BAE Systems plc

Welcome to BAE Systems 2025 Full Year Results. I'm Paul Checketts, Director, Investor Relations, and with me I have Charles Woodburn, our Group Chief Executive, Tom Arsenault, Chief Executive Officer of BAE Systems Inc., and Brad Grieve, 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 three 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 37 billion pounds of new order intake, demonstrating strong demand for our products. Our order backlog increased to a new record of 84 billion pounds, around three times 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 five 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 five years, we've generated more than 11 billion pounds 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, defence 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 US in more depth shortly. Here in the UK, the government has committed to the largest sustained increase in defence spending since the end of the Cold War. the UK Strategic Defence Review set out its vision for defence to move to greater warfighting readiness and to act as an engine of UK economic growth. It committed to invest in both our long-term programmes 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 Programme, 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 three 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 US business. The last year has seen a profound change in Europe's 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 number one 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 KF-21. In air defense, they have capabilities across land and sea, including counter drone, short-range air defense, and medium range, including anti-ballistic 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 in their momentum since 2021. Since Russia invaded Ukraine, order intake has stepped up from a cadence of around €4 billion per year to €13 billion. The order backlog has increased by 150% to €44 billion, or 7.5 times annual revenue. And over that four-year period, revenue has increased by 37%, a compound average growth of 8% to €5.8 billion, with improving momentum in recent years. MBDA is investing to fulfil 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 four-fold increase in production of our THAAD Seeker over the life of the seven-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 five-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 first-hand understanding of our customers' operating environments in real time. For example, our CalenLens 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 four rounds, and leave the location before the first round has reached its target. Now to integration. Bringing 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, a major step was achieved when we successfully used a drone to shoot down another drone. In just four 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 are proven to work on the battlefield, and these provide us with a competitive advantage. And now over to Brad for the financials.