QinetiQ Group plc

Thank you Stephen and good morning everybody and welcome to our half-year results for FY26. Whilst we continue to operate in challenging market conditions, we have taken decisive action to improve our short-term performance and drive long-term growth, creating value for shareholders. And thanks to the dedication and hard work of our highly skilled employees, we've continued to support our customers' operational needs, delivering mission-critical technologies and services. Today we'll take you through our half-won results and the actions we've taken to address both near-term challenges and strengthen our market positioning for the long term. A great example is shown here. which illustrates the successful completion of the synthetic trials we undertook with BA Systems to demonstrate how drones can operate alongside combat aircraft like Typhoon. This was a significant milestone in developing critical sovereign capabilities needed to defend the UK's national interests. Let me start with our key messages for today. First, in tough near-term market conditions that have delayed orders in the UK, we have delivered robust operational performance and our restructuring program in the US is on track. Secondly, our mission-critical capabilities remain highly relevant to our customers' needs in a growing defence market and combined with our significant order book and substantial pipeline provide very good visibility for for long-term growth. Thirdly, despite near-term headwinds in our home markets, we have focus and visibility to maintain our full year guidance and we continue to deploy capital with discipline. In summary, we are delivering the actions to improve business performance in the short term and are well positioned to capitalise on increasing defence spending so that we deliver compelling value creation for shareholders. Our agenda this morning expands on these messages. I'll start by giving you our half year in review. Martin will provide a commentary on our financial results. I'll then come back and give you an overview of our strategic outlook. Finally, we'll open up for questions. So to our review of the half year performance. In response to the market backdrop, we have taken proactive and disciplined portfolio actions. achieving good progress on our US restructuring program, as well as right-sizing other areas of the business. The improvement actions are delivering benefits and building resilience that will improve both short and long-term performance. Overall, our first half financial performance was robust in tough near-term markets. We saw this particularly in the UK, where we experienced delays to orders on our engineering services and R&D framework contracts, in part due to our customers prioritising major equipment programmes. This reduced our underlying book to build to less than one, excluding the LTPA contract award. We achieved two strategic milestones that strengthen our company for the long term. In May, we secured the £1.5 billion extension to transform the LTPA for future warfare through to 2033. As a result, we closed the half with a significant order backlog and substantial pipeline, providing very good visibility for long-term growth. And in September, we announced the strengthening of the EDP contract to accelerate defence productivity by expanding the partnership and augmenting our high-value engineering skills with artificial intelligence. Together, these strategic milestones show how we are playing our part in delivering on the ambitions of the UK Government's Strategic Defence Review. As normal, we delivered a healthy cash conversion, enabling investment in the business and increased shareholder returns through our progressive dividend and multi-year share buyback programme. Looking forward, we have approximately 90% of revenue under contract for this year, which is the same as last year. Whilst market headwinds continue, we're focused on execution and have visibility to deliver our full year forecast. Martin will take you through a bridge of this later in the presentation. I now want to address our half one performance and the progress we are making in each of our segments. Starting with EMEA services. Due to market conditions in the UK and ongoing defence budget pressures in the Australian market, we delivered flat revenue with good margin. In the UK, we grew 2% as a result of delayed orders on our framework contracts. And in Australia, our revenue was lower, predominantly due to the loss of the land systems work package under the MSP framework. In response to these dynamics, we took some resizing actions to build resilience whilst protecting core skills for the future. Our performance was underpinned by successful program execution across our long-term contracts. On the EDP contract, delivery performance was strong, with 98% of all milestones delivered on or ahead of schedule. In September, we announced changes to the LTPA that will make it easier and cheaper for SMEs and new entrants to use our test and evaluation capabilities across the UK. The launch of our T&E Innovation Gateway will help drive greater defence innovation and support wider economic growth across the UK. Notable new contracts in the half include the strategic win £25 million to deliver collective training for the Royal Navy to improve warfighting readiness at pace. This five-year contract will see us deliver an immersive virtual training environment that realistically simulates the threats and missions that Navy personnel can expect to undertake in the future. Whilst near-term trading conditions remain tough, we have a clear pipeline of orders to win and deliver in the second half. Turning to global solutions. During the first half of the year, We've been focused on executing our plan to address the market challenges and operational issues that we highlighted in May. We've made good progress on the U.S. restructuring program. Key actions completed include the disposal of the U.S. Fed IT business, significant headcount resizing and cost base reduction, as well as an improved control of labor rates and inventory. This progress puts us on a stronger foundation to move forward. As we forecast, revenue declined with lower margin compared to the prior year. Half of the decline was due to a lower volume of non-US product sales versus a strong prior year comparator. And the other half was in the US, principally due to the impact of Doge on our Fed IT business that we have now disposed of and our planned resizing actions. As the US market changed, we repositioned the business to build resilience and be better aligned to national security priorities. Our strategy is now focused on four capabilities where we have differentiated long-term incumbent positions and see good growth potential. These four areas are space and missile defence, maritime systems, advanced sensors and persistent surveillance. During the half, we secured $290 million of funded orders with a US book to bill of 1.5 times. Whilst we continue to focus on improving operational performance and winning longer term programs, this strong book to bill underpins our second half forecast for global solutions. To summarise, we're making good progress. Whilst we finish the half with a smaller US business, it is more aligned to national priorities and is well positioned to deliver long-term growth. I'll now hand over to Martin to take us through our financial results.

Thanks, Steve, and good morning, everyone. As usual, 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 capital allocation and guidance. And for reference, the US dollar rate for the half averaged 134 compared to 129 last year, which has provided a headwind to the reported values. So turning to the results for the half. Order intake for half was £2.4 billion, which drove a closing order backlog of £4.8 billion. Both reported records for the group. Revenue was 3% down on an organic basis at £900 million, resulting in a book-to-bill of 0.9 times, reflecting the sale of our Fed IT business and trading conditions in H1, which impacted contract awards. Underlying profit was down £10 million versus H1 last year at £96 million, but margin at 10.7% was ahead of our half-year expectations and underpins our full-year target of around 11%. Underlying basic earnings per share of 14.2 pence were in line with last half as the lower profit was offset by the enduring benefit of the enhanced level of share buyback. Turning profit into cash remains strong at 85%, which again underpins our full year guide of around 90%. The strong operating cash performance combined with the sale of our US Fed IT business has enabled effective and value accretive capital deployment. This has enabled us to not only reduce net debt half on half, but also to significantly enhance shareholder returns, which totaled £101 million, as we made excellent progress on our ongoing two-year share buyback programme and paid the final dividend. And return on capital employed remains strong at 21.1%. Moving to the key group financials and starting with orders, The book-to-bill of 0.9 times, as Steve raised, resulted from delays in contract awards in the UK impacting EMEA services. And within Global Solutions, the year-on-year impact on the federal IT market was particularly stark in the order flow in the business we've now disposed of. Whilst book to bill was down, total orders at £2.4 billion was a record when incorporating the five-year LTPA award. This meant we closed the half with an order backlog of £4.8 billion, which does include £0.4 billion of US unfunded backlog, providing good visibility for future growth of core long-term business frameworks. Revenue at £900 million is down 3% on a like-for-like basis when adjusting for FX and the sale of the Fed IT business. AMIR was lower on reduced volumes in Australia, where we lost the competitive land systems work package, and as Steve mentioned, despite being impacted by delays in orders, the UK business did grow 2% half-on-half. Global solutions declined due to US short cycle revenues, of which a significant part was in the business now disposed of. In addition, our restructuring activities have resulted in us exiting some business lines as we focus on four major areas for long term profitable growth. Within global solutions, our product business was lower against a high year on year comparative, but demand and outlook remains robust and we expect a better second half. Recognising the step-up required in H2 to deliver our revenue guidance, we have detailed on the chart the drivers that bridge us from half-year to our year-end assumption of circa 3% organic growth, like-for-like growth, so taking each in turn. Revenue cover at the half stood at 89%, in line with last year's assumed outturn at this stage, and that includes the core frameworks of EDP and LTPA, established positions on the likes of Naval Combat Systems and MSCA, maritime training following the MCAST win, and in the US, the TARS Persistent Surveillance Contract and the work we do with the Space Development Agency. Secondly, our Period 7 order flow has added a further 2% to the cover and includes the Mission Critical Typhoon Support Uplift. Thirdly, we have around 7% of orders which are extensions of current positions or where we are close to finalising the awards. Examples include the Dragonfire laser weapons contract and target sales with predominantly repeat customers. Finally, we have a good visibility on a pipeline of further rewards that we assume we shall win and deliver in year to cover the remaining around 2%. Whilst there are clearly market headwinds prevailing in the US, UK and Australia, we currently have good visibility and are hence maintaining our full year guidance. Moving to operating profit, which was down 10.6 million against last year, reflecting lower revenue and the impact of the group's restructuring activities. Margin at 10.7% was ahead of expectations at the half, with good consistent programme execution against our backlog, especially in EMEA services. In May, I talked about rebuilding margin from 9.6% to around 11%. and we are on track through driving strong program execution, cost-based efficiency actions, and the portfolio actions in the US. As usual, we have detailed the table reconciling underlying operating profit from segments to statutory profit. The income from RDEC and intangible amortization are standard reconciling items and predictable. The other two major reconciling items reflect the actions being taken to improve the long-term performance of the business. Firstly, our digital investment has increased in the half driven by a major rollout to over 60% of the business. As a reminder, this is part of a programme to enable growth strategy and wider business efficiency. Secondly, we have booked a further £22.6 million of restructuring costs driven by the portfolio work in the US, coupled with a right-sizing activity in Australia and ongoing efficiency activity in the UK. To complete profit, the sale of the Fed IT business led to a £0.5 million profit on disposal. Now turning to the segmental split of the group performance, starting with Amir Services. which had a good operational half in difficult near-term market conditions. Orders increased to £2.2 billion, excluding LTPA. The book-to-bill was down to 0.8 times, with delays in contract awards in the UK and Australia driving the shortfall. Albeit, as mentioned in the revenue bridge, some of those orders have come through since period end. Revenue was broadly stable with the UK defence delivering growth, but this was offset by order delays and lower revenue in Australia with the loss of the land MSP work package. Programme performance and cost control was good, ensuring consistent margins at 11.5%, and funded backlog is now at a record high, £3.9 billion, which supports second-half delivery and longer-term visibility. Next Global Solutions, which posted orders of £247 million at a book-to-bill of 1.3 times, including annual funding on our core US franchise contracts of Tethered Aerostat Radar System, Strategic Capabilities Office and Space Development Agency. These contracts also saw good on-contract growth. Securing these orders in the half helps to de-risk second-half revenue given the ongoing government shutdown. Orders were down half on half due to restructuring of the US portfolio and timing of targets and product awards. These dynamics impacted revenue, which was 16% lower at £192 million. And as covered in the bridge, the book to build gives us a foundation to drive the required second half performance. Margin was down half and half at 7.4%, but up from last year as we work through the US restructuring actions, and was in line with our expectations at this stage. Moving to cash, where operating cash flow continued to be good at £128 million and was in line with last year, delivering a high conversion ratio of 85%. Capital expenditure was £36 million, of which £21 million related to the LTPA. And in line with guidance, we would expect higher spend in the second half, with a total for the year around £100 million. To complete the cash analysis, the movement in net debt from year end is shown here. We generated £63 million of free cash flow and with the proceeds from the Fed IT sale, that allowed us to deliver a significant step up in shareholder returns at £101 million as we accelerated the pace of the buyback programme and grew the dividend 7% in line with our progressive policy. Net debt therefore closed at £180 million at a leverage ratio of 0.6 times up from year end but a £10 million lower net debt than last half year. Turning to capital allocation which is unchanged, the business is delivering good consistent cash flow and the focus and priority is driving sustainable organic growth at good margins whilst investing in the business. We maintain a rigorous approach to the deployment of our capital, scrutinising organic investments against shareholder returns and ensuring we have a balanced and value-accreted deployment of capital. During H1, we've demonstrated our disciplined capital allocation policy by investing in our organic growth through CAPEX, research and development, digital, and major competitive bids. We provided a 7% progressive dividend, completed the sale of our non-core Fed IT business in the US and used the funds from the sale to accelerate our share buyback programme. We have a strong balance sheet which gives us flexibility to drive organic growth and provides optionality for value accretive capital deployment in excess of the £200 million share buyback already announced. So pulling all that together and moving to guidance, which is unchanged, per the revenue bridge, we still expect to deliver a circa 3% organic growth on a like-for-like basis when adjusting for the sale of the Fed IT business and the higher exchange rate versus original guidance. Margin we expect to be around 11% and with the buyback progressing at pace EPS growth at 15 to 20%. Cash we expect to be around the 90% conversion level and leverage around 0.5 times at year end. As usual to help with your models we've included additional technical guidance in the backup slides. This has been a robust half against a difficult market backdrop and with the action taken and in train, have the visibility to deliver this four-year guidance. I'd like to thank all our teams for delivering critical capabilities to our customers and for this half-year result. With that, back to you, Steve.

Great. Thank you, Martin. So to our strategic outlook. Let me start by explaining why we are a differentiated company, highly relevant to the increasing threat, with strong fundamental growth drivers, structurally aligned to the increasing defence spend. The threat environment has changed the market dynamics. We are in a new era of defence. Our customers have committed to long-term spending increases, as we have seen across NATO, and are driving major procurement reforms as they seek to rapidly scale existing capabilities and create new disruptive capabilities to overmatch the threat at wartime pace. We are not standing still. Our mission-critical capabilities, shown here on the right, are highly relevant and are directly aligned to our customers' priorities. We are a horizontal integrator, developing new technologies, testing new platforms, and delivering frontline mission support. We play an essential and vital role in helping our customers accelerate capabilities into service and increase warfighting readiness to counter the threat. As the market is changing, we have adjusted our strategy to increase focus in three areas. Firstly, partnering more closely with our customers to help them build greater resilience, rapidly modernize and deliver innovation at pace. Secondly, continuing to pursue focused growth in each of our key domestic markets. And thirdly, leveraging our capabilities to expand and grow into European NATO markets. Let me take each of those in turn. We are increasing our competitive advantage through greater partnering and innovation with our customers and industry to deliver operational advantage and drive growth. We are a strategic partner to the UK Government and the fourth largest defence supplier to the UK MoD. Our capabilities are aligned to the ambitions of the Strategic Defence Review And we have increasing opportunities to leverage our expertise in partnership with the government into major export programs, such as our engineering services and mission data capabilities into the recent win of Typhoon Intertia. On Monday this week, Luke Pollard, the Minister for Defence Readiness and Industry, visited us in Farnborough and has welcomed our commitment to proactively transform the way that mission-critical engineering services are provided to the UK's armed forces that I mentioned earlier. This includes our investment in new digital and AI technologies to augment our high value engineering skills, significantly increasing UK productivity and innovation. To stay ahead for the long term, we remain focused on investing capital into our people, technology and capabilities. We achieved a major milestone in the half with the successful transition of UK and Australian employees onto our new digital workplace to improve our ways of working and business efficiency. And investing in cutting-edge defence technology continues to be a key driver for our future growth. Our long-term R&D created the laser technology that is critical to the growing Dragonfire laser weapon programme. Investing in the business is core to our strategy to ensure we have a differentiated portfolio and are well positioned to capitalize on increasing defense spending and drive organic growth. The longer term opportunity in our domestic markets remains significant and our mission critical capabilities are focused on areas of priority for our customers, which are robust and set to grow. In EMEA Services, we have deep expertise that we are leveraging on next-generation technologies, capabilities and programmes. This includes the launch of our DroneWorks initiative to help SMEs access our expertise and facilities to accelerate drone development for rapid deployment. And we are delighted with a recent significant competitive win to further develop our disruptive laser technology for next generation laser weapons beyond Dragonfire. In Global Solutions, we now have a US business with much greater focus on the four differentiated capabilities that I described earlier. As a result, we've delivered significant on-contract growth across our large multi-year contracts that Martin described, SCO, TARS and SDA. And we see significant growth potential for space and missile defence, where our capabilities are highly aligned to multiple US space programmes. From a wider product perspective, we are continuing to invest in our maritime, targets, sensors and secure navigation capabilities where we have differentiated offerings to drive organic growth. Our portfolio is now focused and structurally aligned to national security priorities of our domestic customers, underpinning our long-term perspective. We're also increasing our focus to position the business and drive organic growth in adjacent markets by leveraging our core capabilities across the AUKUS nations and into European NATO and allies. We are collaborating with our customers across the AUKUS nations to develop new opportunities. Examples include sharing laser technology from the UK into Australia, leveraging our R&D expertise. We're also sharing our engineering services experience to help shape the future of the EDP and MSP contracts. And we are applying our world leading maritime T&E capabilities in the UK to support the T&E opportunity for the Orca submarine program in Australia. Over recent years, we have made good progress with European NATO and allies where we have differentiated capabilities. We've grown the use of our unique UK test and training capabilities from nations such as Germany, Italy, Spain and most recently Japan. We're also increasing our export focus and a key opportunity progressing well is the export of our electronic warfare and mission data expertise into Belgium. And whilst Poland remains an upside opportunity, we're actively shaping further persistent surveillance opportunities in Eastern Europe and the Middle East beyond our U.S. program. We're also well positioned to capitalize on NATO's increasing defense spending, and we see our addressable market growing. With a focused approach to our international expansion, we are creating value across the company to drive further organic growth. Having secured the LTPA extension, we have a significant order backlog of £4.8 billion, providing a firm foundation for the company. This backlog, combined with our qualified pipeline of £11 billion, provides good long-term visibility at eight times our FY25 revenue. We've built this visibility by focusing on our customers' needs, partnering with industry, and winning larger, longer-term programs. On the left, I'm showing our major domestic programs, where we have strong incumbent positions that build up to approximately 70% of our annual revenue. This solid base in our domestic markets gives us a platform to deliver on-contract growth and win new programs in our pipeline. This solid base also gives the platform to leverage our capabilities to expand internationally, shown here on the right, including opportunities to leverage both our services and product capabilities into European NATO markets. Whilst we may not win all of these, our pipeline is robust and prudent, with many additional growth opportunities beyond the £11 billion shown here. Overall, our significant backlog combined with our healthy pipeline gives us very good long-term revenue visibility and underpins our confidence in creating long-term value for shareholders. So in summary, we've taken the necessary actions in tough near-term market conditions, strengthening our portfolio to improve our performance. The fundamentals of the business remain strong and our mission-critical capabilities continue to be highly aligned to our customers' needs in a growing defence market. Combined with our backlog and pipeline, this gives us very good visibility for long-term growth. Whilst near-term headwinds continue, we're focused on execution and have visibility to maintain our full-year guidance. Ten years ago, we launched our growth strategy. As you can see from the chart on the right, this year is a transition year. Having taken decisive action and significantly grown our backlog, we have a strong platform to capitalise on increasing defence spending. This gives us confidence to drive sustained long-term growth and deliver compelling value creation for shareholders. Martin, I'd be happy to take your questions.