QinetiQ Group plc

Good morning, everybody. Welcome to our FY25 interim results. Thank you all very much for being here in person, for making the effort. We appreciate it. And for those online as well, thank you for joining. I'm joined by our CEO, Steve Wadey, and our new CFO, Martin Cooper. And without further to do, I'll hand over to them. But thank you very much.

Great. Thank you, Stephen. And I'd like to add my welcome to you for joining our half year results today. It's great to be with you and look forward to your questions later. Now, I know many of you do know him well, but I'm really delighted to introduce Martin Cooper, our new group CFO who formally joined us in September. And it's been really great to have Martin on board and I'm really enjoying working with him. We've achieved a good first half performance across the group. This has been delivered thanks to our incredible people who are committed and have delivered our high value services and products that are critical to national defence and security priorities. This picture is a great example. The 10-year, €284 million contract signed in August to deliver aerial training services, where we play a vital role supporting the operational readiness of the German armed forces. Our strategy is working and we have a good long-term outlook to deliver enduring value for our customers' mission and our shareholders. Our agenda today is as follows. I'll start by giving you a review of our first half performance. Martin will then provide a commentary on our financial results. I'll come back and give you a strategic outlook and we'll then open up for questions both here in the room and online. So our review of the first half. Let's start with our headlines for today. First of all, I'm very pleased that we have delivered good, consistent, operational and financial performance across the whole group, against a backdrop of significant political change and an evolving threat landscape. Secondly, we remain on track to deliver £2.4 billion of organic revenue at approximately 12% margin by FY27, and our visibility to the achievement of this goal is increasing. And finally, with our strong balance sheet and continued discipline on capital allocation, we're announcing today an extension of our £100 million share buyback programme by a further £50 million. In summary, we are well positioned and have a clear strategy to deliver long-term sustainable growth and compelling value for shareholders. Moving on to our financial performance. We secured more than £1 billion of orders in the half, demonstrating high demand for our capabilities with a book-to-bill ratio of 1.3. Revenue is up 7% through consistent operational performance, up 8% on an organic constant currency basis. Operating profit is up 7%, with stable margin of 11.3%. This has been achieved through strong program execution across EMEA services, and pleasingly, our performance in global solutions, including Avantis, has been in line with our expectations. We've achieved good cash conversion at 84%, with leverage at 0.6 times, excluding the benefit of the £112 million sale of Cody Technology Park, of which the proceeds have now been received in our second half. And, as I've just mentioned, we've extended our share buyback programme and maintained our dividend growth at 7%, increasing shareholder returns. Overall, we've delivered a good first-half performance and are on track to deliver our full-year guidance. This performance has been underpinned by a number of significant operational highlights across the Group, including the €284 million contract in Germany that I mentioned earlier. Major highlights include commencing the next phase of work on the Dragonfire laser weapon programme to accelerate the deployment of this disruptive counter-drone technology onto Royal Navy warships in 2027. we delivered critical work to NATO. This includes a maritime exercise in Portugal to experiment with the integration of autonomous systems, and we commenced the design of Formidable Shield 2025, which will be NATO's largest integrated air and missile defence exercise. In Australia, we continue to perform under the major service provider contract, winning $148 million of new orders to provide engineering services on critical land and munition programmes such as the new naval strike missile. In the UK, we won a three-year contract worth up to £150 million to help deliver the next generation of tactical communications for the British Army, adopting new technologies to enable better and faster decision-making on the battlefield. Our U.S. business achieved more than 10% on-contract growth across our major five-year programs that provide engineering services and mission support for the Space Development Agency, Strategic Capabilities Office, and the Tethered Aerostat Radar System Program for Homeland Security. And I'm really pleased that we won a significant aerial target systems contract from the U.S. Army. A brilliant example of our strategy in action, entering the U.S. market as a prime contractor by leveraging our world-leading expertise in aerial targets and training services across the group. Now, whilst each of these highlights are significant in their own right, many are just the start of programmes that underpin our long-term outlook. And I'll come back to that later in this presentation. So with that, I'll hand over to Martin, who can take us through our financial results.

Thanks, Steve, and good morning, everyone. It's just over two months since I joined Kinetic, and I've already been able to get to see many of the operations and business sites firsthand, enabling me to get a clear view on the value drivers, capabilities and opportunities that lie ahead. Many of you will know that I've worked most of my career in the defense and security sector, and I truly value the critical importance of what we do for our customers. Here at Kinetic, the depth of embedded capability in our teams, the technology innovation we perform and our differentiation and hence opportunity set going forward is outstanding. And there are a number of areas we can help the external market to better understand the high quality, critical and enduring nature of what we do. These are the main reasons I joined and I'm delighted to be here working with Steve and the wider team and bringing my skill sets to the business to further build and what has been a strong multi-year period of growth for Kinetic. My near-term focus will be on driving further value-accretive organic growth and continue to strengthen core business processes so as we grow in scale and complexity, we do so from firm, cost-effective foundations. Turning to the results for the half. I'll start with the financial highlights before moving on to the key financial metrics at a group level and details on our two reporting segments. I'll finish with outlook and capital allocation. For reference, the dollar rate for the half averaged 129 compared to 125 last half, which has provided a headwind to the reported growth rates of around 0.5% for revenue and profit. And as usual, the technical guidance is in the backup material, and I'll be very happy to take questions at the end. So on to the numbers. Reflecting the strong demand environment for our six distinctive offerings, we booked over £1 billion of order intake, up 9%, on a strong comparator last year. Backlog remained flat versus FY24 at £2.9 billion. Revenue increased to £947 million, a 7% reported increase, resulting in a book-to-bill of 1.3 times. Program execution on the backlog and milestone adherence was good across our major contracts, driving the strong revenue and underlying operating profit growth both at 7%. Underlying basic earnings per share at 14.2 pence increased by 6% as the higher effective tax rate more than offset the ongoing benefit from the buyback program. Turning that profit into cash was much improved and at 84% it underpins our full year guidance of circa 90% plus. Good business performance and cash generation allows for effective and value-creating deployment of capital. Shareholder returns have increased in the period, with excellent progress made against our buyback programme, with £46 million of shares retired and the £32 million final dividend paid. Return on capital remains strong and at the top end of our mid-term guide of 15% to 20%, and as Steve referenced, in a continuation of our disciplined, value-enhancing capital allocation, we are maintaining our 7% progressive dividend and an increase to the current buyback programme of £50 million, which we expect to roll on after the completion of the existing programme in January. So a good reported first half in line with full-year expectations, all delivered against a geopolitical transition in the UK and an FX headwind. Moving to the key group financials, starting with orders, which grew 10% on an organic basis. Orders booked in the period included the 10-year contract to provide aerial training services in Germany, as mentioned by Steve at the start, continued demand on our engineering delivery partner programme, and in the US, the next year of funding was received for FY24 Contracts 1, together with new business and on-contract growth on the Space Development Agency and Strategic Capabilities Office programmes. During H1, we received £133 million of new contract awards in the US, of which £61 million were multi-year and unfunded. This is lower than the prior year, which included the major order wins for SDA, SCO and TARS. The chart at the bottom right highlights that we closed the period with a robust funded order backlog of £2.9 billion, With the additional US unfunded backlog of £0.6 billion, we have a total position of £3.5 billion, providing excellent visibility for future growth. Revenue for the half at £947 million grew 8% on an organic basis as we executed effectively on our order backlog. At around 46% of our expected full year guidance, this is in line with our usual cadence and underpins confidence in our full year guide. Growth was driven by strong performance in our engineering delivery contracts in the UK and Australia, together with increased volumes in aerial targets across the world. As we look to the second half, our revenue under contract is at a similarly high level to last year of approximately 90%. Our good programme execution and milestone adherence led to a 7% increase in underlying operating profit to £107 million at 11.3% operating margin, consistent with last half year and our guide for the year. At the right you'll see a table reconciling underlying operating profit from segments to statutory profit, covering the key points. Income from research and development expenditure credits is in line with last half year. Amortization of intangibles is down on a reported basis due to FX impact, as the intangibles primarily relate to the US and Australia acquisitions in recent years. As outlined in May, the digital platform represents a discrete multi-year investment project to enable our global growth strategy and our AUKUS customer needs. we continue to expect around £25 to £30 million of additional spend over the next three years, which will fade through to completion. The values here reflect the implementation costs. All recurring costs, such as licences and maintenance, are reported within the underlying cost base. And as a reminder, and as outlined in the release following the certain leaseback of the Farnborough site, under IFRS 16 and Right of Use Accounting, a one-off non-cash accounting loss of approximately 30 million is expected to be recognised as a specific adjusting item at full year. Turning now to the segmental splits of the group performance, starting with the mere services. Orders grew 16% to 730 million pounds at a book to bill of 1.2 times. This drove funded order backlog up to 1.6 billion pounds, excluding LTPA, providing visibility on our sales growth expectations. Revenue growth at 10% was driven primarily by execution on the EDP framework contract and growth in the Australia sector. Operating profit grew to £83 million on continued good operational performance, delivering margins at 11.5%, consistent with the outturn for FY24. Next, the Global Solutions, which posted total orders of £304 million at a book-to-bill of 1.3 times. as we saw good order flow from U.S. funding on FY24 contract wins and on-contract growth, together with strong aerial targets orders. As referenced earlier, new unfunded orders in the period reduced due to a higher year prior comparator. Funded order backlog is up 17% on year-end to stand at £0.4 billion, together with the strong U.S. unfunded orders of £0.6 billion we have confidence and visibility in Global Solutions' growth in the coming years. Global Solutions' revenue was in line with last year's half with a number of moving dynamics. There was increased revenue from the TARS and SDA contracts, which led to growth in the legacy Avantis business. The U.S. robot CRISI program completed, but that was offset by higher levels in our targets and other product lines. On the back of this sales mix change, margins increased slightly. So overall, global solutions and EMEA services have delivered in line with our expectations in the half and are well positioned to carry that through to year end. Cash generation was strong with £131 million of net cash flow, which equates to a conversion ratio of 84%. a particularly good performance given the FY24 high cash conversion of 104% was in large part driven by early receipts from FY25. CapEx spend was £49 million and a half, tracking in line with our annual projected £90 to £120 million spend as we continue our investment in infrastructure and capability enhancements. £21 million of this relates to investment in the LTPA, And as a reminder, the LTPA CapEx is funded through the contract. This means that although Kinetic funds upfront investment, it is paid back through depreciation over the contract. To complete the cash analysis, the movement in net debt is shown here. We generated £47 million of free cash flow and delivered a significant step up in shareholder returns at £78 million. This increase in shareholder returns meant the leverage ratio increased marginally from year-end to 0.6 times. For clarity, this excludes the impact of the sale and leaseback of the Farnborough site. The proceeds were received at the end of October, and all things being equal, lowers the leverage by 0.2 times. So pulling all that together and moving on to the outlook, on the back of a good half, our guidance for the full year is unchanged, with us expecting to deliver high single-digit organic revenue growth compared to FY24 at a stable operating profit margin and cash conversion at circa 90% plus. Our FY27 outlook is also unchanged, with us on track to achieve £2.4 billion of organic revenue at approximately 12% margin with high levels of cash conversion. And to help you with your models, we've provided an estimate in the statement of the net debt movement expected at year end, taking into account the sale and leaseback and the extended buyback programme. Finally then, let me turn to capital allocation. We continue to see the business delivering strong cash flow and the focus and priority is unchanged from the prelims in May with the near-term actions prioritised on driving programme performance, investment in the business and organic growth. Alongside our progressive dividend policy, we continue to see buybacks as a compelling component of shareholder returns, as illustrated by the progress made on the current programme and our announcement today of extending that by a further £50 million. We are comfortable with our balance sheet position and it gives us flexibility for growth and enables the potential for further shareholder returns as we look to deploy capital in the most value-enhancing manner. In summary, this has been a good financial half underpinning our full-year and FY27 guidance. Our high backlog and opportunity set are a strong indicator of our prospects. Good operational performance is seeing that translated into consistent sales and profit growth. And through our capital allocation, we are demonstrating that we will allocate our growing returns in ways that continue to create value. Finally, I would like to thank all our teams for delivering for our customers and this half-year result. Before handing back to Steve, I'd like to clarify that going forward, we will drop our pre-closed statements in April and October today. and instead move to a more normalised reporting cycle of a Q1 update in July aligned to our AGM, interim results in November, a Q3 trading update in January, and the preliminary results in May. With that, back to you, Steve.