QinetiQ Group plc

Great. Well, good morning, everybody, and good to see you all here. Welcome to you in the room here, but also those joining us online on the live webcast. This is our full year results for FY23, and we've got some really exciting results and new ambition to share with you today. I'm John Howarth. I'm the Group Director of Investor Relations for Kinetic, and I'm joined here today by Steve Wadey, our Group CEO, and Carol Borg, our Group CFO. As normal, Steve and Carol will run through the presentation, after which there will be an opportunity for you to ask questions. Thank you very much. Steve, over to you.

Good morning, everybody, and welcome to our results for FY23. Thank you for joining us, for those here in the theatre and also those online. I'd like to start by thanking our incredible people. They have responded to the heightened threat environment and supported our customers to deliver a really excellent full-year performance across the group. In March this year, the President of the United States and the Prime Ministers of the United Kingdom and Australia announced a pathway to develop a next-generation nuclear-powered submarine incorporating technology from all three nations. This historic announcement demonstrates the first commitment of the AUKUS trilateral partnership to cooperate on the most sensitive nuclear technology. They also made a second commitment to further trilateral collaboration, strengthening their joint capabilities by enhancing information and technology sharing as part of their shared mission of global security and stability. Our purpose and strategy is directly aligned to serving the national security interests of our AUKUS customers. With a strong track record of growth and increasing demand for our high-value solutions, we are upgrading our long-term guidance. The agenda this morning is as follows. I'll start by giving you the strategic and operational headlines. Carol will provide a commentary on our financial results. I'll come back and provide you with a strategic update. And then Carol and I will jointly give you more detail on our financial strategy and the upgraded guidance. We'll then open up for questions. So let's start with the headlines. We've delivered excellent operational performance across the group. Orders are up 41%, a record high of 1.7 billion pounds, growing our backlog to 3.1 billion pounds. Revenue is up 20% and profit is up 30%, up 11% and 12% respectively on an organic basis, excluding the impact of the write-down in FY22. Cash performance remains strong with 106% conversion, and returns are healthy with EPS up to 26.5 pence and the full year dividend at 7.7 pence up 5%. Significantly, through the disciplined execution of our strategy, we have more than doubled the size of our company over the last seven years. Looking forward, the defense and security context is heightening the long-term market demand for our distinctive offerings. As a result, we now see an addressable market of more than £30 billion per year, and we have delivered a step change in our global growth platform with two strategic acquisitions in the United States and Australia. Both are performing well and integrations are on track. Based upon our building momentum and expanded market opportunity, we are targeting high single-digit organic revenue growth at 11 to 12% margin and have increased the scale of our ambition to grow the company to approximately 3 billion pounds of revenue by FY27, including further strategic acquisitions. This upgraded guidance will approximately double our revenue and profit over the next four years, a 20% improvement to our previous guidance. To realize our increased ambition, we have a robust plan with the right skills and capabilities to deliver our future growth sustainably and enhance shareholder returns. Our excellent performance has been underpinned by a number of significant operational highlights across our six distinctive offerings. In the UK, we secured our largest contract of the year, a 260 million pounds renewal of the Maritime Strategic Capability Agreement. This contract provides sovereign test and evaluation capabilities for the Royal Navy's surface and submarine fleet, enabling the UK to fulfill a strategic role within the AUKUS partnership. We also won an 80 million pounds 10-year contract known as Societus to accelerate the production of mission data, including training and mission rehearsal, to improve the protection of all UK military platforms against rapidly changing threats. In the US, we've strengthened our cyber and information advantage offering through the acquisition of Avantis. I'm delighted that our new team continues to deliver high-quality operational outcomes for our customers, and has been selected for an $80 million multi-year contract by a national intelligence customer. We've had a strong start to this year, and the business is performing in line with our expectations. In addition, our existing U.S. business has delivered 25% revenue growth and won $280 million of new orders, including a $93 million four-year engineering services contract for digital night vision technologies to enhance the warfighter's situational awareness. In Australia, we also strengthened our threat representation offering through the acquisition of Air Affairs. Together with our existing business, we continue our strong customer relationships and have delivered 26% revenue growth. Through team collaboration, we also won a $13 million high-energy laser program by leveraging our laser technology from the UK into Australia. In Germany, we delivered record flying hours. And finally, our target systems business has seen its highest demand with 58 million pounds of new orders. We've had a really excellent year, and these are just a few of many operational highlights that demonstrate how we are serving the national security interests of our customers. I'll now hand over to Carol to take you through the results.

Thank you, Steve, and good morning, everyone. In this section of the presentation, I will provide more detail on our FY23 financial results. Like Steve, I have been extremely pleased with our results. We have delivered excellent operational performance deleveraged our position and continued to deliver impressive revenue growth at stable operating profit margins. Firstly, our key financial highlights. In FY23, we have delivered record high order intake of 1.72 billion pounds, growing 41% on a reported basis, demonstrating high demand for our distinctive offerings. Strong revenue at 1.58 billion pounds, growing 20% on a reported basis, delivered through good program execution across all of our major contracts, and this year with the partial contribution of our recent acquisitions and disposals. Good underlying operating profit at 179 million pounds, growing 30% on a reported basis, which at 11.3% margin reflects investments in the three capability areas that we have spoken about before, Our people, technology and net zero, all necessary to support our delivered growth and further enhancing our capability to achieve our strategic ambition. Strong cash performance with underlying net cash flow from operations at 270 million pounds, resulting in a cash conversion ratio of 106%. our strong underlying cash performance and continued discipline on working capital management has reduced our leverage to 0.8 times net debt to EBITDA. Underlying basic earnings per share of 26.5 pence increased by 29% due to our excellent operational performance. And finally, our return on capital employed has reduced as expected, remaining at an attractive 23% due to the acquisitions made in year. So overall an excellent underlying performance in FY23 with all metrics exceeding our expectations, which is a strong foundation to deliver our future ambition and upgraded guidance. I will now provide further detail on our performance, making reference to our organic growth rates, excluding the impact of the 14 and a half million pound profit write down that we experienced last year demonstrating transparently our true in-year performance. We have delivered excellent order growth, securing 1.72 billion pounds in-year, growing 41%, 37% on an organic consistent currency basis. In EMEA services, this includes the 260 million MSCA contract, as mentioned by Steve, and 404 million pounds of engineering delivery partner framework orders representing 23% of our in-year order intake. In global products, our largest order is the $93 million DNVT award previously described. It is pleasing to see our continued success in winning new business with our distinctive offerings in line with our previously communicated desire of moving towards larger, longer-term contracts. as I'm illustrating on the charts on the right-hand side. The upper bar chart illustrates in FY23, 47% of our orders were greater than £5 million in contract value, an increase from 28% in the same period three years ago. The lower bar chart shows the order backlog. Despite the naturally reducing impact of the long-term partnering agreement, which now represents less than 43% of total backlog, it is a significant achievement to increase our order backlog to 3.1 billion as at the 31st of March, demonstrating excellent order growth across all three of our home countries and shoring up our revenue coverage in future years. We have delivered strong revenue at 1.58 billion pounds, growing 20%, 11% on an organic, consistent currency basis. This has been driven by increased delivery across all of our major contracting frameworks, the largest being a 37% year-on-year increase in EDP framework revenue in EMEA services and good growth in global products across both the US and our target systems businesses. Inorganically, we reflect the partial year contribution of our recent acquisitions in Avantis and Air Affairs and disposal of our Space NV business. 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 FY24 with 61% of our in-year revenue guidance under contract compared to 65% at the same point last year. This represents a more sustainable level of cover that we can expect moving forward as a result of the evolving geographic mix across the group, reflecting the markets we are growing more significantly in. We have delivered strong underlying operating profit at £178.9 million, which is 11.3% operating margin. This represents an increase of 30%, 12% on an organic consistent currency basis. AMEA services has been impacted by the investment made in our people this year as a result of cost of living pressures. Global products delivered double digit margin of 10.4% reflecting strong performance in the US. Our acquisitions, advances and their affairs have delivered operating profit margin in line with expectations. Now, Turning to the segmentation of our group performance, first we have Amaya Services. Amaya Services has delivered significant year-on-year growth, demonstrating our strategy to win larger, longer-term contracts. We have increased orders by 49% and revenue by 10% on an organic basis. Our largest in-year order is the $260 million MSCA contract, and we have successfully acquired and integrated Air Affairs, both of which Steve and I have mentioned earlier. Operating profit has seen a modest decline to 11.6% margin against a strong prior year comparative period, reflecting the additional investment made in our people, which we communicated in our interim results. The investment focused on our lowest paid employees, as well as ensuring we retain and attract highly skilled employees to underpin our future growth. EMEA services, has a funded order backlog of 2.8 billion pounds and a significant increase in our book-to-bill ratio of 1.4 times, excluding the LTPA, giving us good forward revenue visibility. Next on global products. Global products has had a number of notable achievements in year, in particular, the strong performance across both our targets business and in the US, where we delivered $280 million orders and 25% revenue growth in addition to successfully acquiring and integrating Avantis. Global Products has delivered a strong year-on-year growth, demonstrating that we have the right team and capabilities to deliver across this segment. We have increased orders by 2% and revenue by 15% on an organic basis. The largest order is the $93 million DNVT award, again, as both Steve and I mentioned earlier. Operating profit has seen a strong recovery with double-digit margins at 10.4% ahead of my previous guidance. Our strong performance in the US demonstrates greater stability, resilience, and consistent performance, giving us confidence that we have a strong foundation for future growth, both organically and inorganically. Global Products is inherently a shorter-order cycle business and therefore has fewer larger, longer-term contracts, than EMEA services. Global Products has a book to bill ratio of 0.9 times and a growing funded order backlog of 300 million pounds. We have delivered excellent underlying net cash flow from operations at 270 million pounds, which equates to a cash conversion ratio of 106%. This cash conversion is as a result of our strong underlying cash performance and continued focus and discipline on working capital management. We've invested 109 million pounds in capital expenditure, predominantly driven by the ongoing LTPA commitments, enhancing our capabilities for our customer. Upon the completion of Avantis, of the Avantis acquisition, we communicated that leverage at completion was 1.1 times on a full year pro forma basis, and that we were actively planning to rapidly deleverage to less than one times before the end of the first full year after completion. I'm delighted to report that we have delivered against our commitment within the first four months of ownership, much quicker than originally anticipated. A key component of delivering our strategic ambition is to have a robust financial framework that ensures efficient use of our balance sheet. This has been evidenced by the efficient funding of our recent acquisition of both Avantis and Air Affairs, where in line with our plan, we have closed FY23 with 207 million pounds net debt. I'm extremely pleased with our strong cash performance and efforts to successfully reduce leverage. As I have previously mentioned, the group could maintain leverage of up to two times. However, as we have demonstrated with the Avantis acquisition, We deploy strong discipline in the utilization of our balance sheet, actively working to de-lever as quickly as possible to ensure we are able to support our growth ambition. With that, I will now hand back to Steve to present our strategic update and upgraded guidance.

Thanks, Carol. Kinetic is a purpose-driven company. to protect lives and secure the vital interests of our customers. Our purpose drives our strategy to build an integrated global defence and security company operating in attractive markets with distinctive offerings to deliver sustainable growth for our shareholders. As part of our environmental, social and governance responsibility, we've adopted this simple framework to focus our strategy and ensure balance across our stakeholders. Through partnering with our customers, we are seeing higher demand for our offerings in response to the conflict in Ukraine and rising tensions with China. Our people remain at the heart of delivering our strategy. We continue to focus on retaining and attracting the best talent to deliver innovative solutions for our customers with greater agility and pace. With our strategy and capabilities aligned to our customers' evolving needs, and a track record of seven years of growth, our company is at an exciting stage in its development. We're therefore increasing our ambition to approximately double the size of the company to 3 billion pounds of revenue over the next four years, accelerating profitable growth. By focusing on our customer's mission and creating an environment for our people to thrive, we will deliver enhanced shareholder returns. The global security situation continues to worsen and tensions remain high. In Europe, Russia's invasion of Ukraine is reshaping their relationship with the West, and the threat from China remains uncertain. These dynamics are driving defense and security policies, prioritization of budgets, and modernization of capabilities. This picture shows our addressable market for each of our home countries and, our current market share. The United States has requested the largest ever research and development and test and evaluation budget at $145 billion, increasing 40% since 2020. The UK has refreshed its integrated review and is investing 6.6 billion pounds in R&D and experimentation over four years. And the Australian government has recently completed its defense strategic review and is increasing defense spending by 7% to $53 billion. Beyond the new nuclear submarine program, all three countries are committed to working together on a range of advanced capabilities and technologies critical to future warfare, such as advanced cyber and directed energy. These areas align well with our strengths and provide attractive opportunities over the long term. In response to this geopolitical context, we do see greater opportunity from the widening threat spectrum and our enhanced offerings. As a result, we've increased our addressable market from 20 billion pounds to more than 30 billion pounds per year. This increase is driven by RDT&E markets growing in each of our home countries, adding intelligence and security markets for the first time, and our offerings being increasingly aligned to high priority customer needs, enabling us to grow market share. With an addressable market worth more than 30 billion pounds per year and higher customer demand, we have significant opportunity to accelerate our growth. Within this market context, our strategy is unchanged and is increasingly relevant. Our multi-domestic strategy has a clear focus of building one integrated global defense and security company operating in three home countries with six distinctive offerings. We're focused on co-creating high value solutions for high priority segments, investing in innovative business models, technology, and digitization, and leveraging our offerings globally through single routes to market. Let me give you a current example of our strategy in action. using our test and evaluation offering shown by the picture on the center right of this slide. In the UK, we committed 400 million pounds of capital investment to modernize our capabilities under the Long-Term Partnering Agreement. This week, these capabilities are delivering Formidable Shield 23, NATO's largest integrated air missile defense exercise, testing the alliance's response to the world's most challenging ballistic missile threats. Test and evaluation has also been declared as a critical sovereign industrial capability by our Australian customer. We're therefore leveraging our world-class skills and capabilities from the UK into Australia, building local capability through investment in our sovereign skills programme. The formation of the AUKUS trilateral partnership with its shared defence and security mission further underpins the relevance of our purpose and strategy to national and global security needs. Over the last seven years, we've built a company delivering excellent operational performance. Through disciplined organic and inorganic growth, we have more than doubled the size of our company to 1.6 billion pounds of revenue at 11.3% margin. Organically, we've continued to focus on our program and supply chain management to achieve good delivery across all our major contracts. For example, full-rate production of the CRISI robot in the US, a three-year extension to our major service provider contract in Australia, and 97% of our engineering delivery partner outputs delivered on or ahead of time, securing more than 400 million pounds of orders in the UK. All of our acquisitions have enabled us to expand our customer base and create leverage and additional revenue synergies. Overall, they've contributed double-digit revenue growth under our ownership, with Emtek, Inspire, and Nymeri achieving 25% growth over the last year. By focusing on our customers' needs, we are also expanding revenue visibility, with our three-year revenue cover more than doubling to £2 billion. We continue to invest in cutting edge technology to create operational advantage, such as the use of directed energy to counter hypersonic weapons. We deliver innovation by partnering with our customers and industry to co-create solutions that rapidly pull our technology through into operational use. This approach has enabled us to win larger, longer term programs, as described by Carol earlier, and increase our five-year order pipeline by more than 50% to more than £10 billion. Our strong track record of organic and inorganic growth underpins our confidence to deliver an increased ambition. We have a clear business plan which guides our strategic focus and investment choices to enhance our global platform for growth. The picture on the left illustrates the breadth of our offerings in each home country, with the acquisitions of Avantis shown in green and Air Affairs shown in orange. The integration of Avantis is ahead of plan and will complete before the end of this year. The business continues to perform well, delivering high-quality operational outcomes for our customers and winning $100 million of customer business, including 100% of recompetes. The leadership team is now fully integrated and working together to pursue a number of revenue synergies by leveraging and cross-selling our offerings to both existing and new customers. For example, our sensor solutions from the U.S. Army into the U.S. intelligence community. As I said earlier, we've had a strong start to this year and I remain excited about the opportunity we've created building a disruptive mid-tier defense and intelligence company in the largest defense and security market in the world. We've also strengthened our role as a global leader in threat representation through the acquisition of Air Affairs. Integration is progressing to plan and the business is also performing well, including securing the next phase of airborne training services for the Australian Defense Force. As demand for threat representation increases, we are focused on leveraging our airborne training and target capabilities across our target systems, German and air affairs businesses to pursue new customer opportunities globally. A recent example is the successful sale of our Banshee target into the US Army's threat systems management office. By coherently growing an integrated global company relevant to dynamics of today's world, we have made significant progress in delivering our strategy. Building on this strong momentum and with heightened threat context, reinforcing the long-term needs of our customers, we are upgrading our long-term targets. Following the acquisitions of Avantis and of Air Affairs, we will achieve our previous growth ambition and guidance organically. Given our significant growth potential, we have chosen to increase the scale of our ambition, to £3 billion of revenue by FY27. As I explained before, due to the geopolitical context and higher customer demand for our distinctive offerings, we see a larger addressable market of more than £30 billion per year. This provides us with a significant opportunity to accelerate our growth. We are upgrading our revenue target to deliver high single-digit organic growth supplemented by further strategic acquisitions to build the company to 3 billion pounds of revenue, approximately doubling revenue and profit over the next four years. As we pursue our strategy, the geographic mix of the company will change, as Carol said earlier. Whilst the UK will scale by 50%, we will more than double the scale of the business in Australia and the US. This evolving mix across our home countries will result in delivering higher revenue growth at 11 to 12% margin, representing upper quartile performance. The results of this upgrade in our long-term targets will deliver an increase of approximately 20% profit by FY27 compared to our previous guidance. We remain disciplined in the execution of our strategy and have a robust plan to achieve this increased ambition which will accelerate sustainable, profitable growth. Underpinning the delivery of this plan, we remain focused on continuously improving our culture to drive innovation to enable our customers' mission. Creating an environment for our people to thrive is absolutely critical to our performance. We've increased employee engagement to a new high and invested in our response to the ongoing cost of living pressures to retain, attract, and reward the best talent across the whole company. We've also continued to strengthen our leadership with over 35% of our top 100 leaders being American or Australian. We have a leadership team with the diversity, skills, and experience to deliver the scale of our long-term ambition. In response to today's threat environment, our people are delivering for our customers with increasing agility and pace. They are focused on co-creating innovative solutions that are directly aligned with the priorities of our AUKUS customers in advanced technology areas such as sensing, autonomy, and directed energy. To main our relevance at the forefront of innovation, we continue to invest in our internal research and development program at approximately 20 million pounds per year. Our people are also passionate about protecting the environment and delivering sustainable solutions for our customers. This year, we've continued to make progress on our net zero plan and reduced our scope one and two emissions by a further 12%. To accelerate progress, our top 1000 managers now have 17 and a half percent of their personal incentives directly aligned to delivery of our ESG commitments. This is just one example of why we have been rated as a top ESG company in our industry by Sustainalytics. Given our strategic market alignment and our excellent track record, I'm confident that we have the capability to deliver our future growth sustainably. So having provided you with a strategic update, Carol and I will now jointly describe how our company strategy is underpinned by our financial strategy and how that translates into our upgraded guidance. Our company is driven by our purpose, which is strategically aligned with our AUKUS customers. These markets have an enduring need to respond to an increasing and complex threat environment. We have a strong track record of performance underpinned by a normalized level of investment to ensure our growth is sustainable. Core to the company's ongoing success is our focus on our customers and people. Pursuing this strategy will deliver high single digit organic revenue growth at stable operating margins. As an asset like company, we will maintain high cash generation delivering attractive returns on capital employed to enable compounding growth. Through disciplined use of our balance sheet, we will complement our organic performance with strategic acquisitions. ESG remains at the heart of our strategy to ensure our growth is sustainable. Through disciplined execution of this approach, we will achieve the upgraded guidance shown on the right of this slide, which Carol will describe in more detail. Our strategy is building a world-leading defense and security company with attractive returns for our shareholders.

Carol.

Thank you, Steve. So let me demonstrate why we have confidence in our ability to achieve our new upgraded guidance. This chart shows our track record over the last four years against our four key parameters of organic revenue growth, operating profit margin, cash conversion, and return on capital employed, all overlaid with our new upgraded guidance. We have a proven track record of delivering high organic revenue growth. Our new upgraded guidance explicitly articulates that we will deliver high single digit percentage organic revenue growth between 7% to 9% sustainably over the long term. In recent years, we have consistently delivered an operating profit margin in the 11% to 12% range. Further, as the company grows in the US and Australia, the change in geographic mix will impact group margins. Our operating profit margin includes a normalised level of investment, which coupled with our evolving geographic mix will result in us delivering our higher revenue growth at stable operating margins between 11% and 12%. We have delivered high cash conversion consistently over the last four years. Our growth trajectory requires modest investment in our working capital. Hence, we are guiding a cash conversion ratio at 90% or greater. The high quality cash generation of our business allows us to deploy capital for inorganic growth that has a long-term compounding effect on shareholder returns. To this end, we are confident in our current guidance of return on capital employed to remain at the upper end of 15 to 20%. In conclusion, the increased market opportunity, heightened demand for our distinctive offerings and our track record demonstrates our deliberate focus on sustainable performance, giving us confidence in the new upgraded guidance we are communicating today. So now that we've demonstrated track record, How do we fund our ambitious plan? This slide demonstrates how our disciplined capital allocation policy is put into action, supporting us to achieve our growth ambitions. Our first priority is investing in our capabilities to grow, both organically and inorganically. All investments need to pass through three distinct gates, strategic alignment, economics and deliverability. As we articulated during the Avantis acquisition, we have a disciplined process that ensures that all investments are delivering returns ahead of our weighted average cost of capital within the third year of operation. Secondly, it is important that we maintain a strong and efficient balance sheet. We have an asset light cash generative business model with a strong focus on cash conversion. And as we have demonstrated this year, the ability to deleverage to support our future growth plans. Finally, on an ongoing basis, we review the appropriate returns to our shareholders through our progressive dividends and other means. We are pleased to confirm today the full year dividend of 7.7 pence, an increase of 5% on prior year. So in conclusion, we maintain a rigorous approach to the deployment of our capital. We have a clear and concise capital allocation policy that we continue to deploy for the benefit of all of our stakeholder groups, customers, employees, and shareholders. My final slide is the outlook statement articulating our new upgraded guidance, which I will transparently describe across two time horizons. FY24. expectations unchanged in line with current average analyst profit expectations. We enter FY24 with confidence, a healthy order book and positive momentum with 61% revenue under contract. Consistent with our upgraded long-term guidance, we expect to deliver high single digit revenue growth compared to the FY23 pro forma revenue with pro forma meaning the full year effect of the FY23 acquisitions and disposals. This equates to high team's total revenue growth compared to FY23 reported revenue. Operating profit margin will be at the lower end of 11 to 12% range, and capital expenditure is expected to remain within the 90 to 120 million pound range. Longer term, guidance upgraded. In April 2022, we set out an ambitious plan to grow the company to more than 2.3 billion revenue by FY27 and beyond. We have made significant progress since then and are today upgrading this plan and increasing our ambition for the company. We are now targeting high single-digit organic revenue growth supplemented by strategically aligned acquisitions to build a circa 3 billion pound company by FY27. This increased level of growth will be delivered at stable margins of 11 to 12%, reflecting the evolving geographic mix of the global company. Cash conversion will remain strong at over 90%, supporting our ability to deploy capital effectively to achieve our long-term growth ambition and deliver a return on capital employed at the upper end of 15 to 20% range. With that, I'll now hand back to Steve to conclude.

Thanks, Carol. So, in summary, I'm incredibly proud of our people who have supported our customers and delivered a really excellent full-year performance across the group. We've achieved a record order intake of 1.7 billion pounds, up 41%, grown revenue by 20%, and delivered 179 million pounds of profit. We've continued to drive disciplined execution of our strategy, doubling the size of the company over the last seven years. World events have heightened the market needs for our distinctive offerings. As a result, we've increased the scale of our ambition to build the company to approximately 3 billion pounds of revenue by FY27. This upgraded guidance will approximately double our revenue and profit over the next four years. a 20% improvement in our previous guidance. To realize our increased ambition, we do have a robust plan with the right skills and capabilities to deliver future growth sustainably and enhance shareholder returns. We move forward with optimism and are proud of the critical role we play, serving the national security interests of our customers. Carol and I will be happy to take your questions.

So we'll start with questions here in the room first, then we'll go on to questions on the phone line. Could I ask you to introduce yourself and the company you are asking your question from? That would be great. There's a few mics in the room.

Great. Thank you. Hey, good morning, guys. Sam Burgess from Citigroup. I just wanted to ask a question about margins going forward. Obviously, this year, like many others, you felt the impact of wage inflation, and I know you took action on that in November. Do you see that persisting into FY24, and is that baked into your margin assumption? And is that sort of one of the reasons why we're at the lower end of the 11% to 12% range? And then going beyond FY24, Are there any specific areas where you can see scope for improving that margin towards the upper end? Thanks. Do you want to take that directly, Caroline?

Yeah, sure. Thanks, Sam. You're right, Sam. You've articulated what we announced in our interims, which was an investment of $15 million that we put into our people in response to cost of living. We see in FY24 the full-year effect of that investment. As I said, it was only a part-year in FY23 investment. And that's the reason why we are guiding FY24 at the lower end of 11% to 12% margin range. So that's exactly, you've interpreted that correctly. In terms of our longer-term guidance, as we're saying in this presentation today, our higher revenue growth with an evolving geographic mix gets us to 11% to 12% margin in FY27. So if not for our increased ambition, we would have delivered, as Steve mentioned, our previous guidance of 12 to 13%. But this evolving geographic mix puts us into a different margin bracket.

Thanks, Sam.

Thank you, Sasha Tusa from Agency Partners. Just to follow up, first of all, on Sam's question question there on margins. You've talked about the geographical mix driving your new margin targets. Is that because the US and Australia are fundamentally lower margin than the UK or is it because the mix of business that you are looking for in the UK is lower margin but possibly higher internal capital?

Should I take that first?

Predominantly the first part of your answer is the answer. So the US and Australian markets that we would be looking to expand in are at a slightly lower margin, maybe 1% to 2% less than we are. So when you look at the volume of incremental revenue with that difference of margin, you then get the blended margin that Carol just described. But as she also pointed out, that isn't a change to our previous gardens. We would have absolutely, at the same geographic mix, maintained the 2.3 of the 12 to 13. And clearly, it would depend exactly on those targets that we ultimately acquire in that next phase of growth.

Great, thank you. And then a different subject, AUKUS. I wonder whether you could talk about AUKUS and ITAR. Historically, UK companies, European companies, have found it very hard to transfer technology into the US without it being trapped by ITAR. and certainly almost impossible transfer technology out of the US to Europe. Do you see AUKUS as being a genuine triangular relationship between the three countries? Or is it that you in the UK will transfer technology from the UK to Australia or from the US to Australia, but you won't be able to transfer it between the US and the UK? Or do you think it will be better than that? How many permutations? Well, I mean, basically, is it a V or a triangle?

I mean, maybe I'll take the question in a slightly broader sense. If you step back and look at what the three nations have announced together, they've announced clearly the new nuclear submarine program, which is what's called Pillar One. And we talked about that at the start of the presentation. But they also announced a second pillar, which is around technology and specifically, to your point, information sharing. So they have set out an ambition. to share their resources in the most effective way because they want to strengthen their capabilities given the threat environment. That's what is their strategic ambition. So I think part of the answer to your question is we will see how this evolves. But it's only last week you heard a new announcement from the US government where they will now consider the Australian industrial base as an integral component of the US industrial base. And I think we will see more of this going on, that as the partnership strengthens, as confidence builds, I think we will start to see maybe multi-way technology and information sharing as part of the long-term objective that they've set. And maybe it's a small example, but I mentioned at the start of the presentation, a laser energy program contract that we have won in Australia, $13 million program. Yeah, and that is a collaborative program, and it requires information and technology to be exchanged between Australia and the UK. Maybe a small example, but it's an example, and I would expect those to be built upon as the AUKUS partnership matures.

Thank you.

Morning, Richard Page from NUMIS. Just a couple of questions from me. First of all, I'll keep it calm today. EDP, some big numbers in terms of the revenue and order growth in the presentation there and in the year. Can you just give us a sound check as to the size of that contract now and where we are with it and what's driving those moves and sustainability of that? And then secondly, probably aligned to Sam's question again, but you mentioned retaining contracts. talent, attracting talent. Given this is such a strong growth market and outlook, what's the situation on recruitment and retention for you and what that implies in terms of wage inflation more broadly?

Okay. Well, let me take both and if you want to add, Carol. So first of all, EDP, I remember back in 2018 when we announced it and I said that EDP could be as large to the company as as the long-term partner agreement. And I think it would be fair to say that most of the community didn't believe that because it was a £18 million framework contract at that point in time. And I think that that statement has turned out to be true when you look at the order and revenue throughput. And EDP is a really important programme for ourselves, a very large ecosystem, of suppliers and small to medium-sized enterprises where we're really bringing the best engineering services capability across the whole of the UK to bear to help our UK customer deliver their outputs more efficiently and at greater pace. And I think I referred to a statistic that in the last financial year, that community across the whole of the EDP enterprise, so not just kinetic, and that's a really important point, 97% of outputs on or ahead of schedule is really strong performance. And the fact that the customer is seeing that value, and it's not just the value of the EDP tasks, but it's the value of the EDP task of how they interrelate with their much wider procurement programs. That's the dual level of value that our customer sees in EDP. And that confidence that they see has bred through to the volume that is coming through the contract. And I think I mentioned in November last year that we've just been through a major value for money test. So the customer has had to test that this program works. is working, and it is working. They're comfortable with that. They're seeing the value, and that answers your sustainability point. So a really important program, and we hold it in high regard with our customer relationship. In terms of recruitment, recruitment is important. I don't think I speak to any company leader that isn't talking about skills and their people as a primary driver of their performance, and that's Yeah, that is true for us. And, you know, you will have seen yourselves, um, externally, and we certainly are doing a huge amount internally. of connecting people with our purpose, because all of the people who work for Kinetic are passionate about our customers and the reason why they do what they do. We've been really looking at the environment of how they work, our culture. We spend a lot of time developing our culture, our focus on our leadership. And then, of course, it ultimately then comes back down to reward and incentive. And you saw the measures that we took last year. So we're very focused on this subject. Attrition, actually, we're doing really well on attrition. Interestingly, in the US, and we only were doing a US review this week, in fact, our attrition of Avantis, as an example, actually has come down significantly. since we acquired the company. That's a really good message. We're down in sort of normal market levels. In the UK, we think we're a little bit lower than market norm in the UK. And then, of course, the other side of that is recruitment. And if our people function are listening right now, they are working really hard because with these plans and these ambitions, we need more people that are connected with our purpose, like the culture that we're developing, and really empowering them to deliver faster, more effectively for our customers. So It's a great question, Rich, because it's probably one of the biggest things that we as a team are focused on now to make sure that we've got the skills, the capabilities. And if I wouldn't mind just mentioning one of the points in the presentation, which is around leadership. So we've spent a lot of time over the last two years really pre-building what I would say pre-building the leadership capability to execute the plan that we've shared today. Uh, when I started in the company, 2%, 2% of our top hundred were non Brits. Today, 35%, you know, are Australian and American to support this ambition. And I remember when we started to disclose this, some shareholders said, well, why can you as a, you know, some Brits from London think you can win and grow in Australia and the U S well, well, the answer is by building teams with the skills and experience in the market. Last year, we recruited Sean Purvis. You've seen a genuine transformation in the US on our performance, both organically and then the integration of Avantis. A few weeks ago, I announced the recruitment of Gary Stewart that we've recruited from Rymertal. He's based in Canberra in Australia, and that supports the Australian dimension. So yeah, the people dimension, the recruitment dimension, we can't, and I think I said, we can't deliver this plan without the people and we've got the right skills, the experience in our leaders to do that.

Thank you.

Thank you. Morning, it's Annabel Houston Stiefel. Two questions too, if I may, please. Firstly, just on record flying hours in Germany and that 58 million number for the target. I mean, that is a direct correlation to where we are geopolitically now do you see that pushing on from here or are we sort of chattering at a high level or what's the sort of sense check you get from sort of the customer discussions you're having at the moment um and the second one obviously a more exciting question on our deck they were quite exciting as well on our deck, and obviously the accounting change, just how we think about and factor in the tax rate. I know we've got a slide in here, but if you can give us some more colour, that would be appropriate.

I'll do the less exciting one. Oh, come on, our deck. You can do the more exciting one. So, actually, we don't see it changing in the foreseeable future. You know, the German flying is really high. And if anything, we see it increasing during the next few years. And, you know, we're in dialogue with the German customer right now about servicing that. So, We see that, and then the Targets business, I mean, the Targets business has done phenomenally well this year, and it goes right back to the origin of the acquisition of our target systems business. We always saw the potential by thinking about strategy and leverage with our test evaluation and training capability, and then taking those capabilities into other countries. And you'll know if you've followed us for a period of time, there was a bit of a blip in that due to the COVID pandemic, but we are absolutely out the other side of that and now back on our growth trajectory. And you may have noticed In the presentation, I really wanted to build out that we shouldn't really be thinking about acquisitions as discrete items. That's never the way that we thought about our organic and our inorganic growth. We think about them as building blocks that we look for multiple leverage, whether it's organic or inorganic, where we can drive real advantage. And the fact that we now have a targets business, a German business, and an air affairs business, We're a global leader in threat representation, and we have synergies between customers, between capabilities that allows us to grow. And for me, and one of our shareholders that's got an incredible memory wrote to me last week, having seen our announcement of the sale of our Banshee target into the U.S. Threat Management Systems Office that I mentioned in the presentation, because that's been one of our long-term goals. to take our target's capability and break into the US market. And that's exactly what strategy-led teams can deliver. So we don't see it relenting in the foreseeable future. Now to an exciting subject.

The more exciting topic is RDEG, Research Development Expenditure Credit, so tax, basically, innovation. We have, as part of our distinctive offerings, we enjoy the tax benefit that we get from our innovation. And we had previously reported as a credit in the tax line. So net profit still doesn't, is unchanged. It was just in the tax line. We have reconsidered our accounting treatment of that and have decided to move it to operating profit, but outside of operating profit by segments, which is the profitability that we've shared with you for consistency. So what we've tried to do is actually transparently show you the effective tax rate with RDEC as if it was included in the tax line or without it if it was in operating profit. So you can see for your modelling what you can do. But the key takeaway is that it makes no change to earnings because it was already in there. It's where it's reported in our, it's a more disclosure point, technical accounting disclosure point. And you will affect your modeling in terms of effective tax rate based on how you've treated that within your individual analysis. But if you need some more information, Annabel, John would love to talk to you all about it. Don't talk to Steve about it. But yeah, so it's effectively just a disclosure point.

Thank you.

Hi, thanks. David Farrell from Jefferies. A couple of questions for me. As well, just going to global products, obviously going very well, you highlighted a number of contract wins, but the book to bill was still only 0.9 times, orders up 2% organically. I understand it's a shorter cycle, but that still needs to be above one for it to grow. So can you just kind of explain what's going on there a bit more? And then a second question, getting into the weeds a bit more. If I look at the adjusting items, there is an investment in digital that's gone from 1.8 to 5.3, I think it is. I thought that investment was going in through the non-adjusted line. So can you just explain what's going on there as well, please?

I can take both if you like. Go for it. Yeah. Unless you want to do digital. Yeah, global product. David, just to remind you, we also had the complex project write-down in FY24, and we disposed of the SpaceMV business. So the 2% order growth is, as I mentioned, excluding the effect of the complex project write-down in FY22, and it also is on an organic consistent currency basis. So that's just to put that in context. Global products is a shorter cycle business, absolutely, and we do have less long-term visibility in terms of the revenue profile. I still think that the global products business is growing in terms of the funded order backlog, and we could see that by the US new orders of $280 million and the $58 million in terms of the targets business. So I think it will hover around the one time, but I don't think we'll see it as good as the EMEA service, given the nature of the business that it's in.

Can we build on that one before we mix? I think the other thing I would say, David, you also remember that different markets contract in different ways. So everything that Carol said about global products is true, but back to the geographic mix, as we grow, let's say, our US sharing global products, it operates in a different contracting model. They don't tend to have fully funded multi-year contracts in the same way, you will see that number vary between our halves as we report. And as an example on Avantis, we've entered this year with a growing budget and we've got exactly the same revenue cover this year as the business had last year. So you've got to be careful looking at some of the discrete reporting because it's very variable on timing of awards about when contracts are fully funded.

I might make a further build on that build. You know, I think the other key information in global products is we've returned to double digit margins, right? And I think I was here this time last year saying we would take the year to get there and we got there. So I think it's a combination of both the new orders in the US, the great performance in our targets business and also returning to profitability. On digital spend, we have taken an accounting policy. Great accounting questions today. We've taken an accounting policy decision that due to our technical debt, if you like, within our infrastructure, our digital infrastructure, we feel that our investment in digital would be distorting in nature if the non-recurring portion of it was running through underlying profit. So what we've done in agreement with our auditors is we've taken a decision for the next few years, our digital program that is non-recurring in nature to report that in specific adjusting items. to not distort the effect. Having said that, all of our underlying digital spend, licensing, those sorts of things, run through underlying operating profit as per normal. So you should think of our digital spend as our kind of one-off expenditure in actually maturing our environment for our people to thrive based on upgrading our digital infrastructure to fill our strategic ambition in terms of working across our three home countries. So that's how you should read. And we will continue on digital spend in the next few years. So you'll see that in specific adjusting items for the next couple of years.

Okay, thanks. Hi, good morning. It's George McQuire from Berenberg. Just on your future guidance for FY27, you're targeting the 79% organic growth. It seems quite a bit higher than general budget growth in your key markets. Can you just give a bit of colour as to how confident you are into achieving that quite high growth. Thank you.

Confident, otherwise we wouldn't have published it. And I guess the reason why comes back down to the relevance our offering and demand. We've got high backlog, as you've seen. I mean, the relative backlog, I think Carol broke that down. You can see it's growing at quite a high rate. organically, and if we focus on organic, we've had some very significant long-term contract wins that really support that higher revenue guidance coming through. So, I mean, one example that I can bring into the room is the Societus contract. That was a competitive program. It's really exciting. It's a takeaway from another industry. It's £80 million as an initial contract. That contract will grow. We're already delivering ahead of schedule for our customer. The customer is delighted with the way that we are, again, bringing together an industrial team of specialists around mission data. It goes to the heart of UK platform protection in every theatre in the world. And as we perform on that programme, that will flow through into that revenue growth. And it goes right the way back. to the origin of changing customer focus, really getting to understand needs, partnering with industry to then shape and win those programs. So when you see our backlog going up organically, because that's where we've won those significant new programs, we'll then start to see that flow through into our increased organic revenue guidance. That's the logic. After sort of years of work, you're starting to see those benefits coming through.

I can see that we've got about over 100 people on the webcast online watching this. So if there's anyone that would like to ask a question on the webcast, please do use the phone line provided. I'll just see if there's any more questions in the room here before we go onto the phone line.

Is that all right?

Thank you, and Charlotte Keyworth from Barclays. With all this chat on international growth, I thought I'd ask a question on the LTPA. I can see from the pack that you've actually been eating into your order backlog for LTPA over the last three years, which kind of surprised me a bit. And I think it's due for renewal in 2028. So I wondered if you could just maybe give a bit of an explanation on what's going on there for tasking and also... with the capex still quite elevated in 24, how that tracks going forward into sort of the 27 year, the all-important target year?

Yeah, so first of all, the dynamic that you see in the backlog isn't a surprise at all. It's purely mechanical. The contract has got a non-tasking component that's contracted through to 2028, as you quite rightly point out, and then you have variable tasking on top. So... that non-tasking component was loaded into backlog at the point the contract was done. So as you work through in years, you see that naturally reducing mechanically, which is why Carol brought out that you've got to separate the LTPA from the non-LTPA orders to understand the underlying growth in our order backlog that goes back to why you're seeing that come through in revenue growth. In terms of the LTPA, I mean, it remains... One of our primary contracts is really important to us. The contract is performing exceptionally well. The relationship with the customer is very good. As you say, it comes up for major renewal in 2028, but we shouldn't also forget that the contract has a five-year extension available to it. So if the customer wants to proceed with a five-year extension, they can do that very easily. And of course, what's important to us is making sure that the LTPA is relevant, is modernized, and is delivering the outcomes that they want. So I mentioned Formidable Shield. I mean, Formidable Shield is an incredible showpiece event, which actually illustrates the value of of a sovereign T&E capability to our customer, and they're delighted with that, and not just the UK customer. I think we've got about 11 allies using that capability in the last couple of weeks. And then, of course, in terms of the future, we are in regular dialogue about future needs, how we can modernize, how we can veer and haul the way that the program is currently running to bring in more digital technologies, prepare for other advanced systems? How do you run test and evaluation on AI-based or autonomy-based systems? So it's not a static conversation. So it's important. It's performing well. We're very conscious of 2028. We have a five-year extension if the customer wishes to take that. And we're looking to modernize and become increasingly relevant in line with what's going on in the world.

Maybe on CapEx.

Charlotte.

As you know, we committed £400 million on capital commitments in the LTPA. To date, we've probably spent about half of that. CapEx spent on LTPA out of the £109 million that I mentioned was around the £45 million mark. So it still remains a big component of our total CapEx spend. We expect that FY24 will be our peak year in terms of LTPA capex spend. So within the guidance range that I mentioned of 90 to 120 million, we expect that the LTPA will contribute approximately half of that. Thank you.

Great. Thank you. Let's turn over to the phone lines. So Marion, over to you on the phone lines to see if there's any questions from the webcast.

Thank you. If you would like to ask a question over the phone, please press star one. There are no questions on the phone at this time.

Okay, thank you. Well, I think we've had a really good discussion here. So I think we'll probably close there. Steve, any final comments?

No, great. We've had a good year. Really pleased with our upgraded guidance. And if you've got any questions or clarifications you want, please come and talk to us after. Thank you. Thank you.