QinetiQ Group plc

Good morning, everyone. My name is Andrew Carter, Group Director of Investor Relations at Kinetic. Welcome to Kinetic's FY26 preliminary results presentation. Thank you for taking the time to join us, both in person and online. It's my pleasure to hand over to our CEO, Steve Wadey. Steve.

Great. Thank you, Andrew. Good morning, everybody, and thank you for joining us for our full year results. I'd like to start this morning by thanking all of our highly skilled employees for their dedication and hard work during the course of the year, as well as our customers and our partners for their continued support. In what has been a year of significant change for Kinetic, I'm pleased that we have delivered resilient performance, took decisive action to strengthen the business, and have set the foundations for sustainable growth. So our agenda this morning is as follows. I'll start by running through the highlights and our year in review. Martin will then provide his review of our financial results. I'll then come back and give an overview of our strategic outlook. Finally, we'll open up for questions. So turning to our highlights. We have delivered resilient performance in more challenging markets while strengthening the quality of the business and our future growth. Revenue for the year was just over £1.9 billion with operating profit of £218 million and an improved margin at more than 11%. And we delivered significantly stronger cash generation and free cash flow of £159 million up more than 40%. We completed the restructuring in the first half of the year, including decisive portfolio actions in the US. However, Whilst US performance has stabilised and the business is better positioned for future growth, we are actively assessing all options to enhance shareholder value. I'll come back to this in a moment. At a group level, we are now operating from a structurally improved, higher quality platform with a better contract mix, driving stronger cash generation and delivering higher quality earnings. We've also built good forward momentum, with a record order intake of £3.6 billion and a backlog of £4.8 billion, up more than 40%, providing clear multi-year revenue visibility. Growth will be driven by backlog conversion into revenue, with a lower cost base, supporting improved margin and providing operating leverage into earnings and EPS. Looking forward, our visibility of growth and strong cash generation supports continued investment in the business, as well as giving us confidence and clarity to introduce a new three-year target of more than £550 million of free cash flow. This strong performance enables us to significantly increase shareholder returns, with our dividend policy moving to a payout ratio of 35% to 40% and a £200 million extension to our share buyback programme through to 2029. In total, we expect to return around a half a billion pounds of cash to investors over the next three years. Martin will explain more of this in detail later. Now let me turn to our year in review. The major focus of the year was to improve the quality of earnings across the group. We delivered this through three areas. First, restructuring with discipline. We have reshaped the portfolio and reduced the cost base with a reduction of approximately 1,000 roles across the group. We also took action to remove lower quality revenue, allowing us to focus on organic growth, opportunities where we see stronger, more consistent returns. As part of the restructuring, we have also invested in strengthening our program management and business development capabilities, underpinning our operational performance and future growth. Second, execution with control. Despite more challenging markets, we've maintained good delivery to our customers and improved operational execution. We've delivered strong performance in the UK with 7% growth, offsetting stabilised performance in the US. Disciplined execution has also supported improved margin, stronger earnings quality and a step up in cash generation. Third, growth with focus. The defence market is evolving quickly, and we have moved early to align the business to where we see demand developing over the medium term, not just where it is today. We have been selective in deploying capital and resources, focusing on higher return, longer-term opportunities. During the year, we strengthened our role as one of the UK's strategic partners, with major developments to both our LCPA and EDP contracts. In Australia, we are strategically pivoting the business from being a sub to a prime contractor, and we are actively focused on leveraging our UK strengths into European NATO, where we see increased demand for our capabilities. Overall, we have resized the cost base, strengthened execution, and improved our strategic focus, resulting in more consistent, predictable, and higher quality earnings. Let me now return to our US business. The defense services market has been more challenging over the past year. A combination of budgetary pressures shifting towards platform and hardware companies rather than services companies, slower contract awards, the impact of Doge, and margin compression in services work have all impacted performance. At the start of the year, we moved quickly and took decisive action to reshape the business. We've delivered good progress on the U.S. restructuring program. Key actions completed include the disposal of the Fed IT business, significant reductions of the cost base and headcount, exit from non-core and lower return contracts, and a simplified operational footprint. We also recognized that the U.S. market had changed and therefore reposition the focus of the business to be better aligned with national defence and security priorities in four areas where we have differentiated capability. Space and missile defence, maritime systems, advanced sensors and persistent surveillance. All of these areas have contributed underlying growth. During the second half of the year, the business performance has been stable and operating with greater predictability. Revenue is approximately $385 million with a simpler structure and improved operational control. We have focused on driving organic growth, including pursuit of a number of new opportunities as a result of current operational needs. The US business is now a smaller, better business aligned to today's market priorities. However, I recognize the need to deliver enhanced value for shareholders. We are therefore assessing fit within the group and actively reviewing all options, and I will provide a further update at our interims in November. I'll now hand over to Martin to take us through our financial results.

Thanks, Steve, and good morning, everyone. This has been a resilient and improved financial performance by the group. on the back of last year and against the backdrop of near-term budget challenges in our key markets. I'd like to thank our teams, customers and supply chains who have been instrumental to the improved in-year performance. Starting with the FY26 financial headlines and for reference, the dollar rate averaged 134 compared to 128 last year. References to organic numbers are based off a constant currency and adjusting for the disposal of the US Fed IT business Order intake was a record for the group at £3.6 billion, boosting order backlog to £4.8 billion, positioning as well for future growth. Revenue was flat in reported terms, but 1.3% growth on an organic basis, with good and improving growth in the UK businesses, offset by the portfolio actions and market challenges in the wider group. Profit at £218 million was up 18%, Margin at 11.3% saw a return to expected and upper quartile benchmark levels and a higher quality of underlying earnings as we delivered on our commitments from the start of the year. Cash flow was strong with conversion at 100%, enabling us to accelerate our share buyback programme during the year whilst investing in the business and retaining a strong balance sheet. Overall shareholder returns increased 21%. For clarity of disclosure, this page highlights our financial metrics, movements year on year and key takeaways. Orders, revenue, profit and cash I will cover in depth. We continue to drive an enhanced focus on EPS and this saw us deliver a 21% increase to 31.5 pence. This was driven by the underlying profit increase and the accelerated buyback programme delivering a lower average share count. Improved profit and strong cash conversions saw free cash flow increase 41% to £159 million and return on capital employed was again very strong at 34% reflecting the increased profit, efficiency actions and continued capital allocation discipline. Dividend for the year is up 24% to 11 pence as we move to a payout ratio of EPS from a 7% progressive dividend policy. This reflects our confidence in long-term earnings growth and cash flow. Moving to order intake, within our record 3.6 billion of orders, 1.7 billion related to our long-term partnering agreement with the contract now extending to 2033. Amir Services saw 2.3% growth and orders of 1.5 billion pounds, including the major orders of the five-year typhoon support contract, Dragonfire Laser Award and new wins in maritime training and in special forces secure communications and technology. Global Solutions saw orders fall by £85 million. As Steve covered, this was due to the US market dynamics driving us to exit certain business lines. Key awards secured in the year include the Space Development Agency Framework and Supplementary Awards of £68 million, the usual funding awards on TARS and SCO of £72 million, and global target awards of £65 million. Next, revenue, which grew 1.3% on an organic basis. Growth levels were impacted by near-term challenges in our core markets, the timing on orders, and the actions taken in the U.S. While growth was lower, we saw revenue per head increase 13% in the year and 21% over the last three years. EMEA services grew the expected 3.5%, with good growth delivered in UK defence off our framework contracts of LTPA and EDP, and we saw growth in our laser programmes and our intelligence business picking up in the last quarter of the year. As outlined at the hearth, Australia was lower following the loss of the land systems contract. Global Solutions was down, reflecting the contract exits mentioned and timing of awards impacted by the geopolitical backdrop in the US. These headwinds more than offset what was good on contract growth of 25%, equating to $23 million on our space development contract. Target's revenue was up 6% against last year. Profit at £218 million and margin at 11.3% saw us deliver on our commitments to rebuild margin by driving operational performance, financial discipline and addressing the cost base through restructuring and cost efficiencies in our geographies. The mere services at 11.9% was at the top end of our expectations as we executed on our order backlog and controlled costs. Global solutions at 9% improved year on year as the restructuring work in the US took hold. The walk down to statutory profit as usually shown on the right of the table, there were no more material charges in the second half of the year, the main movement being 7 million of further restructuring charges as we drive long-term efficiency, competitiveness and value for money for our customers. Cash was a strong year, with conversion levels at 100%. CapEx was £72 million, of which £37 million related to the LTPA. This was down on last year, reflecting the timing on programme delivery. There was a net outflow of £52 million, reflecting the cash expensed on exceptionals, and you'll remember many of those associated charges were in FY25. Interest and tax were as expected, which meant free cash flow was £159 million, up £45 million from last year driven by the improvement in profitability. Shareholder returns were a record at £183 million, up £32 million. The dividend accounted for £49 million of that, and we accelerated the buyback programme, completing £134 million in the year. These movements meant we ended the year with a net debt of £159 million, a strong balance sheet, and a leverage ratio of 0.5 times, again in line with last year. I now want to cover three forward-looking points prior to guidance. Firstly, my confidence in our return to revenue growth. Secondly, the sustainability of margin and clear route to delivery of higher quality predictable earnings. And thirdly, the strength of our cash flow and commitment to value-enhancing capital allocations. On revenue growth, the chart shown here demonstrates the strong revenue growth of the business over the last five years. This has been underpinned by the UK-based businesses, which combined have grown at 10% CAGR. In the UK, which is now around 75% of the group, we have a high-performing business delivering critical capabilities and military readiness. In challenging near-term market conditions, the UK still grew 7% in FY26, And we see that growth trend continuing from our established positions with the opportunity for it to increase as budgets increase in the UK. Looking beyond the UK and to further accelerate growth, we see significant opportunities in Europe in the coming years off the back of our T&E and mission data capabilities. And with the US now stabilised, we're driving growth through our core franchises, as Steve explained, with the space and special capabilities office contracts expected to lead the way. Historic performance is a strong indicator of future performance, but what also underpins our confidence is the order flow and duration of the work being secured. The underlying book to bill of 1.14 provides the momentum required for us to drive enhanced growth, and this has driven our multi-year record backlog of £4.8 billion, which is up 41% on last year. In turn, that backlog means we enter the year with existing orders that provide contracted revenue cover of 67%, broadly in line with last year. The growth drivers in FY27 are the LTPA contract, US space contracts, in-theater technologies and products, and our weapons research framework and mission data contracts. Steve will give more color on the midterm growth drivers later. Topline growth is our key focus, but that needs to be profitable growth, and we have taken steps to enhance the quality and predictability of earnings. Our backlog is dominated by our framework contracts. This is a high-quality backlog and provides revenue and earnings visibility. We're driving program execution throughout performance function and supply chain effectiveness to drive gross margins, and in cost, we have undertaken significant restructuring with headcount 12% lower. As we grow the top line, we shall ensure that profitability is maintained whilst making sure we invest in the business to deliver growth and returns. Finally, we recognise the need to give greater clarity in reporting, alignment to peers and reduce exceptional reporting. To that end, the digital programme ends this year, so those exceptional costs will drop off and looking forward, any future digital spend and the RDEC income will be reported in underlying operating profit meaning a lot closer alignment to statutory earnings. Next, capital allocation. The quality of this earnings outlook and contract structures mean we have a highly cash-generative business that allows us to step up investment and deliver good growth in free cash flow. We are set to increase investment in our people, sites, technology and R&D to drive growth from the core and realise our opportunities. Reflecting that confidence in cash generation, we are introducing a three-year free cash flow guide, which we are setting at more than £550 million of free cash flow from FY27 to FY29. Our focus remains on organic growth and shareholder returns. With our enhanced dividend policy moving to a 35% to 40% payout ratio of EPS and extending the buyback programme by a further two years, we are today providing mid-term clarity of how we intend to deploy our free cash. This will see the majority of that cash flow returned to shareholders over the next three year period. This capital allocation framework means we see return on capital employed remaining at elevated levels in the 25 to 30% range. Finishing with guidance for the coming year, Revenue growth we expect to be 3% to 5%, driven by EMEA services. Moving to the higher end will depend on greater clarity on budgets in our core markets. Margin we expect to be in the 11% to 11.5% range. Whilst we see operational efficiency continue to come through, we should also look to further invest in the growth of the business. In-year cash conversion, as described by the group, is set to be greater than 90%, and as explained, our three-year free cash flow guide is set at greater than £550 million. The strong cash-generating nature of the business and our capital allocation allows for confidence in our growth algorithm for EPS, which we expect to grow between 8% to 10%, reflecting the revenue-driven profit growth and benefits from the buyback programme. To summarise, it was a resilient and improved financial year where we have driven stronger foundations, We are well set for growth at high quality levels of profitability, delivering good free cash flow over the midterm and clearly laid out the deployment of that cash. Thanks for listening and back to you Steve.