BAE Systems plc (BA) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to BAE Systems 2026 Half Year Results. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Paul Checketts, Director of Investor Relations. Please go ahead.

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

Hello, everyone, and thank you for joining us this morning. Before we begin, I want to thank our employees, trade unions and supply chain partners for the tireless work they do to ensure we deliver on our commitments to our customers. The world has remained highly volatile in 2026 and delivering reliably is vitally important given the increased threats to global security. There are 3 key messages I'd like to leave you with today. First, we've delivered strong results in the first 6 months with good growth in sales, profit, earnings per share, order intake and cash. This strong performance leads us to upgrade our full year guidance. We now expect earnings per share to grow by 11% to 13% in 2026 and free cash flow to be greater than GBP 2 billion. Second, the breadth of our business across geographies, domains and product types puts us in an exceptionally strong position for both current and future opportunities in defense. And third, we are confident in the future growth we can deliver and the extended duration of that growth. We delivered strong outcomes in the first half of 2026. Sales grew by 9% on a constant currency basis, EBIT by 11% and earnings per share by 13%. Cash generation was strong, too, with GBP 1.8 billion of free cash flow in the half. We are experiencing high demand for our products. You can see this in our order intake with GBP 16 billion of new orders secured in the first 6 months of the year, taking our order backlog to a new record of GBP 84 billion. Our balance sheet strengthened further in the half. Having such a strong financial position gives us real strategic flexibility. It allows us to reinvest in the business, and it supports continuing returns to our shareholders. These results further strengthen our track record of consistent delivery and demonstrate the effectiveness of our value compounding model. Just as importantly, they reflect the strength of a business that is well positioned to meet both current and emerging defense requirements around the world, which is what I'd like to turn to next. Our business has an outstanding geographic footprint and the strategic advantages it provides have been underlined again in 2026. Our established positions in some of the largest defense markets in the world give us an excellent breadth of opportunity and reduce the risk and volatility that comes with being more concentrated. Worldwide, governments are responding to geopolitical tensions with sustained increases in their defense budgets. In each of our markets, the work we've done to invest in and position our business means our existing proven portfolio of products and capabilities aligns well to customer priorities. We'll look at Europe and the U.S. in more detail shortly. The U.K.'s new defense investment plan will see almost GBP 300 billion spent on defense by 2030 and commits to invest in both our long-term programs and new disruptive technologies, including next-generation fighter jets, new autonomous collaborative combat aircraft and other capabilities. The geopolitical situation in the Middle East is likely to drive higher defense spending in the region. Our multi-decade track record of partnership in the Gulf positions us well to support government customers there. Australia is also increasing defense spending. We're already the largest defense contractor in Australia, and we expect strong long-term growth driven by the Hunter Class Frigate Program and SSN-AUKUS, where we'll deliver state-of-the-art nuclear-powered submarines. Two countries that are relatively small for us now, but where we see great potential are Japan and Canada. Japan is on a path to double its defense spending by 2027. It's a core partner of GCAP, and we're exploring how we can support the country in other areas of defense capability. Meanwhile, Canada has committed to NATO's 3.5% target, which will drive a large sustained increase in defense investment. We are already working with the Canadian government by providing the warship design for Canada's River Class destroyer. And in recent weeks, we have reached agreement to support the rapid delivery of an Arctic over-the-horizon radar capability, and Canada has now officially joined the Global Combat Air program as an observer. Across the globe, our growth opportunities are significant, and we're focused on consistently executing our long-term strategy to deliver strong top line growth, margin expansion and cash generation. These growth opportunities are particularly evident in Europe, which I'd like to turn to now. The continent of Europe continues to face an acute and growing threat to its security. As countries look to assume greater responsibility for their own security, most are significantly increasing the amount they spend on defense, underpinned by their commitment to meet NATO's target by 2035 of 3.5% of GDP being spent annually on core defense requirements and 5% in total. We're one of the leading defense companies in Europe, and our business continues to go from strength to strength. Our equipment and services are integral to the defense of more than 25 countries across the region. We have great capabilities across multiple areas, including combat air, land vehicles, missile systems and drone and counter drone technologies. Growth in Europe continues to outpace the group overall. Sales increased by 30% in the first half, and Europe now accounts for 33% of our total order backlog compared with just 13% of sales. This provides us with strong visibility of continued growth in the region over an extended period. To support our customers as they look to rebuild defense readiness, we're investing to support increased capacity, efficiencies and enhanced capabilities. An excellent example of our critical role in the defense of Europe, both today and in the future is MBDA. Since we spoke about MBDA at our full year results in February, its importance to the defense of Europe and allied nations has become increasingly evident. As Europe's leading missile systems company, MBDA combines a broad portfolio with a strong track record of proven products. They are well positioned in the areas where customers are accelerating investment to strengthen defense capabilities and readiness. In air defense, they provide capabilities across both land and maritime environments, including counter drone systems, short-range air defense and medium-range solutions capable of addressing ballistic missile threats. In air dominance, MBDA supplies weapon systems for more than 10 combat aircraft programs, including Typhoon, F-35, Rafale, Gripen and KF-21. The company also offers a comprehensive range of deep strike precision weapons. Taken together, these capabilities position MBDA exceptionally well to benefit from rising defense expenditure as nations increase investment in air defense and seek to replenish and expand their inventories. The strength of demand for MBDA's products is clearly reflected in their order intake. Prior to Russia's invasion of Ukraine, order intake was typically around EUR 4 billion per year. In the first 6 months of 2026 alone, MBDA secured EUR 6.5 billion of new orders, equivalent to more than 2x revenue in the period. As a result, the order backlog increased to EUR 48 billion, representing almost 8x annual revenue. To meet growing customer demand, MBDA is significantly increasing investment. The business now intends to spend EUR 5 billion between 2026 and 2030. This investment will modernize manufacturing sites, accelerate digitalization, substantially increase production capacity, strengthen the supply chain and support the continued development of next-generation products and technologies. The combination of this increased investment, a record order backlog and a portfolio that is highly aligned with evolving customer requirements gives us confidence that MBDA is well positioned to deliver strong revenue growth for many years to come. I'll now hand over to Tom, who will explain why we are confident about the outlook for our business in the U.S.

Thank you, Charles. Across the U.S. business, our performance through the first half of 2026 has been strong, reflecting our portfolio's excellent alignment with U.S. defense and intelligence priorities. While a number of factors are shaping the final fiscal year 2027 top line budget numbers, we continue to anticipate substantially higher year-over-year defense spending, which bodes well for our aligned portfolio. The administration continues to focus on a few key defense priorities, including munitions production, drones and counter drone systems, space-based capabilities and the Golden Dome. We are developing systems and delivering products in all of these areas, and we continue to invest in technology and production capacity to meet the record demand. Turning to munitions. Given the increased use of missiles and interceptors in global conflicts, the demand for munitions has significantly increased. There are 12 munitions that the Department of War has identified as critical, and we support 10 of those 12 priority programs. We've signed framework agreements with the Department of War and are at various stages of contracting on these multiyear procurements, which depending on the program, will double, triple or quadruple our current production rates. On THAAD or the Terminal High Altitude Area Defense program, for example, we soon expect to receive a contract to begin procurement for 2,800 seekers over 7 years, which represents a fourfold increase. The combined revenue across the multiyear priority munitions programs represent a multibillion-dollar revenue opportunity. In the counter drone market, we continue to see very strong demand for our APKWS laser-guided rockets. We're currently under a 5-year contract worth up to $1.7 billion. And in recent months, the State Department approved potential foreign military sales for more than 40,000 additional units. This highly effective counter-drone weapon is being deployed on an increasing number of platforms around the world. In a recent collaboration with BAE Systems Air Sector and the Royal Air Force, we successfully completed integration of the APKWS onto the Eurofighter Typhoon aircraft, making this counter drone capability an option in all countries where the Typhoon is operated. In February, I highlighted the investments we've made in our workforce and facilities since 2020, investing more than $4 billion to expand capacity by 2 million square feet, advance R&D and grow our workforce by about 14%. We are continuing to build on those investments. The U.S. business expects to increase capital expenditures 40% year-over-year, driven in large part by munitions production acceleration. In our Electronic Systems reporting segment, we recently approved another $0.25 billion for additional capital projects to support the production ramps on THAAD, AMRAAM and Tomahawk. Turning to the space domain. National security and military space capabilities remain critical to the administration's focus on homeland defense, and we are well positioned in those areas. Sales in our Space and Mission Systems business grew almost 30% in the first half of 2026 over the same period in 2025. Our Elevation and Evolve product lines of spacecraft include a range of standardized high-performing products. They were developed in response to our customers' increasing need for more cost-effective, capable and rapidly delivered spacecraft. The product lines allow customers to choose the best fit for their needs across low and medium earth orbit missions as well as geostationary and Cislunar applications. Combined with our cutting-edge payloads and cost-effective ground systems, our spacecraft products enable full mission solutions. Since introducing our spacecraft product lines last year, we have seen strong and growing customer demand. We announced last month that the Evolve spacecraft was selected by Vantor, formerly Maxar, for its next-generation high-resolution imaging satellites. This adaptable, high-performing spacecraft line continues to be a discriminator across our diverse set of national security and military space missions. Our capabilities will also play critical roles in the U.S. Golden Dome architecture, and we support a number of the key mission solutions, which underpin it. For example, earlier this year, we completed the preliminary design review on the $1.2 billion Epoch 2 resilient missile warning and tracking program, which will provide a multi-satellite constellation and ground command and control system that will contribute critical capability to the Golden Dome. While strong demand for our products continues in the U.S., we are also exposed to increasing demand in Europe through our Hägglunds and Bofors businesses in Sweden. Our CV90 and BvS10 combat vehicles are in high demand across a number of European customers, and these franchise programs are key drivers of our record backlog in Sweden and our platforms and services sector. To meet this customer demand, we've made investments to significantly expand both our production capacity as well as our manufacturing capability in Hägglunds, which we expect to result in a 400% increase in production. In light of the increasingly complex global security situation, Bofors is experiencing strong demand for artillery and munitions like Archer, Tridon and 3P medium-caliber ammunition. Production rates in Bofors have already grown by a factor of 3 to 4 across several product areas. Bofors is also acquiring new facilities and expanding production lines. And in May, we completed the acquisition of a key Swedish supplier of precision mechanics and component machining products, which we're integrating into the Bofors business. This acquisition strengthens our supply chain and supports Bofors increased delivery of core systems. Across our portfolio, we are focused on delivering at speed and scale for our customers. I'm really pleased with our strong performance and with how well we are positioned for long-term growth. With that, Charles, I'll hand it back over to you.

A theme I want to spend a few minutes on is the evolution of modern warfare, what it means for defense spending, capability requirements and how this is not only fueling our performance today, but is also extending our runway for future growth. Let me talk you through that in a little more detail, starting with some of the major programs we deliver. These are long term in nature and account for the vast majority of our revenue, profits and backlog. They include combat aircraft, air defense systems, combat vehicles, nuclear-powered submarines, space systems and the Type 26 family of frigates. These platforms provide capabilities that are essential to protecting our societies, deterring adversaries and supporting our allies. They form the foundation of national defense and will remain critical for many years to come. Indeed, at a time when adversaries are building and fielding major military platforms at a rapid rate, the need for these capabilities has become even more apparent. They require complex and sophisticated engineering to design, manufacture, integrate and sustain, providing high barriers to entry. Throughout the life of these programs, we continue to invest in technology and innovation, enhancing existing platforms while developing the next generation of capabilities our customers will require. Let me bring that to life with a couple of examples. In Combat Air, Eurofighter Typhoon has continued to evolve since entering service in the 2000s. The significant capability upgrades now being introduced will ensure it remains a highly effective platform for decades to come. At the same time, we are working with our partners to develop the next generation of air combat capability through GCAP, which is expected to enter service in the mid-2030s. Together, these programs demonstrate our ability to both enhance existing platforms and develop the technologies that will define the future of combat air. The same is true in our submarine business. As we complete delivery of the Astute-class attack submarines, which will remain in service for many years to come, we are also designing the next-generation SSN-AUKUS submarine for operation by the U.K. from the 2030s and Australia in the 2040s. This business model provides long-term visibility, supporting sustained growth and value creation over time. Alongside these programs, there are areas of the defense market that are evolving more rapidly. These technologies are complementary to traditional defense platforms. They will operate alongside and in collaboration with larger, more complex systems. Areas such as drones, counter drone systems and autonomous capabilities are attracting significant investment in innovation with a growing number of companies competing for opportunities, including new entrants from outside the traditional defense sector. While these markets are dynamic and competitive, developing solutions that can perform reliably in demanding military environments remains an exceptionally complex challenge. Our advantage comes from combining our deep mission and operational knowledge with advanced software capabilities, differentiated hardware, systems integration expertise and the ability to scale production when required. In other words, we're not simply developing individual technologies. We're delivering mission-ready capabilities that work in real-world contested environments. Let me illustrate that with a couple of other examples. The drone market is attracting significant innovation, ranging from low-cost attritable systems through to collaborative combat aircraft. Our focus is on differentiated uncrewed capabilities where our operational understanding, software expertise and industrial scale provide us with a competitive advantage. That capability is already being demonstrated through Nyan, our long-range deep strike uncrewed aircraft, which is operating effectively in some of the most demanding and contested battlefield conditions in the world. It is also evident in Brontanax, our collaborative combat aircraft, which we unveiled last week at the Farnborough Airshow. The program has been entirely self-funded, demonstrating our ability to invest in differentiated capabilities ahead of demand. In this evolving area, our combination of multi-domain expertise, proven delivery and increasingly advanced digital and software capabilities creates a competitive position that is difficult to replicate and enables us to deliver trusted, differentiated solutions across the full spectrum of modern warfare. We have invested significantly in these rapidly evolving capability areas and we'll continue to do so as we build on the strong position that we've established. We expect enduring demand and the largest revenue opportunity to remain in complex high-end defense platforms alongside a rapidly growing, though relatively smaller opportunity in affordable mass systems. Having strong positions across both markets is a powerful combination and one that supports long-term visible growth. Our ability to succeed across both established and emerging defense markets doesn't happen by accident. It's supported by a relentless focus on improving our business, which I'd like to turn to now. Our relentless commitment to operational excellence has been a defining characteristic of our business for many years. We are constantly looking for ways to work more effectively, improve performance and deliver greater value for our stakeholders. Looking back over the past decade, there have been distinct phases in our transformation journey. Our first priority was to address historic program performance challenges and ensure those issues would not be repeated. That meant putting the right systems, processes and culture in place. Our 3P framework saw us focus on strong, consistent program performance, begin deliberately shaping our portfolio for value creation and resolve pension deficit funding, which was holding back cash generation. Building strong foundations was essential to delivering consistent results for our customers, employees and shareholders. Those foundations then enabled us to position the business for growth. You saw that reflected in 2022 when our growth rate accelerated, supported by the deliberate actions we've taken and a changing geopolitical environment. Today, we're operating from a position of strength, and we intend to build on that by continually seeking ways to become a better business. There are many examples of how we've already been doing this. We've invested in digital tools, increased production automation and improved site infrastructure to strengthen how we operate and deliver for our customers. As part of our efforts to improve, we've been reviewing how we are organized and how we operate. As a result, we will streamline the business from 5 reporting segments to 4, and we will begin reporting under the new structure from 1st of January 2027. Integration of cyber intelligence and digital capabilities is now central to our operating model. So folding these into our other segments mean they'll be embedded in the business. And we will continue to focus on becoming a simpler, more agile and effective business in the years ahead. And now over to Brad for the financials.

Thanks, Charles. Momentum continued to build in 2026 as we delivered strong results across the board. Orders of GBP 16 billion exceeded sales with backlog at GBP 84 billion. Sales rose by 9% with double-digit growth in ES, P&S and Air, while EBIT of GBP 1.7 billion grew by 11%, taking return on sales up 20 basis points to 10.8%. Earnings per share was up by 13% versus H1 '25 on the double-digit growth in profit and the lower interest expense from higher cash. Free cash flow was GBP 1.8 billion, largely on the timing of customer advances. These strong numbers are a product of the outstanding efforts of our worldwide teams who continue to deliver to protect those who protect us. Breaking down these numbers, starting with orders. Our GBP 16.4 billion of order intake featured several large items, including GBP 2.5 billion Typhoon support for Türkiye, GBP 2.1 billion for MBDA, GBP 1 billion in F-35 orders and GBP 1.6 billion for our SMS business. It's also worth noting that the half year order intake totals do not include several recent multibillion pound announcements, including the U.K. government's ongoing support for the GCAP program, the Arctic over-the-horizon radar sale to Canada and today's Dreadnought submarine funding announcement, which is why we're here today. With a pipeline of around GBP 180 billion, together with the GBP 84 billion backlog, the group is positioned for continued strong growth well into the future. Moving to sales. The group delivered 9% top line growth, nearing GBP 16 billion. ES grew by 11%, led by a 29% growth in our space business. P&S grew by 12%, featuring nearly 30% growth from Hägglunds and Bofors on sales to Europe. The air sector grew by 11%, led by ramps in GCAP and the Türkiye Typhoon programs. Maritime rose by 4%, while Cyber & Intelligence grew by 3%. Turning to underlying earnings before interest and tax. The group portfolio performed well, expanding half year margins by 20 basis points to hit 10.8% as EBIT grew by 11% to GBP 1.7 billion. ES EBIT of GBP 600 million resulted in 15.5% return on sales, up 50 basis points on strong operational delivery. P&S EBIT grew by 11% with a return on sales of 11.9%. The air sector delivered GBP 580 million of EBIT, growing by 16% for a return on sales of 11.9%, up 40 basis points, driven by risk retirement. Maritime's return on sales of 6.1% continued to reflect the early stage maturity with several first-in-class programs trading at relatively low margins within the sector. And finally, the Cyber & Intelligence sector EBIT of GBP 107 million was up by 14%, reaching 9% return on sales with strong performance from the Kirintec counter drone business in Europe. Our operating cash flow of GBP 2.1 billion featured net customer advances of GBP 1.6 billion, predominantly in our air sector with some of this expected to unwind in the second half. CapEx was GBP 400 million, reflecting continued investments to drive growth and efficiency. Our interest expense of GBP 187 million fell due to higher cash balances, while cash tax was broadly flat, leading to a free cash flow of GBP 1.8 billion. Net debt fell to GBP 3.2 billion. Turning now to guidance. Given the strong half year performance, we are upgrading our key full year targets as follows. We expect sales to grow by 8% to 10%, up 100 basis points from previous guidance. We expect EBIT to grow by 10% to 12%, also up 100 basis points from previous guidance. We expect earnings per share to grow between 11% and 13%, up 200 basis points from previous guidance. Free cash flow should exceed GBP 2 billion, excluding any further material advances we may receive in the second half, but including burn down of existing advances. We are upgrading the '24 to '26 cash target by GBP 700 million as we now expect to exceed GBP 6.7 billion for this period. We have left the other 3-year guides unchanged due to accelerated cash earned in 2026 and the unwind of advances received. Finishing with capital allocation. We continue to prioritize investment in our business through our people, our capital expenditures and our R&D. Our progressive dividend continues to grow with our 2x coverage policy, while our strong balance sheet provides strategic flexibility and capacity for M&A. Our buyback program continues to be an important tool to return any surplus cash after all these outlays. This half year represents records across nearly all our key metrics. Looking ahead, our backlog and pipeline, together with our drive to increase profitability and maintain strong cash flow mean we are well positioned to continue to set new records. Back to you, Charles.

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

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

A couple from me. First of all, Charles, on GCAP, we saw Canada join as an observer, but there's been talk about other participants joining. Does this potentially put at risk the entry into service? And then secondly, probably one for Tom. On the munition framework agreements, we've been getting some details from other U.S. defense companies, for example, LHX saying they could have a high teens margin. Have you got any additional information on what these agreements could mean for BAE?

Yes. Well, I apologize if we do have any connectivity issues because we're up here in Barrow and had to do things rather at the last minute to get up here. So the phone connections are not as perfect as we'd like them. So apologies in advance. And if you don't get the answers through, just let us know, and we'll repeat them. On GCAP, yes, we're delighted to welcome Canada in as observers. And your point on the time frame and the schedule and the initial operating capability is well made. And in fact, I think all 3 governments are very focused on the schedule. And when it comes to additionally expanding the partnership, I think that is a key requirement is that it does not slow the schedule down. And certainly, in the case of Canada, we had no doubt at all that joining as observers was not going to have a negative impact on the schedule in any way, shape or form, but that is a key consideration for other partners. And then over to you, Tom, to talk about the framework agreement.

Yes, Charles. So Rob, we have a very similar situation with respect to the munitions ramps. I mean we're -- we tend to be in the second tier. And so many of the announcements that have come out with respect to the primes on the munitions are a bit ahead of us in terms of backlog building. With respect to margins, so we have signed now 5 of the framework agreements. We have 3 more in negotiations. And then of those framework agreements that are signed, we have a number of multiyear contracts in negotiations as well. As this plays out, I'd say across that set of munitions that we would expect to see accretive margins for ES and SMS over time. I'll leave it at that.

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

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

Next, we have Ross Law from Morgan Stanley.

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

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

Yes. The first half of the year, you can see the strong results across Air, ES and P&S. And when you read across for the full year, the upgrades are really based on the strength of that performance on the top line. So what we see in the first half with European growth being so prominent with the 30% increase that's really going to drive P&S up above where we thought it would be for the year. So that's one of the factors in that upgraded guidance. And ES, as we saw in the first half, space being up 30%. That's coming in higher than our expectations for the full year. So that's a factor of driving our upgrades on the top line. And Air is another one where it's coming in a little bit above where we thought it would be. So those are really the key drivers in the guidance upgrade. And on the bottom line, we're continuing to deliver with that top line performance. So margin expansion is on track. So that's really the key. In the second half, we do expect to have improving performance coming out of the maritime sector, too, which will give us a change H2 versus H1. So those are the main ingredients. And I think your other question, if I heard you right, was on FalconWorks. So the FalconWorks is a great portfolio of differentiated autonomy in Air. And so we've got a range of different products from one-way effectors all the way up to the PHASA-35 product. And the CCAs, which you would have seen at Farnborough at Brontanax, that's an exciting innovation through self-funded R&D that we're really excited about. So over the medium term, we said this will be -- should be over a billion in revenue, and we're on track to hit those targets. And that's -- I'll leave it at that.

Next, we have David Perry from JPMorgan.

I've got 2 questions, please. One of them, capital allocation. Thanks for those comments about modern warfare and MBDA's portfolio positioning. So just going forward, one of your peers has made an acquisition, just announced an acquisition of nearly EUR 4 billion on maritime robotics. Just wondered how you're thinking on buying technology start-ups versus returning cash to shareholders. That's one question. And the second one would just be conversations with Middle East customers right now. I guess probably quite a few of them want more defense equipment, but they've also got a lot of economic uncertainty. I just wonder how you think this will all play out in the coming months and years.

Yes. I'll maybe just take the second one first. And yes, as you said, there is a lot going on in the Gulf with the conflict and as a result of that. And I think a key focus for our customers there is the sort of counter drone mission, which is why we were so pleased to be able to get APKWS onto the Typhoon platform as quickly as we did and giving our customers more defensive capabilities for the airspace is a key requirement. And also pleased to see that the kit that we have in the region has and is performing very well. So I think that positions us well for the future. On capital allocation, I'll hand over to Brad to give a more detailed answer, but we've been interested in acquisitions. We still are in some of the same sort of areas. It's finding the right opportunities around defense electronics, adding to our portfolio, the kind of deals that we've done in the past. And if we can find the right opportunities, what we would consider to be the right price point, we're still very much interested. But in terms of the overall capital allocation framework, I'll hand over to Brad.

Yes. Thanks, Charles. So the first thing I would say is that our priority is to invest in organic growth and accelerate that. So that's why in this market, in particular, with multiples where they are, we feel like you get a better return on capital employed by really accelerating the growth that we have in that GBP 84 billion backlog. So our priority is investing internally, and you're seeing higher CapEx. You're seeing higher R&D. So those are examples of that organic investment. And then, of course, you know the dividend policy and strong balance sheet. It does allow us to do M&A if we do find the right targets at the right price. And that's a difficult equation right now given that it's a seller market and a lot of these assets. So again, that's why our top priority is investing in ourselves. If there's any cash left over, I think the buyback, as you've seen, has been a good tool for us, and we've retired about 10% of our share count since we started those programs, and we continue to use that as a tool in the toolkit.

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

Yes. In fact, if you look over the last several years, the acquisitions that we have made have been really quality additions to the numbers that you see today. They embed solid revenue growth. The Space business is a great example of that, where now we're seeing great exposure to the space budgets in the U.S. and the intelligence budgets in the U.S. and that's driving growth at really -- rates that we're pleased with 30% in the half year. And if you also think about the quality of that revenue we've added from the acquisitions we did from the Raytheon UTC spin-offs to Ball Aerospace, these are all margin-accretive acquisitions. So we've added really good quality and durable growth on the top line, but at really accretive margins. And that's been a really important part of how we looked at acquisitions.

Next, we have Alessandro Pozzi from Mediobanca.

The first one for Charles. The U.K. has published the defense investment program. I was wondering if you can have your view on it given the number of strategic decisions that have been made, some of them quite controversial like going to a hybrid Navy or, for example, the preference of F-35 in terms of new acquisitions over the Eurofighter Typhoon, even though there's a big upgrade there. The second one on Air clearly supportive of revenue growth and margins. Can you give us a bit more details about the production rates, especially for the Turkish contract? And I believe there were some retirement based curve that have been taken out. Can you provide more color on that?

Yes. So I mean, we were very pleased to see the DIP, Defense Investment Plan out and announced a few weeks ago. I think there's still work to be done to translate that into programs. And I think what we're all looking to see is a clear pathway to the NATO 3.5% target. So there's a lot more work to be done. But in terms of some of the big handfuls from our perspective, we were pleased to see, for example, GCAP get the funding that the program required and now translated into a multiway multi-government funding solution for Edgewing, which is the joint venture, which is delivering on GCAP. So from our perspective, we were pleased to see the DIP, but recognize there is still work to be done in the developing a clear pathway to the 3.5% NATO target. And defense is a long-term game. But I'm very happy that we've got a Prime Minister and a Defense Secretary of the new government here in Barrow today, which I think just by their presence here, the announcement that they're making around the next phase of Dreadnought funding is a clear indication of their commitment to defense and security. In terms of their production ramps, I think, as you know, with Typhoon, we were based on what was already in the backlog for Eurofighter, we were, roughly speaking, doubling the production rate from the historic 12 to 14 a year to somewhere in the high 20s. And I think we're well on track to doing that. And in fact, we need to do that to meet our delivery commitments to some of the newer entrants to the Typhoon program such as Türkiye. And I think further, we have a number of other opportunities in the pipeline. And if we deliver more or if we are able to succeed with more Typhoon exports, we may have to go higher on production.

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

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

Next, we have George Mcwhirter from Berenberg.

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

I think Brad, can you do both of those?