QinetiQ Group plc

Well, good morning, everybody, and welcome to the Kinetic full-year 2024 results. So my name is Stephen Lammercraft. I am the interim group director of investor relations, and I'm joined with our group CEO, Steve Wadey, and our interim group CFO, Heather Cashin. What we'll do is we'll start off with a run-through of the presentation with Steve and Heather, and then we'll go to Q&A. Steve, over to you.

Thank you Stephen and good morning. Welcome everybody to our results for FY24. Thank you for joining us here today. I'd like to start by thanking our incredible people. The world is experiencing the highest threat environment for a generation and our teams across the world have worked in partnership with our customers and suppliers to deliver a strong overall group performance. The conflicts in Ukraine, the Middle East and rising tensions with China are driving significant changes in modern warfare. As a consequence, our customers are increasing spending in critical areas of technology and innovation to stay ahead of the threat. With our partner Oshkosh, this picture shows our robotic combat vehicle system undergoing testing and experimentation at Fort Irwin in the summer last year. This next generation autonomous system will increase situational awareness and military effectiveness for the US Army against future threats. Innovation and cutting edge technology is what we do. Our mission critical services and products are highly aligned with national defence and security priorities. We have a clear strategy delivering enduring value for our customers and shareholders. Our agenda today is as follows. I'll start by giving you a year in review. Heather, our interim group CFO, will provide a commentary on our financial results. She was previously our group financial controller, and we've worked together for over six years. Heather is providing continuity until Martin Cooper joins at the end of the summer. Finally, I'll come back and give you our strategic outlook. We'll then open up for questions. So first of all, our year in review. Let's look at our three key headlines. First of all, I am really pleased that we have delivered strong group financial results for FY24, modestly ahead of our guidance, which have been achieved against the background of more difficult market conditions in the US. Secondly, we enter this year with strong momentum and increasing spending in our major markets, which gives us confidence to increase our guidance for FY25 compared to our result for FY24, and underpins the delivery of our £2.4 billion organic revenue at approximately 12% margin by FY27. And finally, with a strengthened balance sheet and an enhanced focus on disciplined capital allocation, we have optionality for additional investment in growth and further shareholder returns. In summary, we are well positioned and have a clear strategy to deliver attractive returns and create sustainable shareholder value. Moving on to the financial highlights. We've achieved a record order intake at 1.74 billion pounds with a book to bill of 1.1 and a strong order backlog. Revenue is up 21% through good program execution, up 14% on an organic basis. Operating profit is up 20% with a stable margin of 11.3%, up 16% on an organic basis. Cash performance remained strong, with high conversion at 104%, reducing our leverage from 0.8 to 0.5 times. We delivered continued strong earnings growth, with underlying earnings per share up 11% to 29.4 pence. Return on capital employed was maintained above the upper end of our guidance at 21% and we're increasing the growth of our progressive dividend from 5% to 7% with a full year dividend for FY24 of 8.25 pence and launched a £100 million share buyback programme. I'll now look at our performance in each of our operating segments. EMEA Services delivered excellent revenue growth at stable margin, driven by execution of high prior year orders and responding to our customers' immediate needs. We achieved a number of significant operational milestones. Our programme to accelerate production of mission data and improve the protection of all UK military platforms delivered three months early. We demonstrated our world-leading laser-directed energy technology with the first firing against aerial targets in the UK. This system is now being accelerated onto Royal Navy warships from 2027. And in Australia, we successfully integrated the air affairs business, which is performing well, with 20% more flying hours and 90% more aerial target missions than originally planned. We also made strategic progress on our long-term contracts. In Australia, we secured a three-year extension to our major service provider contract, winning $87 million of new orders for critical land and munition programmes. We are on track to secure the long-term partner agreement five-year extension through to 2033. continuing in our role as UK MoD's strategic partner for test and evaluation. And our engineering delivery partner contract delivered significant benefits for our UK customers, with £472 million of new orders, including commencing work on the new AUKUS submarine. These are just a few of many highlights. where we are delivering critical capabilities for enduring national and defense and security priorities underpinning our sustainable growth. Global solutions continue to be impacted by a difficult US market due to one of the longest and deepest continuing resolutions on record. Revenue was lower than expected at stable margin. Within this context, we achieved a number of significant milestones. We offset the planned ramp down of the CRISI robot program by delivering the highest ever production levels of our aerial targets. Our Banshee target was certified for the US market, opening the door to significant opportunities to leverage our capabilities globally. And whilst Avantus declined over the whole year, the business did achieve modest growth in the second half, with double-digit margin and 100% cash conversion. Importantly, Avantus won $977 million of awards, achieving a funded book-to-bill of just over 1.2, giving us good revenue visibility for the years ahead. Our most strategic achievement was fully integrating Avantis to build our US platform and leverage market opportunities. The benefits of integration are now being realized, demonstrated by winning $1.3 billion of total contract awards in the US. Our largest U.S. orders were three five-year programs that provide high-value engineering services and mission support for the Space Development Agency, Strategic Capabilities Office, and the tethered aerostat radar system known as TARS for Homeland Security. TARS is a really great example of a contract that would not have been won without our integrated U.S. platform. And all of these three programs have significant on-contract growth potential. In addition, we have strengthened our business development team who have qualified a multi-billion dollar pipeline of opportunities that are directly aligned with the new U.S. national defense strategy. With the integration of Avantis complete, our U.S. business is well positioned to drive synergies and deliver a significant contribution to our sustainable growth over the coming years. I now hand over to Heather to take us through our financial results.

Thank you, Steve, and good morning, everyone. Firstly, our key financial highlights. In FY24, we've delivered record order intake of 1.74 billion, growth on a strong comparison last year. This demonstrates continued high demand for our distinctive offerings. Strong revenue at 1.91 billion, growing 21% on a reported basis, delivered through good program execution across all our major contracts. Good underlying operating profit from segments at 215 million, growing 20% on a reported basis at a consistent margin of 11.3%. High levels of cash conversion at 104%, contributing to leverage falling to 0.5 times. Underlying basic earnings per share of 29.4 pence increased by 11% due to our excellent operational performance, offset by a higher effective tax rate in the UK and interest expense. And finally, return on capital employed we're pleased to see another year of strong performance, marginally ahead of our guidance, delivering 21%. So overall, a strong group result in FY24, which is a good foundation to deliver our future ambition and guidance. Moving on to orders. We've delivered a good order performance in the period against a strong order intake last year. In FY23, we booked the 10-year Maritime Strategic Capability Agreement, or MSCA, for £260 million. This was a significant in-year one-off. Organically, orders declined 10% year-on-year. Excluding the MSCA, orders grew 7%. Order performance of £204 million from acquisitions and disposals includes the contribution from Avantis and Air Affairs and the disposal of Space MV on a comparator basis to the prior financial year. For FY24, including the impact of acquisitions, order growth was 19% for the year excluding MSCA and 1% including the MSCA. If we look to the charts on the right, at the top we can see orders won by size. We continue to book orders on both smaller and larger contracts. Given our larger US footprint, we've expanded our disclosure in line with normal US practice. In the US, orders are won and subsequently funding is released. We book the funded amounts in each year in the orders number. The box highlights contract awards for which funding has not yet been appropriated or authorised. An example of this is the TARS contract that Steve mentioned earlier. The total contract was $170 million. We booked $16 million in FY24 and the remaining contract value we expect to be funded by the customer and booked in future years. The chart on the bottom right highlights that we closed FY24 with a strong funded order backlog of 2.9 billion, with an additional U.S. unfunded backlog of 0.8 billion, bringing the total to 3.7. The U.S. unfunded backlog and the overall book to bill of 1.1 times gives us great visibility into our future growth. We've delivered strong revenue at 1.9 billion, growing 21% or 14% on an organic constant currency basis, demonstrating increasing demand for our six distinctive offerings. This has been driven by increased delivery across our EMEA services major contracting frameworks. Global Solutions was down 11 million, which I'll come back to later. Acquisitions and disposals are shown as partial year contributions to give an accurate year-on-year comparison. This reflects the comparator contribution from Air Affairs, Avantis and the disposal of SpaceMV. As the chart on the right highlights, we end FY24 with 64% of our FY25 revenue under contract. compared to 61% at the same point last year, helping to underpin our confidence in the year ahead. The US unfunded orders of 6% represent contract awards which are expected to be funded in FY25. We've delivered strong underlying operating profit from segments at 215.2 million, which represents an increase of 20% or 16% on an organic constant currency basis. This is an 11.3% operating profit margin, consistent with our guidance range of 11-12%, demonstrating sustainable revenue growth at stable margin. The largest contributions to year-on-year growth were the full-year impact of the Avantis acquisition and organic revenue growth at stable operating margins within EMEA services. On the right, you'll see a table reconciling underlying operating profit from segments to statutory operating profit. If I take these one by one, income from research and development expenditure credits, or RDEC, increased in FY24 due to an increase in the rate paid from 13% to 20%. Amortization of intangibles has increased year on year, reflecting the intangibles acquired through Avantis and Air Affairs. Acquisition costs have reduced, and in FY24 are primarily driven by the integration costs for Avantis and Air Affairs. We expect this number to be significantly lower in FY25 as we focus on organic growth. The digital platform represents a discreet multi-year investment project to enable our global growth strategy and our AUKUS customer needs. We expect approximately 35 million of additional costs over the next three years, which will fade through to completion. The cost here reflects the implementation costs previously accounted for as capex before the SAS accounting changes. All recurring costs such as licenses and maintenance are reported within the underlying cost base. Within other, in FY23, we also reported a one-off adjustment pertaining to the decision from UK government to allow companies to keep the RDEC benefits. This does not repeat in FY24. Now turning to the segmental split of group performance. First, we have EMEA services. Orders saw 7% growth, excluding the impact of MSCA. When including MSCA, orders saw a 13% decline. We secured 1.2 billion of orders, including 472 million from the Engineering Delivery Partnership Framework. We also achieved a variation on price uplift on the LTPA, an extension to our battlefield and Tactical Communications and Information Systems, or BATSIS, contract, and a significant multi-year aerial training target services contract in Germany. Revenue growth was strong, at 20%, driven by our UK sectors, which were underpinned by execution of the EDP framework and inflation uplifts. Operating profits grew in line with revenue at 19%, and margins remained stable at 11.5% in FY24. EMEA Services has a funded order backlog of 1.4 billion, excluding the LTPA, and a book-to-bill ratio of 1.04 times, compared to 1.17 times, excluding MSCA, in FY23. Next, on to global solutions. Total orders grew 56%, driven by the full-year contribution of Avantis. Orders grew 7% on an organic basis. As explained earlier, strong US unfunded orders of 578 million support our confidence and visibility in global solutions. Global Solutions overall saw 23% revenue growth with a small organic decline of 3%. As Steve mentioned earlier, we were impacted by the continuing resolution in the US and a planned ramp down in projects coming to an end. Global Solutions excluding Avantis delivered broadly flat revenue due to the decline in revenue from the Crissy ramp down offset by the highest ever production levels in kinetic target systems. Avantis saw a high single-digit organic revenue decline over the course of the year and a modest revenue growth in H2 versus H1. Despite these headwinds, we've delivered double-digit operating profit margins of 10.5%, with double-digit margins in both Global Solutions and Avantis. We have a strong funded backlog of £321 million, further supported by our unfunded backlog from contract awards not yet authorised and appropriated. Our book-to-bill ratio of 1.1 times and Avantis' book-to-bill ratio of 1.2 times gives us confidence heading into FY25 and beyond. Now if we move to cash, we've delivered excellent underlying net cash flow from operations at 320 million, materially ahead of guidance, which equates to a cash conversion ratio of 104%. 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 96 million in capital expenditure, investing in infrastructure improvements and capability enhancements. 37 million of this relates to investments in the LTPA, reduced from the prior year. The LTPA CAPEX is funded through the contract, which means that although Kinetic funds upfront investment, it is paid back through the depreciation over the life of the contract. A key component of delivering our strategic ambition is to have a robust financial framework that ensures efficient use of our balance sheet. Our net debt position improved from £207 million to £151 million through the year as we saw strong cash conversion and working capital management, particularly in the second half. In FY24, we also returned 62 million to shareholders in the form of dividends and buybacks, with 16 million of the 100 million buyback being executed during FY24. We continue to see a buyback as being a compelling component of shareholder return. Following a year of strong cash generation, prudent investment in the business and the introduction of the share buyback programme, we're pleased to end the year with a leverage ratio of 0.5 times and improvement from 0.8 times last year. This gives us flexibility for growth and enables the potential for future shareholder returns. Following this strong set of results, we're increasing our FY25 guidance and are on track to deliver our FY27 outlook. We enter FY25 with strong momentum, a healthy order book and increased visibility with 64% revenue under contract. We expect FY25 to deliver high single-digit organic revenue growth compared to FY24 at a stable operating profit margin. We are on track to deliver 2.4 billion of organic revenue at approximately 12% margin by FY27. This will deliver an attractive return on capital employed at or above the upper end of the 15 to 20% plus range. Cash conversion will remain high at 90% plus with capital expenditure within the 90 to 120 million range. Our strengthened balance sheet provides optionality through disciplined deployment of capital for bolt-on acquisitions to compound growth at 11% to 12% margin and further shareholder returns. Thank you. Back to you, Steve.