QinetiQ Group plc

And welcome to Kinetic's FY23 interim results presentation. Welcome to those joining both online, but also those that have made it through the tube strike to join us here today in person at the Stock Exchange in London. I'm John Howarth. I'm the Group Director of Investor Relations for Kinetic. I'm joined by Steve Whaley, our Group CEO, and Carol Borg, our Group CFO. Steve and Carol will run through the presentation, after which there'll be an opportunity for you to ask questions. Thank you. Steve, over to you.

Great, thank you, John, and good morning and welcome to our interim results for FY23. And as John said, great to see some of you in person today, despite the tube strike. Six weeks ago, I was privileged to be on board HMS Queen Elizabeth in New York with 400 political, military and industrial leaders to discuss global challenges focusing on security, trade, macroeconomics and skills. Within this context, the ongoing conflict in Ukraine continues to reinforce the vital importance of a technologically advanced defence industry. More importantly, this conflict, along with the heightened tensions in the Indo-Pacific, has increased the needs of our customers for differentiated solutions that are directly aligned with our strategy. I'm immensely proud of how our people have supported our customers at this time of need and delivered a really strong first half performance across the group. As a team, we are fulfilling our company purpose and contributing to global and national security. The agenda this morning is as follows. I'll start by giving you the strategic and operational highlights. Carol will provide you with a commentary on our financial results. I'll come back and give you a strategic update of the company, and we will then open up for questions. So let's start with the headlines. We've delivered strong and consistent operational performance across the group. Orders are up 11%, maintaining a robust backlog of £3 billion. Revenue is up 8% and profit is up 7% on an organic basis. Cash performance remains strong with 106% conversion up from 89% last year and returns are healthy with earnings per share up to 11.4 pence and our interim dividend is maintained at one third of prior year total. We've also made excellent progress executing our multi-domestic strategy. We have delivered strong programme performance across all our major contracts, achieved good order intake across the group at 800 million pounds, responded to the challenging economic environment by increasing investment in our people and capabilities that are critical to the future, and significantly secured a step change in our global growth through two strategic acquisitions in the US and Australia. Looking forward, we start the second half in a very healthy position. With more than 95% of our revenue contracted, we are increasing revenue guidance and will deliver profit in line with expectations for FY23. We are focused on proactively responding to the increasing demand for our distinctive offerings, closing the Avantus and Air Affairs acquisitions over the next few weeks, and mobilising the integration plans which are prepared and ready to execute. Overall, we are on track to deliver our five-year strategic ambition within an addressable market worth more than £20 billion per year. By growing our company to more than £2.3 billion revenue at stable margins, we will deliver even greater returns for our shareholders. Our strong financial results are underpinned by a number of strategic and significant operational highlights across our six distinctive offerings in each of our three home countries. In the UK, we have seen increased support operations, including delivering the RAF's mass missile firing exercise at our world-class test and evaluation range in Scotland, building upon our successful investment in the long-term partnering agreement. We've also recently won a £60 million contract with the Home Office to provide the next two years of the accelerated capability environment known as ACE to co-create digital solutions for frontline law enforcement through information advantage. Our US sector has performed particularly well and shifted focus onto larger, longer-term programmes. We've successfully completed the initial production of the CRISI robotics programme and are ramping up production to full rate over the coming years. We've also successfully completed trials of our electric drive technology on the Bradley fighting vehicle, leveraging our capability from the UK and positioning us for a key role within the US Army's optionally manned fighting vehicle programme of record. In Australia, we continue to deliver strong growth across the business with $77 million of new orders for engineering services through the major service provider contract known as MSP. In addition, we secured a new five-year mine warfare centre contract to sustain and enhance the Royal Australian Navy's training and mission rehearsal capability, which will leverage our T&E skills in the UK. Finally, in Germany, our flying operations continue to perform well for our customers, and our target systems business has also seen high demand with 28 million pounds of new orders. So we've had a really excellent first half. And of course, these are just few of many operational highlights across the company where we are delivering high value solutions that are critical for our customers contributing to global and national security. I'll now hand over to Carol for an overview of our financial performance.

Thanks Alison. Thank you Steve and good morning everyone. In this section of the presentation I will provide more detail on our financial performance in the first half of FY23. Like Steve, I have been extremely pleased with our performance. We have delivered strong and consistent operational performance in the first half, continuing to deliver good revenue growth at stable operating margins, consistent with our short-term guidance. Today, we are increasing our revenue guidance and reaffirm that we are on track to deliver profit in line with current expectations for FY23. So firstly, our key financial highlights. In the first half, we have delivered good order intake at £798.8 million, growing 18% on a reported basis, demonstrating high demand for our distinctive offerings. Strong revenue at £673.4 million, growing 12% on a reported basis, delivered through good program execution across all our major contracts. Good underlying operating profit at £74.1 million, growing 39% on a reported basis, which at 11% margin is within our short-term guidance range. Strong cash performance with underlying net cash flow from operations at £106.8 million. This results in a cash conversion rate of 106% due to good underlying cash performance and continued focus and discipline on working capital management. Underlying basic earnings per share of 11.4 pence, increasing by 41%. Overall, good underlying performance in the first half of FY23 at a group level, with all metrics showing an increase over the same period last year, which, as you know, was impacted by a £14.5 million profit write-down. Orders. We have good order growth, securing £798.8 million in the first half, growing 18%, 11% on an organic, consistent currency basis, excluding the impact of the write-down last year. As Steve has, and will further elaborate, this includes £193 million of engineering delivery partner EDP framework orders in the UK, orders totaling 77 million Australian dollars through the major service provider MSP contract in Australia and orders totaling 173 million US dollars in the US. It is pleasing to see our continued success in winning new business with our distinctive offerings as I'm illustrating on the charts on the right hand side. The upper bar chart illustrates the realisation of the previously stated strategy of moving towards larger, longer term contracts. In the first half of FY23, 45% of our orders were greater than £5 million in contract value, an increase from 29% in the same period two years ago. In the lower bar chart shows the order backlog. Despite the naturally reducing impact of the long-term partnering agreement, it is a significant achievement to maintain order backlog at 3 billion pounds as at the 30th of September, which has been driven from good order growth across all three of our home countries. Onto revenue. We have delivered strong revenue at 673.4 million pounds, growing 12%, 8% on an organic, consistent currency basis, excluding the impact of the write-down last year. This has been driven by 7% organic growth in EMEA services, primarily due to ongoing EDP growth and work delivered under the MSP contract in Australia. Global products grew by 14% organically, excluding the impact of the write-down last year, due to good growth in both the US and our target systems business, QTS. The investment we have made in recent years into our business winning capabilities across our three home countries is delivering results, driving this impressive level of continued revenue growth across the group. We start the second half of FY23 with 95% of our in-year updated revenue guidance under contract, compared to 90% at the same time last year. This reflects strong performance and delivery on our key framework contracts and provides a greater level of confidence in delivery of our FY23 results. We have delivered good underlying operating profit at £74.1 million, which is 11% operating profit margin within our 11% to 12% short-term guidance range. This represents an increase of 39%, 7% on an organic consistent currency basis, excluding the impact of the write-down last year. Here, I would like to provide some additional detail on two specific topics, foreign exchange rate movements and our strategic operating investments. Firstly, the impact of foreign exchange rate movements on operating profit has been minimal in the first half of the year. Should foreign exchange rates remain static, we expect the full-year benefit for FY23 to be in the region of two to three million pounds. Secondly, and more importantly, our strategic operating investments. As we have previously communicated, we are continuing to invest in our people and capabilities in the order of 100 basis points of our margin to enable our step change to deliver our five-year growth ambitions. The chart on the right-hand side illustrates the impact that our strategic operating investments have on our short-term margin. Fundamentally, our long-term ambition remains to grow revenue to more than £2.3 billion by FY27 with operating profit margin of 12% to 13%. Today, we announced an additional investment of £5 million in response to the cost of living pressure predominantly to support our lower paid employees, bringing our total committed strategic operating investments in FY23 to approximately £20 million. This additional investment has the effect of marginally shifting our investment period to the right, but represents no change to our short term or long term absolute profit guidance. Whilst investment brings short term pressure on margins, investing in our innovation platform comprising of our people, technology and digital transformation will ultimately increase competitiveness and drive efficiency in the long term. Steve will provide further detail on our strategic operating investments later in the presentation. Therefore, whilst we are investing in the short term, our operating profit margin for FY23 will remain at the lower end of our 11 to 12% short term guidance range. We remain confident in our ability to improve margins to deliver sustainable operating profit of 12 to 13% in the mid to long term. Now turning on to the segmentation split of the group performance. Firstly, here we have EMEA services. EMEA Services has delivered significant year-on-year growth driven by investment and successful implementation of our strategy to win larger, longer-term contracts, giving greater visibility and margin stability. We have increased orders by 19% and revenue by 7%. A notable example is the LTPA contract uplift demonstrating our ability to partially mitigate inflationary pressures in our large contracts. Operating profit has declined by 8% organically, driven by both a strong prior year comparator period and the short-term strategic operating investment in our people and capabilities to support our growth, as I've just described. Operating profit margins remained strong at 11.7%, consistent with the second half of FY22. With a book-to-bill ratio of 1.4 times, excluding the LTPA, we have maintained a substantial order backlog, which gives us good forward revenue visibility. Next, onto global products. Global Products has had a number of notable achievements in the first half. In the US, we won orders totaling 173 million US dollars and have won two large multi-year framework orders and have delivered strong performance in QTS. We have increased orders by 16% and revenue by 34%, largely driven by good US performance with operating profit margin at 8.5%. We have modified our order recognition criteria to align with industry best practice. This results in a one-off catch-up in the US of 48 million pounds for orders under-recognized in the past and is aligned with our strong revenue performance in the US. In the US, orders, revenue and profit in the first half of FY23 are above the second half of FY22, both before and after the order recognition policy change, demonstrating greater stability, resilience and consistent performance, giving us confidence of a strong foundation for future growth, both organically and inorganically, with the upcoming integration of Avantis. Global products, whilst on a shorter order cycle than EMEA services, has a book to bill ratio of 1.3 times and a growing order backlog, which again gives us good forward revenue visibility. We have continued to deliver strong cash generation in the first half. Underlying net cash flow from operations is at £106.8 million, which equates to a cash conversion ratio of 106%, up from 89% in the same period last year. This strong cash conversion is as a result of our good underlying cash performance and continued focus and discipline on working capital management, as you can see on the chart with a net improvement in working capital in the period. We have invested £49 million in capital expenditure, predominantly driven by the ongoing LTPA commitments, which peak in FY23 and 24. We retain a strong balance sheet to support investment in our long-term growth strategy. After paying tax of £18 million and dividend of £29 million, we delivered a net cash position of £264 million as at 30 September 2022. We maintain a rigorous approach to the deployment of our capital, scrutinising all opportunities in the same manner to ensure returns to our shareholders appropriately reflect the risks. We have a clear and concise capital allocation policy that we continue to deploy for the benefit of all our stakeholder groups, our shareholders, our employees and our customers. As mentioned previously, we invest in our capabilities organically, which are continuing to deliver good revenue growth at stable operating margins. Inorganically, we have committed to two acquisitions, both of which are expected to complete by the end of the calendar year. We continue to maintain our balance sheet strength, evidenced by our strong and consistent cash performance and the disposal of our Space NV business in Belgium. Following the completion of the two acquisitions, we will move into a modest net debt position, representing leverage of circa 1.3 times as previously guided, working to deleverage to less than one time following the first full year of Avantis integration. We have continued to execute our disciplined treasury risk policy, which has resulted in a significant benefit from the FX and interest rate hedges that have been put in place as a result of the Avantis acquisition, as you can also see on this slide. We have announced an interim dividend of 2.4 pence per share and have made dividend payments of 29 million pounds during the first half of FY23. The following slide shows the other technical factors for FY23. Effective tax rate reduces and all other factors are consistent with our prior guidance. Our net finance expense is forecast to increase with the drawdown of the new debt to fund the acquisition of Avantis in December. Effective tax rate and cash tax is expected to reduce due to the single source regulations office determination on the research and development expenditure credit expenditure credit, say that loud, sorry, the effective tax rate will reduce to circa 11.5% organically and then increase with the effect of the Avantis acquisition. Networking capital is expected to realise a modest cash outflow as a result of our growth ambition. Capital expenditure is expected to increase modestly to within the 90 to 120 million pound range as we continue to invest in our customer facing propositions, our employee value proposition and our business infrastructure. Whilst the expectations we set out at the time of Avantis and Air Affairs announcements remain unchanged, we will update for the combined effect of the acquisitions following completion. And finally, our outlook statement. We enter the second half of FY23 with confidence, a healthy order book and positive momentum with 95% revenue under contract. We are increasing our revenue guidance and are on track to deliver profit in line with expectations for FY23. Given our strong growth in the first half, we will deliver high single-digit percentage organic revenue growth with underlying profit margin at the lower end of our 11% to 12% short-term expected range due to the increased investment in our people and capabilities to enable growth, as I explained earlier. In the longer term, our ambition remains to grow revenues to more than £2.3 billion by FY27. With our recently announced acquisition, this means that we are targeting mid to high single digit percentage compound revenue growth over the next five years with further strategic acquisitions enhancing this growth. We are targeting an operating profit margin of 12 to 13% in the mid to long term. Return on capital employed is forecast to remain strong at the upper end of 15 to 20%. And with that, I will now hand back to Steve.