QinetiQ Group plc (QQ) Earnings Call Transcript & Summary

Good morning. Thank you for joining, and welcome to the interim results presentation for QinetiQ Group plc for the 6 months ended September 30, 2020. My name is John Haworth. I'm the Group Head of Investor Relations for QinetiQ. The session will be led by Steve Wadey, Group Chief Executive Officer; and David Smith, Group Chief Financial Officer. David -- Steve and David will run through their presentation, after which there will be an opportunity for you to ask questions. A few pieces of administration before we start. [Operator Instructions] Steve, over to you for the presentation.

Thank you, John, and good morning, everybody, and welcome. Thank you for joining this morning. We will present our half year results for FY '21. I will tell you how we are successfully navigating the ongoing COVID-19 pandemic and set out an exciting future for our company, which will enhance returns for shareholders. In 2016, I launched our vision-based strategy to reverse decline and drive growth by focusing on our customers' needs and our competitiveness. This strategy has worked extremely well. And now more than ever, I'm really proud of all of our people who have pulled together through the pandemic to deliver another excellent set of results. We emerge with strength and agility and are on track to deliver our fifth year of growth. I'm therefore pleased to be announcing a further upgrade to our full year guidance. Today, we find ourselves in a world where the nature of warfare is changing. Our adversaries are harnessing emerging technologies, and our customers need to respond, within constrained budgets, accentuated by the impact of COVID-19. The world is becoming more global and information centric rather than platform centric. These dynamics play well to our inherent strengths. Building on our success, I'm delighted to be setting out a renewed ambition and launching an evolved strategy designed to meet the needs of this new world and accelerate our global growth. So the agenda this morning is as follows. I'll start by giving you the headlines. David will provide a commentary on our financial results. I will come back and give you a strategic and operational update, and we'll then open up for any questions. So let's start with the headlines. We've had an excellent start to the year with strong operational performance through the COVID-19 crisis. Orders are up 37%, and we have good revenue visibility with a backlog of GBP 3.1 billion. Revenue is up 24%, 8% on an organic basis. Profit is up 16%, flat on an organic basis. Returns are healthy with EPS up 10%, and we reinstated the FY '20 full year dividend, and our interim FY '21 dividend will be 1/3 of prior year total. Our growth has been driven by a number of strategic milestones. By the end of October, we secured GBP 500 million of orders through the engineering delivery partner contract signed just 2 years ago. We are ahead of schedule on the 2-year transition program as part of the new long-term partnering agreement signed in April 2019. And we've strengthened our core offerings by acquiring Naimuri and disposing of 2 noncore businesses, Boldon James and Commerce Decisions. These milestones have been achieved by our employees who have been fully engaged and adapted their ways of working to maintain delivery for our customers. Looking forward, we are in a healthy position. Based on our strong first half performance and having 93% of revenue under contract, we are upgrading our full year guidance, whilst proactively managing the potential risks from further impact due to the pandemic. I'm also setting out our renewed ambition and an evolved strategy to meet the needs of the new world, accelerating our global growth into an addressable market worth more than GBP 8 billion per year that will deliver even greater returns for our shareholders. I'll now pass over to David for an overview of our financial performance.

Thank you, Steve, and good morning, everybody. As usual, I'll begin with a summary of our financial performance in the first half before going into more detail on the drivers. So as Steve mentioned, we delivered a very good performance in the first half of the year, progressing towards our fifth year of growth. We've increased revenue by 24% to GBP 603 million and by 8% on an organic basis. We've grown our underlying profit by 16% to GBP 69 million. And we've delivered a margin of 11.4%, in line with our short-term guidance of 11% to 12%. Underlying earnings per share grew by 10% to 10.1p despite an increase in tax rates. And our order intake was excellent, increasing by 17% organically and 37% overall, which maintained our strong order backlog of GBP 3.1 billion. We've delivered a strong cash performance with 134% underlying cash conversion and our balance sheet remains strong with net cash of GBP 113 million. So moving on now to some detail. I'll start with our orders performance. We made very strong progress on orders. As I said, we're 17% organic, 37% growth overall. The key driver of our strong organic performance was EMEA services, which grew orders by GBP 86 million in the first half, and that was primarily driven by new orders under the engineering delivery partner contract. In Global Products, due to COVID-related impacts on QTS and OptaSense, we saw an organic reduction of GBP 18 million. The contribution from prior acquisitions MTEQ, NSC and Naimuri completed in July, contributed GBP 84 million of orders to the reported number in the first half. At the start of the second half, we had nearly GBP 1.2 million (sic) [ GBP 1.2 billion ] of fiscal '21's revenue either delivered or under contract for the second half with 93% revenue cover. Now turning to our revenue. Despite experiencing some COVID-related disruptions in the first half, we made a strong recovery in the second quarter. That resulted in organic revenue growth of 8%. In EMEA services, we grew revenues by 13% organically, primarily due to EDP and growth in Australia and an improving results in Germany. And that was partially offset by an 8% organic decline in Global Products, again due to COVID-related impacts on QTS and OptaSense. The contribution from our acquisitions, including MTEQ, NSC and Naimuri was GBP 80 million, resulting in reported revenue growth of 24%. As Steve will cover in more detail, our new acquisitions are performing well, delivering good growth and profit. And whilst not shown on this slide, international revenue has continued to grow and now represents 35% of group revenue, with strong growth in the U.S. and Australia. Turning to operating profit. Overall reported operating profit was up 16% to GBP 69 million and flat on an organic basis, excluding the impact of nonrecurring trading items, acquisitions and FX. There were some onetime net benefits amounting to around GBP 1.5 million. That was comparable to the previous year. In EMEA services, profit grew by GBP 10 million on an organic basis, and that really reflects disciplined execution of our long-term projects. It was offset by a GBP 10 million organic decline in Global Products due to the impact of COVID on QTS and OptaSense. MTEQ, NSC and Naimuri contributed GBP 9 million of inorganic operating profit, resulting in a group margin of 11.4% overall, in line with our short-term margin guidance of 11% to 12%. We expect to be within this 11% to 12% range at the full year, in line with our previous guidance, with some lower COVID disruption but higher digital transformation spend expected in the second half. So overall, a very strong performance with good growth in orders and revenue and stable operating profit despite a challenging operating environment. So turning now to EMEA Services. The chart here on the left shows the split by business unit within the EMEA Services division. The 31% increase in orders was primarily due to GBP 129 million of orders under the EDP contract. We've made really excellent progress on EDP with the additional GBP 129 million of orders in the first half, bringing the total since inception to GBP 360 million at the end of September. And as Steve said, since period end, that's grown to over GBP 500 million. As a single-source contract and given its minimum capital requirements, the margin we make on EDP and other similar contracts is lower than our average group margin but remains well in line with the defense industry more generally and delivers an appropriate return on capital. We expect EDP to continue to be a growth driver to our U.K. business in the near to medium term. Revenue increased by 15% and by 13% organically, largely driven by new work under EDP, the strong growth in MSC contract, and as we said, a better result in Germany. Underlying operating profit increased by 25%, assisted by a GBP 1.9 million contribution from NSC and Naimuri. That resulted in operating margins of 13.6%. And as I said, that really reflects disciplined execution on long-term contracts, cost control measures plus the impacts of the acquisitions despite the dilution from the growth in EDP. We maintain a substantial order backlog following the strong orders performance, which gives us really good forward visibility. Turning now to Global Products. This division is the shorter-cycle business and performance varies more greatly due to the timing of mix and product sales and in the first half particularly due to the impact of COVID. Order intake, however, was up 55%, with the contribution from MTEQ more than offsetting an organic decline in orders. Reported revenue was up 51%, again, reflecting the contribution from MTEQ, although on an organic basis revenues declined by about 8% due to COVID disruption. Underlying operating profit was down by 18%, with an operating margin of 6.2%. And here, organic operating profit was down GBP 10 million, offset by a GBP 7.4 million contribution from MTEQ. The organic decline really reflects decreased sales of high-margin QTS products, resulting in a loss in that business and also a loss in OptaSense. And while we anticipate some disruption of QTS continuing through the second half, longer term we believe the business remains well positioned, offering advanced target systems with complete integration into test and evaluation at an attractive price point. And on OptaSense, we still believe in the long-term future of that business, and we're continuing to look at ways to improve results in that business. Operating cash conversion next. So overall our operating cash conversion at 134% was strong. We saw a small working capital online of about GBP 11 million in the period. That was actually primarily due to inventories. In the first half, our customer payments remained prompt. However, we do anticipate there could be some potential for some unwind of working capital later in the year, and we'll have to look at how that works. Cash flow associated with CapEx was GBP 42 million as we continue to invest in our core contracts such as the LTPA and supporting the long-term sustainable growth. After CapEx, we had underlying net cash inflows of GBP 50 million from operations. And as we've said before, we're really looking at our operating cash flow to be able to fund our internal CapEx and organic investment from our operating cash flows. So turning on this next slide to the movements in net cash, movement between GBP 84.7 million at the start of the period and GBP 112.7 million at the end of the period. Clearly, we talked about the net cash flow from operations of GBP 50 million. And that was partially offset by tax charges of about GBP 12 million and a small interest charge, resulting in free cash flow of GBP 38 million. The disposal of Boldon James generated net cash proceeds of GBP 27 million, and the acquisition of Naimuri resulted in around GBP 25 million cash outflow. And with those, we ended the period with that GBP 113 million of net cash. With that cash balance and our committed facilities of GBP 275 million, our balance sheet remains robust with the capacity to support our growth plans for the company and prior to strategic acquisitions. The previously declared final dividend and interim dividend announced today will result in cash outflow of around GBP 38 million in the second half. And as we've also announced this morning, the sale of Commerce Decisions for GBP 10 million will result in about an GBP 8.5 million cash flow in the second half. Our financial strategy is to drive revenue growth at stable margins with appropriate return on capital. And I think we're demonstrating that we're doing that. And as part of that, we continue to apply a rigorous approach to evaluate the deployments of that capital, scrutinizing both our organic and inorganic opportunities in the same manner to ensure returns to our shareholders are appropriate for the risks that we're taking. Turning now to some technical factors. I've updated these. Our positive cash balance means that our underlying net finance costs are expected to remain minimal. Our effective tax rate was 14% last year. That increased at the half year to 15.4% as we saw a greater proportion of international revenues and higher U.K. tax rates. We are continuing to benefit obviously within that from R&D grants in the U.K. Because of that higher effective tax rate, we'll see some increase in our cash outflow this year. Working capital outflows were GBP 11 million in the first half. As I've already said, we anticipate that could increase to GBP 15 million to GBP 25 million through the balance of the year depending on what we see on working capital unwind. And our pension deficit payments have now ceased, although we will continue to make the GBP 2.8 million a year contribution to the asset-backed funding scheme. And capital expenditure is projected to remain in the GBP 80 million to GBP 90 million range this year as we continue to invest in our major projects. So finally, turning to our revised outlook, and as Steve said, we have upgraded this. We've delivered a strong first half result with good growth in orders, revenue and profit despite the impact of COVID. We expect EDP to continue being a growth driver in our -- sorry, we -- our revenue visibility being close to GBP 1.2 million (sic) [ GBP 1.2 billion ]. We're increasing our full year guidance by around 5%, now expecting to deliver low double-digit revenue growth or low to mid single-digit organic growth. And we expect margins to be consistent with first half performance within our short-term range of 11% to 12%, reflecting lower COVID disruption in the second half but higher digital transformation spend. Taking a long-term view beyond '21, as Steve is going to describe, we've renewed our ambition and evolve strategy to accelerate our growth at stable margins. That will be supported by a high-performance culture investment in our people, technology, systems and infrastructure and further proactive strategic acquisitions. We're maintaining our medium- to long-term margin guidance of 12% to 13%. However, in the short-term, we expect margins to be around 100 basis points below this level due to COVID disruption, and into next year increased digital investment and the evolution of our business mix with growth from EDP and MTEQ. I'm going to hand back now to Steve to take you through our strategic and operational update.

Great. Thank you, David. The COVID-19 pandemic has had a profound impact on society and global economies. As the scale of the pandemic became apparent, we established a strategic response to the crisis coherent with our long-term growth strategy. Our strategic response focused on 3 priorities: protecting the health and well-being of our employees; continuing to deliver for our customers; and sustaining our company for the long term. During the first quarter of the year, we took necessary and decisive action to boost resilience and ensure that we retain critical skills and capabilities. We implemented a series of short-term temporary actions ranging from stringent cost control to deferral of the full year dividend decision. These actions were very successful in maintaining a strong balance sheet. As we entered the second quarter, we shifted up a gear into our recovery phase. Our people did an amazing job adopting an innovative mindset and embracing new ways of working to deliver for our customers safely despite COVID-19. As a result, our performance improved. And at the end of the half year, we were able to release the majority of our temporary actions, including reinstating the full year guidance and confirming payment of the deferred dividend. Moving into the second half of the year, we are entering our renewal phase as a stronger and more vibrant company. We are ready to drive our full year performance, and learning from the pandemic has helped crystallize an inflection point for our company. We have launched a renewed ambition and evolved our strategy to accelerate our next phase of global growth, an exciting opportunity which will enhance returns for our shareholders. The new defense and security paradigm presents us with strong growth opportunities. In the U.K., the integrated defense and security review is likely to reinforce the importance of information, emerging technologies and the need for greater innovation. In the U.S., Joe Biden has won the presidential election. And despite new policy and budgetary pressures, we expect defense priorities to remain focused on modernization. In Australia, we see continued support across the government for increasing defense budgets to accelerate new capabilities and build domestic supply chains. In broader markets, competition is also increasing as customers wrestle with critical capability modernization and national protectionism. COVID-19 has triggered a strategic shock across the world, and the ensuing economic impacts will increase pressure on macro defense and security budgets. This dynamic, coupled with ever more demanding threats, will result in our customers seeking a major shift in the agility and pace of their in-country industry. Given we are not a major platform provider, the dynamics of this new world play to our unique strengths, which are increasingly relevant. Our close customer relationships and domain knowledge enable us to understand our customers' needs and be proactive to address their challenges. Based on our distinctive offerings, partnering and innovative mindset, we can rapidly create solutions to respond to the evolving threats and drive efficiencies. In summary, we are well positioned to meet the dynamics of this new defense and security paradigm and grow into an addressable market worth more than GBP 8 billion per year. To respond to new threats and budgetary pressures, we have a clear value proposition that we call mission-led innovation. Create it, we develop cutting-edge technology and turn it into capability; test it, we assure that capability will work when critically needed; use it, we ensure our customers are trained and operationally ready. In essence, we deliver high-value added work for our customers, co-creating efficient solutions at pace across the capability life cycle. Here are 2 examples. RCV Light is a signature program for us in the United States, secured this year, providing a demonstrator of the next-generation robotic combat vehicle for the United States Army. We recently delivered the first system on schedule and will deliver 3 more. Combining our distinctive robotics, autonomy and sensors expertise, these platforms will be instrumental in assessing the operational use of robots on the battlefield to meet new threats, and more importantly, inform the future acquisition program which could be worth several hundreds of millions of dollars to us. EDP is an innovative industrial partnership that we signed 2 years ago to provide unique engineering services to U.K. MOD, with a supply chain of more than 120 companies. To date, we have secured more than GBP 500 million of orders and delivered every milestone on the journey to full operational capability in 2021. Over 1,000 tasks have been contracted from short-term provision of expertise to multiyear engineering services, driving significant savings for our customers. EDP complements our long-term partner agreement, known as the LTPA, giving the customer choice to rapidly access engineering and test services across the life cycle. Our mission-led innovation value proposition has increasing resonance with our customers and will drive our global growth by co-creating solutions with greater agility and pace. Focus on meeting our customers' needs was at the heart of our vision-based strategy that I launched at the beginning of FY '16. Based on achieving today's upgraded guidance for FY '21, we will have delivered strong operational performance over the past 5 years by growing our revenue by 60%, increasing the international share of revenue from 21% to 35% and growing operating profit by 28%. Doubling our order book to GBP 3.1 billion has given us good-forward visibility. And for the first time, we are disclosing 2 key indicators of forward momentum in our future growth, as shown on the top right of this slide. We have tripled our qualified 5-year orders pipeline to over GBP 6 billion, and our revenue contracted for the next 2.5 years has increased by 55% and to GBP 1.5 billion. With the changing dynamics of the new world and an addressable global market of more than GBP 8 billion plus a multi-billion-pound opportunity in the United States, now is an exciting and appropriate time to build on our success and set out a renewed ambition for the future of our company. Our ambition is to accelerate our growth trajectory to FY '26 and beyond by building a global company over the next 5 years that is renowned for delivering mission-led innovation, with international revenues of more than 50%, a company with major presence in the United Kingdom, the United States and Australia, making a difference to global and national security. Our objective is to grow by at least the same level over the next 5 to 10 years. This will be driven by continued customer focus and disciplined execution of our strategy, underpinned by our capital allocation policy and rigorous financial discipline. Based on this renewed ambition and our growing maturity, we will convert revenue growth into sustainable profitable growth at stable margins of 12% to 13% in the medium to long term, thereby enhancing returns for our shareholders. To deliver this ambition, we have evolved our vision-based strategy to drive even greater focus in our business decisions and our investment choices. Some elements of the strategy are the same, and some have been refined. Our vision and mission-led innovation value proposition, which I've already described, remain the same. The crucial refinement to our customer-focused growth strategy is greater clarity on where, what and how we deliver value for our customers, where, by building an integrated global defense and security company, through leveraging our unique skills and capabilities into our 6 home and priority countries. What, by sharpening our focus on developing distinctive offerings that add value to our customers differentiated from the competition; and how, by applying disruptive innovation to accelerate solutions for our customers with greater agility and pace. To ensure our growth strategy is both profitable and sustainable, we are maturing our high-performance inclusive culture built upon living simple values and behaviors, where everyone in our company feels respected and included, whilst engaging and incentivizing our people, 80% of whom are now shareholders in driving growth, whilst at the same time adhering to the highest environmental, social and governance standards. This is really important to me and all of our stakeholders. The ethics of defense, taking responsibility for who we do business with and the projects that we undertake, such as protecting lives and reducing collateral damage; the impact of our business operating sustainably, such as a commitment to a science-based target to reduce our carbon-emission footprint by 25% by 2025. This public commitment is an integral part of our evolved growth strategy. I look forward to sharing more details with you at our Investor Seminar early in 2021. Great progress is already being made implementing our evolved strategy. We are successfully building a global company through our multidomestic business model, with clear focus on 6 countries and developing in-country industrial capability to meet the needs of our customers. We currently deliver 95% of our revenue from within these countries, which is not subject to cross-border trade, and have more than doubled our international revenue in the past 4 years, on top of 37% growth in the U.K. We've also sharpened our portfolio by disposing of 2 noncore businesses, Boldon James and Commerce Decisions for GBP 40 million, and we have strengthened our core offerings by investing GBP 266 million in 7 strategy-led acquisitions. To support our global growth and win larger organic opportunities, we will continue to proactively explore further complementary acquisitions. Another key enabler of our growth strategy is our ability to modernize and leverage our skills and capabilities globally as exemplified by the LTPA. Over the last 4 years, we have committed GBP 400 million of capital investment to modernize the LTPA's key capabilities and create a strong platform for growth. I'm delighted to say that we are currently ahead of schedule on the modernization of our capabilities and have won 2 significant new contracts from international customers that will enhance further the return on our investment. The picture on the left is the new unmanned air systems test range designed and, built in Australia by exporting LTPA skills and experience from the U.K. And the picture on the right is a U.S. Air Force F-15 from Lakenheath, which illustrates importing international users to our unique LTPA ranges in the U.K. We are becoming a truly integrated global defense and security company and are on track to grow our international revenue from 35% to more than 50% over the next 5 years and beyond. I'm extremely proud of how we've delivered innovative solutions for our customers over the past 6 months. In Australia, our performance remains strong, including winning the renewal of a $100 million 10-year contract to provide unique engineering services to the Defense Science and Technology Group. Following the impacts of COVID-19, our business in Germany has stabilized with flying activity resuming in the second quarter and securing a EUR 10 million contract extension for slow-speed aerial target services. Despite the short-term impact of COVID-19 on our targets' business, we remain confident in the long-term outlook based on future customer demand. Recent highlights in Canada was producing our 500th Hammerhead next-generation target and delivering it to the Royal Australian Navy. In the United States, our Special Security Agreement with the U.S. government has been formalized, enabling us to integrate our operations following the acquisition of MTEQ. This has enabled us to leverage technology from the U.K. and win a $10 million contract from the U.S. Army to integrate our hybrid electric drive into their Bradley vehicle. Our business in Belgium continues to perform well, securing a EUR 9 million contract from the European Space Agency to develop experiments for the International Space Agency. We have a number of relevant capabilities in the space domain, which are becoming increasingly relevant to the importance of this domain to defense and security. In the U.K., we are rapidly growing our relevance to intelligence and defense customers with our cyber, communications and data analytics capability, recently bolstered by our acquisition of Naimuri, specialists in software development and data analytics. Our growth is being delivered by a team of more than 350 people across our company, and we have now been recognized as a strategic partner to U.K. defense and intelligence. These are great highlights and show how we have transformed from a U.K. company to a global company, delivering distinctive offerings in our 6 countries. To ensure our growth is sustainable, we need to stay ahead by continuing to innovate for our customers' advantage. As I've mentioned before, the threat environment has become increasingly complex, with adversaries taking alternative approaches to warfare by rapidly exploiting emerging technologies, ranging from hypersonics through to the use of information. This means our customers can no longer rely on technological advantage alone to stay ahead of the threat, especially when the opposition doesn't play by the same rules. Pace and agility to counter these threats will be the overriding factor. Our response is to put the mission of our customers first and build a culture in our company that co-creates and delivers innovative solutions at pace. COVID-19 has been a catalyst to accelerate our cultural transformation, providing the opportunity to step ahead and increase our investment in our people, systems and tools. We're also adopting new technologies and flexible ways of working to harness the diversity of our global teams and supply chain. To ensure that we are even more relevant to the changing nature of warfare, we're also investing significantly in digital systems and techniques to enable the rapid development of next-generation products and services. By taking an information-centric rather than a platform-centric approach, we can leverage our skills and data globally to accelerate our growth. This investment underpins our ability to win and deliver major opportunities in our qualified orders pipeline, now worth more than GBP 6 billion, over the next 5 years. Tempest, the U.K.'s next-generation fighter, is a great example of where we will apply new digital techniques to provide capability assurance, increasing the pace of development and reducing cost to the customer. Investing to stay ahead in our distinctive offerings will accelerate our global growth and provide benefit to our customers, our people and our shareholders. So in summary, I'm extremely proud of all of our people who have pulled together through COVID-19 to deliver an excellent start to the year with strong operational performance. We achieved 37% orders growth, 24% revenue growth and 16% profit growth, and maintained good visibility with a healthy order book of GBP 3.1 billion. As we move into the second half of the year, we emerge from the first half with strength and agility and are on track to deliver our fifth year of growth. With a further upgrade to our full year guidance, we are focusing on delivering our full year performance despite COVID-19. Mindful of the potential risk of further impact from the pandemic, we are continuing our resilience actions where appropriate. The changing nature of warfare drives a new defense and security paradigm with evolving threats and increased budgetary pressures due to COVID-19. Learning from the pandemic has helped crystallize an inflection point in our growth strategy to meet the changing needs of our customers. As a result, we have set out an exciting new phase for our company, a renewed ambition and an evolved strategy to meet the needs of this new world and accelerate our global growth into an addressable market worth more than GBP 8 billion per year. Growing an integrated global company at stable margins will deliver even greater returns for our shareholders. David and I will now be more than happy to take any questions. Thank you.

[Operator Instructions] The first question is from Richard Paige. Richard, over to you. Richard, if you want to come off mute, and we'll take your question. Richard, maybe you're having a technical difficulty. We'll come back to you. We do have another question, Sean Stewart. Sean, if you want to come off mute, we'll try and take your question.

So I just wanted to ask maybe one for David just on the margins. Obviously, EMEA Services margin, very strong in the first half. And even if we were to exclude the GBP 2 million in nonrecurring trading items that you have, it's still a margin of over 13%. Now given that you've said full year margin you expect to be broadly in line with the H1, could you perhaps give us some color on what we should be thinking in terms of split between the 2 divisions in the second half in terms of margin?

We will still see a good margin in EMEA Services in the second half, probably a bit lower than 13%. As you say, there were some onetime effects also in the first half. The cost actions that we took in the first half will particularly benefit EMEA Services. So a little bit lower, but still a good level. Most of the improvement in our guidance is really in EMEA Services. On Global Products, there's going to be a couple of effects. I think we'll see better result from QTS in the second half. We obviously are losing both the Boldon James and Commerce Decisions revenue and profit in the second half now from today. But I think we won't -- we will be better than the 6% margin that we had in the first half probably back up to closer to 10% sort of margin in Global Products, I think, or maybe slightly below, but that sort of level. Overall, as I said, I think the 11.4% that we did in the first half, I think, is about right as a group level for the second half. We'll see hopefully less COVID disruption. But we're also beginning to ramp up on our digital transformation spend that Steve was describing earlier, and that's probably going to be GBP 3 million to GBP 5 million sort of cost in the second half.

Does that answer your question, Sean?

Yes, that's great.

Next, Richard, we're going to try you again. Richard?

Hey, Richard.

Sorry about that. EMEA Services, the margin at 13.6% in the first half. Obviously, a lot of that growth driven by a lower margin contract in EDP. Obviously, EIS has rebounded in Q2, but obviously a tricky Q1. So just want to understand the sort of underlying dynamics in that business and how that's been achieved. And the second one, just more broadly on your growth strategy. Obviously, talking about accelerating revenue growth, I guess, a broad question, what do you see as the key challenges and opportunities in delivering that on the long-term basis?

Okay. Thanks, Richard. David, maybe if you can just pick up the drivers around margin in EMEA, and then I'll pick up the question about the growth strategy.

Yes. Couple of things on EMEA. So the first thing is, yes, you're right, EDP is a revenue growth. And I've said before, EDP margins are lower than our group average. But at the same time, I think I've also described previously, as we get more maturity around EDP, we're actually trying to move a lot of the contracts up in terms of what's called the mode complexity of those contracts, which actually do attract a stronger margin. So we're actually improving the EDP margin as well as growing the business, which is obviously a double positive effect from our point of view, but at the same time delivering better savings into the customer. On the rest of the EMEA margin story, I mean it's a combination of some really good performance, as I think I mentioned in Australia. You're right, Germany had a much better second quarter. And then in our longer-term contracts, both what we're doing around, for instance, the LTPA contract but also other contracts that we have in the cyber and information business, we've actually been driving really good cost improvement in those, and that is improving our underlying margin on those contracts that we're actually delivering. So these are all positives because we are absolutely delivering what the customer needs in terms of cost efficiency and delivering great service into them, particularly during COVID, which has been challenging. But also from our point of view, we're able to drive an improvement against our originally contracted margins by driving further cost improvement as well.

Thanks, David. And actually, just before I go on to the question on strategy, Rich, I mean just a comment about EDP and EIS that you both mentioned. I mean, first of all, I'm absolutely delighted with EDP. And the fact that we've had more than GBP 500 million of business in just 2 years since we signed the contract is a great testament to the strategy and very much about how we can respond to the economic pressures of our customers. And whilst you said it's lower margin, it's bringing appropriate margin in supporting our growth strategy within that stable range for the medium and long term. So we're really delighted with EDP. And it's a great example of our innovative approach in action. Secondly, with EIS. Yes, EIS did have that impact, as David described, in the first quarter. But the team is doing exceptionally well there. We have a new Managing Director in Germany. He's got a very clear strategy with his team and actually is pursuing a number of growth opportunities. So we see some significant prospects in the training area, building on our capability in Germany. Specifically, in terms of your question about the growth strategy and the key challenges and opportunities. I mean I'm going to take this, because I haven't really talked about it today, to talk about our global campaigns, which we've talked about in recent years. And that's really driving our focus on our big long-term opportunities in the area of information, test and training. And they are 3 areas that we want to really become famous for in the world, and we see significant specific opportunities within that GBP 6 billion orders pipeline that I mentioned. So those are the big areas of opportunity, and we see those opportunities directly related to the countries of focus. In some ways, the challenge that I see is the breadth of opportunity and keeping extremely disciplined in the way that we select those many opportunities to pursue to make sure that we pursue the right ones, and then we are disciplined in the execution of them. So we have a high range of opportunities. It's about how we get to pursue and win the right ones and get the right complementary bolt-on acquisitions as we pursue that accelerated level of growth. They're the main drivers for us. Does that answer your question, Richard?

Yes, very comprehensive.

We have one more question coming in from Sash Tusa. Sash, if you want to ask your question.

I've just got, I think, a fairly simple follow-on question about the costs of digital transformation. You were very clear that margins FY '22 are going to be similar to this year. So is the digital transformation program essentially a 1.5, 2-year program and then that costs of, let's say, GBP 6 million to GBP 10 million a year, drops out entirely? Or is this the new normal cost of just staying competitive? And tied to that, all of the digital transformation costs broadly proportional to the revenues of each division or do they fall more heavily on one than the other?

David, it's for you?