QinetiQ Group plc (QQ) Earnings Call Transcript & Summary

Good morning, and welcome to QinetiQ's FY '23 Interim Results Presentation. Welcome to those joining both online but also those that have made it through the tube strike to join us here today in person at the Stock Exchange in London. I'm John Haworth. I'm the Group Director of Investor Relations for QinetiQ. I'm joined by Steve Wadey, our Group CEO; and Carol Borg, our Group CFO. Steve and Carol will run through the presentation, after which there will be an opportunity for you to ask questions. Thank you. Steve, over to you.

Great. Thank you, John, and good morning, and welcome to our interim results for FY '23. And as John said, great to see some of you in person today despite the tube strike. Six weeks ago, I was privileged to be on board HMS Queen Elizabeth in New York with 400 political, military and industrial leaders to discuss global challenges, focusing on security, trade, macroeconomics and skills. Within this context, the ongoing conflict in Ukraine continues to reinforce the vital importance of a technologically advanced defense industry. More importantly, this conflict, along with the heightened tensions in the Indo-Pacific has increased the need of our customers for differentiated solutions that are directly aligned with our strategy. I'm immensely proud of how our people have supported our customers at this time of need and delivered a really strong first half performance across the group. As a team, we are fulfilling our company purpose, and contributing to global and national security. The agenda this morning is as follows: I'll start by giving you the strategic and operational highlights. Carol will provide you with a commentary on our financial results. I'll come back and give you a strategic update of the company, and we will then open up for questions. So let's start with the headlines. We've delivered strong and consistent operational performance across the group. Orders are up 11%, maintaining a robust backlog of GBP 3 billion. Revenue is up 8% and profit is up 7% on an organic basis. Cash performance remained strong with 106% conversion, up from 89% last year, and returns are healthy with earnings per share up to 11.4p and our interim dividend is maintained at 1/3 of prior year total. We've also made excellent progress executing our multi-domestic strategy. We have delivered strong program performance across all our major contracts, achieved good order intake across the group at GBP 800 million, responded to the challenging economic environment by increasing investment in our people and capabilities that are critical to the future and significantly secured a step change in our global growth through 2 strategic acquisitions in the U.S. and Australia. Looking forward, we start the second half in a very healthy position. With more than 95% of our revenue contracted, we are increasing revenue guidance and will deliver profit in line with expectations for FY '23. We are focused on proactively responding to the increasing demand for our distinctive offerings closing the Avantus and Air Affairs acquisitions over the next few weeks and mobilizing the integration plans, which are prepared and ready to execute. Overall, we are on track to deliver our 5-year strategic ambition within an addressable market worth more than GBP 20 billion per year. By growing our company to more than GBP 2.3 billion revenue at stable margins, we will deliver even greater returns for our shareholders. Our strong financial results are underpinned by a number of strategic and significant operational highlights across our 6 distinctive offerings in each of our 3 home countries. In the U.K., we have seen increased support operations, including delivering the RAFs mass missile firing exercise at our world-class Test & Evaluation range in Scotland, building upon our successful investment in the long-term partnering agreement. We've also recently won a GBP 60 million contract with the Home Office to provide the next 2 years of the accelerated capability environment, known as ACE, to co-create digital solutions for frontline law enforcement through information advantage. Our U.S. sector has performed particularly well and shifted focus onto larger, longer-term programs. We've successfully completed the initial production of the CRS-I robotics program and are ramping up production to full rate over the coming years. We've also successfully completed trials of our electric drive technology on the Bradley Fighting Vehicle, leveraging our capability from the U.K. and positioning us for a key role within the U.S. Army's Optionally Manned Fighting Vehicle program of record. In Australia, we continue to deliver strong growth across the business. with $77 million of new orders for engineering services through the major service provider contract known as MSP. In addition, we secured a new 5-year mine warfare center contract to sustain and enhance the Royal Australian Navy's training and mission rehearsal capability, which will leverage our T&E skills in the U.K. Finally, in Germany, our flying operations continue to perform well for our customers, and our Target Systems business has also seen high demand with GBP 28 million of new orders. So we've had a really excellent first half. And of course, these are just many -- few of many operational highlights across the company, where we are delivering high-value solutions that are critical for our customers contributing to global and national security. I'll now hand over to Carol for an overview of our financial performance.

Thank you, Steve, and good morning, everyone. In this section of the presentation, I will provide more detail on our financial performance in the first half of FY '23. Like Steve, I have been extremely pleased with our performance. We've delivered strong and consistent operational performance in the first half, continuing to deliver good revenue growth at stable operating margins, consistent with our short-term guidance. Today, we are increasing our revenue guidance and reaffirm that we are on track to deliver profit in line with current expectations for FY '23. So firstly, our key financial highlights. In the first half, we have delivered good order intake at GBP 798.8 million, growing 18% on a reported basis, demonstrating high demand for our distinctive offerings. Strong revenue at GBP 673.4 million, growing 12% on a reported basis, delivered through good program execution across all our major contracts. Good underlying operating profit at GBP 74.1 million, growing 39% on a reported basis, which at 11% margin is within our short-term guidance range. Strong cash performance with underlying net cash flow from operations at GBP 106.8 million. This results in a cash conversion rate of 106% due to good underlying cash performance and continued focus and discipline on working capital management. Underlying basic earnings per share of 11.4p, increasing by 41%. Overall, good underlying performance in the first half of FY '23 at a group level with all metrics showing an increase over the same period last year, which, as you know, was impacted by a GBP 14.5 million profit write-down. Orders. We have good order growth securing GBP 798.8 million in the first half, growing 18%, 11% on an organic consistent currency basis, excluding the impact of the write-down last year. As Steve has and will further elaborate, this includes GBP 193 million of engineering delivery partner, EDP, framework orders in the U.K., orders totaling AUD 77 million through the major service provider, MSP, contract in Australia and orders totaling USD 173 million in the U.S. It is pleasing to see our continued success in winning new business with our distinctive offerings as I'm illustrating on the charts on the right-hand side. The upper bar chart illustrates the realization of the previously stated strategy of moving towards larger, longer-term contracts. In the first half of FY '23, 45% of our orders were greater than GBP 5 million in contract value, an increase from 29% in the same period 2 years ago. The lower bar chart shows the order backlog. Despite the naturally reducing impact of the long-term partnering agreement, it is a significant achievement to maintain order backlog at GBP 3 billion as at the 30th of September, which has been driven from good order growth across all 3 of our home countries. On to revenue. We've delivered strong revenue at GBP 673.4 million, growing 12%, 8% on an organic consistent currency basis, excluding the impact of the write-down last year. This has been driven by 7% organic growth in EMEA Services, primarily due to ongoing EDP growth and work delivered under the MSP contract in Australia. Global Products grew by 14% organically, excluding the impact of the write-down last year due to good growth in both the U.S. and our Target Systems business, QTS. The investment we have made in recent years into our business winning capabilities across our 3 home countries is delivering results, driving this impressive level of continued revenue growth across the group. We start the second half of FY '23 with 95% of our in-year updated revenue guidance under contract compared to 90% at the same time last year. This reflects strong performance and delivery on our key framework contracts and provides a greater level of confidence in delivery of our FY '23 results. We have delivered good underlying operating profit at GBP 74.1 million, which is 11% operating profit margin within our 11% to 12% short-term guidance range. This represents an increase of 39%, 7% on an organic consistent currency basis, excluding the impact of the write-down last year. Here, I would like to provide some additional detail on 2 specific topics: foreign exchange rate movements and our strategic operating investments. Firstly, the impact of foreign exchange rate movements on operating profit has been minimal in the first half of the year. Should foreign exchange rates remain static, we expect the full year benefit for FY '23 to be in the region of GBP 2 million to GBP 3 million. Secondly, and more importantly, our strategic operating investments. As we have previously communicated, we are continuing to invest in our people and capabilities in the order of 100 basis points of our margin to enable our step change to deliver our 5-year growth ambitions. The chart on the right-hand side illustrates the impact that our strategic operating investments have on our short-term margin. Fundamentally, our long-term ambition remains to grow revenue to more than GBP 2.3 billion by FY '27 with operating profit margin of 12% to 13%. Today, we announced an additional investment of GBP 5 million in response to the cost of living pressure predominantly to support our lower-paid employees bringing our total committed strategic operating investments in FY '23 to approximately GBP 20 million. This additional investment has the effect of marginally shifting our investment period to the right, but represents no change to our short-term or long-term absolute profit guidance. Whilst investment brings short-term pressure on margins, investing in our innovation platform, comprising of our people, technology and digital transformation will ultimately increase competitiveness and drive efficiency in the long term. Steve will provide further detail on our strategic operating investments later in the presentation. Therefore, whilst we are investing in the short term, our operating profit margin for FY '23 will remain at the lower end of our 11% to 12% short-term guidance range. We remain confident in our ability to improve margins to deliver sustainable operating profit of 12% to 13% in the mid- to long term. Now turning on to the segmentation split of the group performance. Firstly, here we have EMEA Services. EMEA Services has delivered significant year-on-year growth driven by investment and successful implementation of our strategy to win larger, longer-term contracts giving greater visibility and margin stability. We have increased orders by 19% and revenue by 7%. A notable example is the LTPA contract uplift demonstrating our ability to partially mitigate inflationary pressures in our large contracts. Operating profit has declined by 8% organically, driven by both a strong prior year comparator period and the short-term strategic operating investment in our people and capabilities to support our growth, as I've just described. Operating profit margins remained strong at 11.7%, consistent with the second half of FY '22. With a book-to-bill ratio of 1.4x, excluding the LTPA, we have maintained a substantial order backlog, which gives us good forward revenue visibility. Next on to Global Products. Global Products has had a number of notable achievements in the first half. In the U.S., we won orders totaling USD 173 million and have won 2 large multiyear framework orders and have delivered strong performance in QTS. We have increased orders by 16% and revenue by 34%, largely driven by good U.S. performance with operating profit margin at 8.5%. We have modified our order recognition criteria to align with industry best practice. This results in a one-off catch-up in the U.S. of GBP 48 million for orders under recognized in the past and is aligned with our strong revenue performance in the U.S. In the U.S., orders, revenue and profit in the first half of FY '23 are above the second half of FY '22, both before and after the revenue recognition -- sorry, the order recognition policy change, demonstrating greater stability, resilience and consistent performance, giving us confidence of a strong foundation for future growth, both organically and inorganically with the upcoming integration of Avantus. Global Products, whilst on a shorter order cycle than EMEA Services, has a book-to-bill ratio of 1.3x and a growing order backlog, which again gives us good forward revenue visibility. We have continued to deliver strong cash generation in the first half. Underlying net cash flow from operations is at GBP 106.8 million, which equates to a cash conversion ratio of 106%, up from 89% in the same period last year. This strong cash conversion is as a result of our good underlying cash performance and continued focus and discipline on working capital management, as you can see on the chart with a net improvement in working capital in the period. We've invested GBP 49 million in capital expenditure, predominantly driven by the ongoing LTPA commitments, which peak in FY '23 and '24. We retain a strong balance sheet to support investment in our long-term growth strategy. After paying tax of GBP 18 million and dividend of GBP 29 million, we delivered a net cash position of GBP 264 million as at the 30th of September 2022. We maintain a rigorous approach to the deployment of our capital, scrutinizing all opportunities in the same manner to ensure returns to our shareholders appropriately reflect the risks. We have a clear and concise capital allocation policy that we continue to deploy for the benefit of all our stakeholder groups, our shareholders, our employees and our customers. As mentioned previously, we invest in our capabilities organically, which are continuing to deliver good revenue growth at stable operating margins. Inorganically, we have committed to 2 acquisitions, both of which are expected to complete by the end of the calendar year. We continue to maintain our balance sheet strength evidenced by our strong and consistent cash performance and the disposal of our Space NV business in Belgium. Following the completion of the 2 acquisitions, we will move into a modest net debt position, representing leverage of circa 1.3x as previously guided, working to deleverage to less than 1x following the first full year of Avantus integration. We have continued to execute our disciplined treasury risk policy, which has resulted in a significant benefit from the FX and interest rate hedges that have been put in place as a result of the Avantus acquisition, as you can also see on this slide. We have announced an interim dividend of 2.4p per share and have made dividend payments of GBP 29 million during the first half of FY '23. The following slide shows the other technical factors for FY '23. Effective tax rate reduces and all other factors are consistent with our prior guidance. Our net finance expense is forecast to increase with the drawdown of the new debt to fund the acquisition of Avantus in December. Effective tax rate and cash tax is expected to reduce due to the single-source regulations office determination on the research and development expenditure credit -- yes, expenditure credit, say that loud sorry. The effective tax rate will reduce to circa 11.5% organically and then increase with the effect of the Avantus acquisition. Net working capital is expected to realize a modest cash outflow as a result of our group -- our growth ambition. Capital expenditure is expected to increase modestly to within the GBP 90 million to GBP 120 million range as we continue to invest in our customer-facing propositions, our employee value proposition and our business infrastructure. Whilst the expectations we set out at the time of Avantus and Air Affairs announcements remain unchanged, we will update for the combined effect of the acquisitions following completion. And finally, our outlook statement. We entered the second half of FY '23 with confidence, a healthy order book and positive momentum with 95% revenue under contract. We are increasing our revenue guidance and are on track to deliver profit in line with expectations for FY '23. Given our strong growth in the first half, we will deliver high single-digit percentage organic revenue growth with underlying profit margin at the lower end of our 11% to 12% short-term expected range due to the increased investment in our people and capabilities to enable growth, as I explained earlier. In the longer term, our ambition remains to grow revenues to more than GBP 2.3 billion by FY '27. With our recently announced acquisition, this means that we are targeting mid- to high single-digit percentage compound revenue growth over the next 5 years with further strategic acquisitions enhancing this growth. We are targeting an operating profit margin of 12% to 13% in the mid- to long term. Return on capital employed is forecast to remain strong at the upper end of 15% to 20%. And with that, I will now hand back to Steve.

Great. Thank you, Carol, for that update. So move on to the strategic update. QinetiQ is a purpose-driven company which is protecting lives and securing the vital interests of our customers. Our purpose drives our strategy to build an integrated global defense and security company operating in attractive markets with distinctive offerings to deliver growing returns for our shareholders. To ensure that our growth is sustainable, we've adopted this simple framework as part of our environmental, social and governance responsibility to guide the execution of our strategy and ensure balance across our primary stakeholders. Our customers' mission is to respond to the rapidly changing threat environment as we are seeing day by day in Ukraine, whilst not forgetting the rising tensions with China. Our strategy is to co-create and deliver cost-effective solutions that enable our customers' success. Our people are at the heart of delivering our strategy and are passionate about our customers, whilst also experiencing significant cost of living pressures. Our strategy is to invest in our skills and capabilities so that we retain, attract and reward the best talent to create a safe and secure environment for all of our people to thrive and deliver innovative solutions for our customers with greater agility and pace. Our purpose and strategy have never been more relevant and have provided a clear focus for our business decisions, such as the U.S. and Australian acquisitions, and our investment choices, including our response to the cost of living pressures. By focusing on our customers' mission and investing in our thriving people, we will deliver sustainable growth and enhanced shareholder return. The global security situation continues to worsen, and tensions remain high. Threats in Europe and the Indo-Pacific are driving budget prioritization and defense modernization. Although the global economic outlook is challenging, global defense budgets are increasing, as native countries seek to strengthen their capabilities. Our major focus is on our 3 home countries. The U.K. remains committed to GBP 6.6 billion of investment in research and development over the next 4 years. The U.S. is seeking a 16% increase in its research, development, test and evaluation budget to $130 billion. And the new Australian government has recommitted to nearly doubling their defense budget to AUD 74 billion by the end of the decade. These 3 countries have a shared defense and security mission, and recently formed a new trilateral partnership known as AUKUS. Their objective is to work together on a range of advanced capabilities and technologies critical to the future warfare such as advanced cyber and directed energy weapons. These areas align well with our strengths and provide attractive opportunities for long-term growth. The chart on the right shows our total addressable market worth more than GBP 20 billion per year and our current market share. We are growing our share through execution of our multi-domestic strategy, with targeted organic and inorganic investment decisions to build solutions that meet high-priority customer needs. These favorable market conditions are increasingly in demand for our high-value solutions and strengthening confidence in our growth strategy. We are making good progress in building our integrated global defense and security company. Our customer focus and upskilled business winning capability continues to enable us to be competitive and win larger, longer-term programs. Working in partnership with our customers and suppliers, we continue to grow our position on major contracts such as EDP in the U.K. and MSP in Australia as well as achieving significant awards in the U.S. Momentum continues to build with GBP 800 million of new orders, up 18% from last year. In response to the conflict in Ukraine, we have seen increased activity across many of our countries to support operations. We've responded to our customers' evolving needs as a top priority whilst maintaining consistent delivery across all major programs. As a result, we've achieved strong year-on-year revenue growth across the group, with the U.K. up 6%, the U.S. up 19% and Australia up 16%. I am particularly pleased with the excellent progress in the U.S., where we are seeing a return on the investment in our new leadership team. We are delivering programs that are relevant to our customers' future mission, such as high-altitude flight testing of our next-generation hyperspectral sensor and production of e-mail subsystems for the latest U.S. aircraft carrier. In addition, we have refreshed our U.S. strategy and expanded our pipeline to focus on larger programs to drive organic growth such as the U.S. Army Robotic Combat Vehicle program, known as RCV-Light. By both strengthening our existing business and acquiring Avantus, we are creating a platform for growth and are on track to more than double our U.S. sector. Across our global company, we are delivering consistent operational performance. Underpinning this strong operational performance, we continue to focus on partnering with our customers to deliver mission-led innovation through the 6 distinctive offerings shown on this slide. As part of our multi-domestic strategy, we optimize these capabilities internally by leveraging our skills, technology and engineering solutions across the company so that we can maximize opportunities externally through single routes to market. Applying this business model, we create operational advantage for our customers' mission and enable growth. Let me give you a current example from the Test & Evaluation distinctive offering, shown by the picture in the center of this slide. In our Target Systems business, we are world leaders in threat representation. We are currently leveraging these skills and technology into the U.S. market, winning a $10 million contract to deliver enhanced supersonic target with onboard laser sensing technology. This innovative capability will enable U.S. customers to test and evaluate the next generation of laser-directed energy weapons against supersonic missile threats. This is a really great example of us co-creating high-value solutions that are increasingly relevant to national defense and security challenges and driving growth. To stay ahead for our customers' advantage, we are investing in our people, technology and digital transformation. As Carol mentioned, we have increased our investment to approximately GBP 20 million this year to enable a step change and deliver our 5-year growth ambition. Ensuring we are internationally competitive to retain, attract and reward the best people across the whole company is critical to our performance and growth. In response to ongoing cost of living pressures, we have committed a further GBP 5 million into our reward offering focused on supporting those on lower pay. We've also built a highly capable leadership team in the U.S., consistent with our long-term ambition and are expanding the skills of our Australian business through our T&E sovereign skills program, leveraging our U.K. experience. To deliver operational advantage for our customers, we must remain at the cutting edge of technology and create innovative solutions at pace. Project Vampire is an excellent example of partnering with Royal Navy to develop their future maritime aviation force through rapid prototyping, the novel application of uncrewed systems and offers the potential to experiment with new technologies from our internal research and development program, such as swarming and teaming. As we scale the company globally, our digital transformation program is building a secure, interoperable digital workspace with modern systems and tools to adapt new ways of working and harness the diversity and creativity of our global teams and supply chain. We're also establishing new digital design and assurance techniques to ensure our competitive advantage by reducing the time and cost of major customer projects, such as OMFV in the U.S. and the LTPA in the U.K. By strategically investing in this innovation platform in the short term, we will increase our competitiveness and efficiency, ensuring our growth is sustainable in the long term at 12% to 13% margins. Our strategic business plan is guiding these business decisions and strategic investment choices as we create a global leader in mission-led innovation. We are driving organic growth through our distinctive offerings by building local capability, such as our new $7 million technology center in Australia, and collaborating across countries through our global campaigns, such as robotics and autonomous systems. The breadth of our current offerings in our home countries is shown on this slide in blue. To complement our organic growth, the 2 strategic acquisitions in the U.S. and Australia strengthen these capabilities, extend our customer base and build scale. The capability acquired in the U.S. with Avantus, shown in green, will enable our long-term growth in the largest defense and intelligence market in the world. The business is rapidly growing and is at the heart of the customer's mission in cyber, data analytics and software development solutions. The customer relationships, contract vehicles and capabilities are complementary to our existing U.S. sector and create a strong platform to drive further growth. Avantus has a very similar capability and risk profile to our successful U.K. intelligence sector and is therefore low operational risk to the group. Integration is fully prepared and ready to execute, and we're on track with regulatory approvals to close the transaction before the end of December. Similarly, the acquisition of Air Affairs in Australia, shown in orange, will accelerate our growth in Test & Evaluation and airborne training services. The deal strengthens our long-term strategic partnership with the Australian defense force and underpins our market-leading position in threat representation. Integration is also prepared and we expect to complete the transaction by the end of November. By coherently growing an integrated global company relevant to the dynamics of the new world, we are making significant progress to realize our 5-year strategic ambition. So let's step back and look at the progress in delivering our 5-year plan. Over the last 6 years, we have built a company delivering strong operational performance, as shown from the first graphic on the left to the second, growing revenue by 75% to GBP 1.3 billion and growing operating profit at 6% per year. By focusing on our customers' needs with a -- sorry, by focusing on our customers' needs, we are driving profitable organic growth and building strong momentum with increased forward visibility. Our order book has doubled to GBP 3 billion, and our forward orders pipeline has nearly tripled to GBP 7 billion. In May, I explained that we are at an exciting stage in the development of the company with world events reinforcing the short- and long-term needs of our customers for our distinctive offerings. And as a result, we increased our 5-year ambition to grow to more than GBP 2.3 billion of revenue at stable margins, as shown by the fourth graphic. The third graphic shows the FY '22 pro forma revenue for the combination of QinetiQ with Avantus and Air Affairs. As you can see, group revenue grows by 25% to GBP 1.6 billion with U.S. revenue more than doubling to approximately 25% of the group and Australian revenue increasing by 40% to nearly 10% of the group. Both acquisitions achieved a major step change in delivering our long-term strategy. By making disciplined investment choices in both organic opportunities and strategic acquisitions, we are creating a powerful and differentiated company delivering mission advantage for our customers globally and compelling returns for our shareholders as we drive further profitable growth. We're on track to deliver our 5-year strategic ambition. So in summary, I'm extremely proud of how our people have supported our customers and delivered a really strong first half performance across the group. We achieved 11% orders growth, 8% revenue growth and 7% profit growth on an organic basis, and maintain good revenue visibility with a healthy order book of GBP 3 billion. We've also continued to execute our multi-domestic strategy with focus and discipline. Whilst we've maintained strong operational performance, we've responded to the challenging economic environment by increasing our investment in our people and capabilities that are critical to the future and achieved a major step change in our global growth by securing the Avantus and Air Affairs deals in the U.S. and Australia. Our purpose and strategy have never been more relevant. With increasing demand for our distinctive offerings driven by the threat environment and an addressable market worth more than GBP 20 billion per year, we're on track to deliver our 5-year strategic ambition to grow to more than GBP 2.3 billion of revenue at stable margins. By growing our global company, we are directly contributing to global and national security, and will deliver sustainable growth with enhanced returns for shareholders. Thank you, and Carol and I will be happy to take any questions.

Great. Thank you, Steve, and Carol. We'll take questions here in the room first, followed by those online. For those of you joining online, you'll need to use the phone line provided. And the Spotlight platform has now been updated to reflect that phone line. So you'll need to our browser and you'll see the phone line so you can dial in for your question. And when you call in or in the room, please to introduce yourself by name and by company. Thank you. I'll start in the room here first.

Richard Paige from Numis. I think it's going to be 3 from me, unfortunately, to be regular on that number. First of all, just on these long-term contracts, obviously, the main one, LTPA. Can you just remind us your ability on the -- or the broader longer-term contract, your ability to call back inflationary pressures and over sort of what sort of time frame? And whilst we're on those, just a reminder, when the LTPA becomes cash positive. I'm assuming it's FY '25, just to check on that point. Secondly, just on QTS recovery, it looks like it's come through very strongly in the first half, continuing momentum from the second half. Where are we relative to pre-COVID positioning on that one and performance? And then third, a more general broader question around how agreements such as AUKUS are really helping you transfer technology and operate as a business across the 3 territories and how that's aiding growth, please?

Great. Thank you, Rich. Three good questions. What I suggest, Carol, is I'll take the first one, and then if you can -- sorry, the first -- sorry, the second and the third. And then if you could take out sort of inflationary pressures and cash positive on the LTPA. So first of all, on QTS, you're right, and I'm very, very pleased with the performance. You will have heard, I mentioned GBP 28 million of new orders in QTS. And I think it really does demonstrate the relevance of our Target business, whether that's the current range of target or the investment that we're putting into the next generation. In terms of volumes and levels, we are through COVID. I think we said that at the full year. So we're seeing new levels of demand on orders and seeing good revenue contribution from the business. So very positive performance, full recovery of COVID and now I think we see further -- and growing demand going forward. So I think you'll see even more contribution from QTS in the years to come. And AUKUS is a -- if I take the third question, AUKUS is an interesting question. As you'll know, Rich, when we set out our strategy in 2016, our strategy was focused on 3 home countries, U.K., U.S. and Australia. And the reason for that back then was this view that those 3 countries had shared security and defense mission in the world. And they're already collaborating as countries on intelligence, security, partnerships on programs reinforced by, at that time, the Five Eyes community. So I think our strategy was sound back in 2016 on 3 countries that would, long term, always work together. So as you know, the partnership was formed or created and announced 12 months ago and it went through a modernization or an upgrade in beginning of this year, where it basically is now focused on 2 major capability areas. The first and foremost that it was launched around was the need for the Australian nuclear submarine program. And the second is more around advanced capabilities and technologies. I would say that at this particular point direct opportunity from that customer alignment, we're at very, very early stages. But of course, there are some really great examples where the alignment between those countries has already given us benefit and it just shows that we're on the right trajectory going forward. I mentioned 6 months ago, an example of our laser-directed energy program. You've probably seen yesterday, there was an awful lot in the press about Dragonfire. This is our U.K. laser-directed energy weapon that we're doing in partnership with industry and the U.K. customer. It's achieved first trials in the U.K. And that core technology we've been working in partnership with our Australian team and customer leveraging into a new program in Australia, and we'll hear more about that in the coming months. So I think there are some real practical sort of examples where the alignment between those customers is building opportunities because we're focused on the right customers and we're focused on the right areas of priority for them. But I think it's a runway that's got a long way of support for us. So that's the last 2 questions. If you want to pick up on LTPA, Carol?

Yes, I can take the inflation question. Thanks, Rich. So as you know, that QinetiQ is largely a people-based business. So it's wage inflation really that is the thing that's on my mind. And we have continued to invest as a result of today, with the additional announcement of the GBP 5 million to address the cost of living. The LTPA contract specifically has an ability to vary the price as we could see in the order recognition numbers this half of additional GBP 26 million. And I think as a whole, given our diversified contracting portfolio, we're about 50% covered in terms of, A, the ability to change price through variation of price or pass on through to the customer. So that hasn't changed. Another good example is in the EDP contract, if you like, which is a framework agreement, which is based on pricing at the time of when we actually contract the works. So all in all, I think we are in maybe a slightly advantageous position where we can have a little bit of protection through our contracting structures. Having said that, our investment that we are announcing -- that we have announced previously, and we continue to announce today, we're expecting that to deliver 2 other things, to drive competitiveness and to also drive efficiency where we will also recover that. So my view in terms of our inflationary effect, Rich, is that this is a timing effect on to our margins, which is why we're maintaining within the 11% to 12% in the short term.

Just the cash positive LTPA FY '25? Is that -- because we could all see the CapEx in, but the flowback from that?

The peak of the CapEx is in FY '24. So I'd imagine it is becoming -- that's about the period of time where we generate the -- because it really tails off post that.

David Farrell from Jefferies. I'll reduce it to 2 questions. First question on Avantus. Can you kind of explain in a bit more detail kind of what you're doing ahead of time to facilitate the integration? And then kind of once Avantus is in kind of what is being put in place to ensure that you retain the personnel that are required there? And then my second question. I see kind of within EMEA Services, you've kind of reorganized some of the subdivisions. Assuming U.K. intelligence is the same as cyber and information, that only grew at 4% year-on-year, kind of seems slightly underwhelming. So maybe a bit of explanation there. You also said that -- to that being that international grew at double digits. Can you maybe kind of explain why that's growing so strongly?

Great. Thank you, David. I'll take the first one, Avantus, and then Carol, if you can bring up the point between the sector year-on-year growth. So we've used the time wisely since the acquisition back at the beginning of August. And as I said, integration is prepared and ready to execute. There are probably a couple of points that I would share about philosophy, first of all, which I think are really positive about the relationship that we've built with the Avantus team. And bear in mind that Avantus itself has completed a number of acquisitions in its sort of history. First of all, an overall principle we've adopted as a combined team is we're seeking the best. We're seeking the best in terms of talent. We're seeking the best in terms of processes. And we're seeking the best in terms of capabilities. So we've jointly sat down and looked at our people, our processes and our capabilities and designed a way of integrating that takes the best of breed, if you like, from each area. We've also, through joint dialogue, been very thoughtful in the preparation of the integration plan in terms of the pacing and timing to make sure that we don't push change too quick, but it actually is aligned with what our customers and employees need. I'll come back to customers and employees. And we've also been very focused in planning in terms of accountability and clarity. So we have a clear plan that is laid out for the first 100 days and the first 12 months to complete full execution. And we have accountable leaders and a clear plan that we will be able to manage, review and enable for success. That plan itself covers organization, it covers processes and tools. So that's awfully prepared. But the overarching principles of where the benefits will come from are really about focusing on customers, making sure that we really look for delivering continuity for our customer deliveries, both Avantus' current customers and our current customers, but then specifically looking at opportunities that we can add value on. And we've done some early work on that, but really, that will kick off in earnest once we close. And then in terms of your point about employees, this is a really important point. I'll go back to my philosophy issue around being thoughtful. Avantus, like us, is a people-based business. So making sure that they understand the focus on our customers' mission, the focus on them, it's really important. So the communication and engagement is all prepared and ready to go for close. We'll reinforce that. We're retaining all of their benefits. There's no change to benefits. And in fact, when I talk about best-of-breed, there are some practices inside of Avantus in terms of their resourcing strategy, their talent management, it's called Integrated Talent Management, which actually we're going to reuse as a best-of-breed item and bring into aspects of QinetiQ. So overall, I really feel that we and the Avantus leadership team have had a real shared philosophy in how you go about integration. We've also been able to bring our experience and learning of the 7 acquisitions that we've done. And we have a very thoughtful and structured integration plan, which, as I said in the presentation, is ready to execute as soon as we get through to close. And if I could just take your question as an opportunity, there are 3 regulatory approvals that we needed to achieve for closure. The first one of those was the Hart-Scott-Rodino clearance, we've achieved that one. So that is done. The second one was around technology control. That's the ITAR clearance, that is done. And we've been fully engaged with the CFIUS process, which is the last one, and all of the direction from that is positive, and we expect to clear that CFIUS and then announce the completion of the transaction before the end of December. So we're well on track, and everything is pointing in the right direction for closure, and then we get on with integration and execute, add value to customers and employees. That's where we are on Avantus.

So maybe in terms of segmentation, David, you're right. We have reorganized internally, and the U.K. business is now demonstrating U.K. defense and U.K. intelligence. U.K. intelligence is a little more than the old C&I, but fundamentally, it's the C&I business. EMEA Services in the half has grown revenue by 7% and has delivered margins consistent with the second half of last year, which when you think about the population, our people-based population, about 80% of our individuals, our employees, are in the EMEA Services business. So that, therefore, gets the lion's share of the investment when we're talking about investment in our people and our capabilities. So I think still very strong EMEA growth in the half. I think what's also -- and maybe just a slight extension to your question, Global Products, 14% organically is really demonstrating. I think I said this time last year that we would see double-digit growth in Global Products demonstrating the recovery as well. So I hope that answers your question in terms of the EMEA Services kind of classification.

Sam Burgess from Citi. So obviously, post Ukraine and with kind of tensions mounting in the Indo-Pacific, there is an increasing focus on gray zone conflict and subthreshold competition. In terms of your cyber and information business, do you think there are opportunities to sell outside of the defense community and outside of defense markets into civil markets? I know recently, the MOD and GCHQ have emphasized the need to take a sort of whole society, whole nation approach to cybersecurity. I just wondered if there are opportunities there and sort of confining to purely defense markets might be sort of more blanket approach?

I mean I think you're absolutely right. I think Ukraine is what we see on the TV and then this is what we don't see on the TVs and the cyber world is very active. And as you'll know from our performance in the last 4 or 5 years, our cyber and information business, we're just talking about, has actually grown exceptionally well. And actually, it's achieved some very strategic wins during the last half that we can't talk about. But you're absolutely right to reinforce that Ukraine and tensions in Indo-Pacific reinforce the cyber-related capability are critical to future warfare. And when you look at our 6 distinctive offerings that we've really focused building the strategy around, one of those is all around cyber and information advantage, and that strategic focus on those 6 on that item led us to the strategic decision around Avantus. It's a really significant cyber solutions company. In terms of your question about going beyond the defense and security or in the U.S., the defense and intelligence market, I'm sure there are opportunities. But my answer at this particular point would be to maintain our focus and our discipline. We're a defense and security company. I think that discipline that we have brought in over the last 5 or 6 years is why we're seeing the strong performance, the consistent performance of the company. And when I look at how the market is evolving, particularly in the AUKUS countries, the magnitude of opportunity for us to grow by the way that we work and those 6 areas of capabilities, our runway is very, very significant. So I'm sure you're right that there are opportunities. And sometimes, from time to time, where it's a relevant adjacency and it's a sensible thing to do, and we can execute it well, we will go there and we have gone there. But I think our core is our defense and intelligence, defense and security markets in those 3 countries. But I do expect you will see continued rapid growth in this particular offering that you're highlighting.

Annabel from Stifel. I think 2 questions is the going average, so I'll go with that, please. Firstly, just on the U.S., and thank you again for the detail. You've given us again reminding us as a management change and how you've restructured there and obviously, the deal to follow. But could you give us a bit of color around sort of the market at the moment, budgetary pressures, how conversations with customers are going around sort of timeliness? The second, another home market we don't talk about very much is Germany. We've talked about improvement in flying hours there, but any sort of more thoughts on that space? Is there any more to do there? Or could we actually see perhaps a scaling back on that side?

Yes. I mean, first of all, the U.S. market, whilst defense and security is a positive market to be in at this particular time for reasons that we all know, every market will continue to have its day-to-day sort of pressures and tensions. And the U.S., as we know, is now in a continuing resolution. We went through that experience last year. We learned from that. We're prepared. We're engaged. We know how to navigate through that based on the experience. The things that I would really draw out that are different and you alluded to it in your question is the significant change of our new U.S. leadership. We have a large experienced team with very strong customer intimacy that are leading the team well, are engaging the customer well. And you will have seen in the half, we've announced 2 significant -- Carol listed them specifically, 2 significant new awards based on that intimacy and that customer focus and then bringing forward the capabilities that we've got, particularly around intelligence, surveillance and reconnaissance. So yes, I mean it's a tough market, but it's a large market. And therefore, our strategy is to have great leaders, great people, great capability so that we can then discriminate from our competition and grow. And the performance in the U.S. in the first 6 months, as you can see, is really strong. In terms of Germany, I mean, I agree we don't talk about it a lot. It's really because, I mean, if you look at the way that the focus has changed the dynamics of the company, I think we're 92%, 93% of our revenue now is focused in those 3 customers so -- countries. So if you just look at it on real estate, we don't have a lot of time to talk about it. But the German business is going well. It renewed its slow-speed aerial training services contract. I was there maybe 4, 6 weeks ago. We're seeing a number of training services opportunities in Europe, strength -- by the fact that we've strengthened our capabilities. If you look in social media, you'll see we've referred to here several times the investment that we've been putting into new aircraft. And if you go on social media, you can see the new DA62s that arrived 4, 6 weeks ago, were immediately revenue earning the day after they were delivered. So the team there is focused on its customers, it's performing. On its own scale, it's doing well.

Great. Thank you. So I know we've got a few questions queued up on the phone line. So we'll move on to the phone line, if that's okay. So just as a reminder, for those on the phone, if -- do refresh your browser and you'll see the phone line provided to dial in to ask your question. So I'll pass over to Christophe, our operator, for questions from the phone line, please.

We have now been questions from the phone lines. [Operator Instructions] We will take our first question from Charlotte Keyworth from Barclays.

I've just got 2, actually. One relates to the strategic investments on the margin. Just for clarity, this additional GBP 5 million on cost of living, is this going to be a one-off payment to staff? Or is this something that becomes embedded in your ongoing cost structure? That's the first question. And related to that, I think one of the other fastest with the investment is technology. Perhaps you could just help us understand how these operational efficiencies are related in terms of driving margin improvement? And then my final question actually is just on top line growth. With the rate guidance today, I mean pre-acquisitions, I mean, quite comfortably at GBP 1.4 billion, if we were to lay that then with Avantus and Air Affairs, you're comfortably quite some way beyond that. Are you going to achieve that 2027 target of GBP 2.3 billion early?

The line was very bad. I couldn't quite hear the last question, Charlotte. Do you want to pick up the first one around -- particularly around the cost of living, and then I'll go into the broader strategic investments to talk about ambition.

Sure. Yes. Charlotte, so with regards to the additional investment that we're announcing today, the GBP 5 million is as a result of our response to the cost of living pressures. And we've elected to do that in terms of a salary review of our lower-paid employees. So it does have enduring capabilities. However, having said that, we do expect that we will recover that, to your question about recovery of margin, through 3 areas: through driving increased competitiveness, driving efficiencies, which was your part B of that first question, and also through our contracting model that allows some pass-through of those areas. So I think the way I would phrase it is, think of the strategic investments as a timing issue, which has a delay lag in terms of recovery of that, which is why we still feel confident that we'll get back to the 12% to 13% by FY '27.

Okay. And if I take the back end of that into your wider question, so if we step back and look at the strategic investments and you referred to technology, Charlotte, the investments are in 3 areas: people, technology and our digital transformation. And the combination of all of those allows us to go after higher value areas of work. So there's an opportunity to go for a higher margin work, but also, as Carol and I both referred to in the presentation, it will allow us to increase our competitiveness and our efficiency. So you will have an effect of the investment itself beginning to taper off. You'll have an effect of securing relative higher margin work because we're going for higher value market segments. And then you will have inherent efficiency. So as we said a couple of years ago, when we launched this strategic investment, it was a hump to drive the step change in the way that we worked the technology and our solutions for our customers that actually would then yield our performance improvement to the long-term 12% to 13% margin. So happy for you to come sort of back on that, but the combination of our sort of 2 answers sort of gets you to the long-term ambition at 12% to 13%. Now in terms of the timing of that ambition, and it's a great question. I'd just make a couple of comments at this stage. First of all, we don't own, as of today, either Avantus and Air Affairs. So the first step in answer to your question is that we do need to close both of them. And as I said, confidence is high and a few steps to complete to get through that. But in the near term, our focus is all going to be on integration and execution. We're prepared. We're ready to go, but we need to deliver that execution and ensure that we honor our commitments to customers, employees and shareholders. You're absolutely right that, that might yield enhanced timing of achieving that target but now isn't the time to talk about when that will be or whether the target should change. For us, now the time is to close, integrate and execute. That's our focus at this point, Charlotte. So hopefully, that picks up on each of your 3 questions, but more than happy for you to come back and seek any clarifications.

The next question is coming from Sash Tusa from Agency Partners.

I just -- I've got 1 simple question about Avantus, which is, do you plan for there to be any integration costs in the current year? Or is it possible that Avantus assuming you do complete it at the end of December, it might actually make a positive contribution for the current financial year? And then a slightly longer question, but it is a couple of more complementary question. I just don't understand the R&D tax credits issue. And I wondered whether you could explain it for one more time, why the tax goes down on a single-source contract? Or I may have completely misunderstood it?

Carol, would you do the R&D?

Yes. So Sash, I can take the R&D tax credit. This is basically an accelerated tax credit that you get when you invest in research and development. And just by the sheer nature of the work that QinetiQ does, we are eligible for that tax credit. So that has the effect of driving down our effective tax rate when you apply then the normal corp U.K. -- predominantly in the U.K. R&D tax credits or innovation credits from -- in my part of the world, in Australia, exist in a lot of different tax jurisdictions. So it's not necessarily that we've got R&D on sole-source contracts. It's the fact that we do, do R&D, it enables us to get an accelerated tax deduction for the works that we do. And the reason why I referenced the SSRO, or the single-source regulation authority office, is that they announced a determination that any R&D credits that QinetiQ gets, we can keep. We don't have to pass that on to the customer. So that's why we have a short-term impact of a reduction in our effective tax rate. I think if you're modeling Sash on an organic basis, we had previously guided 15% to 16% ETR. We think that, that's 11.5% in the short term. But that will get back up when the U.K. changes its corporate tax rate from FY '24. So happy to take further questions, and John can speak to you offline for more detail on modeling, but that's effectively the R&D tax credit implication.

That's clearly generous for the SSRO, that's remarkably unusual.

Yes. We agree.

Okay. Thanks, Sash. That's the first one. On the second one, in terms of Avantus, so integration is funded within the guidance we've already given. And when we close, as we've said in the statement today, we will come back and reconfirm that guidance. And that will make a positive contribution. Assuming it closes in December, we'll have a quarter of complementary contribution from Avantus. I might just take the opportunity again, whilst Avantus is in the room, to make sort of 2 additional comments. First of all, as we've been working on that preparatory phase, it's also very pleasing, I can confirm that the business is trading in line with our expectations. So trading of Avantus since we announced the acquisition has been positive. And in fact, they've achieved a number of new awards that are quite significant and in line with our expectations. So trading has been good. The second thing, which isn't really integration, but I'll again widen your question. The team is also prepared and ready to go post close on areas of driving complementary revenue synergy. So we're looking at opportunities between our current existing customer base and the Avantus customer base, where we can increment our business development focus and where we can increment our focus on complementary technologies so that we can go after even larger programs together. So that's part of our thinking, that's part of our plan. And as soon as we complete, we'll be looking for that to support our ongoing growth in the U.S. So Sash, hopefully, that covers both of your questions?

Yes. Thank you very much, indeed.

Thank you. There are no further questions on the conference line. I will now hand back over to the room.

Great. Well, thank you very much for attending the presentation this morning. If you have any further questions, feel free to reach out to me, and we look forward to seeing you again.

Great. Thank you, everybody.

Thank you.