QinetiQ Group plc (QQ) Earnings Call Transcript & Summary

Good morning, everyone. Good to see you all here. So welcome to our interim results presentation, and good to see you here in the room and also those joining us live on the webcast. I'm John Haworth, group Director of Investor Relations, and I'm joined today by Steve Wadey, our Group CEO; and Carol Borg, our group CFO. As normal, Steve will run through the presentation, after which there will be an opportunity for you to ask questions. Thank you very much. Enjoy the presentation. Steve, over to you.

Great. Thank you, John, and good morning, everybody, and welcome to our interim results for FY '24. Thank you for joining us today. In September, I was delighted to announce that we had won a $224 million 5-year contract to provide systems engineering services for the U.S. Space Development Agency. Our contract supports building the SDA's next-generation satellite network launched from SpaceX's Falcon 9 rockets as shown in this picture. This critical capability provides the U.S. with enhanced situational awareness and missile tracking of the battle space. This contract is the largest competitive win for Avantus since our acquisition last year and is a clear demonstration of the value we are creating from a combination of Avantus and QinetiQ, and I'll cover more on this story later. I'd also like to thank our incredible people across the whole company. As the world continues to experience a heightened threat environment, they have continued to support our customers' operational priorities and delivered a really strong first half performance. And as a team, we have a robust customer-focused strategy and are delivering long-term sustainable growth. So the agenda this morning is as follows. I'll start by giving you the headlines, carol will provide a commentary on our financial results and then I'll come back and give you a strategic update. We'll then open up for questions. So let's start with the headlines. We've delivered strong and consistent operational performance across the company globally. Orders are up 19%, a record high of GBP 953 million and a book-to-bill of 1.3, demonstrating increasing demand for our distinctive offerings. Revenue is up 31% and profit is up 35% delivering excellent organic growth of 19% and 25%, respectively and improving margin to 11.3%. Cash conversion was 50% due to short-term timing effects and returns remain healthy with EPS up to 13.4p and an interim dividend of 1/3 prior year total. Beyond this impressive organic performance, our biggest highlight was Avantus winning $657 million of new contract awards. Whilst Avantus first half revenue was lower than expected due to the U.S. continuing resolution and competitor protests, the team have done a really great job integrating the business and winning these awards. This outstanding performance builds strong momentum to drive future revenue growth and demonstrates that the combination of Avantus and QinetiQ is creating a powerful platform to deliver for our U.S. customers. As a differentiated company, we have a clear strategy and a robust organic growth plan to deliver GBP 2.4 billion revenue at 12% margin by FY '27. Our strategy is underpinned by disciplined capital allocation and provides optionality to compound growth with bolt-on acquisitions to reach our long-term ambition of GBP 3 billion revenue. Our focus remains on supporting our customers' mission and increasing returns for shareholders in both the short and long term. We're on track to deliver our full year performance in line with market expectations. I'll now hand over to Carol to take you through our financial results

Thank you, Steve. Good morning, everyone. In this section of the presentation, I will provide more detail on our first half financial performance. Like Steve, I am very pleased with our results. We've delivered strong and consistent operational performance continued to deliver revenue growth at improved operating profit margins and are seeing the Avantus acquisition deliver through winning an impressive amount of new and recompeted business. Firstly, our key financial highlights. In the first half, we have delivered excellent order intake of GBP 953 million, growing 19% on a reported basis, demonstrating high demand for our distinctive offerings. Excellent revenue at GBP 883 million, growing 31% on a reported basis, up 19% on an organic basis, delivered through good program execution across all of our major contracts and the contribution of our acquisitions last year. We delivered excellent underlying operating profit at GBP 100 million, which represents 11.3% margin. I'm particularly pleased by the margin in the half, an increase on the first half last year and stable compared to last full financial year, demonstrating our effort to drive consistent operational performance. Underlying net cash flow from operations was GBP 72 million, resulting in a cash conversion rate of 50%. This cash conversion is lower than we have delivered in the past, but is merely short-term timing and is already reversing. Leverage is at 0.9x net debt to EBITDA. Underlying basic earnings per share of 13.4p is up 18%, reflecting increased profit offset by higher interest payments and increased U.K. tax rate. And with our focus on delivering returns, we have added return on capital employed for the first time in our half year results. Using a rolling 12-month profit, ROCE continues to remain attractive at 25.5%. And while it's not shown on this slide, I can confirm that an interim dividend of 2.6p per share will be paid. So overall, strong and consistent underlying performance in the first half, which is a good foundation to deliver on our full year expectations, derisking the second half. I will now provide further detail on our performance, bringing out our 2 operating segments, which just to remind you, in April, we renamed Global Products to Global Solutions to reflect the changing nature of that segment following the addition of Avantus last year. Orders. We have delivered excellent order performance in the period with orders of GBP 953 million, growing 19%, 2% on an organic consistent currency basis against a high prior year comparator. As we articulated at our investor seminar 3 weeks ago, we are highly relevant in high-growth market segments. Some of these segments are evidenced by the orders that we have won in the half, namely GBP 190 millions of orders under the Engineering Delivery Partner framework and a GBP 39 million battlefield communication program in the U.K. and significant new awards in the U.S. Order performance by our integrated acquisitions has been impressive. As Steve has already outlined, we have won contract awards totaling $657 million in Avantus since the start of the financial year, booking $195 million in our first half orders as per our prudent order recognition policy. It is pleasing to see continued growth in overall backlog figure up to GBP 3.1 billion as at the end of September, particularly with growth continuing outside of our LTPA contract. Our orders won and backlog demonstrate our unique value proposition and high demand for our distinctive offerings. Revenue. We have delivered excellent revenue at GBP 883 million, growing 31%, 19% on an organic consistent currency basis. This revenue growth has been driven by 4 main factors. Firstly, the strong orders won last year flowing into revenue across all of our major contracting frameworks, including EDP and LTPA. Secondly, operational requirements have driven some short-term taskings. Thirdly, with our contracting terms, the impact of inflation has benefited revenue growth. And finally, inorganically with the addition of our recent acquisitions of Avantus and Air Affairs. The investment we have made in recent years into our business winning capabilities across our 3 home countries is delivering results, driving this impressive level of continued organic revenue growth across the group. It is pleasing to also see good revenue cover. We start the second half with 92% of our full year revenue guidance under contract derisking our full year delivery. Underlying operating profit. We have delivered excellent underlying operating profit at GBP 100 million, which is 11.3% margin. This represents an increase of 35%, 25% on an organic consistent currency basis. I'm pleased to see improved margin with good margin performance across both our segments, demonstrating our effort to drive consistent organic operational performance. The improved margin continues the momentum that I have previously guided, in particular. In EMEA Services, profit has grown, reflecting excellent revenue growth at modestly higher profit margin. In Global Solutions, profit has grown with margins increasing towards double digit. And inorganically, our acquisitions achieved good margin in line with our expectations with Avantus maintaining double-digit operating profit margin. Now turning to the segmentation split of the group performance. First, we have EMEA Services. EMEA Services has delivered significant year-on-year growth continuing to demonstrate success in our strategy to win and deliver larger, longer-term contracts. We've increased orders by 4% and revenue by 23%, both on an organic basis. Our largest orders in the half were GBP 190 million of EDP orders, a GBP 39 million battlefield communication program renewal and a GBP 54 million variation of price contract on the LTPA to reflect inflationary impacts. Revenue growth has been particularly strong year-on-year and in line with the second half of last year, demonstrating our relevance in high-growth market segments. Operating profit margin has seen a modest increase to 11.8% demonstrating strong and consistent delivery performance. EMEA Services delivered a good book-to-bill ratio of 1.2x, excluding the LTPA and has a funded order backlog of GBP 2.7 billion, giving us good forward revenue visibility. Next on to Global Solutions. Global Solutions combines our world-leading technology-based products and services. On an organic basis, orders and revenue have been broadly flat. Our largest orders in the half were a $51 million aircraft launch and recovery system award and an $84 million full production contract for the next-generation advanced Bomb Suit of which $34 million has been recognized in the half. We achieved an impressive book-to-bill ratio of 1.4x and grew our funded order backlog to GBP 0.4 billion. Whilst Avantus' first revenue -- first half revenue was slower than we expected due to the U.S. continuing resolution and competitive protests, we are really pleased with the recent contract awards and momentum. The combination of Avantus and QinetiQ is creating a platform that gives us great confidence in the future growth of this business in the second half and beyond. As I have previously communicated, we have been driving improved margins in this segment. Operating profit has been strong with margins improving 150 basis points to 10%, reflecting good margin stability in the U.S. and higher margin products in our threat representation and niche intelligence businesses. Cash. Cash flow management remains strong. But as guided at our Q2 trading update, cash conversion in the first half was lower than prior periods due to short-term timing. We delivered underlying net cash flow from operations of GBP 72 million, which compared to the excellent underlying operating profit, resulted in a cash conversion of 50% due to timing of contract receipts and payables. We are already seeing this reversing. And therefore, I am confident that we are on track to deliver full year cash conversion of at least 90% in line with guidance. As outlined in our recent investor seminar, we have a clear and disciplined capital allocation policy that provides the financial frame to deliver our long-term strategy. We have deployed GBP 47 million in capital investments to support our future organic growth. After distributing GBP 31 million in dividends and an increase of GBP 26 million in lease obligations from entering into new long-term property arrangements in both the U.K. and the U.S., this has resulted in a closing net debt position of GBP 274 million. This is equal to leverage at 0.9x, well below our recently communicated maximum leverage guidance of 1.5x. We continue to maintain a rigorous approach to the deployment of our capital, enabling delivery of our long-term strategy to compound and accelerate growth and shareholder returns. My final slide is the outlook slide, articulating our guidance, which is consistent with what we have previously guided. FY '24 in line with market expectations. We entered the second half with confidence, a healthy order book and positive momentum with 92% of revenue under contract. We confirm that our full year performance will be in line with market expectations, which I have set out in the footnote of this slide. We expect to deliver high single-digit organic revenue growth and high teens reported revenue growth at stable operating profit margin. Capital expenditure is expected to remain within the GBP 90 million to the GBP 120 million range. Longer-term guidance unchanged. As we articulated at our investor seminar, our long-term guidance reflects the financial expectation arising from the delivery of our strategy, which remains unchanged. We remain on track to deliver our exciting ambition to build a company of GBP 3 billion of revenue at 11% to 12% margin by FY '27. And with that, I'll now hand back to Steve.

Great. Thank you, Carol. So as I highlighted at our recent investor seminar, the world is experiencing the most severe threat environment for a generation with conflict escalating in Eastern Europe and the Middle East as well as growing tensions in the Indo-Pacific. Within this geopolitical context, we are a differentiated company with a unique value proposition. In response to the threat, we deeply partner with our customers to rapidly create and experiment with new capabilities, test those capabilities are safe and perform as intended and ensure our war fighters are trained and operationally ready to use those capabilities. We are a horizontal integrator, helping our customers accelerate through this critical capability life cycle to counter the threat with agility and pace. We are a purpose-driven company with a customer-focused strategy. Our purpose is to protect lives by serving the national security interests of our customers. This has never been more relevant. Our strategy has 3 interrelated components delivering 6 distinctive and mutually supportive offerings by applying disruptive and innovative technology in business models and leveraging those capabilities across our 3 home countries of Australia, the United Kingdom and the United States. Our customers need to respond to the enduring and increasing threat and the formation of AUKUS trilateral partnership underpins our strategy and makes us highly relevant. As the global security context continues to worsen, the threat dynamics are driving national security policies, prioritization of budgets and modernization of capabilities. The changing character of water and the widening threat spectrum evidenced by the current conflict in Ukraine and Gaza is demonstrating a major shift in our customers' response to neutralize such threats. NATO is expanding its membership and strengthening its defense capabilities, and as I've already mentioned, the formation of the AUKUS partnership. Whilst the global economic outlook remains challenging, top line defense and security budgets are growing. These budgets need to accommodate inflationary pressures and difficult capability choices from short-term stockpile replenishment through to long-term modern deterrence. As a result, our customers are reprioritizing their budgets and seeking efficiencies through greater innovation and technology-based solutions. As I described at the investor seminar, we are structurally aligned with these market dynamics and focused on our customers' high priority and high-growth segments, which is why we are outpacing the market. Examples, comment to all 3 of our primary customers are research and development and test and evaluation known as RDT&E, Advanced Cyber and autonomy. This is why we have delivered 9% organic revenue growth over the last 5 years, approximately double the rate of growth of national defense budgets and 15% total growth including strategy-led acquisitions. The successful execution of our strategy and the relevance of our value proposition have driven this strong track record and will enable us to grow sustainably into an addressable market worth more than GBP 30 billion per year. Our strong performance has been achieved by significantly improving our customer focus and upskilling capabilities to win and deliver programs critical to national defense and security. In the first half, our U.K. defense sector continued to deliver strong performance across all major contracts and support our customers' operational priorities. EDP delivered significant benefit to our customers and secured GBP 190 million of new orders, including work on the new AUKUS submarine. The LTPA delivered NATO's first multi-domain Formidable Shield exercise testing the Alliance's response to the world's most challenging ballistic missile threats. And in partnership with the Royal Navy, we demonstrated an advanced live synthetic collective training capability for the Carrier Strike Group, positioning us well for future maritime training opportunities. Our U.K. intelligence sector also delivered a number of major outputs for our defense and security customer. The team delivered key milestones on the society contract 3 months early, to accelerate the production of mission data and improve the protection of all U.K. platforms. We developed a T&E environment for an AI demonstrator of cyber resilience for military equipment and networks. And in partnership with our intelligence customers, we delivered a new national exercising capability to enable training and mission rehearsal in the cyber domain. This sector continues to deliver impressive revenue growth consistent with its track record as described by James Willis, our Chief Executive at the investor seminar in New York. Last year, we achieved a step change in our global platform with 2 strategy-led acquisitions to strengthen our capabilities and extend our customer base, Avantus in the U.S. and Air Affairs in Australia. In the first half, our U.S. sector made significant progress. We transitioned N Gaps to full-scale production by winning an $84 million contract to supply 700 next generation Bomb Suits to the U.S. Army. Avantus achieved strong recompete performance, winning 6 out of 7 major renewals. The 2 biggest being the SDA contract that I mentioned earlier and $127 million contract with the DOD Strategic Capabilities Office. Both are 5-year contracts to provide systems engineering and mission support with significant on-contract growth. And in total, so far this year, Avantus has won $657 million of new contracts, a record high for the business. Whilst first half revenue was lower than expected, these major wins build momentum to deliver strong growth in the second half and beyond. We have also identified new opportunities worth an additional $1.5 billion over the next 5 years, driven by the combination of capabilities and transformed market access. I'm excited by the progress that we're making, expanding our customer base and creating a disruptive mid-tier business in the U.S. Our Australia sector has delivered strong performance. We've secured a 3-year extension to our MSP contract and $158 million of new orders for engineering services on land systems and explosive ordinance programs. Air Affairs saw a 24% increase in flying hours on our JATTS contract, including support to the international Talisman Sabre training exercise involving 13 nations and 30,000 military personnel. And finally, demand continues to rise for our global threat representation products and services with Air Affairs, QinetiQ Germany and QinetiQ Target systems, delivering a combined 17% revenue growth. Through disciplined execution of our multi-domestic strategy, we are coherently building an integrated global company with a strong track record of organic and inorganic performance. As Carol described earlier, investing in our business-winning capability has enabled us to win larger, longer-term programs, growing our backlog to more than GBP 3 billion and increasing our future orders pipeline to more than GBP 10 billion. We have fundamentally shifted our focus on to major national programs and are regularly competing for and winning GBP 100 million-plus contracts. By building on our partnering approach and leveraging our scale, we will continue to win larger programs and drive future organic growth. I'd like to give you an insight into 4 of our significant opportunities. First, I'm delighted to share some fantastic news. We have signed a Principles Agreement with the U.K. MOD to jointly explore how the LTPA services are sustained and modernized beyond 2028 to enable next-generation military capabilities such as directed energy weapons as shown in this picture. Under this agreement, we are pursuing the contract option for a 5-year extension, subject to negotiation and approval and securing our long-term role as MOD's strategic test and evaluation partner until 2033. With our focus on AUKUS, we are leveraging these unique T&E capabilities to create new opportunities in Australia across multiple domains. The most immediate need is to enable the Australian nuclear submarine program launched as part of the AUKUS partnership. In the U.K., we are also leading a strong industry team to win the Army collective training services program worth more than GBP 1 billion. The differentiated skills and capabilities of our team will modernize training through better use of technology and transform Army readiness. And finally, in partnership with Oshkosh in the U.S., we have successfully completed trials of our robotic combat vehicle known as RCV Light positioning us well to compete and win the $500 million production phase. Building on our successful performance and long-term visibility, we have a robust and sustainable organic growth plan to deliver GBP 2.4 billion of revenue at 12% by FY '27. Underpinning delivery of this organic growth plan is our disciplined approach to capital allocation. investing in our strategy and building our global platform for long-term sustainable growth. Creating a culture for our people to thrive is critical to our performance. We've increased employee engagement and invested further in our long-term reward strategy to retain and recruit the best talent, growing our company to more than 8,500 people across -- during the course of the first half of the year. We have also introduced a new long-term incentive plan for our top 300 leaders fully aligned with our strategy to drive sustainable performance and increase shareholder returns. In response to today's threat environment, our people are supporting our customers' operational priorities. They are focused on creating innovative solutions that directly respond to these priorities by leveraging our products and skills across the company. An example of this is establishing a U.S. final assembly and test capability for our [indiscernible] targets to support future U.S. customer demand. We continue to invest approximately GBP 20 million per year in advanced technology to maintain our relevance at the forefront of innovation. Whilst we've more than doubled the size of the company over the last 7 years, we continue to invest in strengthening our capabilities consistent with our long-term ambition. We are maintaining rigor in our bidding and program management to ensure we continue to deliver excellent organic performance. In addition, we have a disciplined approach to our acquisition pipeline to grow our global platform coherently and deliver an attractive return on investment. We have evidenced this recently by walking away from a couple of deals that did not meet our returns criteria. Our strategy is underpinned by our capital allocation policy previously covered by Carol to drive both our organic growth and provide optionality for bolt-on acquisitions to reach our ambition of GBP 3 billion revenue by FY '27. So stepping back, we have a robust investment case. Our company is focused on our AUKUS customers' mission and aligned to structural growth markets with our value proposition uniquely relevant to the enduring and increasing threat. We have a track record of delivering Strong operational performance and a robust business plan underpinned with a normalized level of investment to deliver sustainable growth. Underpinning our success is our focus on our customers and our people. By continuing to execute this strategy, we will achieve our longer-term guidance, as shown on the right of this slide, delivering high single-digit organic revenue growth at stable operating margin. As an asset-like company, we will maintain high cash generation and deliver attractive returns on capital employed. Through disciplined use of our balance sheet, we have optionality to compound growth with acquisitions that drive synergies. ESG remains at the heart of our strategy in all dimensions and for all stakeholders. We're well positioned for long-term sustainable growth with increasing returns for shareholders. So, in summary, I'm incredibly proud of the people who have provided outstanding support to our customers and achieved a strong first half performance. We've delivered a record order intake of GBP 953 million with a book-to-bill of 1.3, growing revenue organically by 19% and improved margin to 11.3%. As the world continues to experience an increasing threat, our offerings are uniquely relevant and needed by our customers to counter the threat. Avantus has transformed our customer access in the U.S. and delivered excellent orders performance with $657 million of new contracts. We have a robust organic growth plan to deliver GBP 2.4 billion revenue at 12% margin by FY '27. And this year, we're on track to deliver in line with market expectations. With a strong track record and robust strategy, we remain focused on achieving our growth ambition and increasing shareholder returns. In summary, we're a differentiated defense and security company successfully delivering long-term sustainable growth. Thank you. And Carol and I'd be happy to take any questions.

[Operator Instructions]. Let's start in the room.

Sash Tusa from Agency Partners. I've got a number of questions. Firstly, I'm a bit puzzled by the Global Solutions revenue growth, flat, organic so stripping out the effect of Avantus. But the threat simulation business is up 17%, which implies that the remainder of the business was down quite significantly. What am I missing? And if that math is broadly correct, what are the problems with the rest of the business?

Should I start off, Carol? So I think the first thing, I'm very comfortable sharing this openly. We did have some disappointing news in the U.S. in -- at the end of June when we didn't secure a position on the optionally manned fighting vehicle program. So OMFV was one of the very large programs that we were on 2 of the teams and the U.S. Army was going to win 3 awards. We were confident that we would have won 1 out of those 2. And the outturn of that competition was that the 2 teams that were taken through were neither of the teams that we were on. So that did create an impact in our U.S. business, which we haven't been able to recover on during the course of the half. But that said, the team is working extremely hard, and we have won other contracts, examples being the N GAPs contract that we referred to, the CVN-81 contract. There are 2 significant contracts that give us a long-term foundation. We have other opportunities that we are working on that business, and we'll see some of that come back for the full year and beyond. And examples of future growth would be the robotic combat vehicle light program, that I mentioned and also the digital vision night technology program. So you're right, Sash, to point out that aspects of Global Solutions did very well, but we did have some depression in revenue in our legacy U.S. business, predominantly due to the loss on the OMFV program that will recover from. So that's the primary reason. But Carol, would you like to add? .

No other than the incumbent also lost in OMFV. So BAE, which was widely publicized, we were with BAE on that.

Yes, that's great. And then second question about cash flow. The working capital outflow was bigger than our forecast, but that's really my problem. But to what extent does this suggest that your cash -- and clearly, you had very strong comps last year as well. But to what extent does this suggest that as you start or continue to undertake larger longer-term contracts, the milestones impact on cash flow is going to be much more lumpy. And should we start to expect your cash flow to have a much greater H2 SKU than perhaps it's had previously?

I can take that one. Yes. So Sash, as you know, all businesses have cash flow differences between the half and a good example is the timing of, for example, tax payments, RDEC in P&L and cash comes in later. So those factors plus the timing of our customer billing milestones did have an impact on the half. But as I said, we are already seeing the impacts of that reverse, so which is why I'm confident that we'll maintain our full year guidance. But to your point about larger longer-term contracts and cash profile, we have a really rigorous approach to ensuring that our contract delivery remains cash flow positive throughout, in fact, operationally, any projects that go into a cash flow negative position need to get independent approval by myself. So whilst we are going into longer, larger contracts, we still maintain our discipline of ensuring that it is -- that each project in its own right remains cash flow positive throughout the life cycle of delivery.

But sorry, just to clarify for me. Should we expect it to become more of a norm that the cash conversion is lower in the first half and higher in the second half, perhaps because -- particularly because of the RDEC payments particularly.

Yes.

Charlotte Keyworth from Barclays. You've mainly answered my cash question actually, but just as a very small point of clarity. On that working capital outflow, I mean you all mentioned it's short term and it's timing related. Is there anything in there in terms of customers paying slightly later than expected, not related to sort of time milestones?

There is a little bit in there. We've actually had 1 of our customers upgrade their accounting software, which has resulted in a little bit of a delay. We've caught that back. That was in Australia, actually. So I don't -- there is something around milestone delivery and billing. There is something a little bit about our customers' ability to pay that. But more importantly, as you said rightly, Charlotte, it is a timing issue. We are seeing the reversing effects of that, we're holding our full year guidance.

Okay. And I suppose, given the share price reaction this morning, and it probably is related to cash from the conversations I've had, how can you give investors confidence other than this beginning of reversal that your free cash flow is going to be as expected.

Well, what I would add is that our underlying program delivery is sound. And the biggest driver is program delivery. Carol has described the reasons why there was some short-term timing effects. But revenue is strong. Revenue for the full year is strong. The cash is reversing, as Carol said, and would be back in line with full year guidance.

Sam Burgess from Citi. Just want Carol, actually on Avantus Stage 1 revenue growth slightly weak due to the continuing resolution and competitor protests. Obviously, the budget outlook is still looking quite uncertain. But if a budget deal is reached, would you expect to recoup any of that lost revenue in H2? Or is your confidence in the full year really based on growth in new orders?

Should I start?

Go ahead.

So I think, Sam, I mean, we put in our trading update that we had had some delay in awards and the 2 primary reasons were the continuing resolution and the process. I think we're seeing this more as a shift to the right. So we're going to have a strong second half compared to the first half, so we're going to see growth. But I think revenue this year will be slightly lower than we originally expected. That's also a factor with us maintaining full year guidance in line with market expectations today. But I think the main thing to take away is that Avantus is really performing as a business. I mean we have totally transformed our position in the United States. We've got a strength of capabilities. Hopefully, you all clocked in my narrative. It's not just the $657 million of contracts that we've won, all of which are multiyear, 3- to 5-year contracts. But we've also, in the last 6 months, identified new opportunities beyond the individual pipelines of Avantus and our legacy business worth $1.5 billion over the next 5 years. And that was the whole logic for the acquisition that it fits strategically and we could create value through the combination. And that will drive revenue growth through the second half and beyond. So I understand why you'd be asking about the short-term effect of a slightly short on revenue. But I think overall, we're really delighted with the business. We see it as a really strong platform now that's going to drive growth in line with our original expectations.

That's great. just 1 for you, Steve, just on the capital allocation. I know you had a question on this at the CMD, but I mean I suspect you and I agree that the company is at least 30% undervalued. That feels like a pretty easy value creation opportunity for investors relative to acquisitions at relatively high multiples in the sector at the moment. Does it remain a live option when we think about buybacks? Is that something the company would keep under consideration?

Yes. I mean I'd start with saying we've got a long-term strategy to build a company through the organic growth with optionality for acquisitions. And I think you can see over the last 7 years, the strategy has really worked. It's really relevant to the market, and it's really working with our focus. In terms of capital allocation, look, we have a really robust and disciplined policy. We're constantly reviewing all of our investment options. But right now, as I said, in New York, we're investing in this strategy and we're building the platform. The focus is on organic. I mentioned in the narrative earlier, our pipeline is healthy on acquisitions. We're continuously engaged with companies and looking out options. We demonstrated our discipline recently, 2 that we've walked away from in the last 6 months. Shareholders should be pleased to hear that. We hold our returns criteria as a really strong component of our discipline around acquisitions. Remember, our discipline has got 3 primary principles strategic fit, economics and ultimately, long-term integration and delivering the returns that we expect. So -- and the 2 that we walked away from personally, quite frustrating because they certainly met the first 2 criterias, but we weren't confident on the last. So we withdrew. So I think that our discipline is there around capital allocation. Great investment going into the organic growth that you can see coming on. It's a long-term strategy, and we've really made the right judgments for our shareholders for long-term returns.

It's George McWhirter from Berenberg. Just on the U.S. budget, it looks like you might be facing a slightly longer continuing resolution this year. Can you comment on which areas of the business in the U.S. might see greater disruption or less disruption than others, if that were to materialize?

So first of all, last year, it was very long. So we'll see whether this year is longer or not than last year's. But a couple of points to make. And first of all, the fact that we've now got $657 million orders. We've actually got really good cover for the year with the guidance that we've given on U.S. performance within our full year guidance. So I think we've covered to a very large degree, that risk that you've mentioned. But the business is very different than, say, a year or 2 years ago. We've got much more volume. And we've also got many more programs that are just not contracted but they're with customers that really would continue to perform throughout that period. We've got a large component of intelligence-related contracts that really are not going to be subject to impact through that continuing resolution. So I think the backlog, the way that we've considered the risk in our full year forecast, and the nature of what we're doing really gives us much more resilience to that market dynamic this year -- and let's all hope it's much shorter.

It's Sash Tusa again. I've just got 2 follow-up questions. You talked about your acquisition discipline and walking away from 2 acquisitions. Was 1 of those ESG Electrotechnic in Germany?

I'm not.

That's right. That's delightfully clear. And then...

Nothing else I can say so.

No, no, it's fine. It's good. Second question...

Can ask me another company name.

No, no, no. I'm not going to play Bingo, don't worry. I wonder whether you could just talk about the U.K. Intelligence business a bit. You talked about that having grown at a compound annual growth rate of 28% over the last 4 years. I wonder whether you could just sort of tease out a bit. How much of that was market growth, i.e. the U.K. government is just spending more on intelligence out or contracting out more on the intelligence than it was. How much of that was share wins? Are you taking business from other people? And then how much of that might have been you just can do more than you could 4 years ago. So your market opportunity is bigger.

So first of all, I'm going to make a plug for our investor seminar that we did 2 or 3 weeks ago in New York. Because at New York, we brought 3 of our chief execs of sectors over to unpack the capabilities and the performance of, first of all, the U.K. intelligence sector, Secondly the U.S. and then thirdly Australia and global threat representation. And I'd really encourage you to go on to the website and sort of watch it. James Willis...

I did it, that's why I'm asking.

I'm talking to everyone, Sash, not just you, but because the reason why is that probably for the last 4 years, we've had lots of questions about our U.K. intelligence sector to try to understand it. And I think we've talked often about our main defense programs in the U.K., not a lot about our U.K. intelligence. And that was why we unpacked it at the seminar. In terms of your specific question, I'd say the vast majority is the latter of your 3 categories. So clearly, intelligence budgets are growing at a good rate. So yes, you can get some support from that. But predominantly, if I go back to the origin of this strategy, we really weren't focused on the customer need. We were not teaming to build our combined capabilities and pursuing long-term contracts. And I think really, it's the combination of our strategy. Yes, on market that is growing well that has really created a very impressive performance and track record. And as mentioned, we've seen that performance in the first half of this year continue and be consistent with this track record. So I think it's more the latter.

Richard Paige from Numis. Just a couple from me, please. EMEA Services, the line that in treatment is the operational requirements, with in terms growth given current global threat environment, should we expect that line to reappear a few more times potentially. And then on to that, just the rebalancing of that business across first half and second half, which obviously is your full year guidance points to? And then secondly, the slide on 20 that orders pipeline, big step change for this in FY '23. Just in [indiscernible] you've got -- you've grown the business overall, but wondering about your win percentage rate as to whether you believe within that orders pipeline. Was it still using the same lense on that?

Yes, I'll cover the pipeline. Do you want to cover EMEA?

Can do. Do you want me to go first?

Yes.

Yes. So I'll take your first part -- the second part of the question first, Rich, if I may. So we've gone out very deliberately to drive strong and consistent performance and balance our hubs a little bit better, and that was really evident this year. So traditionally, we've driven around 46% of our full year revenue in the first half. This year, it's closer to 48%, 49%. So again, we're trying quite hard and deliberate to show stable and deliver stable performance, and we get that through the diversity of our program mix and project mix across the organization. So I think you can read into that. Yes, there has been a deliberate effort to drive that stable margin and revenue growth more consistently through the halves. And then in terms of your first question around EMEA Services performance, yes, it's been really strong. It has been aided by inflationary impacts pickup in the LTPA contract. We've delivered fantastic revenue on the back of the really strong order intake last financial year that we've seen come through. And we have seen some modest, I might say, operational tasking requirement. So, if I was putting those 3 categories in order and probably go orders, inflation, new tasking in terms of kind of sequence and impact. I hope that addresses your question.

Yes. And on the pipeline, I might just sort of take an opportunity to make some sort of broader points, Rich. I mean, first of all, let's step back, and you know this, but over the last 7 years, as part of this strategy, we've really fundamentally changed our business winning capability to be really focused on customers to be really looking at partnering industrially to have complementary capabilities. And then really look at how we can add value on much larger long-term programs. You've seen that radically change our backlog over this period of time. I was just looking for Carol's slide, where even in the half, you can see if you exclude the underpinning framework of the long-term partnering contract, you can see that volume of backlog go up quite considerably. So that validates that the strategy and the approach to business winning is really, really strong. When you look specifically at Slide 20 that you've mentioned and you look at that pipeline, that pipeline chart is exactly the same chart that I used in May. It's not changed in the half. I'm referring to the full year at the end of FY '23. And there were 2 reasons for that significant step-up from '22 to '23. So first was the inclusion of Avantus pipeline, yet before we've done any of the work on what I just mentioned in answer to the previous question where we've now identified a further $1.5 billion. And secondly, the general refresh where we were looking at the next wave of larger, longer-term programs. So those were the 2 reasons for the step-up that we reported in May. And my prediction will be that it's why we've sort of unpacked, trying to give you an example. We've gone through a period where we've probably gone from winning when I joined, we were celebrating GBP 1 million contract successes. We then shifted to GBP 10 million, and we're now up into the GBP 100 million and beyond. And that's why I put these 4 on here to give you the scale of type of programs, not instead of but on top of our business winning performance. And then to finish with your specific question about our performance on that pipeline. Probably on average, I would say, on incumbent work that's included in this pipeline, we're sort of well over in 90% win rate. And on true new competitive business, we're probably averaging around 30%, which is strong performance given that we've come from a pretty much standing start 7 or 8 years ago. And then my final point to talk up the pipeline, this obviously is a prudent qualified pipeline that we would be confident to share in the marketplace. It's not a full disclosure of our total pipeline and all of the opportunities that we're pursuing. And the reason why we focused on it today is to just reinforce to all of our shareholders and prospective investors that focused on organic performance.

[Operator Instructions] We've got a first question from David Perry at JPMorgan.

2 or 3 questions, they're all on the same theme, if I may. About Global Solutions. Carol, I apologies if I missed it, but do you have an Avantus organic growth number for H1? The second question is just trying to reconcile to the full year guidance that you've got out there. Can you help me with the organic growth you expect in H2 by division would be amazing, but if not at the group level. And then I'm just trying to work out how big, third question, how big this contract or these 2 contracts were that you didn't win on OMFV? Because they look like they must have been very significant. And are there other large contracts you have that there's not a guarantee that they progress forward to the next stage? .

Do you want me to take the third one Carol?

Go on.

P I mean, David, in every business plan, it goes straight to the question that Rich was asking about when you move into competitive winning. You don't win all of them, an on optionally manned fighting vehicle. The Army was going to proceed with 3 contractors and we were on BAE Systems team, the Incumbent and Oshkosh. And we were confident and assumed in our business plan, that we would win 1 of those 2 deals. And the U.S. Army chose to only take forward 2. And those 2, which were General Dynamics and Rheinmetall, were neither of the 2 teams that we are on. So that was, in our mind, a really prudent judgment in our business planning. And it turned out not to be the case. I think that's the nature of business. And yes, the assumption of the volume that we would have assumed in our legacy business on -- from OMFV was considered, and it was the primary driver, as I answered the question earlier for the lower-than-expected revenue in the U.S. And that is the answer to why in Global Solutions whilst we're sort of flat overall on an organic basis, we had some lower performance and reduced revenue on the legacy U.S. But stand fast at, that is a short-term effect of that particular order. What's really important is we have a solid business. We have a really healthy pipeline and we're going to continue to sort of grow through the rest of the year and into next year. So that is the reason why you see the Global Solutions effect down to that order. And as I mentioned earlier, it's also why -- 1 of the reasons why we're maintaining our full year guidance where we're maintaining it. So Carol, back to you.

Yes. So in the spirit of going backwards and David's questions, I'll answer the full year guidance question. So at a total group level, just to kind of remind everybody, our half 2 performance last year compared to our half 1 performance last year, grew organically 25%. So whilst we have articulated today an impressive half-on-half organic revenue growth of 19%, we have maintained a flat growth compared to half 2 last year. So based on what -- at the group level, what we're predicting or what we're being very transparent today in terms of maintaining our full year guidance at average consensus, which to put it in the room is [ 1 8 6 8 ]. We believe that our organic growth rate will be about 9%, half-on-half, blending in at the high single digits across the full year. So I hope that answers that question. With respect to Avantus and in terms of just kind of giving that a bit more color, let's reiterate what our message has been today. We did have slower-than-expected growth in Avantus. We have some great contract awards that gives us momentum into the future. And we believe that our half 2 on half 1 revenue growth for Avantus will be in the range of 15% to 30% in terms of half-on-half. And that combined platform that we've created with Avantus, probably fair to say, Steve, but I think either Avantus or QinetiQ could have won these awards in theirselves independently. It is the combination of the 2 that has created a great platform for growth, which gives me confidence that we will deliver in line with our expectations for Avantus from second half and beyond.

And I'll just sort of add reinforce a couple of different dimensions what Carol said. I think of $657 million of Avantus awards is equivalent to nearly 2 years of revenue that we've effectively got ready to load in our backlog. That is a really strong achievement so far this year. Carol is absolutely right. Neither Avantus or QinetiQ legacy team could have won those awards independently, it's only come from the combination. And referring to that combination, I mentioned that we've really identified some really significant opportunities that we see, and again, being prudent here of GBP 1.5 billion over the next 5 years. And I hope that there'll be something positive on your screens on Monday. So, this is moving in a good direction.

Am I allowed an annoying follow-up?

Of course you can, David.

You went -- Carol went a little fast for me. And you kind of talked half-on-half, which it's hard to follow. Just year-over-year, so H2 over H2, you make a good point that your last year's H2 was very, very strong. But year-over-year for H2, what is the organic growth you're expecting? .

3%.

Sorry, sorry, say again.

3%.

3%. And that's for both divisions? Or is there a spread?

I'm talking of group numbers, David.

Okay. And for Global Solutions in particular?

Dave, I'd be more than happy we can have a chat afterwards, and we can give you some more insight than that. But at this stage, group number's 3% half-on-half. It depends where you are really. I'm not trying to avoid the question. It depends where each analyst is in terms of their Global Solutions pitch.

And if I could also add, Carol. I mean, Carol made a point, David, which I think we need to reinforce. We've been really driving consistency in delivery of our operational performance back to a whole debate about delivering our big programs. So the smoothing of our halves is something that we've really worked on across our whole leadership team. And I think, Carol, you mentioned that the second half this year, based on our guidance, it will be 12% growth compared to the first half. That's impressive growth -- and compared to last year, what Carol just said about the half-to-half performance comes back to high single-digit organic year-on-year and high teens total growth year-on-year. So these are really impressive growth figures when we look at our full year performance.

So I think we have no further questions in the room. Any final remarks, Steve?

Yes. Great. Thank you. If you got any further questions, please follow them up with the IR team or for those in the room, happy to stay and answer them now. Thank you.

Thank you.