BAE Systems plc

Good day and thank you for standing by. Welcome to BAE Systems 2025 half-year results conference call and webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, please press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 and 1 again. Please note that today's conference is being recorded. I would now like to have the conference over to your speaker, Charles Woodburn, Chief Executive Officer. Please go ahead.

Hello, everyone, and thank you for joining us this morning. The business has had a busy first six 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 three important messages today. First, we've delivered strong results in the first six 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're 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 the 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 deliver double-digit growth in both sales and EBIT. Demand for our products remains strong. You can see this in our £13 billion order intake in the first half and a contract order backlog of £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 earning 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're 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 £260 billion. or more than eight times 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 Program 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, defence spending is set to increase and our existing portfolio of capabilities aligns well to the priorities of our government customers. In the UK, the government has pledged to increase defence 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 defence requirements and 1.5% to improving resilience and security. The UK's recent Strategic Defence Review set out its vision for defence to move to a greater war-fighting readiness and act as an engine of UK economic growth. It committed to invest in both our long-term programmes 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 defence spending by 2027, and we're exploring how we can support them in other areas of defence capability. Australia is also increasing its defence spending. We're already the largest defence contractor in Australia, and through the Hunter-class frigate programme 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 defence spending in the region. The largest defence 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 defence systems, naval vessels and further increasing the localisation of defence 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 six 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 theatre, as well as on homeland defence 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 defence, munitions, counter-drone and maritime modernisations, 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 a path to higher defense spending. We're already deeply embedded in European defence, 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 seven priority areas the EU has identified as critical to build a robust European defence, five 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 defence 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 Turkey and the UK. 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 Program, we are developing next-generation combat aircraft. Our partnership with Italy, as well as Japan, is working well and will 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 capabilities and stocks. To scale up to meet this demand, MBDA has committed to invest 2.4 billion euros over the next five years. We also have excellent positions in combat vehicles, advanced artillery and naval guns with our outstanding Swedish Hagalands and Bofors businesses. Ten nations now operate the CV90 infantry fighting vehicle and we see strong growth potential across our combat vehicle portfolio. We're investing more than 160 million pounds at Hagalands 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 collaborations and 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 defence and security capabilities. This focus exists across all segments of our 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 uncruised 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 are now one of the leading manufacturers of military drones in Europe and we are well positioned to capitalise 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 brings 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 four 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-counterdrone equation. And now over to Brad for the financials.

Thanks, Charles. Before I get into the details, the key message up front is that we delivered a strong first half with double-digit growth in sales and EBIT with good margin expansions. 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 13 billion pounds 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%. 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 3.8 billion pounds of intake included significant orders in the electronic combat business, together with the Missile Warning and Tracking System Award to our space business in the U.S., a capability essential for the Golden Dome concepts. In P&S, the $2.4 billion of intake featured strong European winds and Bofors, as well as continued orders for our U.S. combat vehicle programs. Air recorded $3.8 billion of orders, including $1.4 billion for MBDA, showing continued strength in European growth, and a further $1 billion for the FCAS Tempest activities. The Marathon sector landed $2 billion of orders with Canada's River Class support and consultancy work, Australia's Hobart-class combat systems upgrade, and increased submarine orders for the Royal Navy, all featuring. Cybern intelligence contributed $1.4 billion in new orders across the half year. Moving to sales, the group delivered £14.6 billion for an 11% increase. Our platforms and services sector led the growth up 21%, with a very strong showing in U.S. combat vehicle programs, which were up 27%. along with continued increases in Haglunds and Bofors in Europe, up 25% and 39% respectively. The maritime sector rose by 12% to 3.2 billion pounds for the first half on Type 26 activity, growing ramp and AUKUS design work, and strong growth in UK munitions. Electronic systems delivered 9% growth with a full six months of SMS activity and strong contributions from the Compass Call Program, F-35, and AP KWS volumes. The air sector also grew by 9%, reaching 4.3 billion pounds for the first six months. The rampant design development activity in FCAS Tempest resulted in strong growth, while our drone portfolio within FalconWorks also posted strong gains. NVDA sales grew by 18%, showing the increasing importance of its European footprint. Cyber intelligence rose by 2% to 1.2 billion pounds with growth in the digital intelligence business in the UK. Moving to profit, our focus on margin resulted in a 20 basis point improvement over half one last year to reach 10.6%. The group delivered nearly 1.6 billion pounds in 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 vehicles and accretive growth from Haglunds and Bofors were significant drivers. Electronic Systems posted a strong 15% return on sales, with a full six 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 MVDA volume at expanded margins, along with good growth in FCAS and drone activity in FalconWorks. Profitability in our maritime sector 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 and advances were particularly noted in the P&S and air sectors, with each sector having close to 200 million pounds 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 400 million pounds 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 100 million pounds was invested in P&S, including the Jacksonville shiplift and growth CAPEX for Hagelin. The cash outflow in the first half contributed to a slightly higher net debt. From a starting point of 4.9 billion pounds at the beginning of the year, we finished the half year at 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%, while underlying EBIT 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 1.1 billion pounds, 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 three-year cash guides shown here demonstrate that the business is in a rhythm of delivering between 5 and 6 billion pounds in free cash flow across three-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 two times 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-creative 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.