter Typhoon, we have one of the best performing, most reliable air superiority fighters in the world. It operates as the backbone of European Air Defense and plays a crucial role at the heart of NATO operations. We expect it to remain highly relevant in Europe and beyond for many years to come. This is a key factor in the recent MOU between the governments of Turkiye and the U.K. We're investing to increase the Typhoon production rate and see potential for that to at least double over the coming years.

At the same time, through the Global Combat Air Programme, we are developing next-generation combat aircraft. Our partnership with Italy as well as Japan is working well and we'll reinforce and grow our mutually beneficial ties with other European allies. MBDA, in which we're a 37.5% shareholder is a world leader in the market for complex weapons with its products in service across more than 90 armed forces around the world. It has an established portfolio of combat proven products that is highly relevant for the challenges nations now face as it spans the full spectrum of missions from deep strike through to air dominance. This makes it very well positioned to benefit from increased defense spending as nations focus on growing their weapons capability and stocks.

To scale up to meet this demand, MBDA has committed to invest EUR 2.4 billion over the next 5 years. We also have excellent positions in combat vehicles, advanced artillery and naval guns with our outstanding Swedish Hägglunds and Bofors businesses. 10 nations now operate the CV90 infantry fighting vehicle, and we see strong growth potential across our combat vehicle portfolio. We're investing more than GBP 160 million at Hägglunds to add capacity and scale operations while also teaming to expand production capacity in various customer countries. This approach benefits our partners' local economies and communities.

Lastly, through our FalconWorks drone portfolio, we're already playing a significant role in Europe, and this is opening up new collaboration in revenue streams. This takes us on to technology and innovation. Technology and innovation are at the core of our strategy. To drive innovation, we're continuing to increase our self-funded R&D. We're looking at technology for today, developing solutions that save time and cost and enable greater agility for our business and our customers, innovations that can bring products from concept to reality faster. We're also looking at innovation for the future, to deliver the next generation of defense and security capabilities.

This focus exists across all segments of business. One very current example is drones and counter drone technology where BAE Systems is one of the market leaders in Europe. The conflict in Ukraine has been a highly visible example of the use of drones in warfare and their extremely rapid pace of development. We've been investing in these capabilities and building IP in uncrewed systems for more than 25 years. We've recently added to our own developments by acquiring companies with great fixed wing and multi-rotor technologies that have strengthened our portfolio.

Our strong relationships with our customers and knowledge of what they need allows us to rapidly develop electronically hardened battle-ready solutions across the full spectrum of drone warfare. Our investments in this area mean we're now one of the leading manufacturers of military drones in Europe, and we are well positioned to capitalize on opportunities in this growing market.

The rapid upsurge in drone use means our government customers are now urgently looking for ways to counter them for both military and civilian domains to protect people and critical national infrastructure. We're investing in this area and bringing together capabilities from across the group, and we have a range of ways to neutralize drones from highly sophisticated electronic warfare through -- to cost-effective hard to kill capabilities.

Let me give you a very recent example of how we've enhanced cutting-edge technology by using the defense expertise we've built over decades. Earlier this year, we launched for the first time a guided munition from a drone to shoot down another drone. This new capability bring together the APKWS, precision-guided-munition from our U.S. business, heavy lift quadcopter technology from our Malloy acquisition and expertise in weapons integration from FalconWorks, the business line we've created to bring together and accelerate new products from our Air sector.

In just 4 months, we moved from concept to successful live firing trials for the U.S. Marine Corps. This demonstrates combat-ready capabilities for a fraction of the cost of previous solutions. Each interceptor is roughly the same cost as the drones it can destroy bringing some much-needed cost symmetry to the drone, counter drone equation.

And now over to Brad for the financials.

Thanks, Charles. Before I get into the details, the key message upfront is that we delivered a strong first half with double-digit growth in sales and EBIT with good margin expansion. The group is positioned for sustained growth on the strength of our backlog and pipeline, and we are upgrading our full year guidance to reflect the improved outlook.

So to the numbers. And as usual, I will use constant currency in my comparison to last year. The business continues to see strong demand reflected in the GBP 13 billion of order intake in the first half. We delivered another double-digit increase in sales of 11%, with all sectors contributing to the growth led by P&S and Maritime. Organic growth was 9%. The Underlying EBIT was up 13%, while EPS grew 12%. As expected, our first half free cash flow was an outflow as customer advances were paid out into the supply chain, and we continue to improve our returns to shareholders with an interim dividend increase of 9% complementing continued share buybacks.

I will now break down some of those high level numbers with a bit more detail, starting with orders. There was strong intake across the portfolio, showcasing the geographic and technical breadth of the group. In ES, the GBP 3.8 billion of intake included significant orders in the electronic combat business, together with the Missile Warning & Tracking system award to our space business in the U.S. a capability essential for the Golden Dome concepts. And P&S the GBP 2.4 billion of intake featured strong European wins and Bofors as well as continued orders for our U.S. combat vehicle programs.

Air recorded GBP 3.8 billion of orders, including GBP 1.4 billion for MBDA, showing continued strength in European growth and a further GBP 1 billion for the FCAS Tempest activities. The Maritime sector landed GBP 2 billion of orders with Canada's River Class support and consultancy work. Australia's Hobar Class combat systems upgrade and increased submarine orders for the Royal Navy, all featuring. Cyber & Intelligence, contributed GBP 1.4 billion in new orders across the half year.

Moving to sales. The group delivered GBP 14.6 billion for an 11% increase. Our Platforms & Services sector led to growth, up 21%, with a very strong showing in U.S. Combat Vehicle programs, which were up 27% and along with continued increases in Hägglunds and Bofors in Europe, up 25% and 39%, respectively.

The Maritime sector rose by 12% to GBP 3.2 billion for the first half. On Type 26 activity, growing ramp in AUKUS design work and strong growth in U.K ammunitions. Electronic Systems delivered 9% growth with a full 6 months of SMS activity and strong contributions from the Compass Call Program, F-35 and APKWS volumes. The Air sector also grew by 9%, reaching GBP 4.3 billion for the first 6 months. The ramp in design development activity in FCAS/Tempest resulted in strong growth, while our drone portfolio within FalconWorks also posted strong gains.

MBDA sales grew by 18%, showing the increasing importance of its European footprint. Cyber & Intelligence rose by 2% to GBP 1.2 billion with growth in the digital intelligence business in the U.K.

Moving to profit. Our focus on margin resulted in a 20 basis point improvement over half 1 last year to reach 10.6%. The group delivered nearly GBP 1.6 billion and underlying EBIT up 13%, this was 10% on an organic basis.

P&S led the way in margin expansion, posting an 11.8% return on sales and a 37% improvement in underlying EBIT for the first half. Higher volumes of AMPV full rate production vehicle and accretive growth from Hägglunds and Bofors were significant drivers. Electronic Systems posted a strong 15% return on sales with the full 6 months of contribution from our Space business at group accretive margins. Air profit was up by 13% with a return on sales of 11.5% on higher MBDA volume at expanded margins along with good growth in FCAS and drone activity in FalconWorks.

Profitability in our Maritime center was 6.8%, slightly down versus last year on timing of milestones and subs and contract-related trade-offs posted on the Hunter program last year. Finally, Cyber & Intelligence posted a return on sales of 8.1%.

In terms of cash flow, the half year saw a small outflow in line with expectations as advances from our customers flowed out to the supply chain against the absence of any new material advances received in the first half. The movements in advances were particularly noted in the P&S and Air sectors, with each sector having close to GBP 200 million in advance unwind. Across the group, our CapEx programs feature investments to drive growth and improve the efficiency of how we deliver.

We invested nearly GBP 400 million in CapEx in the first half of the year, with 35% of this in Maritime for submarine infrastructure, expansion of munitions and shipbuilding capacity growth in Australia. A further GBP 100 million was invested in P&S, including the Jacksonville shiplift and growth CapEx for Hägglunds. The cash outflow in the first half contributed to a slightly higher net debt from a starting point of GBP 4.9 billion at the beginning of the year, we finished the half year at GBP 5.6 billion after the free cash outflow and returns to shareholders, slightly offset by the translation effects of a stronger pound for our U.S. dollar-denominated debt.

During the first half of the year, our credit rating was upgraded by Fitch and S&P, while Moody's upgraded our outlook, validating the strong balance sheet and strengthening longer-term outlook for the group. Turning now to guidance. Given the strong first half operational delivery and outlook, we are upgrading sales and EBIT by 100 basis points each.

Sales are now expected to go up between 8% to 10% and while underlying EBITDA should grow in the range of 9% to 11%. The share price increase since the start of the year is expected to result in fewer shares being repurchased, which, along with a marginally higher tax rate, means our guidance for EPS growth remains unchanged at between 8% and 10%. We expect free cash flow to be higher than GBP 1.1 billion, excluding any material advances.

For noting this guidance is on a constant currency basis using $1.28 per pound. And given the higher spot rate, the sensitivities that we have noted on this slide should help with your modeling of various rate scenarios. The 3-year cash guide shown here demonstrate that the business is in a rhythm of delivering between GBP 5 billion and GBP 6 billion in free cash flow across 3-year cycles, even with elevated CapEx investment and advanced consumption.

As we don't guide to the receipt of new material advances, but we do model the unwind of existing advances, there could be upside if any new order volumes have accompanying cash advances, and we have certainly seen that occur over the last few years. Turning to capital allocation. As we have demonstrated over the years, our approach to capital allocation places a higher emphasis on growth. Our internal investments in training and development for our teams, R&D funding and CapEx have all helped improve the performance and top line growth of the group. And the growth, coupled with our focus on margin improvement leads to consistently rising earnings and dividends, which we cover around 2x by earnings.

These results in the half year also reflect strong returns from our successful M&A activities, which not only give us higher end year sales and profit but also enhance our long-term growth. we will continue to look at value-accretive M&A opportunities with a clear focus on maintaining our strong balance sheet. Finally, our share buyback program since 2021 has proven to be an effective way of returning any surplus cash to shareholders. And we expect to keep this tool active in our allocation hierarchy. This approach to capital allocation has been consistent over these last several years and has been an important part of our value compounding approach to business.

Over to you, Charles.

Thanks, Brad. So bringing this all together, what should it mean for our investors? The combination of our exceptional breadth of world-class defense products and capabilities with strong positions in some of the largest defense markets in the world, and a continued focus on execution while increasing our investments in technology and innovation and a large backlog of long-term work with significant new business opportunities. means we're increasingly confident we can deliver attractive revenue growth that is both visible and sustainable over multiple years with higher margins and strong cash generation, all of which will be amplified by our disciplined capital allocation, giving us enhanced visibility on our value compounding model.

Many thanks. And with that, we're ready for your questions.

[Operator Instructions] We are now going to proceed with our first question. And the questions come from the line of Ross Law from Morgan Stanley.

I've got 3, if I may. The first is just on the EPS guidance, and the lack of upgrade there. It looks mechanical, but if you could just flesh out how much of that was driven by the share count versus the higher tax. The second question, just on Maritime, if you could provide a bit more color on the kind of timing around the sub milestones and how that impacts the outlook for the full year?

And then lastly, on the durability of higher growth that you flagged, while you're maybe not willing to put some exact growth rates on that expectation, can you maybe provide the mix of growth within the business that's driving that? So which divisions are going higher, which lower, et cetera?

Thank you, Ross. So I think on EPS guidance, I'll let Brad take that one, and then we'll probably all circle back on the durability of higher growth. But on Maritime, as you know, Ross, the -- that's where the bulk of our single-source work flows into the Maritime sector. And you typically, as we've seen in the past, seen a margin range of between 7% and 9% with a bit of variability around milestones the trade-ups you can get, you can get up to an additional 2% towards the 9%.

So the timing of the milestones will impact that. So I don't see this as a sort of structural change to the sector, but there is a bit of variability from one reporting period to another around milestones. On EPS guidance, maybe over to you, Brad.

Yes. Well, there's 2 main drivers in the EPS relative to our EBIT growth that we left guidance at 8% to 10% for EPS, where we upgraded EBIT growth. And the reason being that there -- as you point out, lower shares removed than what we estimated given the higher share price. We're still doing the circa GBP 500 million a year in share buybacks. So that quantum hasn't changed. But because the share price has gone up, it means we're taking out fewer shares. That's probably about half of it.

And then the other half is coming from a higher -- slightly higher tax rate. And you might have seen that the French tax regime has increased for a sort of a 1-year surcharge. They went from a 25.8% to a 36% plus tax rate. And we do have more meaningful MBDA profits in France. And you might have seen that our MBDA growth was pretty significant in this half of the year. So given that effect on tax, that's probably about the other half of the impact, so it's kind of split between the tax increases and the share buyback amounts.

And then on the durability of higher growth, I mean obviously, I want to stop short of giving medium-term guidance, but we're on a pretty good tempo over the last few years. And I think what we have seen in recent months, particularly the step-up in the NATO numbers and the success of the recent NATO Summit is our confidence around the durability of those sort of growth rates continuing. And I think it's fair to say that we're a lot more confident around that than we were even a few months ago.

We are now going to proceed with our next question, and the questions come from the line of Robert Stallard from Vertical Research.

A couple from me. First of all, Charles, for you across the whole business portfolio, there's clearly very strong demand for missiles and munitions. I wonder if you put all that together, how much this area could grow by in the medium term? And what sort of investments, again, in aggregate, you may have to put into increased capacity? And then second one for Brad. Just on the changes on the U.S. R&D tax credit, whether there's any impact on the tax rate from that and also cash taxes, too.

Yes. So missiles, I'm trying how to quantify that. I mean there is -- it is one of the fastest-growing parts of the portfolio. But worth mentioning it's -- we see it in many areas of our portfolio. So for example, you have the huge success of APKWS as a counter drone weapon and it's, I think, certainly for the U.S., it's proven to be one of the most successful hard kill capabilities largely because it's relatively inexpensive interceptor compared to some of the options.

So we're literally selling them as fast as we can make them. You've got the growth in MBDA with platforms, but also in the integrated missile defense arena, both in Europe and elsewhere. And then other pockets of the business. So for example, within ES, you've got the Seeker on THAAD interceptors, you also got within Tactical Systems within SMS, some key positions across a range of U.S. missiles and munitions. And it is definitely an area that we're seeing some big growth whether that's -- I mean, I'll put a number on it, double our overall growth rate, but it is certainly significantly faster-growing area than the rest of our portfolio. But I think worth mentioning, it's not in just one part of our portfolio. We see that across multiple divisions. Anything, Tom, Brad, do you want to add to that?

No, I think, that's covered it.

And then the second question, you were going to...

So the changes in the R&D tax treatment in the U.S. is not really an ETR point, Rob. But it does give us some benefits on cash tax, and we expect to realize some of those benefits this year. So when we guided to free cash to greater to GBP 1.1 billion, it just makes us confident that we'll be able to get that guidance greater than GBP 1.1 billion and meaningfully more than that potentially depending on how material that becomes. And as I said on guidance in the scripts, that cash guidance doesn't really include any material advances.

So if any material advances do come in, that would be upside to the greater than GBP 1.1 billion. The tax is also an upside.

And the questions come from the line of David Perry from JPMorgan.

I'd like to zoom in on 2 of the divisions, if I may. So the first one, Platforms & Services, obviously, very, very strong growth. Just wondering, going forward, do we grow off the higher base that this year will probably deliver? Or do you think there's anything there that's kind of a lump that might not recur?

And then can I just be annoying and ask another question on Maritime, sort of I know Ross has already asked, but I would like a little bit more color. Are you able to talk about this milestone that led to the lower margin? Which of the programs it was? Was it related to the fire? And do we bounce back to the middle of the range? You talked about 7% to 9% next year, which would give you quite a strong growth in earnings next year. Just any more color around that, please?

On P&S, you were going to take that, Brad?

Yes. We have really strong growth in the half year, as you pointed out, 21% up half year to half year. That's going to start to flatten a bit in the second half. So we do expect to see some fairly decent overall full year growth rates from P&S in the circa mid-teens sort of thereabouts for the full year. And going forward, where we get growth from P&S is really coming from the continuing ramp in CV90s, BvS10s and those orders there in Hägglunds and Bofors. And we still have some growth coming in the shorter term on U.S. combat vehicles. And that was a big part of our growth in the first half of the year.

So there's still some really, I think, decent components of growth coming in the P&S portfolio. It's not going to be 21% going forward on this higher base, but I think there's still reasonable growth coming mainly from Hägglunds and Bofors. And then on Maritime, there's always going to be puts and takes across the Maritime portfolio given risk retirements and different milestone timings. And so we -- as Charles said, there's nothing structural that's changed in Maritime. We expect that sector to be between 7% and 9%.

And I think as we move into the subsequent periods, that's exactly where we expect it to be. So we do think that there's upside in Maritime going forward, getting back into that range that we expect. The other thing to point out is in the first half of last year for the comparable margins, we had signed a contract for the Hunter Class program, but we had not traded any profit at all on the long lead time materials that we had procured. Once that contract was signed, we were able to release that profit.

So it's been an exceptional credit to last half year's results. So those are the types of things that you get every now and then, these sort of timings of risk retirements and exceptional events, but nothing structural different there, 7% to 9% is where we expect Maritime to be.

And the questions come from the line of Benjamin Heelan from Bank of America.

First question was on FalconWorks, you've seen very, very strong growth there. Can you talk a little bit about how you see that business progressing going forward? Are there more deals that can be done? There have been some JVs announced in the space with other peers. So is there opportunities for you there? Just how can we see FalconWorks progressing over the next couple of years?

And then on Turkey, and Eurofighter. Is there potential, obviously, the MOU has been signed potential that gets closed by the end of the year? And at what happen, would there be a cash inflow in terms of a prepayment? How can we think about that?

I'll do Turkey first and then hand over to Brad on FalconWorks. So on Turkey, I mean, as you said, great news on the MOU. I think things are progressing pretty quickly, and there is definitely a requirement to move quite fast. However, I don't want to make myself a hostage to fortune here, so I'm not going to commit to a time frame, but the MOU is a very significant step in that relationship. On FalconWorks, I mean, a huge progress there. But Brad, do you want to just open that up a bit.

Yes. Well, Ben, I know you're at the Capital Markets Day and working with us. So you've got a sense for our capabilities that are going from strength to strength. And as I said in this case, we've been developing IP around autonomous uncrewed platforms for quite a while now. And I think what is exciting as you've seen probably in some of our communication materials is this ability to rapidly disrupt this market and equipping a Malloy T-150 with APKWS, being able to take a drone out with this Malloy APKWS combination is a great example of a very fast disruption that we're bringing to the market. So we're pretty excited about where FalconWorks can go. It's already grown pretty significantly this year. Callen-Lenz is an important part of that as well.

And beyond those types of drone platforms, we've got a more complete portfolio as you would have seen in the Capital Markets Day, going from a variety of range, scope and weight capacity. So really exciting things happening, and we're excited about our ability to disrupt the market out there.

It's probably fair to say it will be the fastest-growing sector within Air over the next few years.

All right. And just on capital allocation, in that division, are there more deals that you have in the pipeline that we could potentially see?

We've already got a really good portfolio there, Ben. But definitely, if we can find more sort of technology bolt-ons into FalconWorks, we're sort of very interested in that area, both in terms of drone and counter drone.

And the questions come from the line of Ian Douglas-Pennant from UBS.

First question, after the recent EU-U.S. trade deal, there was some talk about how Europe is going to buy a large amount of defense equipment from the U.S. Could you talk about how much of an opportunity that could be and under -- by which mechanism you expect that, that would take place? Is the EU going to instruct different countries to make purchases? I mean, how exactly would that work in theory? Second, there's been some headlines recently on Hawk replacements in the U.K., a joint venture that you might be forming. I don't know whether you can comment on that. And then my third question has been answered already.

EU defense purchases, on the deal. I mean, it's still pretty early days, Ian, I don't think we've really got any great clarity as to how that may unfold other than we got a really strong position in the U.S., particularly on combat vehicles, for example, and the capacity is clearly needed. So I think it would be a great benefit. But we've yet to see how that might unfold. I mean, Thomas, anything you want to add?

No, it's exactly right. I think the mechanics of how that will work are yet unclear, but we can just point to some of the existing demand that we have in the U.S. business, about 28% of our backlog is from Europe, in our current backlog, and we've had a number of FMS cases and opportunities either in train or on the horizon, some of those combat vehicles we're doing an upgrade in Croatia.

We've had a few inquiries about Bradley from a few countries, naval guns, Compass Call, we've gotten into Italy. And so a good set of prospects there. Again, the mechanics of the EU-U.S. trade deal remain to play out. We'll be watching that closely.

And then on the JV, I think there's no point me adding to any further speculation apart from to say that training is obviously a very important part of our overall portfolio, and particularly as it pertains to the Air sector. And that's all I'll add to the speculation.

And the questions come from the line of Alessandro Pozzi from Mediobanca.

I have 2 questions. Just the first one, going back to the U.S., if you can perhaps talk about how you see your portfolio, how well positioned it is to capture new opportunities. We know that defense budget is going up about 13%, even though base budget probably is not growing as much. But I was wondering if you can talk about how well you're positioned to capture that increase in spending?

And also you mentioned that potentially for the next fiscal year, you see a further increase in spending there. So any color would be appreciated. And also, I think in your opening remarks, you mentioned that potentially you could help Japan in supporting their quest to increase the spending there by 2027. And again, I was wondering if you can elaborate on the opportunities that you see there as well.

Yes. Tom, let me go over to you on the U.S. portfolio. And maybe we're saying a few words on potential around Golden Dome as well, just as being a relevant topic.

Yes, everyone, I'm sure, is tracking the increase in the U.S. budget brought about by the reconciliation bill to the tune of $113 billion on top of the President's initial request. BAE Systems is very well positioned for some of that increase. We have equities in a number of the programs that are actually mentioned there, our electronic warfare, for example, on the F-15EX which got a sizable increase. Again, Compass Call, this is an electronic attack aircraft and so additional budget there.

We see the munitions which Charles touched on earlier, but there's definitely been an uptick in demand requests for rough order of magnitude sizing around various ramp rates for munitions in the U.S. and as Charles pointed out, we have good exposure across the portfolio there. We support the nuclear deterrent in a number of different ways, services into the ground-based strategic deterrent as well as participation on the B-21 program.

Again, another couple of programs highlighted. Space written large, we expect increases in both national security space and military space. A lot of that around Charles' point with respect to Golden Dome. Golden Dome got about GBP 25 billion earmarked for that in that reconciliation bill. And while the specifics of the Golden Dome architecture requirements are just starting to play out, we are already, we believe, well positioned. You will have read about our win, there at the end of the first half on a program called the Resilient Missile Warning & Tracking, Medium Earth Orbit Epoch 2 satellite constellation to the tune of $1.2 billion. This is out of our Space & Mission Systems business.

We also won earlier in the year a program called FORGE C2. FORGE C2 is a ground-based system. And here, we're going to help the space force modernize its existing ground systems infrastructure in order to manage missile warning satellites, which will obviously be a key part of Golden Dome. We also play into the effector side of Golden Dome with munitions and interceptors like the THAAD, the Lockheed Martin program. That's the Terminal High Altitude Area Defense system. We do the seeker for the interceptors there.

And so we, again, expect that be a part of the overall portfolio. You'll have read in the press around the administration's intent to use as much of the existing technology as possible with speed being a key parameter here and our ability to get a Golden Dome up and running here in the next handful of years. And so written large we are well positioned for the budget increase ahead and look forward to the opportunity to leverage that.

And then on Japan, I mean, it's a good question. And with Japan, themselves significantly growing their defense spending, as we've said, circa 2% by second half of this decade. Clearly, GCAP is a big flagship program. We're off to a really good working relationship with MHI. And I think on the back of that, we do see other opportunities to work with Japan as they scale their defense spending, building on the very strong relationship we already have with MHI, there are other opportunities and things like Maritime that we could work together and we'd be very happy to do that.

And the questions come from the line of George Mcwhirter from Berenberg.

I've got 2, please. Firstly, on the Typhoon. The CEO of the Eurofighter Consortium said last month that he has the ambition to increase production to about 30 aircraft a year, which is slightly more than you mentioned in your prepared remarks, do you think this is likely 30 year rate given the order pipeline? And when could this one be achieved? That's the first question.

Yes. I mean Typhoon, I seem to recall, he actually talked about a range of production rates. I mean we've -- so the midpoint is roughly doubling from the 12 to 14 of where we are today. So I think a range of options are being considered and obviously, the sort of driving factor is the demand signal. There's a significant increase in requirements from Europe, and then there are other potentials.

For example, the MOU in Turkey being a possibility to take that through into contracts. So that demanding will drive the ultimate step up in production. The actual increase in production takes a couple of years. I think I made the comment at the Capital Markets Day that the peak production of Typhoon sort of peak European production was 60 aircraft. So we're still some way short of that. And our ability, therefore, to scale really means bringing gigs back from their sort of cold stacked position, training people and so on and so forth, all of which can be achieved within circa a 2- to 3-year period.

And so therefore, it's not a rate-limiting issue for us now. So a little bit will depend on next several months here as to what the demand signal actually drives that. So my view is that our comments and his comment are entirely consistent. He was talking at the upper end of the range, but it is still a range that we're looking at.

That's helpful. And the second one, perhaps for Tom. Following the good CMS growth in the half, can you give us an idea of the share of revenue that is accounted for by the AMPV in CMS, given the reference in the release to the U.S. Army's plan to feel about 3,000 of these vehicles in the U.S. And what is the outlook for the remainder of the CMS business apart from the AMPV.

Yes. Thank you, George. Clearly, the AMPV is the current flagship vehicle being built in the U.S. One of the great features about it. The AMPV stands for armored multipurpose vehicle, and that multipurpose nature of its intent gives us good confidence in our ability to continue to create variety around those and the various missions that those play. We are just entering full rate production that -- on AMPV, that has led to some of the growth that you saw this year as we move down of a limited rate production, we've been [indiscernible] and so we expect that, that will continue for some period of time.

We have been projecting for some time that the overall combat vehicle business in the U.S. would -- as we backfill the demand created by the donations to Ukraine that would start to flatten, AMPV is about 20% of the overall portfolio, to your original question. But when you combine that with the work we're doing in Sweden through Hägglunds in particular, just a really nice resilient portfolio with a good play over the medium and long term. We'll build about 600-ish -- over 600 vehicles this year between the 2, the U.S. building more vehicles than Sweden currently.

But when you get to the medium term, that actually flips in the Swedish demand and the growth there will lead the way. And so good, steady progress across the combat vehicle portfolio with attention to the margins as well. You see good margin performance in P&S. And so this growth is also coming with good, high-quality execution leading to good margin performance. I hope that's helpful, George.

We are now going to proceed with our next question. And the questions come from the line of Olivier Brochet from Rothschild and Co, Redburn.

Yes, I would have 2 as well for me. The first one on AUKUS. What happens at the end of the day, if the U.S. review underway concludes that continuing the program is not in the interest of the U.S. Is there any change to the outlook for the next 5 years that would come from that?

And the second question is going back on P&S U.S. is the margin that we saw in H1 sustainable? Was there anything kind of one-offs in that number?

What was the last question?

P&S margin.

P&S margin. So on AUKUS I mean, Olivier, I just don't think there's too much point speculating on this. I mean the U.K., when we had a changing government here in the U.K. commissioned a review led by Stephen Lovegrove on the AUKUS program, which has concluded and reported, and the U.S. is doing a similar thing under the new administration. And I just -- there's no point speculating too far on that beyond what I've said already. On P&S, do you want to?

Yes, it's really a strong H1 margin, as you pointed out, live, 11.8%. We expect the full year number to be a little bit lower than that. There's some timing of business development, R&D expenses in that sector, that will be more backloaded. But what we're seeing is a really nice expansion over the last several years in P&S. And we're at a really good rhythm right now.

And you're some operating leverage across some of our scaled businesses and it's coming into the bottom line and exactly in line with what we had expected to happen with P&S. And in some cases, we're a little bit out of schedule on what we're delivering. So good news story. I think it will out turn something a little bit lower than H1 for the full year.

We are now going to proceed with our next question. And the question comes from the line of Nicholas Cunningham from Agency Partners.

It's one topic, but some sub questions within that, which is MBDA, which has almost got a growth problem in it, that it's had a book-to-bill of well over 2 for the last 3 years. It hasn't seemed to be able to grow production in line with the huge amount of demand. It seems that it needs to more like double or triple like Hägglunds than grow in the teens.

And so 1 question is, is that addressable? Can it actually achieve adequate growth? Second sort of almost contradictory to that. It seems to be remarkably weak in the high end of Air and Missile defense. It's some -- so you just can't sell against patriot, and there's also oddly made in too quantity as well. How can that be solved? Is that a priority, resources going to be pushed to that? And then final part of it, it's an incredibly opaque organization, which goes to the history of how it was created and so on.

But nevertheless, one press conference a year and a couple of numbers isn't really good enough for something that's becoming so important for all of its stakeholders. So is it fit for purpose? Does it need to change? Is there a risk of government to just step in and decide that they want to change things.

So I'll maybe take the latter couple. So I think we are reflecting with MBDA and fellow shareholders in terms of how we can do a better job of eliminating some of their activities. So I think expect to see some progress on that. On SAMP/T, I think a lot of work being done. I think there's been some good progress in recent tests. I don't know probably all I'll say on that. I think it's a clear and obvious area of focus for the MBDA team, and I think that they are seeing some very good progress around that. And then on the book-to-bill and the growth, we are seeing quite rapid growth out of MBDA and there's more to come.

Yes. I think that's fair. I mean 18% growth half year for '25 versus half year '24, really strong book-to-bill over the years, as you've noted, Nick, has led to an overall backlog of close to EUR 39 billion for the 100% view of MBDA. So the revenue recognition though for MBDA is point-in-time delivery for the most part. So a lot of it will depend on the underlying platform deliveries that these weapons packages go on. So that's going to mean very lumpy and nonlinear revenue growth.

But overall, as you can imagine, with the EUR 39 billion backlog, you're going to have growth for years to come. So I think MBDA is incredibly well positioned. And we're investing -- MBDA is investing EUR 2.5 billion. And an expansion of capacity to address the growing demand that we see. So it's got a growth problem. I may agree with that statement, but it's a good problem to have, and we're dealing with it. And I think we're going to start to see the benefits of that. And you're already seeing pretty decent growth numbers already.

Just one quick follow-up on that. The U.S. peers are seeing particularly Lockheed to seeing similar problems in terms of growing as fast as the market wants to grow. And the major constraint there seems to be rocket motors. Is that the same issue? Or is it broader than that within MBDA?

Well, I won't say necessarily what specific things are challenging, but I think people sometimes underestimate the sophistication of modern missile systems. I often describe them as like small fighter jets, often with their own electronic warfare, they've got flight control systems and so on and so forth. So it's not surprising that they are hard things to scale at the rate that we like. But I mean you can be assured that all efforts are on it. And I think that we are seeing already some progress, and you'll see that progress accelerate.

We are now going to proceed with the final question for today. And the questions come from the line of Christophe Menard from Deutsche Bank.

If I can continue on the profitability questions, both on P&S and Air, and especially MBDA. You mentioned MBDA on the call that there was a margin uptick, the question is, is it sustainable? I mean you just mentioned sales are lumpy, but it's -- their sales are probably up for the long term now. So should we now assume that the MBDA margin will continue to get stronger as time goes by and be quite -- I mean, a key beneficiary or a key contributor to your Air profitability?

And the second question also is still on margins, but P&S, you have had questions on this. I was wondering whether Hägglunds and Bofors outlook is actually better than what you presented to us at the CMD, I think it was last year. Is it ahead of schedule? Is it something where you see more potential than initially presented to us?

What don't we do reverse order? So you want to do the Hägglunds first.

Yes, Christophe, the journey in P&S has been several years in the making, and this has all been moving us toward double-digit margins. And now as you see well into the double-digit margins. This is largely driven by efficiencies as we move into full rate production, a number of the investments we've made over the years in automation and robotics are playing through. And to your point, Hägglunds has done the same thing, but they are just a little bit more offset in time.

And so we expect very similar as we move deeper into full rate production, we'll see some of those same kinds of efficiencies come to the surface there as well. Similar investments over GBP 250 million just in the last couple of years in Sweden, robotics facilities, et cetera. And so we are on a drive to continue to focus on good solid high-quality margin performance in that business. You'll notice in the range of competitiveness with our peers, and we will be relentless to continue to focus on that. I hope that's helpful.

Yes. I mean I think both Hägglunds and Bofors and Tom, in my perspective, have been stunningly successful at winning the work. I actually forget the exact scenarios. We presented, but there was a range of production outlooks for Hägglunds at the time. And it's fair to say that we've won everything at the top end, and now we're looking at going above that. So it is definitely above this kind of scenarios where we were looking at last summer. On the...

Yes, MBDA margin question. I think that over the course of this year, I think MBDA will probably have some margin expansion year-on-year to the tune of circa 100 basis points. And I think that gets into a margin that's on par with the Air sector margins. And I think going forward, I would expect their growth to be accretive to Air sector growth. And I think their margins will be on par, if not better than our sector margins. So I think it will be helpful to Air story going forward.

I think that brings us to an end on the question. So thank you all very much, and I expect to see many of you on the -- when we're out on the road show in September. So thank you very much for joining.

This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you.