QinetiQ Group plc (QQ) Earnings Call Transcript & Summary

Great. Good morning, everyone. Good to see you. Welcome to our investor seminar for QinetiQ, drivers of our sustainable growth. It's great to see so many of us here in person in New York, and I know we've got about 80 to 100 online on the webcast. So thank you very much for joining us this morning, this afternoon, if you're joining from the U.K. For those of you that I haven't met, my name is John Haworth. I'm Group Director of Investor Relations. And with over 1/4 of our shareholders now here in the U.S. and a significant amount of increased attention and demand from prospective shareholders in the U.S. and with our U.S. business now representing over 1/4 of our group revenues, I'm really delighted that we can present this seminar today in New York. That said, it's not an investor seminar on our U.S. business alone. It is one of the areas, but it's really looking at the 3 largest growth drivers of -- for the group going forward. Our U.K. Intelligence business, our U.S. business and our Australian business, including our global threat representation capabilities. A couple of points of [indiscernible] before we start. There's no fire alarm test planned for this morning. So if you hear what sounds like a fire alarm going off, you know, the floor gets hot, do start heading out the main entrance and a must [indiscernible], its just outside the main door. The seminar is split into 2 parts and there'll be Q&A at the end of each of the sections, as Steve will mention and outline shortly. When we get to the Q&A, for those of you on the live webcast, in order to ask a question, please use the phone line provided. I hope you enjoy the presentation. Thank you very much.

Thank you, John. Hello, everybody. Welcome, and thank you for joining our investor seminar today. Two weeks ago, we released our second quarter trading update. And I was really pleased to announce that we had delivered a strong first half performance with improved organic revenue growth and margin moderately ahead of expectations and that we are on track to deliver our full year expectations of GBP 1.85 billion of revenue at stable margins. Today, the team and I are going to take you through more detail about our differentiated strategy and demonstrate that the drivers of our long-term growth are sustainable. The specific focus will be on our U.K. intelligence, United States and Australia businesses as they represent 75% of our organic growth plan to deliver GBP 2.4 billion revenue by FY '27. Let me start by giving you the headlines of what you will hear from us today. First and foremost, we have a clear growth strategy and you'll get a good insight into the quality and depth of our leadership team delivering that strategy. That our offerings are uniquely relevant compared to our peers and are needed to counter the increasing threats in the world. We, as a business, are structurally aligned to our customers' high priority and high-growth segments which is why we can grow faster than macro defense and security budgets. A deeper understanding into the acquisitions of Avantus and Air Affairs and what they have brought us in transformed customer access to provide further attractive growth opportunities. We have a robust organic growth plan to deliver GBP 2.4 billion of revenue at 12% margin by FY '27 with 3/4 of the growth driven by our U.K. intelligence, U.S. and Australia businesses that the team will showcase in their presentations today. Our highly cash-generative business provides acquisition optionality to compound growth and reach our long-term ambition of GBP 3 billion revenue. And finally, our strategy is underpinned by a disciplined financial strategy with a clear capital allocation policy that will continue to deliver attractive and sustainable returns for our investors. Our agenda for today's seminar is as follows: I'll provide a short introduction to the company's strategy. The team will then go through our global market opportunity, followed by overviews of each of the 3 businesses and we will finish with an update on our financial strategy. As John said, the presentation will take about 3 hours with 2 opportunities for questions, and we will also have a half-hour break in the middle of the seminar. So let's start with an overview of our company strategy. Just over 7 years ago, I launched our strategy to build a disruptive and integrated global defense and security company to make a positive difference to national and global security. Today, we are a multinational company listed on the U.K. stock market with a strategy and value proposition primarily focused on 3 home countries, Australia, the United Kingdom and the United States. We have successfully more than doubled the size of the company to GBP 1.6 billion revenue at 11.3% margin by the end of FY '23 and have more than 8,500 dedicated and highly skilled engineers and business professionals across 60 sites globally. Our people are really passionate about our customers' mission, and we as a team live by 3 core values: Performance. We do what we say we're going to do. Collaboration. We work together in partnership, both internally and with our customers; and Integrity, we do the right thing. The increasing threat in the world and the formation of the new trilateral partnership between Australia, the United Kingdom and the United States, known as AUKUS, further underpins our strategy and makes us even more relevant. Whilst we've made significant progress over the last 7 years, we have so much more potential to come. The world is experiencing the most severe threat environment for a generation with conflict in Eastern Europe and the Middle East as well as growing tensions in the Indo-Pacific. Within this geopolitical context, we are a unique company that helps our customers respond to their national and global needs. Our value proposition is to rapidly develop an experiment with new capabilities, test those capabilities are safe and perform as intended against the threat and ensure our war fighters are trained and operationally ready. With us, our customers can accelerate through this critical cycle and be prepared and ready to counter the threat. This is why we are driven by our purpose and our strategy. On the left of this slide, our purpose, which has never been more relevant, protecting lives and serving the national security interest of our customers. In the middle of the slide, our strategy, which has 3 interrelated components. Delivering 6 distinctive and mutually supportive offerings listed on the right by applying disruptive and innovative technology and business models and leveraging those capabilities across our 3 home countries. In order to counter the increasing threat, our customers are prioritizing their budgets on rapid defense modernization. Our value proposition is structurally aligned to their high priority and high-growth segments. And you'll hear more about that from Sam. This is why our growth is outpacing headline defense spending. And also, we see a total addressable market for the company worth more than GBP 30 billion per year which is why we will continue to see our long-term growth being sustainable. Through continued and disciplined execution of this strategy, we offer an attractive investment case. Our company is focused on our AUKUS customers' mission and aligned to structural growth markets due to our value proposition being uniquely relevant to the increasing and complex threat environment. We've delivered a strong track record of operational performance and have a robust business plan underpinned by normalized level of investment to ensure continued sustainable growth. And as part of our ongoing success, our focus is on our customers and attracting the very best talent to the company. Pursuing this strategy, we will achieve our longer-term guidance shown on the right-hand side of this chart. We will deliver high single-digit organic revenue growth at stable operating margins. And an asset-light company, we will maintain high cash generation, delivering attractive returns on capital employed through disciplined use of our balance sheet, we have optionality to complement our organic performance and compound growth with strategic acquisitions. ESG remains at the heart of our strategy in all dimensions and for all stakeholders. In summary, we're a world-leading defense and security company that will continue to deliver attractive and sustainable returns for our shareholders. So let me introduce the 4 main speakers. First, we have Sam Lewis, who joined the company in June 2021. Sam is our Chief Growth Officer for the group, driving our pipeline of new business opportunities, including leadership of our global campaigns. We then have James Willis, who joined the company in 2017. James is the Chief Executive for our U.K. Intelligence business, which under his leadership, has more than tripled in size over the last 5 years. We then have Shawn Purvis, who joined in 2022, Sean is the President and Chief Executive Officer of our U.S. business, which following the successful acquisition of Avantus has more than doubled insights. And finally, we have Gary Stewart who joined us in May this year. Gary was previously the Chief Executive Officer, Vehicle Systems, Asia Pacific for Rheinmetall as Chief Executive of our Australia business. Gary has an objective to approximately double the size of the business over the next 4 years. After these 4 main speakers, Carol Borg, our Group CFO, will provide you with an update on our financial strategy. I hope you enjoy the presentations and we look forward to some engaging questions. I'll now hand over to Sam.

Thank you, Steve. Hello. My name is Sam Lewis. And as Steve mentioned, I'm the Chief Growth Officer for QinetiQ. And I want to extend my warm welcome as well. We're grateful that you're here. We're building a mid-tier disruptive innovator and we're excited to take you on that journey a little bit with us this morning. We believe we are uniquely positioned to respond to this moment in time where tactics and the threat is rapidly evolving. And that positioning really is our willingness to challenge the cherished places of comfort and rest that we associate with our market like bureaucratic acquisition processes or serial life cycle management. And what we bring is innovative and customer intimate knowledge to help take those anchor points and turn them into disruptive movement. And that disruptive movement is what we'll spend a little more time talking about this morning. Let me take a step back and start with a bit of the history, which Steve articulated in in the formation and outlaying of his strategy. When we launched the strategy 7 years ago, it created an organic growth profile that significantly outpaces the market. And in fact, this disruptive innovation, organic growth profile is seeing a defense budget that grows 3% to 5% of the top line and complementary to that, our budget or -- excuse me, our results grow at 9% organically in the same time horizon. And I really put this down to a number of reasons, but I think there's 2 that I really like to highlight. The first is that we indeed are that disruptive innovator that I mentioned in my opening. And that's that we bring new and novel technology and new and novel business processes. And sometimes we put the 2 of those together, to crack some of the hardest challenges that are aligned to our nations, and I'm referring to our home countries and our priority countries, their highest priorities. These aren't just science projects or engineering challenges or business optimization drills, right? They're actually going after the hard to get at problems. Some examples in our corporate history include the invention or at least the first optimized use of radar or the invention of LCD screens, very similar to the ones that you have in your pockets or on your laptops today. The second reason is we have deep and trusted relationships with our customers. And that's really led to framework contracts. And in U.S. DoD parlance, those are IDIQ or in delivery indefinite quantity contracts that make it easy or more rapid for our customers to come to us and put capability under contract. They allow us to both sense with our intimate customer relationships and respond to their needs and oftentimes ahead of their needs. Now shifting our focus a little bit to the future. I wanted to share a little bit about the market dynamics that when coupled with what QinetiQ brings to [bear], can, in fact, help us drive higher growth than some of our peers and others in the sector. It is now widely accepted and even okay to publicly acknowledge the risk posed by a rise in China, the state-based competition referred to on the chart. As a former Naval officer, I'm alarmed at the pace and speed of Chinese shipbuilding. And they're not just building mass. They're also building capability. And that's really just an example. They're actually building capability at pace in all of the warfighting domains of air, sea land and most recently, space and information or cyber. And that's, in fact, the reason why we've launched or why our nations have launched the Trilateral Alliance, as you referred to an AUKUS. AUKUS is about changing the way we deter and prepare to fight. And we believe we, QinetiQ are poised to support that AUKUS partnership on meeting that challenge to both create a sovereign nuclear submarine capability in Australia. But also to collaborate amongst our 3 nations on disruptive technologies like AI and autonomy, of which we are experts in. In addition to thwarting the rise of China, we are faced with an ever deteriorating and increasingly hostile geopolitical climate on the other fronts as well. Evidenced, obviously, most recently in the form of Russia's war in Ukraine and the Hamas attack on Israel. The combined effect of these are driving our market to reward those companies that are horizontally aligned across the breadth and even deep or shallow across that breadth of capability and companies that can balance the need to provide at scale and help the customers provide at scale assurance to exquisite weapons on one hand, and on the other hand, provide rapid development of low-cost mass on the other hand. The companies that we believe will outgrow the market will have an ability to almost at a moment's notice, allow their customers to experiment, develop, train and filled systems. This will also support the high complexity, low complexity mix and immediately leverage the lessons learned on the battlefield. Today's conflicts are affirming the areas of focus articulated in the AUKUS agreement. And coincidentally, the areas we are equipped to excel in. They're actually driving 12% to 15% growth. That's 3x the overall top line budget growth in some of the subareas we focus on, listed on the chart, sensors, communications and information processing, cyber and electronic warfare and autonomy and AI. This is why we continue to deliver growth rates at a multiple higher than top line defense spending. Throughout today, you'll hear a number of examples of current efforts, delivering disruptive capability to our customers from 3 of our 4 business CEOs. The presentations will help to solidify and give you some concrete examples of what we have and can continue to deliver to outpace and outgrow the organic market. As a primary for my colleagues, I want to focus you on the left side of this chart and our 6 distinctive offerings, which Steve mentioned earlier. We have dedicated business development. And if I say it better, we have focused market shaping campaigns associated with these distinctive offerings. Focused on the AUKUS countries and responding to the lessons learned on a daily basis in both the hot and cold conflicts around the globe. Just to walk through them briefly, I'll start with our leadership position in experimentation and technology development. You heard me mention a couple of our legacy inventions. Today, we are deeply involved in research and development out of exquisite sensors, sensor fusion and processing technology, precision navigation and timing, autonomy and AI, just to name a few. It has spawned leading offerings in robotics and autonomous systems that we are taking to all 3 of our home markets. We have also developed and support hardening ours and other systems from electromagnetic and cyber attack, a reemerging and important area of warfare. We then digitally connect work like that which we do in technology and development through engineering services, which supports our customers in maturing and acquiring these and other capabilities from both us and your more traditional OEMs. We stay connected through that life cycle, iteratively delivering test and evaluation services and assuring that the weapons and the processes deliver the outcomes that our customers are expecting. We do that both physically and digitally. That then creates adjacent opportunity to apply our knowledge and even some things we manufacture like aerial and surface targets to deliver testing as well as training that not only assuring a capability, but ensuring that the warfighter knows how to use that capability to effect. And finally, we apply all that knowledge and innovative business processes and technologies to create what we call information advantage. My colleague, James, will share about a contract that is focused on the electronic warfare arena and take sensor information to create mission data packages to empower faster and rapid decision-making. The application of these distinctive offerings on the left side applied to those key growth areas articulated in the center of the chart is what yields that graph on the right of the chart. We have rapidly grown at 19% annual growth rate, our pipeline of well-qualified opportunities to well over GBP 10 billion. And when you couple that with a significant backlog, traditionally yielding 60% to 70% revenue coverage at the beginning of the fiscal year, we can confidently say and plan to deliver above market growth. With that, I will turn the floor over to my colleague, James, to share more details about the U.K. Intelligence business.

Thanks, Sam. Good morning, everybody here. Great to see everybody. Good afternoon to everybody in the U.K. I'm James Willis. I'm the Chief Executive of the U.K. Intelligence business. I'm going to give you an overview of my business, its performance and then the future growth potential. So QinetiQ U.K. Intelligence business is a critical partner to U.K. defense and security from strategic command or Joint Forces Command, as you'll know, in the U.S. or equivalent in the U.S. across the dstl, the U.K. equivalent of DARPA and international security and homeland security. And we've been on the leading edge of defense technology and services for a number of years through our focus on the customer's mission from our heritage as a government agency and also through our people and their technology expertise. And we were the pioneers of modern cyber services in the 80s and 90s, including pen testing, firewalls, boundary protection services, as well as sending the first transatlantic e-mail from DARPA here in the U.S. to my business back in the U.K. We operate in a GBP 3 billion and growing addressable U.K. market and we've grown to GBP 400 million revenue in the last 5 years. And we remained relevant in a fast-changing market through both organic capability development, as well as through acquisition and disposals. And it's worth noting that the majority of our growth has been organic, even though the 3 acquisitions all made around FY 2021 have more than doubled in size. So we have a strong track record of delivery and growth. So I'm now going to bring to life what we do using 3 of our key contracts. Firstly, on the left-hand side is the engineering delivery partner. And this is a framework contract, QinetiQ won in 2018 for the MOD's procurement agency, DE&S, defense equipment and support, is to deliver engineering services more efficiently to the military frontline users like Strategic Command, Royal Air Force, Navy and the Army. And QinetiQ as a group has delivered around GBP 1 billion worth of orders through the framework to date. Covering both defense engineering as well as digital engineering services across cyber, intelligence and operational communications. And with U.K. Intelligence delivering around GBP 400 million of those orders. And we won EDP by proving we could deliver value for money and savings as well as bring the best of industry together to deliver services for the frontline war fighter. Secondly, in the middle, as Sam touched on it earlier, is societies, the mission data intelligence contract we won recently, and this is an initial GBP 80 million deal for Defense Intelligence as part of strategic demand and it's to transform the way they collate, analyze and disseminate electronic warfare threat intelligence in support of war fight missions. And this threat intelligence or mission data, as it's called, will deploy into platforms like F-35 in Eurofighter Typhoon. So pilots and planners can plan their missions to avoid threats like surface-to-air missiles and electronic warfare jamming. And we won this by working with the customer over 3 years to understand the transformation they needed and then bringing together a team of leading industry experts as well as Defense & Security, Artificial Intelligence Center at the University of Lincoln to deliver modern tools and technology, including machine learning, to transform the speed we collect mission data and threat intelligence. And the third example on the right-hand side here is within the U.K. homeland security market. and as the home office as or accelerated capability environment. And this is a joint government industry venture primed by ourselves through a contract we call Vivace and it includes home office staff embedded in a joint team. And this is fairly unique in the U.K., and it brings together the operational uses such as a police with industry to jointly understand the mission problem that needs solving, always in the information domain and then to develop information solutions at pace within 12 weeks using agile, DevOps and data science tools. And this is all about rapid capability development in the information domain. There was one because of our ability to rapidly develop solutions using an ecosystem of over technology companies as well as using our own data intelligence capability. And all of these contracts support our customers' digital transformation to keep pace with the threat. And as well as advice and services, we also develop highly specialized mission-centric technology products. In the short video I'm going to show you, brings to life some of the solutions we've developed to meet the threat that Sam talked about earlier. And I'll bring to life for a couple of minutes when we talk about the market and the threat landscape. And these solutions are in the main developed jointly with our customers, keeping this embedded in the heart of our customers' mission. [Presentation]

So I'm now going to cover the market we operate in and then our future growth on the final slide. So the threat environment in Cyber and Intelligence changes rapidly, as you'd imagine, from the introduction of artificial intelligence to what we're seeing in Ukraine at the minute, which is state-level cyber attack, electronic warfare jamming of GPS and drones to name just a couple of examples. And U.K. is investing heavily in countering these threats and QinetiQ is at the forefront of much of this research and development and operational delivery. And to give you a very current example, we're delivering a GBP 20 million research contract looking at artificial intelligence in the cyber defensive systems and how that can then be integrated and deployed. The picture you see on the right-hand side highlights the space domain, and that's a critical area we're working. From communications and geospatial intelligence to resilient GPS SAT and AV receivers, which can resist jamming and spoofing and secure satellite communications, which can deliver resilient communications to the users on the ground, all examples you just saw in the video. And we differentiate in the market with our deep technology and mission understanding versus the consultancies of your generic system integrators. We're also seen as noncompetitive to many companies. We don't produce competing products at scale, very highly specialized in the product space. So we have an unrivaled partnering capability in the U.K. defense and security market. And this allows us to innovate through our 2,000 technology specialists alongside our 400 or so industry partners. And finally, on the competitive landscape, we're seeing more commercial customers coming into the security market. And we embrace this and have relationships with companies like AWS, Google and Microsoft to enhance our capabilities and offerings. And we compete based on our unique industry knowledge in defense and security, allied to our technology and partnering capability. So finally, future growth. As I said earlier, we operate in a GBP 3 billion and growing addressable cyber and intelligence market in the U.K. We're already a top 5 player in U.K. defense and security, cyber and intelligence and are seeing strong double-digit growth this year and beyond. Our aim is to be one of the key British sovereign cyber and intelligence companies, and we're well on the way to achieve this ambition. We'll stay relevant and continue this growth across a number of opportunity areas, of which the ones shown in the middle of the section of this slide is a 3 of many. The one worth touching on, though has been highlighted on the right around virtual experimentation, simulation and mission rehearsal, such as the creation of digital twins to test and experiment on, cyber exercising and mission rehearsal and AI insurance and integration into mission systems. And this is a major area of investment for all our customers because of the flexibility, speed of execution and value for money it brings. We'll execute this growth through continuing to win and deliver strategic deals like SOCIETAS that we saw in the previous slides. And by keeping our capabilities relevant to our customers, through our 7 centers of excellence based alongside our customer locations in the U.K., focused on areas like data intelligence and cyber and electronic warfare. All delivered using the latest tools in the right environment to deliver what the customers need at pace. So finally, let me finish by reiterating what Sam and Steve highlighted earlier. We operate in a high-growth market and have tripled in size in the last 5 years, and we see continued strong market outperformance in the coming years. Thank you. And John, I think we're handing over to you for questions.

Thank you, James and team. So as James said, we've got our first session of Q&A now for Steve, Sam and James. And if you want to bring any of the others ask any other questions in these areas, please feel free. But we'll try and focus this first set of questions on the first presentation. So we'll start with questions in the room here first, and then we'll go on to some questions on the phone line. Please do introduce yourself and the company you represent and we'll go from that. So let's start to -- start in the room, which I'm pleased to wait for microphone.

Alex [Foreign Language]. My question for Sam. Sam my experience a little bit -- I mean I'm familiar, I worked for a number of defense contractors, but I kind of speak from technology to finance, finance to technology. And as I mentioned, I'm currently accreted in [test]. I am really interested to understand. I know you briefly mentioned it, but still it's probably not enough. Your company kind of in between traditional defense contractor, I see there is [indiscernible], I see is SAIC and also the hardware component, obviously, with the manufacturing products over there. I honestly see the same -- kind of the same offerings from large defense contractors from smaller defense contractors, not to mention DARPA. And again, my apology for asking this question. Can you tell us a little bit more how is it -- I don't want to use that word secret sauce, but how is it really like different? Like what I don't understand like seeing your presentation trying to compare what I just told you.

Yes, sure. Absolutely. So the secret sauce, right, and everyone who articulates a value proposition, will claim they have a secret sauce. Really, our secret sauce, I think, is related to our true deep technical capability. We're predominantly engineers that many of whom grew up when we were a government agency, not dissimilar to DARPA. And that culture has allowed us to continue to be disruptive and innovative and creative. DARPA in the U.S. likes to take on challenges that are -- DARPA hard is kind of their tagline. Well, that's what our engineers and technicians do as well. When we did it for the U.K. government and in presidential we've done and maintained that kind of do the hard things mentality, which is not what everybody else does. They tend to bring just what the customer needs at the time that they can sell it. And that's not necessarily what we do. We try to bring things the customer may not even know they need ahead of the time they need it. And we have that not only those relationships. But again, we do have the foundational frameworks to allow us to do that and react and respond very quickly. So I would say that's the the key differentiator discreet, I don't know if you want to.

I'd add a couple of comments. A lot of the contractors that you might compare us against are more vertically integrated, and they provide a plane and all the relevant subsystems or through a supply chain. We often describe ourselves as we are more a horizontal integrator, very deep as Sam said, partnering with our customers. And if you think about what our customers, our defense and intelligence customers are really trying to do. They understand there's a threat in the world and they want to quickly have a capability that they can mitigate that threat and that is a horizontal process. And the value proposition that Sam has just described, we're really at that horizontal layer. We're not a vertically deep integrated product company. We're a horizontal enabler for our customers. So we sit in a very unique position. In fact, as I said in my presentation, we don't believe there is any other company in the world that is focused on that horizontal enabler which is why we described the value proposition as create it, test it, use it. We help them create technology and experiment with capability that will mitigate the threat, test it in terms of safety, performance and know that it's going to work and then with the use of trained and operationally ready. So it's a great question because it goes to the heart of everything that we talk about today in terms of our performance and our future growth and why we can outpace headline defense and security spending because it is that secret source of that unique value proposition. I hope that sort of goes to answer your question. Great. Thank you. Next question. I think it was Charlotte's hand just picked at the post, but we will come to you.

Charlotte Keyworth from Barclays. I just wanted to touch on Intel. I mean, you've mentioned the business has grown threefold in the last 5 years. I mean it's quite punchy growth rates. How scalable is this business? I mean in terms of things like recruitment and exportability because I think we had a chat earlier 10%, 15% of its products rest services. You just give me as your view on the future?

The vision for the future. Firstly, to answer your first question, very scalable business we do probably about 40% of our revenue through our partnering. So we bring partners in system integrate so we can scale rapidly through our partners. So that allows us -- and we've got 400 technology partners from the IBMs of the world down to small sort of start-ups with highly specialized technology. So we scale a lot through the ability to bring partners in and integrate and deliver solutions for the market. So that is one key part of our growth. And that's been a big driver. And it's that -- to answer the secret sauce question earlier, it's that noncompetitive nature, which actually stands us apart. We don't compete against the big defense OEMs, the consultancies. So we can scale quite rapidly in that space. We are doing more managed services, so intelligence systems, intelligence platforms versus people to task. We are doing more specialist products, which are scalable and global to the answer your question. So about 15%, 20% -- sorry, yes, 15%, 20% of my business is technology products, which we export mostly around NATO allies. So that is scalable, and we're investing in those at the minute, and you saw some of those in the video. And the rest of the business is broadly U.K., but highly scalable within the U.K. through the partnering. We are recruiting rapidly. We created about 10% of our workforce every year, year-on-year. And we're attracting them with the interesting work and the mission that we do, which is because we're not going to compete against Google and AWS on salaries. We compete on the mission, the interesting work, the career development that people can get from to highly specialized work that's why we run the first site we were the first DARPA will think they were the first cyber company. We do think we were the first. So we sent an e-mail to each other to prove it in the '80s. But we are we are at the cutting edge of that technology. And you saw that from some of the stuff Sam talked about and we talked about. So hope that helps answer the question.

I'd add, Charlotte, and I know that you've been wanting to talk to James for years because whenever you are here, you question about U.K. intelligence and so I can't really tell you what he does. But to give James credit from when he first joined the company, I think you'd agree, James, at the start. It was very much around staff augmentation for the customer. And James was really clear in the strategy that actually we had to move to a higher level. So scalability, yes, comes with people but it comes from many other dimensions like the product mix and the exportability of those. And we, as a team, through our single routes to market, look for those opportunities, you'll see some of those come out of the conversation. And whilst in the intel world, there are certain aspects that are going to be protected within the nation. Some of the underpinning technology or trade graph can be shared, and that's the sort of future. So I think he's he's got himself to -- he's demonstrated scalability, right, in the last 5 years and the same model will apply going forward.

And we're going to do 15% to 20% growth this year on top of what we've done. So we are sort of -- we are continuing that. So we've got a scalable model. The market is big enough, GBP 3 billion and growing. We're about 13% market share in that. BAE is the biggest player. We -- as we talked about top 5 player, and they're growing into that. So we've got all the things set up, we believe, with the strategy and the people and the partners to deliver that growth going forward.

And if I just add to that because we haven't covered it today, but I covered it in May. We redefined the scope of our addressable market to include the intel security markets in May when we increased the addressable market for the company with this strategy from GBP 20 billion per year to GBP 30 billion because of the maturity of the strategy and ultimately, the scalability that we could see that could be developed that the add of intel and security is an important part. I think James also alluded to it, I think that Shawn will talk a lot about it. If you look at what our customers going through right now, yes, they need equipment. But the internal digital space is growing rapidly back to why we're focused on high-priority, high-growth segments. So it's a great question and we think about it a lot every day because we have to be able to scale to continue our performance.

A quick follow-up. So on that sort of scale of growth, Are you facing any restraints on recruitment? Because everybody is talking about outpaced budgets and the priorities. And I would have thought recruitment would be one of the sort of overhangs that you have. And also, obviously, the inflation environment was very down. Can you pass that back in contracts?

I might say, Shawn, do you want to talk a little bit about recruitment because it's -- I'm trying to bring some different voices in , right? But -- and I'll add some points, but recruitment is really important. And I think James teed up a key point that this is not just about salaries. Do you want to add?

Thanks. Appreciate that. And we share some of the same like growth opportunities and challenges across the market. I think that the piece that's most important is in today's world, an employee choose the company not just for salaries we talked about. They choose it for mission and they choose it for the employee value proposition. So what you see, I think the uniqueness of QinetiQ is culture and the culture work that we've done across all of our core markets, that really allow employees to come in, start their career, develop through multiple different disciplines, but also understand how much we're investing in them. That to me is that sticky part and the unique piece from a QinetiQ component. In the United States, over 26% of our population are military -- former military veterans. And there's nothing more passionate about the mission than those who serve and now see core capability, whether it be software or as you see our next-generation bombsuit, go back into market to their other than systems we are still serving and to be able to defend them. So we pull from kind of a different base I think than just a pure-play commercial market, we don't do commodity IT. And I think that's the piece where we're able to keep pace with recruitment.

And I think I'd add that if you look at overall resourcing, I think I said we're over 8,500 people in the company now. One of the other measures is to look at attrition, we are either at or below market norms in attrition, which really illustrates the point that Shawn is making. This is a wider value proposition in terms of mission, strategy, create development and their contribution to what they see as important in the world. So I think we are on or ahead of our resourcing requirements for this year. So we're confident in our growth. I'm going to move us to our next question.

Byron Callan, Capital Alpha Partners. Just following up on Charlotte's question, really 2 questions. You talked about the organic sales growth targets. Do you think turnover per employee will be working at the same pace? Do you got more productivity or more sales or turnover per employee. So is it growing? Were your head count got 4% or 5%? Or does it also have to track that 9% curve? And then Sam, can you talk a little bit -- we talked about Ukraine, but the war in the Gaza Strip is going to put a pretty keen focus on urban warfare. How do you think that's going to shape what QinetiQ might be able to address going forward?

So if I address the first one, and I think we alluded to it in the answers to the previous question, so we absolutely don't see head count in line with organic revenue growth. And there are 2 or 3 reasons for that, just to sort of name them. First of all, a lot of what we do we are integrating. So we're managing a supply chain as well as our own direct engineering contribution. So our supply chain component is an important part of delivering our our service. And secondly, the mix of what we are doing. If we simplify it in terms of service and product, there is an increasing small but increasing product component because we're really playing -- at what we would describe the solution level to mix services and products. So if you think about those 2 gearing factors, you're going to end up with a differentiation between revenue growth and head count growth. Do you want to pick up on the second?

Yes. So the question on urban warfare is a good one. We still believe, and it will -- we think it will prove out to be true that the advances in electromagnetic warfare and electric warfare, electronic warfare, an information advantage will translate in either environment, whether it's urban or more traditional environments. The other bit is when you get into an urban environment, we've got a lot of products, capabilities and past performance that have grew out of urban conflicts, right? If you think about in the U.S. business for Shawn, Shawn's business has counter ID robots, for example, that were pervasive in the Iraq and Afghanistan conflict, and we're supporting dangerous missions just disrupting IEDs and disrupting the enemy and urban environments throughout that entire conflict. So we have that same and similar technology that we can bring to bear in the urban environment. But when you really just step back and look at it, our focus on intelligence, and making information and advantage, it applies across the board. And we think that's -- we're going to see continued real growth in that arena.

As a reminder for those on the live webcast, if you'd like to ask a question, please dial a phone line provided.

Richard Paige from Numis. A couple of questions, please. Firstly, to Sam. Just trying to understand a bit more how you interact with the business? Identifying opportunities and through the pool either way on that front. And then secondly, maybe no attention -- there's nothing. And then just James and Shawn, sure, actually, just obviously, with the development of the U.S. business, AUKUS as a medium of operation as well, is there any future opportunity between your 2 businesses that you can operate.

Yes. So first of all, how we operate. We have business development professionals of all stripes really in both the central function as well as in our sectors. And I would say it's extremely collaborative. We share -- we all have the same number and target. We manage a combined pipeline for the company and we devote resources based on where the priorities are, regardless of what business they sit in. The other element that is centrally led and supported by the businesses is the campaigns that Steve mentioned. Around those distinctive offerings, we have dedicated market shaping campaigns that are really about looking at the 3- to 5-year problem and creating opportunities where there aren't or shaping opportunities that we think are emerging towards the business. And that interaction and interplay between the campaigns and business development professionals that actually resulted in the businesses is what I think accelerates our ability to organically grow to be honest.

Yes. I mean maybe just before we go to -- I think I'd reinforce what Sam is saying, a way of thinking about that is that whilst -- I mean, we've got 3 of our 4 sectors here have their own BD leads. There are functionally matrixed into Sam. So that's a core lever of alignment and collaboration and then the while you got 4 global campaigns that actually sit at a level across the whole company. And actually, it's not unconnected to the question that we're going to hear whatever Sean and James is going to say because AUKUS, one of the objectives that I've given, Sam, is actually developing a really clear AUKUS road map for the company as the customers are maturing and getting an understanding of what they aim to deliver through AUKUS Pillar 1, the submarine program to the technologies. And even let's start thinking about, well, what's AUKUS Pillar 3, what's going to come beyond those 2 levels. So it's a really critical part of our change. And if you follow the history of this phase of QinetiQ change, business development was one of the 4 fundamental change levers for the company, professionalizing business development with experienced people that understand customers partnering and how you develop high-value long-term programs has been the core and Sam presented the pipeline. The pipeline has gone from less than GBP 1 billion. I think it's probably GBP 700 million back in FY '16. And here today, we've got a pipeline that we'll be prepared to share publicly of GBP 10 billion. And of course, our internal business plan has got opportunities well beyond that. So a critical part of our historic growth, but importantly, our future growth. James, Shawn?

So I think the question was with the advent of AUKUS, how can we continue to work together. I would say first, as Sam and Steve alluded to, that is a core part of our overarching strategy. For those of us who've been in defense companies who've tried to do cross country and it's really something that is a core part of who we are. It's a natural conversation. And with that, taking core capability that's in one resident country and applying that into the same mission in another country is something that then is facilitated, not as I have to do, but something as we see as a value creation, a unique way to go to market. The second, I'd say, outside of AUKUS, our customers, especially in the intel community actually work very closely together. They've always had is actually great collaboration. There's very few missions that our countries are not partners with. So you think about joint communications, you think about sharing of Intel, you think about needing to have an ability that when you're forward operating to be able to see the same situation awareness. And that goes all the way back to the Iraq and previously environment. And so we actually have deep relationships facilitated by our customers' partnership and the core capability that James and team build, very similar to the needs that we see in our customers and vice versa. And to me, it's a very powerful relationship for us to go forward.

Yes. We tend to find that and this is driven by security. Obviously, higher classifications. It tends to be government-to-government. So I'll do it on our behalf. It's quite nice.But the lower classify goes on class, we can work together. And we've already had discussions. I mean, Jonathan over there, we had dinner last night, we were Jonathan from Avantus, an awful lot of stuff in the homeland security market, for instance, that we do in Homeland Security. -- we had 10 opportunities, I think we were talking through, things like that areas we need to look at and transfer of that unclass, -- so it's driven a bit by the security levels as well. But government-to-government at the senior and we can do the unclass power levels, yes.

I'd say 1 build, when you put it in the context of the AUKUS relationship, we like to think of AUKUS as a joint program to put money and resource from the 3 countries in different buckets to arrive at different conclusions as opposed to pouring the same money in the same bucket to drive a similar conclusion. And we actually think that we can use our position in both the intelligence communities, for example, to help shape what the U.K. can focus on and what our strategy focus on and what the U.S. should focus on. So that we arrive at a combined solution, a collaborative solution that outpaces the threat we're facing.

And I might just add a couple of thoughts and I'm going to ask Gary to say a few words because whilst you talked about AUKUS in your question, Rich, to Shawn and James, it's worth just stepping back 1 of the key ingredients to our success is simple focus in our strategy. One company 3 countries, 6 mutually supportive offerings. And the fact that we can express that with such succinct clarity and that flows down into our people, our investments is why you're seeing the performance that you see. But Gary is fresh to the business, huge experience multinationally, -- you might even want to introduction now before he does his presentation. But 1 of the things that we've been partnering on between Sam, myself, Gary and Nick Anderson, who's Chief Executive U.K. Defense, who's not here, today, which is a very important part of the company, and it's growing exceptionally well, Nick, if you're listening. -- is actually some of the development of opportunities between the U.K. and Australia. So maybe just some words about what you think about AUKUS Gary?

Yes. So I mean AUKUS is -- has fundamentally changed the -- what the Australian customer is setting its priorities around, I'll talk about it in my segment. And 1 of the real strengths that QinetiQ brings to that is the role that we're already undertaking. You've heard about it from the intelligence side with James, Shawn will expand on it. But across every dimension of the capabilities that are now a priority and a number of those are actually creating industries and environments that haven't existed in Australia, where we can provide direct access and speed because of our presence and our pedigree and our performance and our relationship with the U.K. and the United States customers. And that's a really unique position that QinetiQ has. And to James' point, because we operate at the higher levels of classification with those customers, you get a very high level of customer advocacy and ability to transfer and enable a lot of those capabilities that simply are difficult to translate on a purely commercial basis. And that's generating a significant amount of opportunity and growth for us that we actually didn't have 2 years ago within the Australian market. So I'll talk about that some more as well.

Thank you, Gary. Other questions. Do you want to make a comment on online, just to remind people, John?

Sure. Any questions from the online webcast, please do call into the phone we have provided. I've got no questions at this point in time so maybe will.

Any further questions in the room?

Oh, we do have...

This is Chris Meeker from Franklin Mutual Series. Just a quick maybe high-level question. You had a slide up with regard to market growth of 12% to 15% in the high priority segments. Can you just kind of tease out what percentage of the business would fall kind of into these high priority segments that have this above-market growth?

Yes, that's a great question. So -- when we look at that 12% to 15%, and we talk about communications, sensing, autonomy, AI, we think that's about 25% to 30% of our business today. And so that 30% then is experiencing higher growth rates, which is why we're delivering closer to 9% organic growth, not 12% to 15%, right? So it does have a demonstrative impact. And by the way, it also commands a lot of our internal R&D and our focus on how we're shaping deals or how we're trying to connect deals. We talked about the SOCIETAS contract, right, and that's an electron electronic warfare mission data right? We're trying to apply that. And in fact, in our tech process. We helped to make sure that, that could apply to the AUKUS trilateral partnership, right? So those areas are not only growing in the defense markets that we're currently got expertise in, say the U.K. in that, but also in Australia and the U.S., for example, right? So that's the percentage of the business focused on that.

So just to be clear, 25% to 30% of the intelligence piece of 25%, 30% of...

25% to 30% of the company is in those kind of higher growth areas.

I think, Chris, if I might add, I think Sam's accurately describe the current state. But I'll make another dynamic point, which will cause resonance around the table is our ongoing dynamic and conversation on your question. So as a team, we are continuously ensuring through the pipeline, through our customers, through the way that we engage, that we're continuously looking to orientate the focus of the business on to those higher value and higher-margin opportunities. Again, if you look at some of the history, arguably, there has been lower value staff augmentation, where is actually whereas actually the more we can pivot towards these higher-value hire segments, you'll see these continued higher growth rates, really attractive margins that the company is achieving. So I think the dynamic is important on top of the current facts. And I think whoever said it, but our incentive model throughout all of the executives of the company is aligned with that as well. Thank you.

John Koch with Federated. Curious on your comment about margins. So if you guys are kind of guiding margin stability. So would that imply some of the other legacy businesses, maybe there's cost deflation in those or...

Carol. Opportunity for you to say something.

Thanks, John I have been quite, quiet here in the inside. So we're guiding our long-term guidance of 11% to 12%. Currently, our organic pipeline is delivering circa 12%. So with the optionality of some strategic investments, particularly focused in the U.S. and Australia, we see that blend just mathematically come down. I think what Steve was saying previously, our unique offering does afford us to play in that, I believe, upper quartile kind of margin stack based on the uniqueness of our offering. And I think our margins do range. I think I know, our margins do range across the business. We are about 7% product-related revenue that attracts higher margins. We have some services-related business that attracts lower margins. But in the whole, we're hearing from some of our higher-growth areas that afford us a little bit of higher margins, but we blend in to 12% organically, 11% to 12% with some optionality for strategic investments.

Thank. I think -- so I think we'll leave it there for questions. We do have another session at the end presentation. So we'll take a break now, a good opportunity to have a look at some of our capabilities we've got to show here for those on the webcast chance to get a coffee and a biscuit. So it is now 10:07, let's regroup local time 10:40. So U.K. time, that's 15:40. Start from the 15:40, 10:40 here. Thank you. [Break]

Thank you for bearing with us. We are on a short break, and we'll be back with you at about 15:40. [Break]

Great. Welcome back, everyone. And I hope you've enjoyed that first -- the first part of the seminar. We're now going into the second part, where you'll hear from Shawn, Gary and Carol and then an opportunity of further questions at the end. Shawn, over to you.

Good morning, everyone. It's a little warmer for those of us in the room. So I appreciate that. Good morning. So my name is Shawn Purvis, I am the President and CEO of QinetiQ U.S. I'm excited to be here today to talk to you about the U.S. organization. I joined QinetiQ about 1.5 years ago, excited to take the opportunity to transform the company. Build upon our core technology and intimate customer access with a pivot towards sustained profitable growth. We're well on our way to being a middle-tier provider of mission essential technical solutions to the United States Department of Defense, National Security and Intelligence and our customers in the Department of Homeland Security. Our core offerings are focused in the areas of intelligence, surveillance, reconnaissance, or ISR, mission operations, advanced cyber offerings, information advantage, multi-domain autonomous solutions and systems and engineering and innovation such as our persistent surveillance and multi-sensor integration. The delivery of these capabilities is powered by the more than 1,500 highly technical, mission-focused QinetiQ employees in the United States. And our core growth markets are aligned to the National Defense strategy. We're focused on areas of high growth while fully aligned to our customers' mission, which combined with our organic and inorganic growth has propelled us to outpace the market. To highlight a few of our areas within our portfolio, I'd like to speak to 3 recent contract wins. Our recent win at the Space Development Agency as a prime contractor demonstrates our deep customer intimacy and exceptional program performance. SDA will quickly deliver needed space-based opportunities to the joint war fighter to support terrestrial missions through development, fielding and operation of the National Defense Space Architecture. As prime on this contract, the QinetiQ team will deliver agile program services, adding capabilities to the future generation as the threat evolves. Our next win at the Strategic Capabilities Office, or SCO, builds upon our existing work within DoD, while adding resources, which demonstrate incremental on-contract growth. SCO is an organization within the Office of Secretary of Defense, which seeks to identify, analyze and prototype disruptive applications of new systems, unconventional uses of existing systems and implementing emerging technologies to create operational strategic effects. Our highly technical engineers work to quickly identify and prototype disruptive technology to enhance the customers' ability to counter adversaries. Both SDA and SCO were re-competes, one, by the customer intimacy and the delivery of our current team, but also will excel with on-contract growth as it's now been won and baked for the next 5 years. Our Next Generation Advanced Bomb Suit or NGABS, you can see it outside when you take it -- at the next break. This award represents years of partnership with the Army customer to build the next-generation bomb suit. It's integrated with sensors and controllers to save the war fighter's life. This award replaces a 20-year bomb suit and will provide enhanced protection to its users and operators. It represents a start from a concept where our customers said, "How can you take the current technology, integrate new sensors, new features, information advantage and make it better?" This new suit will increase our soldier survivability and readiness to respond to evolving threats, providing 360-degree ballistic protection while significantly increasing situation awareness. We'll now show a short video of our NGABS technology. And again, the suit is on display in the lobby. [Presentation]

I'm really proud of the work our team did on the next-generation advanced bomb suit. It brought together mechanical, electrical and mission-oriented individuals in partnership with the customer to create the next-generation bomb suit. I'm proud of the work that we've done to complete the full integration of Avantus into QinetiQ U.S. The company has been fully integrated and operates as one QinetiQ U.S. since the beginning of our fiscal year. The combination of QinetiQ U.S. and Avantus has expanded our addressable customer market, which provides immediate opportunity for revenue synergies in new markets, such as National Security, Department of Defense and Department of Homeland. We've also pulled through key capabilities across the company, allowing us to bid large prime opportunities. Areas of cyber, robotics, information advantage, all have identified new areas of opportunity in both our current markets but also in the adjacent markets across the company. Avantus' core capability are aligned nicely with our QinetiQ strategic offerings. In the areas of ISR Mission Solutions, the legacy Avantus team has employees across DoD, DHS, National Security and Intelligence Agencies, supporting our customers missions and program requirements. In advanced cyber, we provide cyber intelligence, managed attribution and advanced cyber network defense to national security intelligence customers. Our deep knowledge of data analytics provides leading-edge information advantage to the customer, allowing them to consolidate and utilize vast amounts of disparate data, including open source intelligence data to create finished intel that's actionable to the war fighter and the legacy Avantus engineering and innovation in areas of persistent surveillance and reconnaissance pairs nicely with our multi-domain autonomous organization to create modular payloads that can be served on land, air or sea platforms. Avantus has provided a great momentum for our full year, winning 6 out of 7 of our critical re-competes delivering over $600 million in Q2. I'm just going to say that one more time $600 million in Q2. The company now fully integrated, has a best-in-class employee value offering for our over 1,500 highly technical, mission-focused employees and is expected to grow in net new employees throughout the rest of the year. The significance of winning those re-competes this year gives us 5 years now of backlog with those core customers and allows us to grow and take those capabilities across other adjacent markets. QinetiQ U.S. is a solid company with a strong technical base business. We support long-term business partners and customers through our mission-led technology deployment. We primarily sell high-value services and products to United States Department of Defense and our national security agencies. And we are positioned to develop and enhance offerings in the U.S. defense modernization platforms and programs. Part of our core offering is our family of autonomous platforms such as our work done with our Army customer on the Robotic Combat Vehicle Light or RCVL. This is an area that is constantly evolving as we move to larger form factors and integrate autonomous systems and platforms in the battle space. Our core customers in this market to include the U.S. Army Tank, Combat Capability Development, Ground Vehicle System Center and the Marine Corps War Fighting Laboratory. They rely on our engineers to develop and field unmanned combat vehicles, giving the war fighter a competitive edge on the battle space. Our highly technical engineers deliver capability in multi-domain autonomous systems persistent surveillance and deep data analytical AI/ML solutions. Our engineering services span the DoD and intel community, providing subject matter expertise in the areas of communication, sensor integration, research development, survivability and unmanned ground combat systems. Our investment in our center of excellence for information advantage allows us to create innovative and new data analytic platforms for our space, intel and DHS customers. We combine our employees deep customer mission and knowledge, and we create a competitive advantage to deliver capabilities that rapidly fuse data together and create applications to support our customers most sacred mission. Underpinning this core capability is our deep technical talent with a strong customer affinity and mission knowledge. This allows us to continue to compete and win against near-peer defense and intel competitors in the United States market. Our employee value offerings recognized by our employees as the top workplace in 2023 provides best-in-class offerings to our over 1,500 employees. Finally, we see the ability for strong double-digit organic growth with optionality for strategic inorganic acquisitions through FY '23 and '27. The growth is fueled by our $2 billion in qualified opportunities across all of the markets I just spoke to. From a market perspective, we look to grow in national security and intelligence customers focused expansion on U.S. Intel and Cyber. We continue to expand our automation and analytics services to all our core demographics. Another area of expansion is in our areas of persistent surveillance along the U.S. and allied border. Sensors, radar and ISR mission operations combined with our commercial offerings such as our SPADE software development, allow our customers to enhance their ability to detect, defend, eliminate threats to their borders. As SPADE integrate sensors and software and workflow automation, we will see our customers elevate their mission from where they are today. The combined capabilities of U.S. and Avantus allows us to go to market as one defense intel company. We continue to pursue and invest in high-growth markets, such as space, national intelligence and global security. I'm excited about the future of QinetiQ U.S. and our team, our company and our employees, bolstered by a strong pipeline, a robust technical offering, we remain focused and continued on growing our business. Thank you. I will now bring up Gary to talk a bit about Australia.

Thanks, Shawn. Okay. Good morning, and good afternoon to those joining us from the U.K. I'm Gary Stewart. I started with QinetiQ in May this year, almost 6 months ago now as the Chief Executive of our Australia business, which includes our global threat representation offering, and I'll talk about both aspects. Throughout my career to date, I've actually had the fortune of living and working in all 4 countries where my business operates, Australia, the United Kingdom, Canada and Germany. I'd like to think that, that experience actually helps with what our growth and performance focuses over the coming years. Today, I'll give you an overview of the Australia and global threat representation business as a whole, the changing market dynamics and where we see the future from here. Over the last 8 years, we have increased our contributions and relevance to the Australian Department of Defense, related federal agencies like the Bureau of Meteorology and the National Emergency Management Authority and our global threat representation offerings deliver to over 40 countries around the world. We are a truly global team. We've got close to 1,000 people in Australia and in excess of 200 people working and operating in Germany, Canada and the United Kingdom. We've got a highly skilled and diverse mix of talent in those 4 countries, critical to our customers' missions and needs across guided weapons, ammunitions, aircraft structural integrity, military and civilian pilots and drone operators, robotics and autonomous systems and complex trials, testing and training. Our revenue profile is balanced between Australian domestic and global threat representation revenue streams. And we've delivered consistent annual growth over the last 5 years through strong organic growth and targeted acquisitions. Our breadth of core offerings, clear growth opportunities to increase and expand those offerings and our talent and degree of customer trust and intimacy positions us favorably in our markets. To give you an idea of what we do and how we do it, we've got an example from each of the 3 segments that make up the Australia business. First, we've got our advisory segment, and this is the foundation of QinetiQ's entry and performance in the Australia geography makes up about 30% of our revenues for this year. And within this segment, our major service provider contract is the major contract through which we provide specialist technical expertise and delivery of capability to the Department of Defense. There are only 4 major service providers which have this contracting relationship. And together are responsible for the majority of service provision and deep technical support. For QinetiQ, we are intrinsic to the delivery of capability across land vehicles, maritime warfare, guided weapons, explosive ordinance and aerospace surveillance and reconnaissance. And there are 2 really interesting decisions that the Australian customer has taken this year, which really open up the growth or continuing organic growth opportunity. First, the entire Department of Defense has been instructed to maximize the use of our major service provider contracts, which means we've got a good runway of organic growth and our current contracts were renewed for another 3 years earlier this year as well, giving us good stability and reliability in those revenue streams. Our Engineering segment provides a similar service to the Defense Science and Technology group oriented around technology, manufacturing and training makes up about 20% of our revenue profile for this year. And within this segment, our integrated engineering services contract is the primary delivery mechanism. It is a sole-source multiyear relationship between QinetiQ and the Defense Science and Technology Group who are responsible for all of the defense-related research and development in Australia and is -- has got the leadership responsibility within the AUKUS Pillar 2 Scientific and Technology Partnership Alliance with the U.K. and the United States. Our role within that arrangement is to actually operate many of the workshops that Defense Science and Technology Group relies on to build prototypes and testing that contributes to underwater warfare, submarine design, guided weapons, hypersonics, lasers and quantum computing. And finally, our global threat representation segment makes up about 50% of our revenues for this year. For those that are here, you'll be able to see some of those products actually out in the lobby, our Banshee and our Rattler high-performance aerial targets. But we've now got a short video to show you which you can explain what we're doing and what our current thinking is. [Presentation]

So within the Australian business, we actually face two quite different sets of market dynamics. Within Australia itself, there are a number of factors that are changing those dynamics, competition and creating new opportunities for QinetiQ. Within the last 2 years, we've seen the adoption of the AUKUS Trilateral Security Alliance as a clear response to the growing major power contest between the United States and China. AUKUS strengthens and builds upon a number of existing security and intelligence arrangements which is a natural extension of the quite special role that Australia has within each of those arrangements, whether it's NATO, the Five Eyes Intelligence Alliance between the United States, the United Kingdom, Australia, Canada and New Zealand or the quadrilateral security dialogue between the United States, Australia, South Korea and Japan. In parallel, the Australian government completed its defense strategic review in March this year, fundamentally rebalancing the priorities and budgeting for future capability for the decades to come. And the new priorities that this sets out for Australia are quite clear. In integrated air and missile defense, maritime warfare, including nuclear-powered submarines, and a more potent maritime surface force and cyber, information and electronic warfare. Within this changing set of priorities and financing, QinetiQ's offerings and proven performance in the United Kingdom and the United States are even more relevant for Australia's new needs and process. And by building on our proven, trusted and deep customer relationships within our advisory and engineering segments, we can rapidly offer and link those solutions from our United Kingdom and United States markets. This is a unique proposition that is opening up new growth opportunities for QinetiQ given that our 3 home market orientation is directly aligned to the AUKUS Security Alliance. Turning now to global threat representation. We are at a critical point in the role and changing nature of threat representation and its contribution to our customer's mission and need. Traditionally, countries tested and trained against single or small numbers of inbound targets, representing variously helicopters, missiles, fast attack boats or attack aircraft. Worldwide, we're seeing the rapid merging of technologies that are greatly increasing the complexity and the lethality of real-world threats. In the last couple of years, we've seen the introduction of low-cost and swarming drones, the use of autonomy and artificial intelligence, resilience to electronic warfare and increasing combination of crewed and uncrewed threats. In the coming years, we're already seeing the emergence of new threats such as hypersonics, lasers, cyber and information warfare to overwhelm and confuse. So over the last 5 years, QinetiQ has acquired a number of physical threat representation companies, QinetiQ Target Systems in the United Kingdom and Canada. QinetiQ Germany and most recently, Air Affairs in Australia. QinetiQ is integrating these companies into an integrated global live threat representation offering with the unique mix of piloted aircraft and sea and aerial drones. And this year, for example, we're also industrializing our United States operations to build and support some of these drones like the Banshee out in the lobby to open up and access the large and exciting U.S. market. These live threat representation offerings are complemented by the ongoing delivery and investment we have in the United Kingdom, and the United States market for virtual, synthetic and simulated threat representation, some of which you saw on the video a bit earlier. There is no other company with the global reach, live and virtual threat representation offerings and vertically integrated operating model to design, build and deploy these representative threats to both QinetiQ operated ranges and customer testing and range facilities. We have a clear ambition and plans to double the Australia business to more than AUD 700 million in the Australian and global threat representation markets. The adoption of the AUKUS Security Alliance and the Australian Defense strategic review have enhanced the areas within which QinetiQ can become an even closer, trusted and sovereign partner for defense capability testing, trials and mission rehearsal. That unique role performance and capabilities that we have available to us in the United Kingdom and United States perfectly aligned to the AUKUS priorities and security alliance, enabling QinetiQ to access and migrate with speed, trusted and required capabilities into Australia for maritime warfare, both nuclear submarine and surface warfare, integrated air and missile defense, including the associated investments in guided weapons and cyber information and electronic warfare. And with Australia as a respected and reliable security partner in the Indo-Pacific region, this provides a longer-term opportunity for how QinetiQ can support Australia and the United States and the United Kingdom into the region itself. With our threat representation, our integration of those global operations are creating synergies in a multi-domain crewed and uncrewed product and services segment, providing a strong foundation for future growth. We will complement this with new product offerings by coupling the live with our virtual, synthetic and simulated threat representation capabilities. We are confident that our continuing delivery performance, our customer intimacy in our strong AUKUS market alignment creates the leverage to grow above market rates and realize our ambition. Thank you, and I'll hand over to Carol.

Thank you, Gary. So in this final section of today's seminar, I will bring together what you've heard from my colleagues translating it into 4 key areas of our equity investment case. Specifically, our proven track record to deliver organic revenue growth at stable margins, our successful execution, integration and value creation of our disciplined acquisition and disposal strategy, our reducing capital intensity and increasing cash returns and our clear and robust capital allocation model. The first and most important pillar of our investment case is our strong, resilient and predictable organic growth. Over the last 4 years, we have achieved compound annual organic revenue growth of 9% from our core underlying businesses or 15% if we include the effect of our strategy-led and disciplined inorganic activity of 9 acquisitions and 4 disposals. This organic revenue has been achieved at circa 12% operating profit margin. We have made a conscious effort to drive towards larger, longer-term contracts, a few of which you've heard about today, which gives us great forward revenue visibility as demonstrated earlier by Sam. Today, we have shared with you our key growth drivers. On the 25th of May this year, we provided updated longer-term guidance that we will achieve high single-digit organic revenue growth, which is to be interpreted to be 7% to 9%. We continue to maintain this guidance. And today, we are showing that this longer-term guidance provides a path to organic revenue of GBP 2.4 billion in FY '27 and supplemented by optionally strategic aligned acquisitions. Simply put, we are setting out to achieve over the next 4 years, what we have proven over the past 4 years. We have a clear strategy, one company focused on 3 home countries with 6 distinctive offerings being delivered by an experienced leadership team. Our unique offerings are in high demand and give us competitive advantage. This sustainable performance will deliver year-on-year high digit -- high single-digit organic profit growth. So in summary, we will continue on our trajectory, a proven track record with a robust plan to deliver organic revenue growth to GBP 2.4 billion in FY '27 at stable margins. Capital deployment is evaluated consistently across both our organic and inorganic opportunities. All opportunities are evaluated using our simple 3-gate model being strategic fit economic viability, which primarily is delivering a return on invested capital greater than our WACC in the third year of ownership and deliverability. Our strategy includes the optionality to inorganically acquire capabilities that allow us to build greater scale and success across our distinctive offerings. Within the frame of ensuring that we appropriately deploy our capital to generate sustainable returns for our shareholders. This builds us from organic revenue of GBP 2.4 billion to circa GBP 3 billion in FY '27, which is also what we communicated in May. Over the past 8 years, we have invested approximately GBP 800 million in 9 acquisitions and generated approximately GBP 200 million via the disposal of 4 businesses and 9 sites from our property portfolio, demonstrating our disciplined assessment of our portfolio and relevance to the execution of our strategy. All acquisitions were funded by putting our balance sheet to better use in essence, from our highly cash-generative business model and proceeds from our disposals. Gary has shared his ambition to build a global threat representation business, which we have been building our capability in both organically and inorganically over the past 5 years. A case study that brings this to life and brings to life our discipline towards inorganic growth is the acquisition we completed in 2016 of the QinetiQ target systems from Meggitt for GBP 57.5 million. We committed at the time of this announcement that this acquisition would be highly cash generative and profitable. Earnings per share accretive in the first full year of ownership and generating returns in excess of our weighted average cost of capital within 3 years. I'm pleased to share that through disciplined execution and integration, this acquisition has delivered better than we communicated. Generating a return on capital investment of 10% in years 2 to 3 post-acquisition, a compound annual growth rate of 11% and has been margin accretive to the group. Overall, delivering our promise of a highly profitable and cash-generative business. This example is illustrative of our overall average return performance across all of our acquisitions. In summary, our track record demonstrates a thoughtful and disciplined approach to acquisitions and disposals with successful execution, integration and value creation from our acquisition and disposal strategy. This slide shows our capital intensity and free cash flow yield trajectory, metrics that have been improving over time. However, also an area where we have a slight nuance compared to our peers, particularly in relation to the long-term partnering agreement with the U.K. Ministry of Defense. I'll call it the LTPA, not to be confused with some other U.S. parlance. We have 2 types of organic investment, one which is used to sustain the growth of the company like any other organization. The other is what we have committed to as part of the LTPA, our only capital-intensive contract, which was a commitment of GBP 400 million of capital funding to modernize the U.K. Ministry of Defense's facilities and capabilities, which has a contractual recovery mechanism in excess of our weighted average cost of capital in exchange for securing the contract to 2028. The LTPA represents circa half of our annual capital expenditure with the peak reducing from FY '25. The other half relates to investment in our estate research and development and information technology, all of which is at normalized levels to deliver our growth ambition. The chart on this slide shows that looking forward, our capital intensity is reducing, and as a result, our free cash flow yields are increasing. Our business model is highly cash generative, and we expect that trajectory to continue, indicating that scale and in particular, organic revenue growth does matter, particularly as our capital expenditure begins to reduce. For those that are not new to our investment case, you will have heard me describe our clear and robust capital allocation policy. We have made 2 slight refinements to our policy that I'm sharing with you today further aligning our financial framework with our overall strategy. Our operating business delivers strong and sustainable growth and margin, which is supplemented by returns being generated on capital that has been deployed in the past. This generates impressive operating cash flow, which enables us to reinvest to compound our growth. The financial frame that governs our capital allocation is to maintain a prudent and optimal balance sheet. Whilst this has always been a feature of our framework, we have refined this by articulating this as the frame in which our capital allocation is governed and specifically drawing out the leverage, i.e. net debt-to-EBITDA range that we would sustain to execute our strategy. The forward visibility of our organic cash generation, coupled with our current view of the potential size and timing of future strategy-led and value-enhancing acquisitions, would result in our leverage not exceeding 1.5x over the foreseeable future. Within this frame, we apply discipline to pursue our 4 priority areas that deliver our required return hurdles. Firstly, we invest in our organic capabilities, which I previously described in relation to our capital expenditure, characteristics and profile. Our final refinement to the policy is the explicit articulation of our second priority to complement our organic capabilities with optional strategic acquisitions. This was previously grouped under our first priority. However, we felt that it was important to show this as a discrete and separate priority area. I've previously mentioned our track record in this space and James, Shawn and Gary have all mentioned how successful integration of acquisitions have benefited their total compound annual growth rates. Thirdly and fourthly, we proactively consider shareholder returns through a progressive dividend policy and through other means such as returning excess cash to shareholders. In summary, we have a clear financial frame that governs our capital allocation, and we actively continue to review our capital deployment across all 4 priority areas, weighing up the short- and long-term benefits to ensure that we continue to maximize value and returns for our shareholders. So bringing this all together, I'm reiterating the key financial highlights of our investment case. We are guiding to high single-digit organic revenue growth. We have achieved this before, and we are well placed to achieve the same again, aligned to many areas of the defense budgets with higher growth rates. This organic growth will be delivered at stable margins. And with the strategic U.S. and Australian focused acquisitions, this is expected to blend margins in the range of 11% to 12%. A highly cash-generative business with an asset-light business model ensures we can deliver an attractive return on capital employed. We continue to guide for modest cash outflow in working capital to support our growth but expect to retain full year cash conversion of at least 90%. Our ROCE will reduce modestly as we have the full year effect of last year's acquisitions, and we are targeting ROCE at the upper end of the 15% to 20% range. And finally, we are proud that we've been recognized so well in relation to our ESG commitments, and we continue to push ahead with all aspects of our E, S and G agenda, including driving towards net zero. In summary, as has been demonstrated by all of my colleagues, we are truly a unique company with attractive financial characteristics compared to our broad peer set. We are a company with an impressive track record and will continue to deliver organic revenue growth, margin, cash and returns as set out in our longer-term guidance. And with that, I will hand back to John to open the floor for questions.

Great. Thank you, Carol and team. So we've now got an opportunity for further questions. So as before, if you can give us your name and the company represents. We'll start in the room here, and please do use a microphone so people can hear you on the webcast. And then we'll go to the phones. And if you do want to ask a question from the webcast, please do use the phone line provided.

It's Richard Paige from Numis again. Question for you, Shawn, some great contract wins recently across the business. Could you give us a sense of what sort of pipeline or guaranteed, I hate to use that word phrase, but level of base level of contract visibility you've got over the next few years within the U.S. business?

Sure. So I think there are 2 questions in that. I'll talk pipeline first. So when I talk $2 billion qualified pipeline, qualified pipeline means we've identified the opportunity. We've assessed it as one that, given our current skill sets, core capabilities solution is viable and we're actually going to pursue it. Unlike if I give you the full pipeline, full pipeline is probably about $4 billion, right, of those that are still going through a gated process. So we have a business acquisition process that actually helps identify that. That pipeline is in the core areas. We have 4 business units that are aligned related to who we serve in that DoD market, DHS space, national security intelligence and then our fourth business unit that does the autonomous robotics mission systems that you see upfront across those platforms. So in each of those markets, they have both new opportunity on contract growth and then adjacent opportunity. And that's what we see in terms of what I would call qualified pipeline across the portfolio. In terms of backlog, which is the other piece and we've talked about, how do we talk about backlog. So all of those contract wins, for example, we just started in Q2 as well as what has come through the first half of the year are on contract unfunded backlog. In the United States, we have a base plus 4 in general, about a 5-year period of performance. And the option year is exercised 1 year after award barring anything different. You run that for 5 full years and at the end of the fifth year, you either get a contract extension or you go back into recompete. So we can see in terms of a backlog perspective, roughly about 60% of our portfolio going into next year is in backlog. Does that help?

And Rich, I'm going to ask Shawn a question as well. No, because I think the whole point of these investor seminars is about really getting clear understanding. And what Shawn just expressed is a very significant difference to how the U.K. Ministry of Defense contracts and the U.S. DoD contract or the U.S. government contracts. And it may have been in the footnote of our Q2 trading update, but we were very clear on the repeated twice $600 million of contract wins. I think, and Carol may correct me, only $137 million of that -- $169 million of that was actually booked in our Half 1 figure when we referred to 950. And therefore, you have a very different confidence level of backlog that isn't in our formal backlog. And I think maybe, Shawn, just add into your own words, the difference, but maybe the confidence level that those 5-year contracts based on our past performance and our current performance gives us because effectively, we have a much bigger backlog than you're actually seeing in our formal accounting. But maybe you could just add some confidence factors.

No, that's great. I appreciate that. So that -- not just the Avantus awards, and those were -- the 2 of those recompetes are highlighted. Those were legacy Avantus contracts, NGABS is a the legacy C5ISR, MTEQ for those who track some of the components to it. MTEQ [indiscernible], I'm just using for like-for-like last year went through the same process. Almost our entire book was up for recompete. 99.9% recompete win rate and so all of that win from last summer is also in our backlog. When you combine now the businesses, our DoD space really is very strong across all of the market components to it. The other areas that we have are in our intel organization where we have prime contracts we have customers shifting from where we are subcontractor on other primes, moving that into our prime contract vehicles and in those contracts. They don't tend to go as long as the DoD components to it, but having the prime contract allows you to have more control of your destiny. And then where we have additional, I would say, go get in the U.S. is our products business. So all of our robots contract vehicles in general, they are shorter in duration, but what you see is that they serve so many different multiple missions and different platforms. And that's the variety that you see outside everything from a small that can go for a Navy or Marine Corps customer up to a larger one that's more serving an Army customer, our international Army customer. We balance a bit of all of that across the whole of the portfolio.

One to Gary. The doubling revenue target for... I assume it's not all organic, what do you think you could do organically?

Well, that's the process we're going through at the moment. We've actually got a very clear runway for organic growth being a predominant part when we've spent the last 6 months looking at what AUKUS and the defense strategic review actually represent as generating new requirements and capabilities that the Australian customer hasn't had previously, nuclear-powered submarines, significant increase in investment in cyber and electronic warfare, creation of a guided weapons industrial base, which Australia has never built a guided weapon before. So there are these really key new segments where we've got across the QinetiQ portfolio a substantial contribution that we're already making in the United Kingdom and the United States. And so what we've been doing in the last 6 months has been mapping what we can bring forward in partnership with those government agencies to rapidly insert or orient for those new sectors. So it is a -- and those will predominantly be delivered through organic growth firstly but where scale or speed dictates that we need to bring in additional capacity or heft, we've got the ability to look at that as well through disciplined inorganic. But it starts from how can we build that capacity organically, how can we leverage the expertise we've got across our other markets and pull that through.

I think if I add to that, what you just heard from Gary is exactly what you heard from Shawn, the discipline and the focus on the organic growth. Hence, our clarity today on the GBP 2.4 billion organic growth based the platforms that we've created is a core focus. And I would add, because I'm sure we're going to get to this question about acquisitions. Our focus there exactly, as the team has said, is around discipline, first of all, with the strategy, our ability to get the right economics and then deliver incremental value through that particular asset. And just to reconfirm something that we've said before the United States and Australia are our primary focus for where if we choose to, we would deploy that optionality of acquisitions.

Thanks for putting today on. It's been great to see everything. Gary, when you were talking about growth, you mentioned there were 2 things that were accelerating growth. The first was that the Australian DoD had instructed people to use the service providers. And then I actually missed the second bit. So I don't know if you could elaborate on that.

So the -- we were -- it was the contract renewals for another 3 years. So all of the major service provider contracts were reaching expiry of their first period of performance, and they all got renewed this year as well to make sure that the Australian customer base has got access to those -- that expertise with confidence over the next 3 years as well as then the first decision of maximizing the use of those skill sets because they provide guaranteed access to skilled labor force to complement and build teams that can respond to those different needs. And that's going into capability in acquisition, which is the traditional use customer of those service provision contracts, but also into defense estate, joint capability and cyber and electronic warfare as an initiation point.

And Carol, you took us through the organic revenue growth in the last few years, but there have been a couple of things that have been weighing on the margin like the extra investment in people, which has been great to see and the extra sort of catch-up IT investment. Can you just walk us through as the revenue growth continues as you gave us the outlook? What are the puts and takes on the margin that will help or hinder your target to keep margins constant from here?

Yes. So we think, Tom, that we can deliver an 11% to 12% margin with a normalized level of investment that is now sustainable. I think we've heard from my colleagues about the building of the business development machine, the investment that we're making in IT capabilities and just broader R&D. That is now all baked in to our 11% to 12% margins. I think I'd raise another point that Charlotte alluded to in her first question, but we didn't answer, which is our protection against inflation. So we tend to have, through our contracting vehicles, 50% to 60% of our business is a people-related business. So it's wage inflation that worries me the most. And we have about 50% to 60% protection. And you would have seen that actually in our Q2 trading update, our LTPA variation on price order intake uplift to adjust for inflationary pressures. So not complacent, absolutely not. But we do have an ability. And I think, Sam, you even mentioned that we enter any year with 60% to 70% of our revenue undercover. So we do have some good forward visibility in terms of delivery of those stable margins in the 11% to 12% range.

Charlotte from Barclays. Question for Carol. So thanks very much for putting the leverage target of ceiling down effectively. I'm just looking at my numbers, and I've got you at sort of half a turn for 2024, which implies to go to 1.5x net debt to EBITDA you'd be prepared to take on another GBP 300 million or so. And you deleverage very quickly from the Avantus acquisition. So my question -- sorry, my question is really whether -- yes, you delevered very quickly from the Avantus acquisition. So in this sort of high interest rate environment we're in, given how cash generative you are, when you look at bolt-ons, would it not be more sensible to think about funding them through free cash flow? Or do you think the scale and the size of these deals will require debt as part of the transaction?

I'll answer that in a couple of ways, Charlotte, if I may. Firstly, it's not a target for us to hit 1.5x leverage. If we choose to organically -- inorganically invest. I'm saying our forward visibility has us in that window. So I'm not aiming to get there, yes. Secondly, I think I've demonstrated through our 9 acquisitions and 4 disposals that, that was all largely funded off balance sheet. We entered debt with Avantus for the first time in 10 years. So again, I think we are highly cash generative, and we are working at deploying our capital a bit better. I think that, thirdly, we've got a really robust and strict treasury policy in terms of ensuring up to 80% of our interest rate is fixed. We have a very nonspeculative kind of approach with the Board in terms of managing that, and we keep a very tight aim on that. And then the final thing I would say because I am quite braggy about it, as Shawn was: We -- when we did the Avantus deal, we said that we would be under 1x lever within the first 12 months of operation. We did it in 4, so again the use of our kind of cash generation in other parts of the business is helping us on managing our capital cash flow, capital allocation and associated cash flow.

So it's conceivable then that -- to get to your target in 2027, with acquisitions, that you may not be actually taking on any additional debt.

Could be. It depends on size, timing...

It depends -- size, timing. I mean I'd just like to add to reinforce because we have so many questions on this. Everything that Carol has just said is absolutely right. The 1.5x is not a target. We're just trying to help give some clarity about where we would see the limits, but the target is the strategy. It's strategy led. I think you've heard it from everybody in slightly different language. It's strategy led. It's got to hit the right economics and we've got to know that we can integrate and create value. And I think we really tried to clarify today, or confirm, nothing has changed on the strategy. Our focus is absolutely about organic growth. Carol changed, refined -- 2 refinements in the capital allocation policy to make that crystal clear if it wasn't already crystal clear. And I think that, just to help really illustrate the discipline point, we always have a pipeline of acquisitions that we're pursuing, that we're continuously reviewing in terms of long-term value creation for the company. And even in the last 6 months, for different reasons, there are 2 particular targets that we have walked away from, 1 based on margin, another based on just too high a price that we weren't prepared to pay. And I say that quite deliberately to make sure that our investor community knows that we really do live and breathe the policies that we set out and the description of our strategy that we set out. And I think Carol was very clear about the value that we have created through disciplined use of the balance sheet in support of long-term value creation for our investors. We have had a request to go to the phone lines. So it's great that there are more questions coming from the room, but I'm going to go to John. And we're going to bring in some of our investors that are on the phone. So John, over to you.

Thanks, Steve. We do have quite a few viewing this live. So David Farrell from Jefferies, if I could pass over to the phone line for your question. David?

I've got 2. Firstly, just for Carol, on the return on capital employed profile. Just wondering if you can maybe explain kind of what organically the U.S. and Australia looks like relative to the U.K., conscious that the U.S. and Australia are likely to outgrow the U.K. [ over the ] organic period to 2027. And then my second question is clearly, with targets, you've always got to set a date, but it is coincidental that the target is 2027. The LTPA expires in 2028. I'm just wondering, in terms of that LTPA renewal, if there's anything in there that might change the profile of the company beyond the current target period.

Great, thank you, David. I'll maybe -- do you want to start on the first one and a little bit on the second one? Then I'll add some comments on the LTPA, to finish.

Yes, sure. So return on capital employed and our investment hurdles are the same regardless of where we are investing either organically, inorganically; and regardless of anywhere in the world. So our key primary metric, David, is to ensure that all of our investments, organic and inorganic, return above our weighted average costs of capital within the third year of operation, so we don't make any distinction if it's an acquisition in the U.S. or in Australia. We are deploying a consistent kind of hurdle rate.

Do you want to start on the LTPA from a funding point of view? And I'll add.

Yes, sure. So LTPA, the long-term partnering agreement, with the U.K. MOD is a contract that is in operation until 2028. Steve will talk about where we're going with that. I mentioned just briefly today that we do have a CapEx commitment. It's our only capital-intensive contract, where we are deploying GBP 400 million. We've spent about half of it already in modernizing facilities and capabilities around the U.K. And we will see that CapEx kind of peak reduce from FY '25 as we run-out that contract in its current form to 2028.

Yes. And my builds are, I mean, a couple of points on 2028, nothing new that I haven't said before: David, whilst you bring up that the current contract extends to 2028, full confidence and great engagement with our customers that, that will extend at least another 5 years. And it's worth just describing why. I think Carol has just mentioned GBP 400 million of investment in the last 7 years into the LTPA, and that investment has achieved huge modernization. And the contract is performing exceptionally well, so our relationship and our outputs that we're delivering for our customer are going really great. And then if your next question would be, "Well, if you're confident on the extension, well, what is the further capital commitment?" one comment I would make before I sort of answer that would be, if you think about an estate that was underinvested, the GBP 400 million that's gone in over the last 7 years has had quite a significant amount of catch-up in terms of really establishing new and modern capabilities. And whilst there will be continued CapEx commitment for the future LTPA beyond 2028, we would expect it to, relative to the prior investment, be a slightly lower level and clearly all beyond the 2028 figures that Carol was mentioning on her presentation. So hopefully, David, that answers your question.

Yes.

So one more on the lines. And then I suggest we come back into the room. So George Mcwhirter from Berenberg.

I hope you can hear me all right. Just 2 questions on your threat representation business, please, just on Slide 27 of the presentation. You indicated about AUD 200 million in revenue from threat representation in FY '24, which I think implies quite a high rate of growth versus the FY '23 level. Please, can you outline, what level of growth do you think that business can achieve to FY '27, if possible? And just related to that, can you comment on the order book trends and order book cover in threat representation, please?

Okay, thanks. So the -- we've seen an increase in the use of the threat representation activities over the last 6 months. And part of that is the effect that bringing Air Affairs into the threat representation portfolio brings. However, we've also seen a number of our existing contracts either extend or increase through recompete and win. We've seen that happen in Germany. We've seen that in the changing dynamic between Canada and the United States in particular, where a number of the extant aerial threat service contracts are actually going through a retendering recompete. It's one of the reasons we're industrializing our U.S. sector to be able to increase capacity and supply into the U.S. market for the future. And we've just come off the back of Exercise Talisman Sabre in the -- in Australia, largest peacetime exercise and mission rehearsal bringing together Australia, United States Marine Corps, United States Navy and Japanese defense force and other nations. This year, Air Affairs actually supported Japanese defense force testing and trials in Australia. We're increasing the support we're providing to countries like Singapore and South Korea as well. So there's a growing demand and use of all of our threat representation services. And if we look into the next couple of years, there are new recompetes and new competitions happening in Germany, in the Indo-Pacific region that will -- where we're ideally positioned for that continuing growth and targeted organic investment to keep our products relevant and able to satisfy those wider missions.

Thank you, Gary. It's a great question, George, and I'm really pleased you ask them. A couple of builds. If you go back to Carol's description about our organic revenue growth: This is an area, by definition. We're going to have a blend of different revenue growths across different segments of the company. This is an area that would probably be at the upper, if not beyond, the net guidance, but I'd like to sort of come back to 2 or 3 fundamental points that your question illustrates. And the fact that we had some strategy-led acquisitions here means that we're really creating value by leveraging what we acquired with the capabilities that we already have, so when we look at the true growth in the company, there is mutual growth going on between the acquired companies and our core businesses. Let's say and take an example of test and evaluation in the U.K. So this mutually supportive growth that is coming from these acquired assets is important. And I think, if we go back to the first question-and-answer session, we started talking about AUKUS. It's a great example. And Gary has just given one illustration talking about establishing capability in the U.S. with a very large and growing market. It's another example of how we create value by leveraging our capabilities of product or service across borders with the nature of strategy that we have. So thank you, George, for the question. We're back in the room. We're back in the room.

[ We have ] question back there.

Whoever gets the microphone first. It's you.

Sure.

Byron Callan, Capital Alpha Partners. A couple of things. I just wonder if you could talk more generally about the budget environment. In the United States, we don't have a defense budget [ to do ] -- going to keep pace with the rate of inflation. We have a fair amount of dysfunction going on within Congress right now, just a little. How is it affecting the dialogue you're having with your customers? Are they looking for better effect at lower cost? I mean, are they really starting to [ read things ] here? And maybe also just on the whole issue of autonomy, particularly the vehicles, where do you think the army is and their thinking about this? What do they need to get over the hill to really get comfortable with having these in an operating environment? And how big an opportunity are they going to be for you guys?

Do we want to start with overall budget; and then migrate for your view of budget then build in autonomy, Shawn? Do you want to start, Sam?

Sure, yes. So I think there's a couple of dynamics at play, right? You've correctly identified that top line budget growth may in fact be outstripped by inflation. And that's why we really spend a lot of time focusing on what are the high-growth areas in that budget growth -- or in that budget. And those are in fact outstripping inflation and growing in some cases double digits. You've also seen just recently in the last couple of days President Biden has reiterated his support for things like AUKUS, throwing another $50 billion on the playing field, if you will, $4 billion or $5 billion of that which is designed around supporting the submarine industrial base, which is a direct hat tip to getting sovereign capability for nuclear submarines into Australia, which we're going to participate in through our U.K. businesses with the Australians and through our U.S. businesses. So I think, while you're correct that inflation is suppressing the opportunity, it's not necessarily suppressing the opportunity in the areas we're critically focused on.

[indiscernible] more about the trade-offs [ that may be made early in that topic ]...

Yes. And I think that comes right back to autonomy and AI sensors and information advantage, all right? Those are the places that are going to see the...

And maybe just before we flip to Shawn on that. I mean it is a good question. I remember when we launched this strategy. The U.K. defense budget was in depression and -- the few nods, right And people were saying, how on earth can you grow in a depressing market? And the answer is by having the right strategy and focusing on, to the point of your question, the sub-elements where there is high priority and high growth. So I think that again our track record of our strategy execution says that we understand those dynamics, which is why we can still grow, but Shawn...

Yes. So I think, great question. And we talked a bit during the break. We'll take an example of OMFV. OMFV [ as an ] opportunity originally thought, downselected 3 budget concerns, downselected to 2. I think the uniqueness, though, of our position is that, our capability in autonomy, our universal controller, it's applicable to whichever prime. And where you see us playing is really shifting from being platform specific to platform agnostic; and therefore, we benefit regardless, frankly, of that component to it. And that's a key piece. I think, the other side, I love the diversity of our business. So when there is challenges, for example, in the uniqueness of the United States government contracting field, where there is a potential threat of shutdown, over 80% of my business is mission essential. We support war fighters downstream. That funding does not get cut and that funding does not stand down. And those areas are areas where we are prime, special forces, our intel customers, where we are really in the heart of mission. I think that's really critical for us to try and get across in those components. On autonomy. The video that's playing, the robot combat vehicle light: A series of over 5, 10, years of work with a customer started as a concept in an OTA phase has moved through now the next downselect to Phase 2. We expect it then to go to full rate in about 18 months to 2 years, that competition to come out. What we see is, in particular, that customer has used that platform, if with manned and unmanned, in tests and saw results that they weren't even expecting, phenomenal results of being able to flank manned vehicles with unmanned, if you think about a lead-follow kind of situation. They're also thinking about how can they use that for its own situational awareness. If there's -- if you were at AUSA, you see there was a tethered UAS, for example. And so you now get to a multi mission with one platform that is unmanned that allows us to do a series of this component. We are right in the heart of that with the customer. We are leading that. We are recognized for that, as a leading industry. That is our prime work that our team has continued to go through, over $66 million in funding year-to-date with that part of the customer. And what we're doing now is saying, well, "Given that platform on land, well, what can we do and see UUVs? What can we do as you bring targets in, in air?" And really if you take that stack and worry less about the platform and more about the mission, that's where I see us moving forward. It's a very significant both pivot but also opportunity space across those 3 domains.

Next question?

Kevin Oro-Hahn with Saddle Point. I wanted to return to the earlier question about capital allocation. And Steve, Carol, you probably won't be surprised to hear this. I know we've talked about this some, but I guess, if I take as your assumption that you're trying to maximize value and returns, on your slide, I just want to ask you about priorities 2 and 4. And so priority 2, in terms of acquisitions, you have a hurdle rate something above your WACC. If I look at the sum total of what you said today and believe what you're saying, I don't think your stock price has kept up over the last 5 years with the value creation. And so on priority 4, there may be an opportunity there that's significantly better than your WACC. And so I guess my specific question is, if you believe that that's true, why wouldn't you vary your hurdle rate explicitly to express the value that may be there in buying back your own stock?

Who wants to go first? I'll go first.

Go ahead.

So first of all, one of your middle column -- comments, I completely agree with. And as you know, we've discussed this. And I'll -- our answer will be the same as we discussed before, but as Carol brought out -- 2 refinements of a capital allocation policy that is essentially the same. And she also said that we continuously and actively review our capital allocation policy as we're executing strategies, so as you alluded to in your question, we're absolutely about executing the strategy and maximizing value creation. And that's why we continuously look at it. In terms of option -- priority #2, real clarity that, that is around the complementary acquisitions and the optionality that we have from high-cash-generative business. And the reason for that refinement was not that it is changing our strategy, our focus on organic growth supplemented by acquisitions, but we wanted to make sure that it was clear and understood by everybody that it was a second priority. And in terms of your direct question about should we be considering a buyback, which is what the question is getting at: We're always reviewing and considering that, but when we look at our 4 priorities and we look at our strategy and we look at all the things that we're doing inside the business and -- we believe we really have the right balance of value creation and strategy execution for us at this point in time. Carol?

Yes. I think my build on that would be I'm quite encouraged by the compound growth that we have done through organically to back our strategy, right, in -- to avoid -- let's call it what it is, to not go into a share buyback at the moment. We still continue to look at it, but I think we've got more value to create for you guys as shareholders through continuing on our growth trajectory and executing our strategy. But definitely very active conversations at all levels of the organization consistently.

Other questions? Anything more online, John? Any more questions on anything from the first, second or anything else?

Sorry. And I hate to be a pain in the butt. And I feel like I crossed over the line here, but I guess, when I hear that, like, I don't completely understand. Like what I hear you saying in that is that actually you disagree with my view that you're trading at a significant discount to intrinsic value when you say that you don't think there's an opportunity in the stock. And so I just want to put a fine point on that. Do you agree or disagree with the fact that you may be trading at a substantially discount to your intrinsic value such that you could create more value by buying [ back stock ]?

I agree that we are undervalued, yes.

Okay, so if that's true, then I don't understand the follow-up point that you can create more value by making acquisition where the target is to hit WACC within 3 years, versus you could use that same cash to buy back stock and have, whatever that discount is, I think, significantly higher than your WACC at the current valuation.

Well, I think the answer is because we are trading lots of dimensions inside the company on multiple [ time frames ]. So your thesis is correct if that were the only independent judgment we're making, but we're making a judgment across a wide waterfront of different investment choices that we're pursuing, all at the same time on a multiyear basis. And I mean that's our judgment of active review and consideration on a regular basis. We can talk more about it over lunch, but I'm very happy to have these conversations because they're good questions to ask. And we take them very seriously internally as a team. Thanks, Kevin. Was that a sign to wrap? Any more questions before we wrap? Okay, well, first of all, thank you for joining our investor seminar today and for your engaging questions from online and also in the room. Genuinely, we hope that you really gained a better understanding of QinetiQ, a better understanding that our strategy is differentiated and we are a unique company to respond to the threats in the world. We are going to be around for a few hours, for those of you that are here in New York. We would love to showcase the capabilities that are outside. Particularly, there's an immersive zone, which you may not have noticed, which actually will really bring our cyber and intelligence business alive for you, so I would encourage you to go and enjoy that. And if you have any further questions, for those online, please do send them in. John Haworth, our lead for investor relations -- we would be really pleased to answer any questions that you might have got post today's seminar or in the coming weeks and months. So thank you. And for those of you here, please, let's enjoy lunch and continue the conversation. Thank you.