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Good day, and thank you for standing by. Welcome to BAE Systems 2026 Half Year Results. [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, Director of Investor Relations. Please go ahead.

Good morning. Welcome to BAE Systems 2026 Half Year Results. I'm Paul Checketts, and I'm here with Charles Woodburn, our Chief Executive; Brad Greve, our Chief Financial Officer; and Tom Arseneault, Chief Executive of our Inc. business.

Charles, I'll hand 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. The world has remained highly volatile in 2026 and delivering reliably is vitally important given the increased threats to global security.

There are 3 key messages I'd like to leave you with today. First, we've delivered strong results in the first 6 months with good growth in sales, profit, earnings per share, order intake and cash. This strong performance leads us to upgrade our full year guidance. We now expect earnings per share to grow by 11% to 13% in 2026 and free cash flow to be greater than GBP 2 billion.

Second, the breadth of our business across geographies, domains and product types 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 extended duration of that growth. We delivered strong outcomes in the first half of 2026. Sales grew by 9% on a constant currency basis, EBIT by 11% and earnings per share by 13%. Cash generation was strong, too, with GBP 1.8 billion of free cash flow in the half. We are experiencing high demand for our products. You can see this in our order intake with GBP 16 billion of new orders secured in the first 6 months of the year, taking our order backlog to a new record of GBP 84 billion.

Our balance sheet strengthened further in the half. Having such a strong financial position gives us real strategic flexibility. It allows us to reinvest in the business, and it supports continuing returns to our shareholders. These results further strengthen our track record of consistent delivery and demonstrate the effectiveness of our value compounding model. Just as importantly, they reflect the strength of a business that is well positioned to meet both current and emerging defense requirements around the world, which is what I'd like to turn to next.

Our business has an outstanding geographic footprint and the strategic advantages it provides have been underlined again in 2026. Our established positions in some of the largest defense markets in the world give us an excellent breadth of opportunity and reduce the risk and volatility that comes with being more concentrated. Worldwide, governments are responding to geopolitical tensions with sustained increases in their defense budgets.

In each of our markets, the work we've done to invest in and position our business means our existing proven portfolio of products and capabilities aligns well to customer priorities. We'll look at Europe and the U.S. in more detail shortly.

The U.K.'s new defense investment plan will see almost GBP 300 billion spent on defense by 2030 and commits to invest in both our long-term programs and new disruptive technologies, including next-generation fighter jets, new autonomous collaborative combat aircraft and other capabilities. The geopolitical situation in the Middle East is likely to drive higher defense spending in the region.

Our multi-decade track record of partnership in the Gulf positions us well to support government customers there. Australia is also increasing defense spending. We're already the largest defense contractor in Australia, and we expect strong long-term growth driven by the Hunter Class Frigate Program and SSN-AUKUS, where we'll deliver state-of-the-art nuclear-powered submarines.

Two countries that are relatively small for us now, but where we see great potential are Japan and Canada. Japan is on a path to double its defense spending by 2027. It's a core partner of GCAP, and we're exploring how we can support the country in other areas of defense capability.

Meanwhile, Canada has committed to NATO's 3.5% target, which will drive a large sustained increase in defense investment. We are already working with the Canadian government by providing the warship design for Canada's River Class destroyer.

And in recent weeks, we have reached agreement to support the rapid delivery of an Arctic over-the-horizon radar capability, and Canada has now officially joined the Global Combat Air program as an observer.

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. These growth opportunities are particularly evident in Europe, which I'd like to turn to now.

The continent of Europe continues to face an acute and growing threat to its security. As countries look to assume greater responsibility for their own security, most are 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 continues to go from strength to strength.

Our equipment and services are integral to the defense of more than 25 countries across the region. We have great capabilities across multiple areas, including combat air, land vehicles, missile systems and drone and counter drone technologies.

Growth in Europe continues to outpace the group overall. Sales increased by 30% in the first half, and Europe now accounts for 33% of our total order backlog compared with just 13% of sales. This provides us with strong visibility of continued growth in the region over an extended period. 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. Since we spoke about MBDA at our full year results in February, its importance to the defense of Europe and allied nations has become increasingly evident. As Europe's leading missile systems company, MBDA combines a broad portfolio with a strong track record of proven products. They are well positioned in the areas where customers are accelerating investment to strengthen defense capabilities and readiness.

In air defense, they provide capabilities across both land and maritime environments, including counter drone systems, short-range air defense and medium-range solutions capable of addressing ballistic missile threats. In air dominance, MBDA supplies weapon systems for more than 10 combat aircraft programs, including Typhoon, F-35, Rafale, Gripen and KF-21. The company also offers a comprehensive range of deep strike precision weapons.

Taken together, these capabilities position MBDA exceptionally well to benefit from rising defense expenditure as nations increase investment in air defense and seek to replenish and expand their inventories. The strength of demand for MBDA's products is clearly reflected in their order intake.

Prior to Russia's invasion of Ukraine, order intake was typically around EUR 4 billion per year. In the first 6 months of 2026 alone, MBDA secured EUR 6.5 billion of new orders, equivalent to more than 2x revenue in the period. As a result, the order backlog increased to EUR 48 billion, representing almost 8x annual revenue.

To meet growing customer demand, MBDA is significantly increasing investment. The business now intends to spend EUR 5 billion between 2026 and 2030. This investment will modernize manufacturing sites, accelerate digitalization, substantially increase production capacity, strengthen the supply chain and support the continued development of next-generation products and technologies. The combination of this increased investment, a record order backlog and a portfolio that is highly aligned with evolving customer requirements gives us confidence that MBDA is well positioned to deliver strong revenue growth for many years to come.

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 performance through the first half of 2026 has been strong, reflecting our portfolio's excellent alignment with U.S. defense and intelligence priorities. While a number of factors are shaping the final fiscal year 2027 top line budget numbers, we continue to anticipate substantially higher year-over-year defense spending, which bodes well for our aligned portfolio.

The administration continues to focus on a few key defense priorities, including munitions production, drones and counter drone systems, space-based capabilities and the Golden Dome. We are developing systems and delivering products in all of these areas, and we continue to invest in technology and production capacity to meet the record demand.

Turning to munitions. Given the increased use of missiles and interceptors in global conflicts, the demand for munitions has significantly increased. There are 12 munitions that the Department of War has identified as critical, and we support 10 of those 12 priority programs. We've signed framework agreements with the Department of War and are at various stages of contracting on these multiyear procurements, which depending on the program, will double, triple or quadruple our current production rates.

On THAAD or the Terminal High Altitude Area Defense program, for example, we soon expect to receive a contract to begin procurement for 2,800 seekers over 7 years, which represents a fourfold increase. The combined revenue across the multiyear priority munitions programs represent a multibillion-dollar revenue opportunity. In the counter drone market, we continue to see very strong demand for our APKWS laser-guided rockets. We're currently under a 5-year contract worth up to $1.7 billion.

And in recent months, the State Department approved potential foreign military sales for more than 40,000 additional units. This highly effective counter-drone weapon is being deployed on an increasing number of platforms around the world. In a recent collaboration with BAE Systems Air Sector and the Royal Air Force, we successfully completed integration of the APKWS onto the Eurofighter Typhoon aircraft, making this counter drone capability an option in all countries where the Typhoon is operated.

In February, I highlighted the investments we've made in our workforce and facilities since 2020, investing more than $4 billion to expand capacity by 2 million square feet, advance R&D and grow our workforce by about 14%. We are continuing to build on those investments. The U.S. business expects to increase capital expenditures 40% year-over-year, driven in large part by munitions production acceleration. In our Electronic Systems reporting segment, we recently approved another $0.25 billion for additional capital projects to support the production ramps on THAAD, AMRAAM and Tomahawk.

Turning to the space domain. National security and military space capabilities remain critical to the administration's focus on homeland defense, and we are well positioned in those areas. Sales in our Space and Mission Systems business grew almost 30% in the first half of 2026 over the same period in 2025.

Our Elevation and Evolve product lines of spacecraft include a range of standardized high-performing products. They were developed in response to our customers' increasing need for more cost-effective, capable and rapidly delivered spacecraft. The product lines allow customers to choose the best fit for their needs across low and medium earth orbit missions as well as geostationary and Cislunar applications. Combined with our cutting-edge payloads and cost-effective ground systems, our spacecraft products enable full mission solutions.

Since introducing our spacecraft product lines last year, we have seen strong and growing customer demand. We announced last month that the Evolve spacecraft was selected by Vantor, formerly Maxar, for its next-generation high-resolution imaging satellites. This adaptable, high-performing spacecraft line continues to be a discriminator across our diverse set of national security and military space missions.

Our capabilities will also play critical roles in the U.S. Golden Dome architecture, and we support a number of the key mission solutions, which underpin it. For example, earlier this year, we completed the preliminary design review on the $1.2 billion Epoch 2 resilient missile warning and tracking program, which will provide a multi-satellite constellation and ground command and control system that will contribute critical capability to the Golden Dome.

While strong demand for our products continues in the U.S., we are also exposed to increasing demand in Europe through our H gglunds and Bofors businesses in Sweden. Our CV90 and BvS10 combat vehicles are in high demand across a number of European customers, and these franchise programs are key drivers of our record backlog in Sweden and our platforms and services sector.

To meet this customer demand, we've made investments to significantly expand both our production capacity as well as our manufacturing capability in H gglunds, which we expect to result in a 400% increase in production.

In light of the increasingly complex global security situation, Bofors is experiencing strong demand for artillery and munitions like Archer, Tridon and 3P medium-caliber ammunition. Production rates in Bofors have already grown by a factor of 3 to 4 across several product areas. Bofors is also acquiring new facilities and expanding production lines.

And in May, we completed the acquisition of a key Swedish supplier of precision mechanics and component machining products, which we're integrating into the Bofors business. This acquisition strengthens our supply chain and supports Bofors increased delivery of core systems.

Across our portfolio, we are focused on delivering at speed and scale for our customers. I'm really pleased with our strong performance and with how well we are positioned for long-term growth. With that, Charles, I'll hand it back over to you.

A theme I want to spend a few minutes on is the evolution of modern warfare, what it means for defense spending, capability requirements and how this is not only fueling our performance today, but is also extending our runway for future growth.

Let me talk you through that in a little more detail, starting with some of the major programs we deliver. These are long term in nature and account for the vast majority of our revenue, profits and backlog. They include combat aircraft, air defense systems, combat vehicles, nuclear-powered submarines, space systems and the Type 26 family of frigates. These platforms provide capabilities that are essential to protecting our societies, deterring adversaries and supporting our allies.

They form the foundation of national defense and will remain critical for many years to come. Indeed, at a time when adversaries are building and fielding major military platforms at a rapid rate, the need for these capabilities has become even more apparent. They require complex and sophisticated engineering to design, manufacture, integrate and sustain, providing high barriers to entry.

Throughout the life of these programs, we continue to invest in technology and innovation, enhancing existing platforms while developing the next generation of capabilities our customers will require.

Let me bring that to life with a couple of examples. In Combat Air, Eurofighter Typhoon has continued to evolve since entering service in the 2000s. The significant capability upgrades now being introduced will ensure it remains a highly effective platform for decades to come. At the same time, we are working with our partners to develop the next generation of air combat capability through GCAP, which is expected to enter service in the mid-2030s.

Together, these programs demonstrate our ability to both enhance existing platforms and develop the technologies that will define the future of combat air. The same is true in our submarine business. As we complete delivery of the Astute-class attack submarines, which will remain in service for many years to come, we are also designing the next-generation SSN-AUKUS submarine for operation by the U.K. from the 2030s and Australia in the 2040s.

This business model provides long-term visibility, supporting sustained growth and value creation over time. Alongside these programs, there are areas of the defense market that are evolving more rapidly. These technologies are complementary to traditional defense platforms. They will operate alongside and in collaboration with larger, more complex systems. Areas such as drones, counter drone systems and autonomous capabilities are attracting significant investment in innovation with a growing number of companies competing for opportunities, including new entrants from outside the traditional defense sector. While these markets are dynamic and competitive, developing solutions that can perform reliably in demanding military environments remains an exceptionally complex challenge.

Our advantage comes from combining our deep mission and operational knowledge with advanced software capabilities, differentiated hardware, systems integration expertise and the ability to scale production when required. In other words, we're not simply developing individual technologies. We're delivering mission-ready capabilities that work in real-world contested environments.

Let me illustrate that with a couple of other examples. The drone market is attracting significant innovation, ranging from low-cost attritable systems through to collaborative combat aircraft. Our focus is on differentiated uncrewed capabilities where our operational understanding, software expertise and industrial scale provide us with a competitive advantage. That capability is already being demonstrated through Nyan, our long-range deep strike uncrewed aircraft, which is operating effectively in some of the most demanding and contested battlefield conditions in the world. It is also evident in Brontanax, our collaborative combat aircraft, which we unveiled last week at the Farnborough Airshow.

The program has been entirely self-funded, demonstrating our ability to invest in differentiated capabilities ahead of demand. In this evolving area, our combination of multi-domain expertise, proven delivery and increasingly advanced digital and software capabilities creates a competitive position that is difficult to replicate and enables us to deliver trusted, differentiated solutions across the full spectrum of modern warfare.

We have invested significantly in these rapidly evolving capability areas and we'll continue to do so as we build on the strong position that we've established. We expect enduring demand and the largest revenue opportunity to remain in complex high-end defense platforms alongside a rapidly growing, though relatively smaller opportunity in affordable mass systems. Having strong positions across both markets is a powerful combination and one that supports long-term visible growth.

Our ability to succeed across both established and emerging defense markets doesn't happen by accident. It's supported by a relentless focus on improving our business, which I'd like to turn to now. Our relentless commitment to operational excellence has been a defining characteristic of our business for many years. We are constantly looking for ways to work more effectively, improve performance and deliver greater value for our stakeholders.

Looking back over the past decade, there have been distinct phases in our transformation journey. Our first priority was to address historic program performance challenges and ensure those issues would not be repeated. That meant putting the right systems, processes and culture in place. Our 3P framework saw us focus on strong, consistent program performance, begin deliberately shaping our portfolio for value creation and resolve pension deficit funding, which was holding back cash generation.

Building strong foundations was essential to delivering consistent results for our customers, employees and shareholders. Those foundations then enabled us to position the business for growth. You saw that reflected in 2022 when our growth rate accelerated, supported by the deliberate actions we've taken and a changing geopolitical environment.

Today, we're operating from a position of strength, and we intend to build on that by continually seeking ways to become a better business. There are many examples of how we've already been doing this. We've invested in digital tools, increased production automation and improved site infrastructure to strengthen how we operate and deliver for our customers.

As part of our efforts to improve, we've been reviewing how we are organized and how we operate. As a result, we will streamline the business from 5 reporting segments to 4, and we will begin reporting under the new structure from 1st of January 2027. Integration of cyber intelligence and digital capabilities is now central to our operating model. So folding these into our other segments mean they'll be embedded in the business. And we will continue to focus on becoming a simpler, more agile and effective business in the years ahead.

And now over to Brad for the financials.

Thanks, Charles. Momentum continued to build in 2026 as we delivered strong results across the board. Orders of GBP 16 billion exceeded sales with backlog at GBP 84 billion. Sales rose by 9% with double-digit growth in ES, P&S and Air, while EBIT of GBP 1.7 billion grew by 11%, taking return on sales up 20 basis points to 10.8%.

Earnings per share was up by 13% versus H1 '25 on the double-digit growth in profit and the lower interest expense from higher cash. Free cash flow was GBP 1.8 billion, largely on the timing of customer advances. These strong numbers are a product of the outstanding efforts of our worldwide teams who continue to deliver to protect those who protect us.

Breaking down these numbers, starting with orders. Our GBP 16.4 billion of order intake featured several large items, including GBP 2.5 billion Typhoon support for T rkiye, GBP 2.1 billion for MBDA, GBP 1 billion in F-35 orders and GBP 1.6 billion for our SMS business. It's also worth noting that the half year order intake totals do not include several recent multibillion pound announcements, including the U.K. government's ongoing support for the GCAP program, the Arctic over-the-horizon radar sale to Canada and today's Dreadnought submarine funding announcement, which is why we're here today.

With a pipeline of around GBP 180 billion, together with the GBP 84 billion backlog, the group is positioned for continued strong growth well into the future. Moving to sales. The group delivered 9% top line growth, nearing GBP 16 billion. ES grew by 11%, led by a 29% growth in our space business. P&S grew by 12%, featuring nearly 30% growth from H gglunds and Bofors on sales to Europe. The air sector grew by 11%, led by ramps in GCAP and the T rkiye Typhoon programs. Maritime rose by 4%, while Cyber & Intelligence grew by 3%.

Turning to underlying earnings before interest and tax. The group portfolio performed well, expanding half year margins by 20 basis points to hit 10.8% as EBIT grew by 11% to GBP 1.7 billion. ES EBIT of GBP 600 million resulted in 15.5% return on sales, up 50 basis points on strong operational delivery.

P&S EBIT grew by 11% with a return on sales of 11.9%. The air sector delivered GBP 580 million of EBIT, growing by 16% for a return on sales of 11.9%, up 40 basis points, driven by risk retirement. Maritime's return on sales of 6.1% continued to reflect the early stage maturity with several first-in-class programs trading at relatively low margins within the sector.

And finally, the Cyber & Intelligence sector EBIT of GBP 107 million was up by 14%, reaching 9% return on sales with strong performance from the Kirintec counter drone business in Europe. Our operating cash flow of GBP 2.1 billion featured net customer advances of GBP 1.6 billion, predominantly in our air sector with some of this expected to unwind in the second half. CapEx was GBP 400 million, reflecting continued investments to drive growth and efficiency. Our interest expense of GBP 187 million fell due to higher cash balances, while cash tax was broadly flat, leading to a free cash flow of GBP 1.8 billion. Net debt fell to GBP 3.2 billion.

Turning now to guidance. Given the strong half year performance, we are upgrading our key full year targets as follows. We expect sales to grow by 8% to 10%, up 100 basis points from previous guidance. We expect EBIT to grow by 10% to 12%, also up 100 basis points from previous guidance. We expect earnings per share to grow between 11% and 13%, up 200 basis points from previous guidance. Free cash flow should exceed GBP 2 billion, excluding any further material advances we may receive in the second half, but including burn down of existing advances.

We are upgrading the '24 to '26 cash target by GBP 700 million as we now expect to exceed GBP 6.7 billion for this period. We have left the other 3-year guides unchanged due to accelerated cash earned in 2026 and the unwind of advances received. Finishing with capital allocation. We continue to prioritize investment in our business through our people, our capital expenditures and our R&D. Our progressive dividend continues to grow with our 2x coverage policy, while our strong balance sheet provides strategic flexibility and capacity for M&A. Our buyback program continues to be an important tool to return any surplus cash after all these outlays.

This half year represents records across nearly all our key metrics. Looking ahead, our backlog and pipeline, together with our drive to increase profitability and maintain strong cash flow mean we are well positioned to continue to set new records. Back to you, Charles.

Thanks, Brad. As Brad outlined, growth continued to be strong in the first half, and the business performed well. Looking ahead, a key strength of BAE Systems is not just our near-term growth, but the visibility we have over the longer term. Our order backlog and incumbent program positions total around GBP 260 billion, around 8x our annual sales. This includes both defense tech products such as drones and counter drone, where we're currently experiencing high growth and critical multi-decade programs such as frigates, submarines and air defense with long-term embedded value. Some of our biggest programs like the Global Combat Air Programme and SSN-AUKUS submarines don't reach full production until the mid-2030s and beyond. The combination of our order backlog, incumbent positions and a robust 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 does it mean for investors? The combination of our exceptional global portfolio of world-class defense products and capabilities, proven track record of execution, increased investment in technology and innovation and substantial backlog and significant new business opportunities gives us confidence in our ability to deliver sustained, visible and enduring revenue growth over the coming years with expanding margins and robust cash generation. Combined with disciplined capital allocation, this reinforces our confidence in the long-term strength of our value compounding model. Many thanks. And with that, we're ready for your questions.

[Operator Instructions] Our first question comes from Robert Stallard from Vertical Research.

A couple from me. First of all, Charles, on GCAP, we saw Canada join as an observer, but there's been talk about other participants joining. Does this potentially put at risk the entry into service?

And then secondly, probably one for Tom. On the munition framework agreements, we've been getting some details from other U.S. defense companies, for example, LHX saying they could have a high teens margin. Have you got any additional information on what these agreements could mean for BAE?

Yes. Well, I apologize if we do have any connectivity issues because we're up here in Barrow and had to do things rather at the last minute to get up here. So the phone connections are not as perfect as we'd like them. So apologies in advance. And if you don't get the answers through, just let us know, and we'll repeat them.

On GCAP, yes, we're delighted to welcome Canada in as observers. And your point on the time frame and the schedule and the initial operating capability is well made. And in fact, I think all 3 governments are very focused on the schedule. And when it comes to additionally expanding the partnership, I think that is a key requirement is that it does not slow the schedule down. And certainly, in the case of Canada, we had no doubt at all that joining as observers was not going to have a negative impact on the schedule in any way, shape or form, but that is a key consideration for other partners. And then over to you, Tom, to talk about the framework agreement.

Yes, Charles. So Rob, we have a very similar situation with respect to the munitions ramps. I mean we're -- we tend to be in the second tier. And so many of the announcements that have come out with respect to the primes on the munitions are a bit ahead of us in terms of backlog building.

With respect to margins, so we have signed now 5 of the framework agreements. We have 3 more in negotiations. And then of those framework agreements that are signed, we have a number of multiyear contracts in negotiations as well. As this plays out, I'd say across that set of munitions that we would expect to see accretive margins for ES and SMS over time. I'll leave it at that.

Okay. That's great. I can hear you fine.

That's good to hear. When we started and you couldn't hear us, I was slightly concerned there. But anyway, glad to hear you.

Next, we have Ross Law from Morgan Stanley.

So the first is just on the guidance upgrade. Can you maybe just provide a bit more detail about the key drivers of that at the kind of divisional or subdivisional level? And then secondly, on drones and your FalconWorks business, it's clearly a key growth driver looking forward. I'm interested if you could indicate what the revenue contribution from this business could look like over the medium term.

Very good. I think I'll put those over to you, Brad.

Yes. The first half of the year, you can see the strong results across Air, ES and P&S. And when you read across for the full year, the upgrades are really based on the strength of that performance on the top line. So what we see in the first half with European growth being so prominent with the 30% increase that's really going to drive P&S up above where we thought it would be for the year. So that's one of the factors in that upgraded guidance.

And ES, as we saw in the first half, space being up 30%. That's coming in higher than our expectations for the full year. So that's a factor of driving our upgrades on the top line. And Air is another one where it's coming in a little bit above where we thought it would be. So those are really the key drivers in the guidance upgrade. And on the bottom line, we're continuing to deliver with that top line performance. So margin expansion is on track. So that's really the key.

In the second half, we do expect to have improving performance coming out of the maritime sector, too, which will give us a change H2 versus H1. So those are the main ingredients. And I think your other question, if I heard you right, was on FalconWorks. So the FalconWorks is a great portfolio of differentiated autonomy in Air. And so we've got a range of different products from one-way effectors all the way up to the PHASA-35 product. And the CCAs, which you would have seen at Farnborough at Brontanax, that's an exciting innovation through self-funded R&D that we're really excited about. So over the medium term, we said this will be -- should be over a billion in revenue, and we're on track to hit those targets. And that's -- I'll leave it at that.

Next, we have David Perry from JPMorgan.

I've got 2 questions, please. One of them, capital allocation. Thanks for those comments about modern warfare and MBDA's portfolio positioning. So just going forward, one of your peers has made an acquisition, just announced an acquisition of nearly EUR 4 billion on maritime robotics. Just wondered how you're thinking on buying technology start-ups versus returning cash to shareholders. That's one question.

And the second one would just be conversations with Middle East customers right now. I guess probably quite a few of them want more defense equipment, but they've also got a lot of economic uncertainty. I just wonder how you think this will all play out in the coming months and years.

Yes. I'll maybe just take the second one first. And yes, as you said, there is a lot going on in the Gulf with the conflict and as a result of that. And I think a key focus for our customers there is the sort of counter drone mission, which is why we were so pleased to be able to get APKWS onto the Typhoon platform as quickly as we did and giving our customers more defensive capabilities for the airspace is a key requirement.

And also pleased to see that the kit that we have in the region has and is performing very well. So I think that positions us well for the future.

On capital allocation, I'll hand over to Brad to give a more detailed answer, but we've been interested in acquisitions. We still are in some of the same sort of areas. It's finding the right opportunities around defense electronics, adding to our portfolio, the kind of deals that we've done in the past. And if we can find the right opportunities, what we would consider to be the right price point, we're still very much interested. But in terms of the overall capital allocation framework, I'll hand over to Brad.

Yes. Thanks, Charles. So the first thing I would say is that our priority is to invest in organic growth and accelerate that. So that's why in this market, in particular, with multiples where they are, we feel like you get a better return on capital employed by really accelerating the growth that we have in that GBP 84 billion backlog. So our priority is investing internally, and you're seeing higher CapEx. You're seeing higher R&D. So those are examples of that organic investment.

And then, of course, you know the dividend policy and strong balance sheet. It does allow us to do M&A if we do find the right targets at the right price. And that's a difficult equation right now given that it's a seller market and a lot of these assets. So again, that's why our top priority is investing in ourselves. If there's any cash left over, I think the buyback, as you've seen, has been a good tool for us, and we've retired about 10% of our share count since we started those programs, and we continue to use that as a tool in the toolkit.

And we are very pleased with the acquisitions that we have done. I mean maybe just a couple of words on SMS, Brad, standout performance.

Yes. In fact, if you look over the last several years, the acquisitions that we have made have been really quality additions to the numbers that you see today. They embed solid revenue growth. The Space business is a great example of that, where now we're seeing great exposure to the space budgets in the U.S. and the intelligence budgets in the U.S. and that's driving growth at really -- rates that we're pleased with 30% in the half year.

And if you also think about the quality of that revenue we've added from the acquisitions we did from the Raytheon UTC spin-offs to Ball Aerospace, these are all margin-accretive acquisitions. So we've added really good quality and durable growth on the top line, but at really accretive margins. And that's been a really important part of how we looked at acquisitions.

Next, we have Alessandro Pozzi from Mediobanca.

The first one for Charles. The U.K. has published the defense investment program. I was wondering if you can have your view on it given the number of strategic decisions that have been made, some of them quite controversial like going to a hybrid Navy or, for example, the preference of F-35 in terms of new acquisitions over the Eurofighter Typhoon, even though there's a big upgrade there.

The second one on Air clearly supportive of revenue growth and margins. Can you give us a bit more details about the production rates, especially for the Turkish contract? And I believe there were some retirement based curve that have been taken out. Can you provide more color on that?

Yes. So I mean, we were very pleased to see the DIP, Defense Investment Plan out and announced a few weeks ago. I think there's still work to be done to translate that into programs. And I think what we're all looking to see is a clear pathway to the NATO 3.5% target. So there's a lot more work to be done. But in terms of some of the big handfuls from our perspective, we were pleased to see, for example, GCAP get the funding that the program required and now translated into a multiway multi-government funding solution for Edgewing, which is the joint venture, which is delivering on GCAP.

So from our perspective, we were pleased to see the DIP, but recognize there is still work to be done in the developing a clear pathway to the 3.5% NATO target. And defense is a long-term game. But I'm very happy that we've got a Prime Minister and a Defense Secretary of the new government here in Barrow today, which I think just by their presence here, the announcement that they're making around the next phase of Dreadnought funding is a clear indication of their commitment to defense and security.

In terms of their production ramps, I think, as you know, with Typhoon, we were based on what was already in the backlog for Eurofighter, we were, roughly speaking, doubling the production rate from the historic 12 to 14 a year to somewhere in the high 20s. And I think we're well on track to doing that. And in fact, we need to do that to meet our delivery commitments to some of the newer entrants to the Typhoon program such as T rkiye. And I think further, we have a number of other opportunities in the pipeline. And if we deliver more or if we are able to succeed with more Typhoon exports, we may have to go higher on production.

And also on the deal, I was a bit surprised to see that the allocation to autonomous systems was just maybe GBP 5 billion, so a fraction of the overall allocation despite all the talks about collaborative combat aircraft and hybrid vessels for the Navy. I mean are you surprised or are we going to see a bigger allocation for autonomous systems in the future?

It's definitely a trend. I mean it's a big step up from where we were, and I touched a little bit on my prepared remarks that some of the autonomous systems, whilst an incredibly important part of modern warfare, it's -- they end up working in a hybrid way with the traditional larger platforms. And some of the larger platform programs are still for example, nuclear submarines, these are expensive to build over time, but they give a capability that is just not -- you can't do with some of the unmanned capabilities. So it's that combination that we should be focused on. And I think what was announced in the DIP is actually a big increase in the drone and the autonomous funding.

Next, we have George Mcwhirter from Berenberg.

I've got 2, please. Firstly, on free cash flow, you mentioned that the upgraded guidance doesn't include any large down payment in H2. Can I just check if any of the big contracts that you received at the start of H2 came with any material down payments? And the second question is on GCAP. It's grown very strongly in the last few years. Could you just outline the revenue trajectory that you see for the program?

I think Brad, can you do both of those?

Yes, sure. So the free cash flow, as you rightly point out, we don't include new material advances for the second half set of assumptions. We do include burn down of advances that we already have. And of those orders that you referred to that have recently been announced but aren't included in the H1 order book, none of those had advances attached to them. Of course, there's quite a big set of order opportunities that we're chasing in the second half. Some of those may have advances. We don't know. It's hard to predict, which is why we don't include it in guidance. So I hope that helps.

Yes, on GCAP, now that we're -- we've got maturity with Edgewing structure in place, we're seeing growth as we shift into this phase. And I expect those revenues for us to be well over $1 billion for 2026. And it should ramp up a little bit as we move into this phase that we're in. So yes, it's been great to see the JV set up. Great to see Edgewing really stand on its own legs, and we're really pleased with the progress there.

Next, we have Benjamin Heelan from Bank of America.

I have 2. Firstly, could you provide a bit of an update on what you're seeing in terms of MBDA and in particular, on the EUR 5 billion investment plan. What are you targeting there? Is it just capacity expansion? Is there more investment in product? If you could just give us a bit of an overview on that. And then a quick follow-on on the Global Combat Air because obviously, you've had the falling apart of the FCAS. And I know you commented on it earlier, not impacting the entry into service. But how potentially would it work as you, Leonardo, Mitsubishi, you've invested a lot of money, a lot of time, a lot of effort in designs, a lot of design IP there. Would you potentially have to yield some of that design IP to allow another country into the program? Or is it something like they can just take the design and they have their own final assembly line capability just from an intellectual property standpoint, how can you squeeze another country into the program?

Yes. On MBDA, I'll probably throw one over to Brad, but just start by saying that, as you know, much of the pacing sort of time frame for MBDA deliveries is associated with platform deliveries. The area that isn't and that is really driving growth at the moment is in integrated air and missile defense. And there, frankly, we could sell whatever we had available and more. So I think a lot of that investment is going in the short term here to build out capacity for the missile defense capabilities, which as we see, particularly in both Middle East and in the Ukraine conflict, the importance of those capabilities and very specifically the interceptors for things like ballistic missiles, which MBDA has some superb capabilities around.

On MBDA, do you want to add anything for us?

Yes. I mean obviously, the EUR 48 billion backlog that MBDA has, it requires a lot of investment to deliver. So that EUR 5 billion cuts across sites and buildings, infrastructure projects that we're working on customers on, capacity uplift for machining, tooling, test equipment and digitalization of systems as we modernize sort of the under-the-hood delivery mechanisms of the company. So it cuts across all those things. And the idea is to just really deliver that EUR 40 billion backlog quicker than -- or as quick as we possibly can.

And then on Combat Air specifically the question on GCAP. So as you alluded to already, GCAP is moving at pace and particularly now with the international contract with Canada joining as observers. We have real pace in the program.

When it comes to others joining, I mean, as we've said before, and you know well, Ben, is a decision for governments. And key to all of that is not slowing down the program in any way, shape or form. And I think the consideration will be around potential acquisition of aircraft, what would a new partner bring to the program, both in terms of funding orders and capability. And I mean, the window is -- as others in the partnership have said, is closing, but it is probably just about still open now, but it is closing given the pace that we have within the program. So as I said, the actual decision clearly is one for the government.

Next, we have Rory Smith from Oxcap Analytics.

It's Rory from Oxcap. I'll stick to one just in terms of time, but it's really coming back to that capital allocation question, I guess, picking up where David left off. But in the face of the sort of rapidly changing innovation landscape in the defense sector, I guess, thinking about CapEx and R&D and M&A is sort of the first point.

But my question really is around how do you see your investment in going into sort of more venture capital and investing in early-stage companies without buying them outright. Obviously, there's a big number out there, sort of EUR 4 billion has been invested by primes so far this year. You've got a piece of that. You've also invested EUR 25 million in Expeditions and Lakestar. So I guess the question is why those 2 VC funds, why that number couldn't be higher in the future? Just your sort of evolved thought process on that piece of the innovation R&D landscape would be greatly appreciated.

Thanks for the question, Rory. I'll hand that one over to Brad.

Yes. We've set up a whole structure called Launchpad, which includes a broad scope of activities that are all centered around innovation. And part of that is investing in the funds that you mentioned. So Lakestar and Expeditions was the first into that thread of strategy. And we're really excited about those. Why did we choose those? I think the interesting thing and intriguing thing to us was, a, they're a Europe defense tech; b, they are really exposed to what we're seeing in terms of cutting-edge requirements across the vital lines there.

And so the Eastern European defense and air defense and defense tech needs, there's really pretty amazing innovation that's happening in some of these defense tech start-ups. And we just wanted to get visibility into that and exposure to that. And the hope is that some of that innovation lines up that runs back into our technologies. And so it's a nice synergistic exposure that we have. Not only is a good investment, but it gives us really good visibility on what's happening in the broader innovation world and perhaps opportunities for us to incorporate into our own offerings.

So I think we'll see how those go, and we're interested in doing more of that. And yes, I think it's an exciting thread that's opening up for us. And we also had -- a couple of years ago, we took a stake in a business that we recently disposed of, and it's an example of really good returns on these types of investments. But I think the intriguing thing for us is just learning from the state of innovation out there on the cutting edge.

Next, we have Adrien Rabier from Bernstein.

First, if I can follow up on P&S, please. You had another very strong half in H gglunds and Bofors. So I'm wondering if you could talk about your expectations for the business in 2027 and maybe even 2028, please.

And then if I could follow up on your comments about the impressive backlog in Europe. I was wondering if you could talk about the impact on your business profile in the coming years, which segments in Europe do you think will grow most? And how do margins compare in Europe with the rest of your business?

Thanks, Adrien. So on P&S, do you want to take that one, Tom?

Yes, we are very, very pleased with the performance at H gglunds. We will build almost 300 combat vehicles this year. We expect to be up over 400 next year. And none of that includes a deal we're currently in negotiations on for a 5-Nation CV90 program. And that would be another 400-plus vehicles in its own, right. And so some really good strong growth potential on top of very solid performance in the growing portfolio we have over there.

I should mention Bofors as well. I mean Bofors, as I mentioned in the earlier remarks, performing very strongly also as the demand for artillery and their munitions continues to grow. And so just very, very pleased with the footprint there in Eastern Europe and the Nordics.

Yes. And they are obviously important parts of the Europe backlog that was the second part of your question. And I was just going to say building on H gglunds both as MBDA, obviously, a key driver and our success with Eurofighter and adding to the Eurofighter partnership with things like countries like T rkiye joining the program continues to drive growth in Eurofighter. So from our perspective, it's broad-based, but those are some of the key pillars.

Next, we have Yassin Moktadir from UBS.

Yassin Moktadir at UBS. Just one from me, please, in the interest of time. So kind of following up on a couple of your comments previously relating to potential further Typhoon orders and also the outlook for CV90 where there's potentially further orders to come. Brad, I think you mentioned that you see GBP 180 billion in pipeline opportunities. Could you maybe detail some of the key opportunities in that GBP 180 billion that you're eyeing, please?

Yes. We -- I mean, we have a breakdown of the main components of that GBP 180 billion, things like F-35 and EW in support and Typhoon Support, the Dreadnought that you've seen the announcements today, I mean, SSN-AUKUS, GCAP program and all these are pretty chunky elements of that GBP 180 billion. And I think that's just scratching the surface. But I mean, in big, big handfuls, those are some pretty significant ones right there.

Yes. It tends to -- how we characterize that is the roll forward of many of our incumbent positions on programs. And for example, as you will know, many of the U.S. programs are just funded on an annual basis. However, we have visibility of the program running much beyond that. So that's how we come up with that sort of pipeline number.

Next, we have Chloe Lemarie from Jefferies.

I just have one, if I may. So in Maritime, I noticed the comment on first-in-class obviously holding back the margin there. Had the Type 26 in mind, are there any other platforms that contribute to this? And could you provide any indication on the timing when the headwind should ease, please?

Thank you, Chloe. Do you want to touch on that, Brad? I know you made reference to it earlier, but...

Yes. I mean if you look at first-in-class as a term, I mean, Type 26, certainly Hunter Class in Australia, the Dreadnought, these are all first-in-class programs. I think the delivery of these contracts, the phases that they're in now, we always recognize that we're going to be on a learning curve and experience curve. And we saw the first half results at 6.1% there. And we do expect there to be an improvement in the second half. And we should get pretty close to the guidance that we set at the beginning of the year. And then as we move forward through the experience and learning curve, we do expect those results to improve. So we are in the first-in-class.

And the reason why we say that is these are the challenging parts of the program, and we do trade very prudently at these phases. And then as we retire risk and get the benefits of that experience curve, we start to see that margin improvement. And we typically think that the maritime sector should be greater than 7% type [indiscernible] sector, and we're on a glide path to get there, and that's our expectation.

Our last question comes from Olivier Brochet from Rothschild & Co.

I would have one question on the electronic system side about these new defense primes and new space companies. Do you see them as a threat, as a risk of displacement for existing program? Or are they a commercial opportunity and clients for this business, electronic system, please?

Olivier, yes, very good question. I mean our matter inside BAE is we disrupt ourselves before we're going to get disrupted, which is why we create these incubators such as FalconWorks or FAST Labs in the U.S. but it's something we've been doing for quite some time. But maybe over to you, Tom, to specifically talk about ES.

Yes, sure. No, it will be -- really a good question. It's one we get quite a bit. And I've been known to say that the defense ecosystem needs both the new entrants as well as the traditionals. And what we look at is an opportunity for partnering. I mean we are working together on a number of programs with smaller start-up firms. And to Charles' point, we continue to invest in technology ourselves to work, to innovate and create the next generation of systems that will feed into this environment, particularly in space. So we see it as a good opportunity, but we do recognize the need to stay on top of things and continue to invest to advance. I hope that...

Do you have any example of these opportunities for partnering that you've already concluded and can talk about?

Yes. I mean some of what we do, as I mentioned, is national intelligence-related space. Unfortunately, some of this is classified work, but we do find ourselves with an interesting set of players there, and I think we're working together very well. I'll leave it at that.

Thank you for all the questions. This concludes our Q&A session and our conference call. Thank you for joining us today. You may now disconnect.

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.