Bae Systems Plc S/Adr

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.

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 £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 2.2 billion pounds 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 1.5 billion pounds 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 37 billion pounds, the book to build was 1.2 and reflected the continued relevance of our broad technical and geographical reach. Key orders in the year featured close to £9 billion in electronic systems orders. This included £2 billion from our space business, featuring the missile warning and tracking satellite systems for the U.S. Space Force. £6 billion in our P&S business, including significant orders in Europe for Haglins and Bofors, and over £2 billion for U.S. combat vehicles. The air sector recorded £15 billion, including the typhoon wind in Turkey and £4.2 billion in MBDA. Our maritime business recorded 5 billion pounds of orders, including increased funding for submarines. And finally, the cyber and intelligence sector recorded a further 2.7 billion pounds. Our record backlog, together with the pipeline of incumbencies, sets us up well for continued growth over the median term. We grew sales by 10% to reach 30.7 billion pounds, with growth across all sectors. Organic growth was 9%. Platforms and services led the group with a 17% increase, hitting 5 billion pounds for the year. European growth in Haglunds 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 6.8 billion pounds, 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 £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 intelligence was up 2%, predominantly on gains in counter-drone sales. Group EBIT of 3.3 billion was up 12%, and our margin of 10.8% represented 20 basis points of expansion. This means over the last five years, we have delivered 100 basis points of expansion. The largest gain in EBIT came from P&S with 30% growth to reach 576 million pounds. 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. Their 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 care and tech included. Organic growth for the sector was 10%. The group delivered operating cash flow of 2.8 billion pounds, significantly higher than our expectations as large customer advances were received very late in the year. With close to a billion of capex, we once again invest at levels substantially higher than depreciation, with capacity expansion and efficiency investments across the portfolio. There was a reduction in net advance 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 cost, was 2.2 billion pounds. The strong performance contributed to a 22% reduction in net debt, which landed at 3.8 billion pounds. Excluding lease liabilities, the net debt EBITDA was 0.9 times. 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 1.3 billion pounds, reflecting advance 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 three-year cash delivery in a little bit more detail. Our consistency in hitting our three-year guides continued in 2025, where we recorded 7.3 billion pounds over these last three years. For the next three-year period, covering 26 to 28, the target we are setting today is to exceed 6 billion pounds, 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 1 billion pounds 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 4 billion pounds since 2020 and are now averaging close to a billion pounds 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 two times 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 £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 £260 billion, nearly nine times 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.

Thank you, dear participants. As a reminder, if you wish to ask a question, please press star 1-1 on your telephone keypad and wait for a name to be announced. To withdraw a question, please press star, 1 and 1 again. Please compile the Q&A roll studies. We'll take a few moments. And now we're going to take our first question. And it comes from Ross Law from Morgan Stanley. Your line is open. Please ask your question.

Hi. Good morning, everyone. Thanks for taking my questions. The first is just on the US budget and the potential upside there for fiscal 27. Are you actually planning for a 1.5 trillion 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 mid-term, please? And then lastly, just on MBDA, how should we think about the growth outlook there in terms of a CAGR? Thanks. Thanks.

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

Yeah, sure. Morning, Ross. I think we're very encouraged by the trajectory of the budget. I mean, 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 the 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, THAAD and others. And so I think that you'll see some of the budget applied there, as well as shipbuilding. We've recently pivoted some of our maritime solutions projects a 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 the 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-UK in-ask current sales and 32% in the order backlog. Quite what the final number ends up being, I think, is a bit hard to tell. A lot depends back on things like U.S. budgets as to the rate at which they grow and 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 five years as we build out that backlog. On MBDA Bradham, we've had already a pretty rapid growth. year to the year before. But do you want to comment a little bit on the outlook for that business?

Yeah, I'll just echo, too, on Europe. You know, we have 3.6 billion of sales in Europe in 2025. You know, that is against 2.8 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. Again, BDA has been a really strong 2025 with, you know, over 17% growth. And, you know, Charles laid out some of that backlog that they've got. So, you know, sometimes revenue there can be a bit choppy because it's planned on delivery revenue recognition. So, you know, some of that revenue growth may not be even. But with that backlog they've got, you know, we expect really continued high levels of growth, you know, 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, you know, I think all of this points to a really strong outlook for MDDA on the back of what's already been a pretty strong run for that business.

Thank you, Brad. Many thanks.

Thanks, Ross.

Thank you. Now we're going to take our next question. And the question comes line of Robert Stallard from Vertical Research. Your line is open. Please ask a question.

Thanks so much. Good morning. Good morning, Rob. Good morning, Rob. 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 at MBDA and the rapid growth you've seen already. Have you 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? Thank you.

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 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 could 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, maybe.

Morning, 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 investment, some of which I mentioned earlier. We are on the verge. We're part of the THAAD program. 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 seven-year multi-year program. As part of that, we would look to invest appropriately, and it's quite a bit easier to close a business case on a multi-year demand like that 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.

Yeah, at a higher level, Rob, as we've laid out in the scripts and the prepared remarks today, you've seen us talk about a lot more investment. And over the last three years, we've been averaging sort of a billion a year. I would expect in the next three, 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 three-year cash guide where we said we're going to have over $6 billion in the next three years of free cash. That is reflective of higher CapEx investments.

Thank you.

Thank you very much.

Thank you.

Thanks, Rob. Next question.

Thank you so much. And now we're going to take our next question, and it comes from David Perry from J.P. Morgan. Your line is open. Please ask your question.

Yes, good morning, Charles, Brad and Tom. Two questions. First one, just an update on AUKUS, please. I think the last few days has been quite a lot of press reporting out of Australia that the government now is about to commit 30 billion Australian dollars 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 US 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? Thank you.

Thanks, David. Good morning. 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 UK perspective as well, there's been continued investments in the design work that's going on 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 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, it's the best place to answer that one.

Thank you, Charles, and good morning, David. Yes, no, thank you for pointing that out. I mean, I think the team in Platforms and Services has done an excellent job of playing out the backlog that we've been reporting in recent years. And it's programs like the Amphibious Combat Vehicle, for example, which is a Marine Corps program, factors well into the Pacific deterrent, a dimension of the National Defense Strategy, an important vehicle for the Marine Corps, as well as the armored multipurpose vehicle, AMPV, which is the highest volume vehicle running through the factories there. Some of 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 and some of those higher margins. 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 will point out, I mean, we do our combat vehicle portfolio also includes the business in Haglund in Sweden, and that business is growing quite strongly. We are, it was in the press late last year, working on a six-nation agreement for CB90s, That will likely result in orders for additional vehicles in the hundreds. The six nations, Finland, Sweden, Norway, the Netherlands, Lithuania, and Estonia, and the team is working with all six 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 on a program like that. Next question. Thank you, David.

Now we're going to take our next question. And it comes to the line of Christophe Manard from Deutsche Bank. Your line is open. Please ask your question.

Yes, good morning. Thank you for taking my question. I had three. The first one is still on the U.S. Can you comment on the drive for affordability in the U.S.? How does it impact you? Is it in technology programs or in, for instance, I don't know, the Radford Rebid that's coming up? The second question is on capital allocation and share buyback. The $1.5 trillion 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 always very positively surprised by your order intake. Any guidance for 2026 of book to be or any key orders we should be watching in terms of influencing the order intake in 2026? Thank you.

Very good morning, 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. That allocation, I might correct you there, it's $1.5 billion, not $1.5 trillion. And 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, you want to expand on that, by all means do. So maybe, Tom, over to you on the drive for affordability.

Yeah, no, that's a great question. Thank you, Christophe. The focus on affordability is highly enabled by volume production. 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. As microelectronics get denser and denser, we're able to get more capability into smaller space. drive down the bills 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?

Yeah, thank you. Good morning. I think it's healthy just to look back at our cap allocation hierarchy again. And, you know, 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 billing that we spent our last several years on skills academies and early careers programs, self-funded R&D. You know, 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 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 and covered two times by underlying earnings. And we've then looked at M&A as sort of another rung and using that 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. um, electronic systems as opportunities with compass call. I mean, there's a wide, uh, hopper of opportunities. Uh, but as you always know, the, some of these big programs, you know, quite what year they fall from a, from an order intake perspective can be a little hard to predict, which is why we are cautious around giving, uh, giving specific guidance on that.

Thank you very much. And yesterday there was 1.5 billion. Thank you.

I knew, I knew, I was joking to be honest, Christophe, I knew you meant anyway. Uh, Thank you, Christophe.

Thank you. Now we're going to take our next question. Just give us a moment. And the question comes from the line of Ian Douglas Pennant from UBS. Your line is open. Please ask your question.

Thanks very much. I have three, at least one of which is quite quick. Firstly, on the free cash flow, so your free cash flow guidance 2025 to 2027 implies $2 billion of free cash flow in 2027. which is a decline on what we've seen recently. Can you talk about why that's the case beyond, and obviously I hear what you're saying on the advance payments, but anything else beyond that we should be considering? Secondly, can 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 demands 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 by customers? Thank you.

Very good. So maybe the first couple for you there, Brad.

Free cash flow and... Yeah, morning, Ian. 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 modeled the burn of advances. And in 2026, we expect to have a circa 600 million burndown of advances. We haven't guided to any material advance receipts. So to the extent those come in, that would be upside to what we've guided. And that also is true of, you know, the forward guidance ranges in those three-year increments that we've outlined. None of those include material receipts for new advances, but all of those new ranges, looking ahead, include burndown. So I think that's really the simple explanation of your question on that one. And then on tax rates, we did see an increase or expect an 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 one-year surplus in tax rates. They've now taken those into a second year. So the France tax rate is 36% compared to what we expected to be sort of in the mid-20s. So I think that really explains the tax movements and a 22% guidance for ETR for 26, you know, that's probably a range that's likely to endure for a little bit longer.

Thank you, 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 A, 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-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... you know, production requirements all the way through to when we start doing, you know, 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, you know, moving well, and I'm delighted with the partnership that we have and moving at pace.

Thank you, Ian. And now we're going to take our next question. And the question comes from the line of Olivier Brochet from Rothschild & Co. Your line is open, please ask your question.

Good morning, Charleston, Brad. 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 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 helpfully 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, you know, 25 is no exception to that. We did see some advances come through in our space business from SMS, you know, 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.

Yeah, I think, I mean, backlogs in the former Ball Aerospace now, our space and 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 is the ground systems for this missile warning and tracking kind of mission. And our national and military space businesses grew and won a number of other programs. And so record levels, I think, Brad just checked me if I'm wrong, eight-ish billion for SMS. And so a really good performance there, one that will play out through sales growth here. We're projecting double-digit sales growth in 2026. Very good.

Thank you, Olivier. Thank you very much.

Now we're going to take our next question. And it comes from the line of Alessandro Pozzi from Mediobank. Your line is open. Please ask your question.

Good morning. Thank you for taking the questions. 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. You 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 a high single digit also in line of growth? defense funding 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 we 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? Thank you.

Thank you for the question, Alessandro. We don't, as you know, give medium-term outlook, but we've been on a strong tempo of growth and we do see that continuing. As you probably are aware, everyone has called much debate around the UK, for example, and the defence 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, but it would affect our median term outlook. But we just have to wait and see how that plays through. So there is further upside, you know, 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 three governments of Italy, Japan, and the UK that are partners already. So there's 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 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 Air coming into the Eurofighter family. That's really all I can say at this point.

All right. Thank you.

Thank you so much. Now we're going to take our next question. And the question comes from a line of Samba guests from Goldman Sachs. Your line is open. Please ask your question.

Morning, Charles, Brad and Tom. Thanks for the questions. Three, if I may. Firstly, just back on Europe, if there is movement in the rules on UK company participation in future European defence 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 advance payments expected in 2026 relative to 2025? I mean, given quite a lot fell in Q4 2025, 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's questions about potential US budget increases, I know there's been a lot of CapEx going in for Jacksonville and Louisville, but that was obviously in advance of some of the latest messaging from the US 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? Thank you.

Thanks very much. 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, Safe 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 UK business, but very importantly, strongly enhanced by our footprint already within the Europe and specifically the 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 capital in the U.S., do you want to say a little bit about that?

Yeah, I'm happy to. Thank you for the question, Sam. Yeah, 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 multi-year contracts, particularly in and around munitions. So if you look at the 2026 National Defense Authorization Act, the budget is outlined, particularly Section 804, they outline these multi-year procurements where they create munitions effectively seven years of demand for some of these munitions. There are eight-ish munitions sort of called out there as key munitions. We play a role on six of those. Thad, I mentioned earlier, is one. And so as we look to the sorts of volume increases associated with those, anywhere from doubling in production to quadrupling, you know, there will definitely be some capex expected in those areas across the portfolio. By the way, that's both ES And SMS, those two businesses will contribute. So I'd call that out as probably the dominant area, although there would be others. Great.

Thank you very much. Really helpful.

Thank you so much. Now we're going to take our next question. And it comes to the line of Chloe LeMarie from Jefferies. Your line is open. Please ask your question.

Good morning, Charles Brandon. Thank you for screening me. What is likely the end? I have a first question, please, on the 2026 to 2028 cash outlook. You've hopefully shared the 600 million advances burned 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, so obviously quite a strong performance in 25. We touched on the US platform performance, I think a 30% growth in Bofors and Haglund was mentioned, so could you maybe touch on capacity utilization now in those businesses and the expansion phasing going forward? Thank you.

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

Yeah. Chloe, good morning, by the way. The $600 million burndown is probably a fair average to use across the medium term, so $26 to $28 cash cut. Again, we don't assume any advances coming in, so any prepayments coming in. We do have a slightly higher CapEx across the next three years. And then there's the normal working capital movements. But we will have higher profits, which will fall to cash. So, you know, all that weighted in is kind of what colors in that $6 billion, greater than $6 billion cash cut over the next three years. I mean, it's going to be timing on programs that will dictate the cash burn on advances. You know, it may not be evenly distributed, $600 each year. But I wouldn't be surprised if it's a number like that over the next three.

Yeah, and then on, Adrian, on vehicle performance and production, 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 Haglund's and Bofors over in Sweden. You know, we expect that we would focus, you know, 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 five or six years, and so now we're sort of running at rate, focusing on good performance there, and that, you know, you can see in the bottom line of that business. Over in Haglund's, I mentioned earlier the Six 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 in an industrial cooperation. And so a modest investment there, we expect. But, you know, 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, really good opportunity there. Business has done well at this scale. I hope that is helpful. Thanks, Chloe.

Thank you so much. Thank you. And now we're going to take our next question. And it comes from the line of Adrienne Robier from Bernstein. Your line is open. Please ask a question.

Good morning. Thank you for taking my question. I also have two please. Sorry to ask again about the U.S. budget, but if you don't mind me asking in a more basic manner, if we have anywhere near 50% growth in the U.S. budget in 2027, what would that mean for you? How much do you expect to participate and how long will it take to flow into your P&L? And then 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 rich and you've been expanding capacity, so Should we see this as a reasonable quotient or is there a reason to actually expect to slow down this year?

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

On top line?

Yeah, on top line.

Yeah, the growth that we printed for 2025, that 10%, included a full year of SMS, our space business. formerly Ball Aerospace. So that compares to a partial year in 2024. If you look at 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, you know, hopefully that helps you understand a little bit that we're continuing to grow in pretty high levels here.

Yeah, we still see strong momentum in the business and maybe over to you, Tom, to address budgets.

There is so much that has to play out here before we understand where the top line for 2027 will settle. I mean, again, we're very encouraged by the directionality of the discussions around the budget. You know, you'd have to imagine that the way that would translate into portfolios would be, you know, 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. You know, 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 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 necessary. when it settles out.

But this would really play out in 28, 29 years. Right.

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

Thank you very much. Thank you for the question. Adrian.

Thank you. Now we're going to take our next question. And the question comes from George McWhirter from Bernberg. Your line is open. Please ask your question.

Hi, good morning. Thank you for the questions. 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 governments shift to a greater company-led 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 a second one. Maybe on margins, you talked about 20 basis points of margin expansion a year for the past five years. Do you think this is a reasonable level that you can achieve in the next five years?

Very good. Thanks, George. 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 electronic systems portfolio in the U.S., and that's been really good investments. Things like APKWS was a self-funded R&D program that is now... are 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 UK air sector, specifically around drones, counter drones, some of those capabilities, is making sure that we really build out 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?

Yeah, good morning. The 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 five years, and When we look forward, we'll continue to focus on these things. 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. 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, you know, I would look at that sector as being the one that will drive the biggest gains over the next three years. But we're already pretty top range at a lot of our delivery across the sectors. We look at ES at 15.4 and P&S at 11.4. You know, there's still room to go on those. So I wouldn't just extrapolate a 20 basis point a year over the next five 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. Great.

Thanks for the question, George.

Thanks very much.

Thank you. Now we're going to take our next question. And the next question comes from the line of Nick Cunningham from Agency Partners. Your line is open. Please ask your question. Excuse me, Nick, your line is open.

Good morning, everybody. Thank you. Yeah, so a few details on the US. Hello. Yeah, we can hear you, Nick. Morning. Yeah, it's loud and clear. Yeah, yeah. Can you hear me? We hear you loud and clear. Nick, we are hearing you. Right. OK, thank you. So the administration isn't... Good. So the US administration is not very happy about NOAA and NASA's budget. And it's obviously engaged in a big fight with Congress. But in the meantime, it's been holding up signing checks. And is that an issue for BAE? 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 PNS 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 US peers are looking at retiring debt instead of buybacks. In that context, what is the right level of debt? Thank you.

Okay. 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 said a bit on that and also the shipbuilding and maybe the pivot to submarines.

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

The question was about civil space and NASA.

Yeah, 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 were exactly right, and that is, you know, the growth we've seen has really been driven by a 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 the likes of GOXO, 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 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, you know, off on a commercial shipbuilding venture. That is not our intent here. We are contributing components and working to earn our way into to be a reliable supplier. We do the Virginia payload modules, 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, reliable supplier in this submarine and shipbuilding industrial base, but in the supply chain. I hope that's clear.

Yeah, thanks, Tom. Maybe I would you, Brad, on the debt reduction, debt levels.

Yeah, we're not looking at doing any accelerated reductions in our debt. We're already at 0.9%. times net debt to EBITDA. So, you know, 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 we're over to Ben for the last question. Yes, of course.

And now we're going to take our last question for today. And it comes from the line of Benjamin Healan from Bank of America. Your line is open. Please ask your question.

Yeah, morning, guys. 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 de-emphasized, the potential to 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 for Tom, if I look at electronic solutions, 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 for 26, the six to eight, 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 be thinking about? And then you've had a lot of questions on the budget in the US. 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 1.2 to 1.3 trillion range over the next couple of years, do you think the US exposure that the BA has will be able to outgrow that budget over the medium term? Is that what we should be thinking about? Thank you.

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 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 there. We just announced our intention to move forward with the acquisition of a relatively small business in Sweden, which supplies barrels and castings to our Swedish businesses. I think it would 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 counter drone space, things like Malloy, Canon Lens, Kirin Tech 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?

Yeah, sure. Good morning, Ben. So, yes, as you know, it includes SMS, the Space and Mission Systems business. And as we were discussing a little bit earlier, we saw a slowing of growth in space and mission systems over what we had originally expected in 2025, driven by some of this uncertainty, some of the delays in the, you know, again, as the administration settled in and they worked 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 balls trying to get a sense of whether, what that trajectory, what the slope of that budget growth will be. You know, our strategy all along, 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 War. You know, where is that budget likely to be spent? It's in the areas, you know, we've mentioned, munitions. The Secretary of the Navy came out the other day saying that with the higher budget, they could potentially double the shipbuilding budget for the Navy. You know, the Marine Corps and ACV sort of 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.

Very good. I think, Ben, 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.