QinetiQ : Financial Document

QinetiQ

Interim Results| Video Webcast

16th November 2023

Transcript

Disclaimer

This transcript is derived from a recording of the event. Every possible effort has been made to transcribe accurately. However, neither QinetiQ nor BRR Media Limited shall be liable for any inaccuracies, errors, or omissions.

payments and increased UK tax rate. And with our focus on delivering returns, we have added return on capital employed for the first time in our half year results.

Using a rolling 12 month profit, ROCE continues to remain attractive at 25.5%. And whilst not shown on this slide, I can confirm that an interim dividend of 2.6 pence per share will be paid. So overall, strong and consistent underlying performance in the first half, which is a good foundation to deliver on our full-year expectations, de-risking the second half.

I will now provide further detail on our performance, bringing out our two operating segments, which, just to remind you, in April, we renamed Global Products to Global Solutions to reflect the changing nature of that segment following the addition of Avantus last year.

Orders. We have delivered excellent order performance in the period, with orders of £953m, growing 19%, 2% on an organic consistent currency basis against a high prior year comparator. As we articulated at our investor seminar three weeks ago, we are highly relevant in high-growth market segments. Some of these segments are evidenced by the orders that we have won in the half, namely £190m of orders under the Engineering Delivery Partner framework and a £39m Battlefield Communication Programme renewal in the UK and significant new awards in the US.

Order performance by our integrated acquisitions has been impressive. As Steve has already outlined, we have won contract awards totalling $657m in Avantus since the start of the financial year, booking $195m in our first half orders as per our prudent order recognition policy. It is pleasing to see continued growth in overall backlog figure up to £3.1bn as at the end of September, particularly with growth continuing outside of our LTPA contract. Our orders won and backlog demonstrate our unique value proposition and high demand for our distinctive offerings.

Revenue. We have delivered excellent revenue at £883m, growing 31%, 19% on an organic consistent currency basis. This revenue growth has been driven by four main factors. Firstly, the strong orders won last year flowing into revenue across all of our major contracting frameworks, including EDP and LTPA. Secondly, operational requirements have driven some short-term taskings. Thirdly, with our contracting terms, the impact of inflation has benefited revenue growth. And finally, inorganically with the addition of our recent acquisitions of Avantus and Air Affairs. 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 organic revenue growth across the group. It is pleasing to also see good revenue cover. We start the second half with 92% of our full-year revenue guidance under contract, de-risking our full-year delivery.

Underlying operating profit. We have delivered excellent underlying operating profit at £100m, which is 11.3% margin. This represents an increase of 35%, 25% on an organic consistent currency basis. I'm pleased to see improved margin with good margin performance across both our segments, demonstrating our effort to drive consistent organic operational performance.

The improved margin continues the momentum that I have previously guided. In particular, in EMEA services, profit has grown, reflecting excellent revenue growth at modestly higher profit margin. In Global Solutions, profit has grown, with margins increasing towards double-digit. And inorganically, our acquisitions achieved good margin in line with our expectations with Avantus maintaining double-digit operating profit margin.

Now turning to the segmentation split of the group performance. First, we have EMEA Services. EMEA Services has delivered significant year-on-year growth, continuing to demonstrate success in our strategy to win and deliver larger, longer term contracts. We've increased orders by 4% and revenue by 23%, both on an organic basis. Our largest orders in the half were £190m of EDP orders, a £39m Battlefield Communication Program renewal, and a £54m variation of price contract on the LTPA to reflect inflationary impacts.

Revenue growth has been particularly strong year-on-year and in line with the second half of last year, demonstrating our relevance in high-growth market segments. Operating profit margin has seen a modest increase to 11.8%, demonstrating strong and consistent delivery performance. EMEA Services delivered a good book to bill ratio of 1.2x, excluding the LTPA and has a funded order backlog of £2.7bn, giving us good forward revenue visibility.

Next, onto Global Solutions. Global Solutions combines our world leading technology based products and services. On an organic basis, orders and revenue have been broadly flat. Our largest orders in the half were a $51 million aircraft launch and recovery system award, and an $84m full production contract for the next generation advanced bomb suit, of which $34m has been recognised in the half.

We achieved an impressive book to bill ratio of 1.4x and grew our funded order backlog to £0.4bn. Whilst Avantus first half revenue was slower than we expected due to the US continuing resolution and competitor protests, we are really pleased with the recent contract awards and momentum. The combination of Avantus and QinetiQ is creating a platform that gives us great confidence in the future growth of this business in the second half and beyond.

generation with conflict escalating in Eastern Europe and the Middle East, as well as growing tensions in the Indo-Pacific. Within this geopolitical context, we are a differentiated company with a unique value proposition. In response to the threat, we deeply partner with our customers to rapidly create and experiment with new capabilities. Test those capabilities are safe and perform as intended and ensure our war fighters are trained and operationally ready to use those capabilities. We are a horizontal integrator helping our customers accelerate through this critical capability lifecycle to counter the threat with agility and pace.

We are a purpose-driven company with a customer focused strategy. Our purpose is to protect lives by serving the national security interests of our customers. This has never been more relevant. Our strategy has three interrelated components, delivering six distinctive and mutually supportive offerings by applying disruptive and innovative technology and business models and leveraging those capabilities across our three home countries of Australia, the United Kingdom and the United States. Our customers need to respond to the enduring and increasing threat and the formation of the AUKUS trilateral partnership underpins our strategy and makes us highly relevant.

As the global security context continues to worsen, the threat dynamics are driving national security policies, prioritisation of budgets and modernisation of capabilities. The changing character of warfare and the widening threat spectrum evidenced by the current conflicts in Ukraine and Gaza is demonstrating a major shift in our customer's response to neutralise such threats. NATO is expanding its membership and strengthening its defence capabilities. And as was already mentioned, the formation of the AUKUS partnership. Whilst the global economic outlook remains challenging, top line defence and security budgets are growing. These budgets need to accommodate inflationary pressures and difficult capability choices from short-term stockpile replenishment through to long-term modern deterrents.

As a result, our customers are reprioritising their budgets and seeking efficiencies through greater innovation and technology-based solutions. As I described at the investor seminar, we are structurally aligned with these market dynamics and focused on our customer's high priority and high growth segments, which is why we are outpacing the market. Examples common to all three of our primary customers are research and development and test and evaluation, known as RDT&E, advanced cyber and autonomy. This is why we have delivered 9% organic revenue growth over the last five years, approximately double the rate of growth of national defence budgets and 15% total growth including strategy led acquisitions. The successful execution of our strategy and the relevance of our value proposition have driven this strong track record and will enable us to grow sustainably into an addressable market worth more than £30bn per year.

Our strong performance has been achieved by significantly improving our customer focus and upskilling capabilities to win and deliver programmes critical to national defence and security. In the first half, our UK defence sector continued to deliver strong performance across all major contracts and support our customers' operational priorities. EDP delivered significant benefit to our customers and secured £190m of new orders, including work on the new AUKUS submarine. The LTPA delivered NATO's first multi-domain Formidable Shield Exercise, testing the alliance's response to the world's most challenging ballistic missile threats. And in partnership with the Royal Navy, we demonstrated an advanced live synthetic collective training capability for the carrier strike group, positioning us well for future maritime training opportunities.

Our UK intelligence sector also delivered a number of major outputs for our defence and security customer. The team delivered key milestones on the SOCIETAS contract three months early to accelerate the production of mission data and improve the protection of all UK platforms. We developed a T&E environment for an AI demonstrator of cyber resilience for military equipment and networks. And in partnership with our intelligence customers, we delivered a new national exercising capability to enable training and mission rehearsal in the cyber domain. This sector continues to deliver impressive revenue growth consistent with its track record, as described by James Willis, our sector Chief Exec at the investor seminar in New York.

Last year, we achieved a step change in our global platform with two strategy led acquisitions to strengthen our capabilities and extend our customer base. Avantus in the US and Air Affairs in Australia. In the first half, our US sector made significant progress. We transitioned NGABS to full scale production by winning an $84m contract to supply 700 Next Generation Bomb Suits to the US Army. Avantus achieved strong recompete performance winning six out of seven major renewals, the two biggest being the SDA contract that I mentioned earlier and $127m contract with the DOD's Strategic Capabilities Office. Both are five-year contracts to provide systems engineering and mission support with significant on contract growth. And in total so far this year, Avantus has won $657m of new contracts, a record high for the business. Whilst first half revenue was slower than expected, these major wins build momentum to deliver strong growth in the second half and beyond.

We have also identified new opportunities worth an additional $1.5bn over the next five years. Driven by the combination of capabilities and transformed market access. I'm excited by the progress that we're making, expanding our customer base and creating a disruptive mid-tier business in the US. Our Australia sector has delivered strong performance. We've secured a three-year extension to our MSP contract and won $58m of new

orders for engineering services on land systems and explosive ordinance programmes. Air Affairs saw a 24% increase in flying hours on our JATTS contract, including support to the international Talisman Sabre training exercise involving 13 nations and 30,000 military personnel. And finally, demand continues to rise for our global threat representation products and services with Air Affairs, QinetiQ Germany and QinetiQ Target Systems delivering a combined 17% revenue growth. Through disciplined execution of our multi domestic strategy, we are coherently building an integrated global company with a strong track record of organic and inorganic performance.

As Carol described earlier, investing in our business winning capability has enabled us to win larger, longer term programmes, growing our backlog to more than £3bn and increasing our future orders pipeline to more than £10bn. We have fundamentally shifted our focus onto major national programmes and are regularly competing for and winning £100m plus contracts. By building on our partnering approach and leveraging our scale, we will continue to win larger programmes and drive future organic growth. I'd like to give you an insight into four of our significant opportunities. First, I'm delighted to share some fantastic news. We have signed a principles agreement with the UK MOD to jointly explore how the LTPA services are sustained and modernised beyond 2028 to enable next generation military capabilities such as directed energy weapons, as shown on this picture. Under this agreement, we are pursuing the contract option for a five-year extension, subject to negotiation and approval, and securing our long-term role as MOD's strategic test and evaluation partner until 2033.

With our focus on AUKUS, we are leveraging these unique T&E capabilities to create new opportunities in Australia across multiple domains. The most immediate need is to enable the Australian Nuclear Submarine Programme launched as part of the AUKUS partnership. In the UK, we're also leading a strong industry team to win the Army Collective Training Services programme worth more than £1bn. The differentiated skills and capabilities of our team will modernise training through better use of technology and transform army readiness. And finally, in partnership with Oshkosh in the US, we have successfully completed trials of our robotic combat vehicle known as RCV-Light, positioning us well to compete and win the $500m production phase. Building on our successful performance and long-term visibility, we have a robust and sustainable organic growth plan to deliver £2.4bn of revenue at 12% by FY27.

Underpinning delivery of this organic growth plan is our disciplined approach to capital allocation, investing in our strategy and building our global platform for long-term sustainable growth. Creating a culture for our people to thrive is critical to our performance. We've increased employee engagement and invested further in our long-term reward strategy to retain and recruit the best talent, growing our company to more than 8,500 people

during the course of the first half of the year. We have also introduced a new long-term incentive plan for our top 300 leaders, fully aligned with our strategy to drive sustainable performance and increase shareholder returns. In response to today's threat environment, our people are supporting our customers' operational priorities. They're focused on creating innovative solutions that directly respond to these priorities by leveraging our products and skills across the company. An example of this is establishing a US final assembly and test capability for our Banshee targets to support future US customer demand.

We continue to invest approximately £20m per year in advanced technology to maintain our relevance at the forefront of innovation. Whilst we've more than doubled the size of the company over the last seven years, we continue to invest in strengthening our capabilities consistent with our long-term ambition. We are maintaining rigor in our bidding and programme management to ensure we continue to deliver excellent organic performance. In addition, we have a disciplined approach to our acquisition pipeline to grow our global platform coherently and deliver an attractive return on investment. We've evidenced this recently by walking away from a couple of deals that did not meet our returns criteria. Our strategy is underpinned by our capital allocation policy, previously covered by Carol, to drive both our organic growth and provide optionality for bolt-on acquisitions to reach our ambition of £3bn revenue by FY27.

So stepping back, we have a robust investment case. Our company is focused on our AUKUS customer's mission and aligned to structural growth markets. With our value proposition uniquely relevant to the enduring and increasing threat. We have a track record of delivering strong operational performance and a robust business plan underpinned with a normalised level of investment to deliver sustainable growth. Underpinning our success is our focus on our customers and our people. By continuing to execute this strategy, we will achieve our longer term guidance, as shown on the right of this slide, delivering high single digit organic revenue growth at stable operating margin. As an asset-like company, we'll maintain high cash generation and deliver attractive returns on capital employed.

Through disciplined use of our balance sheet, we have optionality to compound growth with acquisitions that drive synergies. ESG remains at the heart of our strategy in all dimensions and for all stakeholders. We're well positioned for long-term sustainable growth with increasing returns for shareholders.

So in summary, I'm incredibly proud of the people who have provided outstanding support to our customers and achieved a strong first half performance. We've delivered a record order intake of £953m, with a book- to-bill of 1.3. Grown revenue organically by 19% and improved margin to