BAESY - BAE Systems plc
Q1
Q1 2025
2025-07-30
+
Operator: Good day, and thank you for standing by. Welcome to BAE Systems 2025 Half Year Results Conference Call and webcast. [Operator Instructions] Please note that today's conference is being recorded. I would now like to turn the conference over to your speaker, Charles Woodburn, Chief Executive Officer. Please go ahead.
Charles Nicholas Woodburn: Hello, everyone, and thank you for joining us this morning. The business has had a busy first 6 months of the year and delivered another strong set of results. Before I go further, I'd like to thank our employees, trade unions and supply chain partners for all they do to ensure we deliver on our commitments to our customers. Delivering reliably on our mission to protect those who protect us is increasingly important in the light of escalating global threats. I'd like to leave you with 3 important messages today. First, we've delivered strong results in the first 6 months with good growth in both revenue and profit, and we're upgrading our full year guidance, second, our business is exceptionally well positioned for the global opportunities we are seeing, and third, the performance of our business, the positions we have and the backdrop of increased defense spending across our regions has further increased our confidence in rate of growth we can deliver and the duration of that growth. These results continue the excellent momentum we've built over successive years of strong financial and operational performance and demonstrate our value compounding model in action. We delivered double-digit growth in both sales and EBIT. Demand for our products remain strong. You can see this in our GBP 13 billion order intake in the first half and the contract order backlog of GBP 75 billion. This backlog is largely driven by our incumbent positions on existing long-term programs, it therefore gives us exceptional visibility and supports our confidence in the growth outlook over the medium term. And as we'll go on to explain, we're also at the forefront of new technologies that will drive new earnings streams and help deliver on our customers' immediate needs. We've maintained a strong balance sheet, enabling the same disciplined capital allocation approach that we've taken for the past several years. Growth continued to be strong in the first half, and the business performed well. Looking further ahead, we are well positioned to continue driving the positive momentum of the business well into the future. Together, our confirmed order backlog and programs on which we have incumbent positions is approaching GBP 260 billion or more than 8x our annual sales. This includes both shorter-cycle products where we're experiencing high growth right now, such as drones and munitions and critical multi-decade programs such as frigates and submarines with long-term embedded value. Some of our big programs like the Global Combat Air Programme and SSN-AUKUS submarines don't come into full production until the mid-2030s and beyond. This combination of our order backlog incumbent positions and a strong new business opportunity pipeline due to rising defense spending, gives us the visibility and confidence that we can deliver strong growth for an extended period. Looking at the macro environment, the outlook for global defense spending continues to strengthen in 2025, reflecting the elevated threat environment. We have well-established positions in some of the largest defense markets in the world. In all our key regions, defense spending is set to increase, and our existing portfolio of capabilities aligns well to the priorities of our government customers. In the U.K., the government has pledged to increase defense spending over the next decade so that by 2035, it will meet the NATO commitment of 5% of GDP annually on national security with 3.5% allocated to core defense requirements and 1.5% to improving resilience and security. The U.K.'s recent strategic defense review set out his vision for defense to move to a greater war fighting readiness and act as an engine of U.K. economic growth. It committed to invest in both our long-term programs and new disruptive technologies. In the Indo Pacific, we formed a new joint venture with industrial partners in Japan as well as Italy to design and develop next-generation combat aircraft under the Global Combat Air Programme. Japan is on a path to double defense spending by 2027, and we're exploring how we can support them in other areas of defense capability. Australia is also increasing its defense spending. We are already the largest defense contractor in Australia and through the Hunter Class Frigate Program and SSN-AUKUS, where we'll build state-of-the-art nuclear-powered submarines in Australia. We expect strong long-term growth. The situation in the Middle East is likely to drive higher defense spending in the region. The largest defense market there is the Kingdom of Saudi Arabia, where we have a long-established position. Their 2025 military budget is expected to increase by 5% and areas of longer-term focus include combat aircraft, missile defense systems, naval vessels and further increasing the localization of defense spend. Across the globe, our growth opportunities are significant, and we're focused on consistently executing our long-term strategy to deliver top line growth margin expansion and solid cash generation. Turning now to the U.S. business. Our strong performance in the first 6 months reflects the tight alignment we have with the U.S. defense and intelligence priorities, as well as those of the new administration. The U.S. defense budget request of $961 billion, including reconciliation funds of $113 billion represents a 13% increase over the prior fiscal year and supports the numerous high-level programs and technologies where we have expertise. With a continued focus on the Indo Pacific theater, as well as on homeland defense under the Golden Dome concept, we are well positioned to continue to benefit from strong funding in critical areas such as national security, space, missile defense, munitions, counter drone and maritime modernization to include surface ships and submarines, all of which align with key U.S. priorities. In addition to these areas, good order intake over the last couple of years mean we will continue to execute on our U.S. franchise positions in electronic warfare and combat vehicles. Europe has seen a seismic change in its security situation, and most countries are now on the path to higher defense spending. We are already deeply embedded in European defense, a fact, I think, is sometimes underappreciated because of our strong positions in other parts of the world. We are actively investing to help European governments meet the challenge of rearming. If you look at the 7 priority areas the EU has identified is critical to build a robust European defense, 5 of which are shown here. We have long-standing proven capabilities in each of them. With Eurofighter Typhoon, we have one of the best performing, most reliable air superiority fighters in the world. It operates as the backbone of European Air Defense and plays a crucial role at the heart of NATO operations. We expect it to remain highly relevant in Europe and beyond for many years to come. This is a key factor in the recent MOU between the governments of Turkiye and the U.K. We're investing to increase the Typhoon production rate and see potential for that to at least double over the coming years. At the same time, through the Global Combat Air Programme, we are developing next-generation combat aircraft. Our partnership with Italy as well as Japan is working well and we'll reinforce and grow our mutually beneficial ties with other European allies. MBDA, in which we're a 37.5% shareholder is a world leader in the market for complex weapons with its products in service across more than 90 armed forces around the world. It has an established portfolio of combat proven products that is highly relevant for the challenges nations now face as it spans the full spectrum of missions from deep strike through to air dominance. This makes it very well positioned to benefit from increased defense spending as nations focus on growing their weapons capability and stocks. To scale up to meet this demand, MBDA has committed to invest EUR 2.4 billion over the next 5 years. We also have excellent positions in combat vehicles, advanced artillery and naval guns with our outstanding Swedish Hägglunds and Bofors businesses. 10 nations now operate the CV90 infantry fighting vehicle, and we see strong growth potential across our combat vehicle portfolio. We're investing more than GBP 160 million at Hägglunds to add capacity and scale operations while also teaming to expand production capacity in various customer countries. This approach benefits our partners' local economies and communities. Lastly, through our FalconWorks drone portfolio, we're already playing a significant role in Europe, and this is opening up new collaboration in revenue streams. This takes us on to technology and innovation. Technology and innovation are at the core of our strategy. To drive innovation, we're continuing to increase our self-funded R&D. We're looking at technology for today, developing solutions that save time and cost and enable greater agility for our business and our customers, innovations that can bring products from concept to reality faster. We're also looking at innovation for the future, to deliver the next generation of defense and security capabilities. This focus exists across all segments of business. One very current example is drones and counter drone technology where BAE Systems is one of the market leaders in Europe. The conflict in Ukraine has been a highly visible example of the use of drones in warfare and their extremely rapid pace of development. We've been investing in these capabilities and building IP in uncrewed systems for more than 25 years. We've recently added to our own developments by acquiring companies with great fixed wing and multi-rotor technologies that have strengthened our portfolio. Our strong relationships with our customers and knowledge of what they need allows us to rapidly develop electronically hardened battle-ready solutions across the full spectrum of drone warfare. Our investments in this area mean we're now one of the leading manufacturers of military drones in Europe, and we are well positioned to capitalize on opportunities in this growing market. The rapid upsurge in drone use means our government customers are now urgently looking for ways to counter them for both military and civilian domains to protect people and critical national infrastructure. We're investing in this area and bringing together capabilities from across the group, and we have a range of ways to neutralize drones from highly sophisticated electronic warfare through -- to cost-effective hard to kill capabilities. Let me give you a very recent example of how we've enhanced cutting-edge technology by using the defense expertise we've built over decades. Earlier this year, we launched for the first time a guided munition from a drone to shoot down another drone. This new capability bring together the APKWS, precision-guided-munition from our U.S. business, heavy lift quadcopter technology from our Malloy acquisition and expertise in weapons integration from FalconWorks, the business line we've created to bring together and accelerate new products from our Air sector. In just 4 months, we moved from concept to successful live firing trials for the U.S. Marine Corps. This demonstrates combat-ready capabilities for a fraction of the cost of previous solutions. Each interceptor is roughly the same cost as the drones it can destroy bringing some much-needed cost symmetry to the drone, counter drone equation. And now over to Brad for the financials.
Bradley Madsen Greve: Thanks, Charles. Before I get into the details, the key message upfront is that we delivered a strong first half with double-digit growth in sales and EBIT with good margin expansion. The group is positioned for sustained growth on the strength of our backlog and pipeline, and we are upgrading our full year guidance to reflect the improved outlook. So to the numbers. And as usual, I will use constant currency in my comparison to last year. The business continues to see strong demand reflected in the GBP 13 billion of order intake in the first half. We delivered another double-digit increase in sales of 11%, with all sectors contributing to the growth led by P&S and Maritime. Organic growth was 9%. The Underlying EBIT was up 13%, while EPS grew 12%. As expected, our first half free cash flow was an outflow as customer advances were paid out into the supply chain, and we continue to improve our returns to shareholders with an interim dividend increase of 9% complementing continued share buybacks. I will now break down some of those high level numbers with a bit more detail, starting with orders. There was strong intake across the portfolio, showcasing the geographic and technical breadth of the group. In ES, the GBP 3.8 billion of intake included significant orders in the electronic combat business, together with the Missile Warning & Tracking system award to our space business in the U.S. a capability essential for the Golden Dome concepts. And P&S the GBP 2.4 billion of intake featured strong European wins and Bofors as well as continued orders for our U.S. combat vehicle programs. Air recorded GBP 3.8 billion of orders, including GBP 1.4 billion for MBDA, showing continued strength in European growth and a further GBP 1 billion for the FCAS Tempest activities. The Maritime sector landed GBP 2 billion of orders with Canada's River Class support and consultancy work. Australia's Hobar Class combat systems upgrade and increased submarine orders for the Royal Navy, all featuring. Cyber & Intelligence contributed GBP 1.4 billion in new orders across the half year. Moving to sales. The group delivered GBP 14.6 billion for an 11% increase. Our Platforms & Services sector led to growth, up 21%, with a very strong showing in U.S. Combat Vehicle programs, which were up 27% and along with continued increases in Hägglunds and Bofors in Europe, up 25% and 39%, respectively. The Maritime sector rose by 12% to GBP 3.2 billion for the first half. On Type 26 activity, growing ramp in AUKUS design work and strong growth in U.K ammunitions. Electronic Systems delivered 9% growth with a full 6 months of SMS activity and strong contributions from the Compass Call Program, F-35 and APKWS volumes. The Air sector also grew by 9%, reaching GBP 4.3 billion for the first 6 months. The ramp in design development activity in FCAS/Tempest resulted in strong growth, while our drone portfolio within FalconWorks also posted strong gains. MBDA sales grew by 18%, showing the increasing importance of its European footprint. Cyber & Intelligence rose by 2% to GBP 1.2 billion with growth in the digital intelligence business in the U.K. Moving to profit. Our focus on margin resulted in a 20 basis point improvement over half 1 last year to reach 10.6%. The group delivered nearly GBP 1.6 billion and underlying EBIT up 13%, this was 10% on an organic basis. P&S led the way in margin expansion, posting an 11.8% return on sales and a 37% improvement in underlying EBIT for the first half. Higher volumes of AMPV full rate production vehicle and accretive growth from Hägglunds and Bofors were significant drivers. Electronic Systems posted a strong 15% return on sales with the full 6 months of contribution from our Space business at group accretive margins. Air profit was up by 13% with a return on sales of 11.5% on higher MBDA volume at expanded margins along with good growth in FCAS and drone activity in FalconWorks. Profitability in our Maritime center was 6.8%, slightly down versus last year on timing of milestones and subs and contract-related trade-offs posted on the Hunter program last year. Finally, Cyber & Intelligence posted a return on sales of 8.1%. In terms of cash flow, the half year saw a small outflow in line with expectations as advances from our customers flowed out to the supply chain against the absence of any new material advances received in the first half. The movements in advances were particularly noted in the P&S and Air sectors, with each sector having close to GBP 200 million in advance unwind. Across the group, our CapEx programs feature investments to drive growth and improve the efficiency of how we deliver. We invested nearly GBP 400 million in CapEx in the first half of the year, with 35% of this in Maritime for submarine infrastructure, expansion of munitions and shipbuilding capacity growth in Australia. A further GBP 100 million was invested in P&S, including the Jacksonville shiplift and growth CapEx for Hägglunds. The cash outflow in the first half contributed to a slightly higher net debt from a starting point of GBP 4.9 billion at the beginning of the year, we finished the half year at GBP 5.6 billion after the free cash outflow and returns to shareholders, slightly offset by the translation effects of a stronger pound for our U.S. dollar-denominated debt. During the first half of the year, our credit rating was upgraded by Fitch and S&P, while Moody's upgraded our outlook, validating the strong balance sheet and strengthening longer-term outlook for the group. Turning now to guidance. Given the strong first half operational delivery and outlook, we are upgrading sales and EBIT by 100 basis points each. Sales are now expected to go up between 8% to 10% and while underlying EBITDA should grow in the range of 9% to 11%. The share price increase since the start of the year is expected to result in fewer shares being repurchased, which, along with a marginally higher tax rate, means our guidance for EPS growth remains unchanged at between 8% and 10%. We expect free cash flow to be higher than GBP 1.1 billion, excluding any material advances. For noting this guidance is on a constant currency basis using $1.28 per pound. And given the higher spot rate, the sensitivities that we have noted on this slide should help with your modeling of various rate scenarios. The 3-year cash guide shown here demonstrate that the business is in a rhythm of delivering between GBP 5 billion and GBP 6 billion in free cash flow across 3-year cycles, even with elevated CapEx investment and advanced consumption. As we don't guide to the receipt of new material advances, but we do model the unwind of existing advances, there could be upside if any new order volumes have accompanying cash advances, and we have certainly seen that occur over the last few years. Turning to capital allocation. As we have demonstrated over the years, our approach to capital allocation places a higher emphasis on growth. Our internal investments in training and development for our teams, R&D funding and CapEx have all helped improve the performance and top line growth of the group. And the growth, coupled with our focus on margin improvement leads to consistently rising earnings and dividends, which we cover around 2x by earnings. These results in the half year also reflect strong returns from our successful M&A activities, which not only give us higher end year sales and profit but also enhance our long-term growth. we will continue to look at value-accretive M&A opportunities with a clear focus on maintaining our strong balance sheet. Finally, our share buyback program since 2021 has proven to be an effective way of returning any surplus cash to shareholders. And we expect to keep this tool active in our allocation hierarchy. This approach to capital allocation has been consistent over these last several years and has been an important part of our value compounding approach to business. Over to you, Charles.
Charles Nicholas Woodburn: Thanks, Brad. So bringing this all together, what should it mean for our investors? The combination of our exceptional breadth of world-class defense products and capabilities with strong positions in some of the largest defense markets in the world, and a continued focus on execution while increasing our investments in technology and innovation and a large backlog of long-term work with significant new business opportunities. means we're increasingly confident we can deliver attractive revenue growth that is both visible and sustainable over multiple years with higher margins and strong cash generation, all of which will be amplified by our disciplined capital allocation, giving us enhanced visibility on our value compounding model. Many thanks. And with that, we're ready for your questions.
Operator: [Operator Instructions] We are now going to proceed with our first question. And the questions come from the line of Ross Law from Morgan Stanley.
Ross Law: I've got 3, if I may. The first is just on the EPS guidance, and the lack of upgrade there. It looks mechanical, but if you could just flesh out how much of that was driven by the share count versus the higher tax. The second question, just on Maritime, if you could provide a bit more color on the kind of timing around the sub milestones and how that impacts the outlook for the full year? And then lastly, on the durability of higher growth that you flagged, while you're maybe not willing to put some exact growth rates on that expectation, can you maybe provide the mix of growth within the business that's driving that? So which divisions are going higher, which lower, et cetera?
Charles Nicholas Woodburn: Thank you, Ross. So I think on EPS guidance, I'll let Brad take that one, and then we'll probably all circle back on the durability of higher growth. But on Maritime, as you know, Ross, the -- that's where the bulk of our single-source work flows into the Maritime sector. And you typically, as we've seen in the past, seen a margin range of between 7% and 9% with a bit of variability around milestones the trade-ups you can get, you can get up to an additional 2% towards the 9%. So the timing of the milestones will impact that. So I don't see this as a sort of structural change to the sector, but there is a bit of variability from one reporting period to another around milestones. On EPS guidance, maybe over to you, Brad.
Bradley Madsen Greve: Yes. Well, there's 2 main drivers in the EPS relative to our EBIT growth that we left guidance at 8% to 10% for EPS, where we upgraded EBIT growth. And the reason being that there -- as you point out, lower shares removed than what we estimated given the higher share price. We're still doing the circa GBP 500 million a year in share buybacks. So that quantum hasn't changed. But because the share price has gone up, it means we're taking out fewer shares. That's probably about half of it. And then the other half is coming from a higher -- slightly higher tax rate. And you might have seen that the French tax regime has increased for a sort of a 1-year surcharge. They went from a 25.8% to a 36% plus tax rate. And we do have more meaningful MBDA profits in France. And you might have seen that our MBDA growth was pretty significant in this half of the year. So given that effect on tax, that's probably about the other half of the impact, so it's kind of split between the tax increases and the share buyback amounts.
Charles Nicholas Woodburn: And then on the durability of higher growth, I mean obviously, I want to stop short of giving medium-term guidance, but we're on a pretty good tempo over the last few years. And I think what we have seen in recent months, particularly the step-up in the NATO numbers and the success of the recent NATO Summit is our confidence around the durability of those sort of growth rates continuing. And I think it's fair to say that we're a lot more confident around that than we were even a few months ago.
Operator: We are now going to proceed with our next question, and the questions come from the line of Robert Stallard from Vertical Research.
Robert Alan Stallard: A couple from me. First of all, Charles, for you across the whole business portfolio, there's clearly very strong demand for missiles and munitions. I wonder if you put all that together, how much this area could grow by in the medium term? And what sort of investments, again, in aggregate, you may have to put into increased capacity? And then second one for Brad. Just on the changes on the U.S. R&D tax credit, whether there's any impact on the tax rate from that and also cash taxes, too.
Charles Nicholas Woodburn: Yes. So missiles, I'm trying how to quantify that. I mean there is -- it is one of the fastest-growing parts of the portfolio. But worth mentioning it's -- we see it in many areas of our portfolio. So for example, you have the huge success of APKWS as a counter drone weapon and it's, I think, certainly for the U.S., it's proven to be one of the most successful hard kill capabilities largely because it's relatively inexpensive interceptor compared to some of the options. So we're literally selling them as fast as we can make them. You've got the growth in MBDA with platforms, but also in the integrated missile defense arena, both in Europe and elsewhere. And then other pockets of the business. So for example, within ES, you've got the Seeker on THAAD interceptors, you also got within Tactical Systems within SMS, some key positions across a range of U.S. missiles and munitions. And it is definitely an area that we're seeing some big growth whether that's -- I mean, I'll put a number on it, double our overall growth rate, but it is certainly significantly faster-growing area than the rest of our portfolio. But I think worth mentioning, it's not in just one part of our portfolio. We see that across multiple divisions. Anything, Tom, Brad, do you want to add to that?
Bradley Madsen Greve: No, I think, that's covered it.
Charles Nicholas Woodburn: And then the second question, you were going to...
Bradley Madsen Greve: So the changes in the R&D tax treatment in the U.S. is not really an ETR point, Rob. But it does give us some benefits on cash tax, and we expect to realize some of those benefits this year. So when we guided to free cash to greater to GBP 1.1 billion, it just makes us confident that we'll be able to get that guidance greater than GBP 1.1 billion and meaningfully more than that potentially depending on how material that becomes. And as I said on guidance in the scripts, that cash guidance doesn't really include any material advances. So if any material advances do come in, that would be upside to the greater than GBP 1.1 billion. The tax is also an upside.
Operator: And the questions come from the line of David Perry from JPMorgan.
David Howard Perry: I'd like to zoom in on 2 of the divisions, if I may. So the first one, Platforms & Services, obviously, very, very strong growth. Just wondering, going forward, do we grow off the higher base that this year will probably deliver? Or do you think there's anything there that's kind of a lump that might not recur? And then can I just be annoying and ask another question on Maritime, sort of I know Ross has already asked, but I would like a little bit more color. Are you able to talk about this milestone that led to the lower margin? Which of the programs it was? Was it related to the fire? And do we bounce back to the middle of the range? You talked about 7% to 9% next year, which would give you quite a strong growth in earnings next year. Just any more color around that, please?
Charles Nicholas Woodburn: On P&S, you were going to take that, Brad?
Bradley Madsen Greve: Yes. We have really strong growth in the half year, as you pointed out, 21% up half year to half year. That's going to start to flatten a bit in the second half. So we do expect to see some fairly decent overall full year growth rates from P&S in the circa mid-teens sort of thereabouts for the full year. And going forward, where we get growth from P&S is really coming from the continuing ramp in CV90s, BvS10s and those orders there in Hägglunds and Bofors. And we still have some growth coming in the shorter term on U.S. combat vehicles. And that was a big part of our growth in the first half of the year. So there's still some really, I think, decent components of growth coming in the P&S portfolio. It's not going to be 21% going forward on this higher base, but I think there's still reasonable growth coming mainly from Hägglunds and Bofors. And then on Maritime, there's always going to be puts and takes across the Maritime portfolio given risk retirements and different milestone timings. And so we -- as Charles said, there's nothing structural that's changed in Maritime. We expect that sector to be between 7% and 9%. And I think as we move into the subsequent periods, that's exactly where we expect it to be. So we do think that there's upside in Maritime going forward, getting back into that range that we expect. The other thing to point out is in the first half of last year for the comparable margins, we had signed a contract for the Hunter Class program, but we had not traded any profit at all on the long lead time materials that we had procured. Once that contract was signed, we were able to release that profit. So it's been an exceptional credit to last half year's results. So those are the types of things that you get every now and then, these sort of timings of risk retirements and exceptional events, but nothing structural different there, 7% to 9% is where we expect Maritime to be.
Operator: And the questions come from the line of Benjamin Heelan from Bank of America.
Benjamin Michael Heelan: First question was on FalconWorks, you've seen very, very strong growth there. Can you talk a little bit about how you see that business progressing going forward? Are there more deals that can be done? There have been some JVs announced in the space with other peers. So is there opportunities for you there? Just how can we see FalconWorks progressing over the next couple of years? And then on Turkey, and Eurofighter. Is there potential, obviously, the MOU has been signed potential that gets closed by the end of the year? And at what happen, would there be a cash inflow in terms of a prepayment? How can we think about that?
Charles Nicholas Woodburn: I'll do Turkey first and then hand over to Brad on FalconWorks. So on Turkey, I mean, as you said, great news on the MOU. I think things are progressing pretty quickly, and there is definitely a requirement to move quite fast. However, I don't want to make myself a hostage to fortune here, so I'm not going to commit to a time frame, but the MOU is a very significant step in that relationship. On FalconWorks, I mean, a huge progress there. But Brad, do you want to just open that up a bit.
Bradley Madsen Greve: Yes. Well, Ben, I know you're at the Capital Markets Day and working with us. So you've got a sense for our capabilities that are going from strength to strength. And as I said in this case, we've been developing IP around autonomous uncrewed platforms for quite a while now. And I think what is exciting as you've seen probably in some of our communication materials is this ability to rapidly disrupt this market and equipping a Malloy T-150 with APKWS, being able to take a drone out with this Malloy APKWS combination is a great example of a very fast disruption that we're bringing to the market. So we're pretty excited about where FalconWorks can go. It's already grown pretty significantly this year. Callen-Lenz is an important part of that as well. And beyond those types of drone platforms, we've got a more complete portfolio as you would have seen in the Capital Markets Day, going from a variety of range, scope and weight capacity. So really exciting things happening, and we're excited about our ability to disrupt the market out there.
Charles Nicholas Woodburn: It's probably fair to say it will be the fastest-growing sector within Air over the next few years.
Benjamin Michael Heelan: All right. And just on capital allocation, in that division, are there more deals that you have in the pipeline that we could potentially see?
Charles Nicholas Woodburn: We've already got a really good portfolio there, Ben. But definitely, if we can find more sort of technology bolt-ons into FalconWorks, we're sort of very interested in that area, both in terms of drone and counter drone.
Operator: And the questions come from the line of Ian Douglas-Pennant from UBS.
Ian Christopher Douglas-Pennant: First question, after the recent EU-U.S. trade deal, there was some talk about how Europe is going to buy a large amount of defense equipment from the U.S. Could you talk about how much of an opportunity that could be and under -- by which mechanism you expect that, that would take place? Is the EU going to instruct different countries to make purchases? I mean, how exactly would that work in theory? Second, there's been some headlines recently on Hawk replacements in the U.K., a joint venture that you might be forming. I don't know whether you can comment on that. And then my third question has been answered already.
Charles Nicholas Woodburn: EU defense purchases, on the deal. I mean, it's still pretty early days, Ian, I don't think we've really got any great clarity as to how that may unfold other than we got a really strong position in the U.S., particularly on combat vehicles, for example, and the capacity is clearly needed. So I think it would be a great benefit. But we've yet to see how that might unfold. I mean, Thomas, anything you want to add?
Thomas Arnold Arseneault: No, it's exactly right. I think the mechanics of how that will work are yet unclear, but we can just point to some of the existing demand that we have in the U.S. business, about 28% of our backlog is from Europe, in our current backlog, and we've had a number of FMS cases and opportunities either in train or on the horizon, some of those combat vehicles we're doing an upgrade in Croatia. We've had a few inquiries about Bradley from a few countries, naval guns, Compass Call, we've gotten into Italy. And so a good set of prospects there. Again, the mechanics of the EU-U.S. trade deal remain to play out. We'll be watching that closely.
Charles Nicholas Woodburn: And then on the JV, I think there's no point me adding to any further speculation apart from to say that training is obviously a very important part of our overall portfolio, and particularly as it pertains to the Air sector. And that's all I'll add to the speculation.
Operator: And the questions come from the line of Alessandro Pozzi from Mediobanca.
Alessandro Pozzi: I have 2 questions. Just the first one, going back to the U.S., if you can perhaps talk about how you see your portfolio, how well positioned it is to capture new opportunities. We know that defense budget is going up about 13%, even though base budget probably is not growing as much. But I was wondering if you can talk about how well you're positioned to capture that increase in spending? And also you mentioned that potentially for the next fiscal year, you see a further increase in spending there. So any color would be appreciated. And also, I think in your opening remarks, you mentioned that potentially you could help Japan in supporting their quest to increase the spending there by 2027. And again, I was wondering if you can elaborate on the opportunities that you see there as well.
Charles Nicholas Woodburn: Yes. Tom, let me go over to you on the U.S. portfolio. And maybe we're saying a few words on potential around Golden Dome as well, just as being a relevant topic.
Thomas Arnold Arseneault: Yes, everyone, I'm sure, is tracking the increase in the U.S. budget brought about by the reconciliation bill to the tune of $113 billion on top of the President's initial request. BAE Systems is very well positioned for some of that increase. We have equities in a number of the programs that are actually mentioned there, our electronic warfare, for example, on the F-15EX which got a sizable increase. Again, Compass Call, this is an electronic attack aircraft and so additional budget there. We see the munitions which Charles touched on earlier, but there's definitely been an uptick in demand requests for rough order of magnitude sizing around various ramp rates for munitions in the U.S. and as Charles pointed out, we have good exposure across the portfolio there. We support the nuclear deterrent in a number of different ways, services into the ground-based strategic deterrent as well as participation on the B-21 program. Again, another couple of programs highlighted. Space written large, we expect increases in both national security space and military space. A lot of that around Charles' point with respect to Golden Dome. Golden Dome got about GBP 25 billion earmarked for that in that reconciliation bill. And while the specifics of the Golden Dome architecture requirements are just starting to play out, we are already, we believe, well positioned. You will have read about our win, there at the end of the first half on a program called the Resilient Missile Warning & Tracking, Medium Earth Orbit Epoch 2 satellite constellation to the tune of $1.2 billion. This is out of our Space & Mission Systems business. We also won earlier in the year a program called FORGE C2. FORGE C2 is a ground-based system. And here, we're going to help the space force modernize its existing ground systems infrastructure in order to manage missile warning satellites, which will obviously be a key part of Golden Dome. We also play into the effector side of Golden Dome with munitions and interceptors like the THAAD, the Lockheed Martin program. That's the Terminal High Altitude Area Defense system. We do the seeker for the interceptors there. And so we, again, expect that be a part of the overall portfolio. You'll have read in the press around the administration's intent to use as much of the existing technology as possible with speed being a key parameter here and our ability to get a Golden Dome up and running here in the next handful of years. And so written large we are well positioned for the budget increase ahead and look forward to the opportunity to leverage that.
Charles Nicholas Woodburn: And then on Japan, I mean, it's a good question. And with Japan, themselves significantly growing their defense spending, as we've said, circa 2% by second half of this decade. Clearly, GCAP is a big flagship program. We're off to a really good working relationship with MHI. And I think on the back of that, we do see other opportunities to work with Japan as they scale their defense spending, building on the very strong relationship we already have with MHI, there are other opportunities and things like Maritime that we could work together and we'd be very happy to do that.
Operator: And the questions come from the line of George Mcwhirter from Berenberg.
George Mcwhirter: I've got 2, please. Firstly, on the Typhoon. The CEO of the Eurofighter Consortium said last month that he has the ambition to increase production to about 30 aircraft a year, which is slightly more than you mentioned in your prepared remarks, do you think this is likely 30 year rate given the order pipeline? And when could this one be achieved? That's the first question.
Charles Nicholas Woodburn: Yes. I mean Typhoon, I seem to recall, he actually talked about a range of production rates. I mean we've -- so the midpoint is roughly doubling from the 12 to 14 of where we are today. So I think a range of options are being considered and obviously, the sort of driving factor is the demand signal. There's a significant increase in requirements from Europe, and then there are other potentials. For example, the MOU in Turkey being a possibility to take that through into contracts. So that demanding will drive the ultimate step up in production. The actual increase in production takes a couple of years. I think I made the comment at the Capital Markets Day that the peak production of Typhoon sort of peak European production was 60 aircraft. So we're still some way short of that. And our ability, therefore, to scale really means bringing gigs back from their sort of cold stacked position, training people and so on and so forth, all of which can be achieved within circa a 2- to 3-year period. And so therefore, it's not a rate-limiting issue for us now. So a little bit will depend on next several months here as to what the demand signal actually drives that. So my view is that our comments and his comment are entirely consistent. He was talking at the upper end of the range, but it is still a range that we're looking at.
George Mcwhirter: That's helpful. And the second one, perhaps for Tom. Following the good CMS growth in the half, can you give us an idea of the share of revenue that is accounted for by the AMPV in CMS, given the reference in the release to the U.S. Army's plan to feel about 3,000 of these vehicles in the U.S. And what is the outlook for the remainder of the CMS business apart from the AMPV.
Thomas Arnold Arseneault: Yes. Thank you, George. Clearly, the AMPV is the current flagship vehicle being built in the U.S. One of the great features about it. The AMPV stands for armored multipurpose vehicle, and that multipurpose nature of its intent gives us good confidence in our ability to continue to create variety around those and the various missions that those play. We are just entering full rate production that -- on AMPV, that has led to some of the growth that you saw this year as we move down of a limited rate production, we've been [indiscernible] and so we expect that, that will continue for some period of time. We have been projecting for some time that the overall combat vehicle business in the U.S. would -- as we backfill the demand created by the donations to Ukraine that would start to flatten, AMPV is about 20% of the overall portfolio, to your original question. But when you combine that with the work we're doing in Sweden through Hägglunds in particular, just a really nice resilient portfolio with a good play over the medium and long term. We'll build about 600-ish -- over 600 vehicles this year between the 2, the U.S. building more vehicles than Sweden currently. But when you get to the medium term, that actually flips in the Swedish demand and the growth there will lead the way. And so good, steady progress across the combat vehicle portfolio with attention to the margins as well. You see good margin performance in P&S. And so this growth is also coming with good, high-quality execution leading to good margin performance. I hope that's helpful, George.
Operator: We are now going to proceed with our next question. And the questions come from the line of Olivier Brochet from Rothschild and Co, Redburn.
Olivier Brochet: Yes, I would have 2 as well for me. The first one on AUKUS. What happens at the end of the day, if the U.S. review underway concludes that continuing the program is not in the interest of the U.S. Is there any change to the outlook for the next 5 years that would come from that? And the second question is going back on P&S U.S. is the margin that we saw in H1 sustainable? Was there anything kind of one-offs in that number?
Charles Nicholas Woodburn: What was the last question?
Bradley Madsen Greve: P&S margin.
Charles Nicholas Woodburn: P&S margin. So on AUKUS I mean, Olivier, I just don't think there's too much point speculating on this. I mean the U.K., when we had a changing government here in the U.K. commissioned a review led by Stephen Lovegrove on the AUKUS program, which has concluded and reported, and the U.S. is doing a similar thing under the new administration. And I just -- there's no point speculating too far on that beyond what I've said already. On P&S, do you want to?
Bradley Madsen Greve: Yes, it's really a strong H1 margin, as you pointed out, live, 11.8%. We expect the full year number to be a little bit lower than that. There's some timing of business development, R&D expenses in that sector, that will be more backloaded. But what we're seeing is a really nice expansion over the last several years in P&S. And we're at a really good rhythm right now. And you're some operating leverage across some of our scaled businesses and it's coming into the bottom line and exactly in line with what we had expected to happen with P&S. And in some cases, we're a little bit out of schedule on what we're delivering. So good news story. I think it will out turn something a little bit lower than H1 for the full year.
Operator: We are now going to proceed with our next question. And the question comes from the line of Nicholas Cunningham from Agency Partners.
Nick Cunningham: It's one topic, but some sub questions within that, which is MBDA, which has almost got a growth problem in it, that it's had a book-to-bill of well over 2 for the last 3 years. It hasn't seemed to be able to grow production in line with the huge amount of demand. It seems that it needs to more like double or triple like Hägglunds than grow in the teens. And so 1 question is, is that addressable? Can it actually achieve adequate growth? Second sort of almost contradictory to that. It seems to be remarkably weak in the high end of Air and Missile defense. It's some -- so you just can't sell against patriot, and there's also oddly made in too quantity as well. How can that be solved? Is that a priority, resources going to be pushed to that? And then final part of it, it's an incredibly opaque organization, which goes to the history of how it was created and so on. But nevertheless, one press conference a year and a couple of numbers isn't really good enough for something that's becoming so important for all of its stakeholders. So is it fit for purpose? Does it need to change? Is there a risk of government to just step in and decide that they want to change things.
Charles Nicholas Woodburn: So I'll maybe take the latter couple. So I think we are reflecting with MBDA and fellow shareholders in terms of how we can do a better job of eliminating some of their activities. So I think expect to see some progress on that. On SAMP/T, I think a lot of work being done. I think there's been some good progress in recent tests. I don't know probably all I'll say on that. I think it's a clear and obvious area of focus for the MBDA team, and I think that they are seeing some very good progress around that. And then on the book-to-bill and the growth, we are seeing quite rapid growth out of MBDA and there's more to come.
Bradley Madsen Greve: Yes. I think that's fair. I mean 18% growth half year for '25 versus half year '24, really strong book-to-bill over the years, as you've noted, Nick, has led to an overall backlog of close to EUR 39 billion for the 100% view of MBDA. So the revenue recognition though for MBDA is point-in-time delivery for the most part. So a lot of it will depend on the underlying platform deliveries that these weapons packages go on. So that's going to mean very lumpy and nonlinear revenue growth. But overall, as you can imagine, with the EUR 39 billion backlog, you're going to have growth for years to come. So I think MBDA is incredibly well positioned. And we're investing -- MBDA is investing EUR 2.5 billion. And an expansion of capacity to address the growing demand that we see. So it's got a growth problem. I may agree with that statement, but it's a good problem to have, and we're dealing with it. And I think we're going to start to see the benefits of that. And you're already seeing pretty decent growth numbers already.
Nick Cunningham: Just one quick follow-up on that. The U.S. peers are seeing particularly Lockheed to seeing similar problems in terms of growing as fast as the market wants to grow. And the major constraint there seems to be rocket motors. Is that the same issue? Or is it broader than that within MBDA?
Charles Nicholas Woodburn: Well, I won't say necessarily what specific things are challenging, but I think people sometimes underestimate the sophistication of modern missile systems. I often describe them as like small fighter jets, often with their own electronic warfare, they've got flight control systems and so on and so forth. So it's not surprising that they are hard things to scale at the rate that we like. But I mean you can be assured that all efforts are on it. And I think that we are seeing already some progress, and you'll see that progress accelerate.
Operator: We are now going to proceed with the final question for today. And the questions come from the line of Christophe Menard from Deutsche Bank.
Christophe Menard: If I can continue on the profitability questions, both on P&S and Air, and especially MBDA. You mentioned MBDA on the call that there was a margin uptick, the question is, is it sustainable? I mean you just mentioned sales are lumpy, but it's -- their sales are probably up for the long term now. So should we now assume that the MBDA margin will continue to get stronger as time goes by and be quite -- I mean, a key beneficiary or a key contributor to your Air profitability? And the second question also is still on margins, but P&S, you have had questions on this. I was wondering whether Hägglunds and Bofors outlook is actually better than what you presented to us at the CMD, I think it was last year. Is it ahead of schedule? Is it something where you see more potential than initially presented to us?
Charles Nicholas Woodburn: What don't we do reverse order? So you want to do the Hägglunds first.
Thomas Arnold Arseneault: Yes, Christophe, the journey in P&S has been several years in the making, and this has all been moving us toward double-digit margins. And now as you see well into the double-digit margins. This is largely driven by efficiencies as we move into full rate production, a number of the investments we've made over the years in automation and robotics are playing through. And to your point, Hägglunds has done the same thing, but they are just a little bit more offset in time. And so we expect very similar as we move deeper into full rate production, we'll see some of those same kinds of efficiencies come to the surface there as well. Similar investments over GBP 250 million just in the last couple of years in Sweden, robotics facilities, et cetera. And so we are on a drive to continue to focus on good solid high-quality margin performance in that business. You'll notice in the range of competitiveness with our peers, and we will be relentless to continue to focus on that. I hope that's helpful.
Charles Nicholas Woodburn: Yes. I mean I think both Hägglunds and Bofors and Tom, in my perspective, have been stunningly successful at winning the work. I actually forget the exact scenarios. We presented, but there was a range of production outlooks for Hägglunds at the time. And it's fair to say that we've won everything at the top end, and now we're looking at going above that. So it is definitely above this kind of scenarios where we were looking at last summer. On the...
Bradley Madsen Greve: Yes, MBDA margin question. I think that over the course of this year, I think MBDA will probably have some margin expansion year-on-year to the tune of circa 100 basis points. And I think that gets into a margin that's on par with the Air sector margins. And I think going forward, I would expect their growth to be accretive to Air sector growth. And I think their margins will be on par, if not better than our sector margins. So I think it will be helpful to Air story going forward.
Charles Nicholas Woodburn: I think that brings us to an end on the question. So thank you all very much, and I expect to see many of you on the -- when we're out on the road show in September. So thank you very much for joining.
Operator: This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you.