QinetiQ Group plc (QQ) Earnings Call Transcript & Summary

Well, good morning, everybody, and welcome to the QinetiQ Full Year 2024 Results. So my name is Stephen Lamecraft. I am the Interim Group Director of Investor Relations. And I'm joined with our Group CEO, Steve Wadey; and our Interim Group CFO, Heather Cashin. What we'll do is we will start off with the run-through of the presentation with Steve and Heather, and then we'll go to Q&A. Steve, over to you.

Thank you, Stephen, and good morning. Welcome, everybody, to our results for FY '24. Thank you for joining us here today. I'd like to start by thanking our incredible people. The world is experiencing the highest threat environment for a generation and our teams across the world have worked in partnership with our customers and suppliers to deliver a strong overall group performance. The conflicts in Ukraine, the Middle East, and rising tensions with China are driving significant changes in modern warfare. As a consequence, our customers are increasing spending in critical areas of technology and innovation to stay ahead of the threat. With our partner, Oshkosh, this picture shows our robotic combat vehicle system undergoing testing and experimentation at Fort Irwin in the summer last year. This next-generation autonomous system will increase situational awareness and military effectiveness for the U.S. Army against future threats. Innovation and cutting-edge technology is what we do. Our mission-critical services and products are highly aligned with national defense and security priorities. We have a clear strategy delivering enduring value for our customers and shareholders. Our agenda today is as follows: I'll start by giving you a year in review. Heather, our interim group CFO, will provide a commentary on our financial results. She was previously our Group Financial Controller, and we've worked together for over 6 years. Heather is providing continuity until Martin Cooper joins at the end of the summer. Finally, I'll come back and give you our strategic outlook. We'll then open up for questions. So first of all, our year-end review. Let's look at our 3 key headlines. First of all, I am really pleased that we have delivered strong group financial results for FY '24, modestly ahead of our guidance, which have been achieved against the background of more difficult market conditions in the U.S. Secondly, we entered this year with strong momentum and increasing spending in our major markets, which gives us confidence to increase our guidance for FY '25 compared to our result for FY '24, and underpins the delivery of our GBP 2.4 billion organic revenue at approximately 12% margin by FY '27. And finally, with a strengthened balance sheet and an enhanced focus on disciplined capital allocation, we have optionality for additional investment in growth and further shareholder returns. In summary, we are well-positioned and have a clear strategy to deliver attractive returns and create sustainable shareholder value. Moving on to the financial highlights. We've achieved a record order intake at GBP 1.74 billion, with a book-to-bill of 1.1 and a strong order backlog. Revenue is up 21% through good program execution, up 14% on an organic basis. Operating profit is up 20% with a stable margin of 11.3%, up 16% on an organic basis. Cash performance remained strong with high conversion at 104%, reducing our leverage from 0.8 to 0.5x. We delivered continued strong earnings growth, with underlying earnings per share up 11% to 29.4p. Return on capital employed was maintained above the upper end of our guidance at 21%, and we're increasing the growth of our progressive dividend from 5% to 7%, with a full-year dividend for FY '24 of 8.25p and launched a GBP 100 million share buyback program. I'll now look at our performance in each of our operating segments. EMEA Services delivered excellent revenue growth at a stable margin driven by the execution of high prior-year orders and responding to our customers' immediate needs. We achieved a number of significant operational milestones. Our program to accelerate the production of mission data and improve the protection of all U.K. military platforms delivered 3 months early. We demonstrated our world-leading laser-directed energy technology with the first firing against aerial targets in the U.K. This system is now being accelerated onto Royal Navy warships from 2027. And in Australia, we successfully integrated the Air Affairs business, which is performing well with 20% more flying hours and 90% more aerial target missions than originally planned. We also made strategic progress on our long-term contracts. In Australia, we secured a 3-year extension to our major service provider contract, winning $87 million of new orders for critical land and munition programs. We are on track to secure the long-term partner agreement, 5-year extension through to 2033, continuing in our role as U.K. MOD's strategic partner for test and evaluation and our engineering delivery partner contract delivered significant benefits for our U.K. customers with GBP 472 million of new orders, including commencing work on the new AUKUS submarine. These are just a few of many highlights where we are delivering critical capabilities for enduring national and defense, and security priorities underpinning our sustainable growth. Global Solutions continued to be impacted by a difficult U.S. market due to one of the longest and deepest continuing resolutions on record. Revenue was lower than expected at a stable margin. Within this context, we achieved a number of significant milestones. We offset the planned ramp-down of the CRS-I robot program by delivering the highest-ever production levels of our aerial targets. Our ban sheet target was certified for the U.S. market, opening the door to significant opportunities to leverage our capabilities globally. And whilst Avantus declined over the whole year, the business did achieve modest growth in the second half with double-digit margin and 100% cash conversion. Importantly, Avantus won $977 million of awards, achieving a funded book-to-bill of just over 1.2 giving us good revenue visibility for the years ahead. Our most strategic achievement was fully integrating Avantus to build our U.S. platform and leverage market opportunities. The benefits of integration are now being realized, demonstrated by winning $1.3 billion of total contract awards in the U.S. Our largest U.S. orders were three 5-year programs that provide high-value engineering services and mission support for the space development agency, strategic capabilities office, and the Tethered Aerostat Radar System known as TARS for Homeland Security. TARS is a really great example of a contract that would not have been won without our integrated U.S. platform, and all of these 3 programs have significant on-contract growth potential. In addition, we have strengthened our business development team who have qualified a multibillion-dollar pipeline of opportunities that are directly aligned with the new U.S. National Defense strategy. With the integration of Avantus complete, our U.S. business is well-positioned to drive synergies and deliver a significant contribution to our sustainable growth over the coming years. I'll now hand over to Heather to take us through our financial results.

Thank you, Steve, and good morning, everyone. Firstly, our key financial highlights. In FY '24, we've delivered a record order intake of GBP 1.74 billion, growth on a strong comparator last year. This demonstrates continued high demand for our distinctive offerings. Strong revenue at GBP 1.91 billion, growing 21% on a reported basis, delivered through good program execution across all our major contracts. Good underlying operating profit from segments at GBP 215 million, growing 20% on a reported basis at a consistent margin of 11.3%. And high levels of cash conversion at 104% contributing to leverage falling to 0.5x. Underlying basic earnings per share of 29.4 increased by 11% due to our excellent operational performance, offset by a higher effective tax rate in the U.K. and interest expense. And finally, return on capital employed, we're pleased to see another year of strong performance marginally ahead of our guidance, delivering 21%. So overall, a strong group results in FY '24, which is a good foundation to deliver our future ambition and guidance. Moving on to orders. We've delivered a good order performance in the period against a strong order intake last year. In FY '23, we booked the 10-year Maritime Strategic Capability Agreement, or MSCA, for GBP 260 million. This was a significant in-year one-off. Organically, orders declined 10% year-on-year. Excluding the MSCA, orders grew 7%. Order performance of GBP 204 million from acquisitions and disposals includes the contribution from our Avantus and Air Affairs, and the disposal of Space NV on a comparative basis to the prior financial year. For FY '24, including the impact of acquisitions, order growth was 19% for the year, excluding MSCA, and 1%, including the MSCA. If we look to the charts on the right, at the top, we can see orders won by size. We continue to book orders on both smaller and larger contracts. Given our larger U.S. footprint, we've expanded our disclosure in line with normal U.S. practice. In the U.S., orders are won and subsequently, funding is released. We booked the funded amount in each year in the orders number. The box highlights contract awards for which funding has not yet been appropriated or authorized. An example of this is the TARS contract that Steve mentioned earlier. The total contract was $170 million. We booked $16 million in FY '24 and the remaining contract value we expect to be funded by the customer and booked in future years. The chart on the bottom right highlights that we closed FY '24 with a strong funded order backlog of GBP 2.9 billion with an additional U.S. unfunded backlog of GBP 0.8 billion, bringing the total to GBP 3.7 billion. The U.S. and funded backlog and the overall book-to-bill of 1.1x give us great visibility into our future growth. We've delivered strong revenue of GBP 1.9 billion, growing 21% or 14% on an organic constant currency basis, demonstrating increasing demand for our 6 distinctive offerings. This has been driven by increased delivery across our EMEA services major contracting frameworks. Global Solutions was down GBP 11 million, which I'll come back to later. Acquisitions and disposals are shown as partial-year contributions to give an accurate year-on-year comparison. This reflects the comparator contribution from Air Affairs, Avantus, and the disposal of Space NV. As the chart on the right highlights, we end FY '24 with 64% of our FY '25 revenue under contract compared to 61% at the same point last year, helping to underpin our confidence in the year ahead. The U.S. unfunded orders of 6%, represent contract awards, which are expected to be funded in FY '25. We've delivered strong underlying operating profit from segments at GBP 215.2 million, which represents an increase of 20% or 16% on an organic constant currency basis. This is an 11.3% operating profit margin, consistent with our guidance range of 11% to 12%, demonstrating sustainable revenue growth at a stable margin. The largest contributions to year-on-year growth with the full-year impact of the Avantus acquisition and organic revenue growth at stable operating margins within EMEA Services. On the right, you'll see a table reconciling underlying operating profit from segments to statutory operating profit. If I take these one by one, income from research and development expenditure credits, or RDEC, increased in FY '24 due to an increase in the rate paid from 13% to 20%. Amortization of intangibles has increased year-on-year, reflecting the intangibles acquired through Avantus and Air Affairs. Acquisition costs have reduced and in FY '24 are primarily driven by the integration costs for Avantus and Air Affairs. We expect this number to be significantly lower in FY '25 as we focus on organic growth. The digital platform represents a discrete multiyear investment project to enable our global growth strategy and our AUKUS customers' needs. We expect approximately GBP 35 million of additional costs over the next 3 years, which will fade through to completion. The cost here reflects the implementation costs previously accounted for as CapEx before the SaaS accounting changes. All recurring costs such as licenses and maintenance are reported within the underlying cost base. Within other, in FY '23, we also reported a one-off adjustment pertaining to the decision from U.K. government to allow companies to keep the RDEC benefit. This does not repeat in FY '24. Now turning to the segmental split of group performance. First, we have EMEA Services. Orders saw 7% growth, excluding the impact of MSCA, when including MSCA, orders saw a 13% decline. We secured GBP 1.2 billion of orders, including GBP 472 million from the engineering delivery partnership framework. We also achieved a variation on price uplift on the LTPA, an extension to our Battlefield and Tactical Communications and Information Systems or BATCIS contract, and significant multiyear aerial training targets to the services contract in Germany. Revenue growth was strong at 20%, driven by our U.K. sectors, which were underpinned by execution of the EDP framework and inflation uplifts. Operating profit grew in line with revenue at 19% and margins remained stable at 11.5% in FY '24. I EMEA Services has a funded order backlog of GBP 1.4 billion, excluding the LTPA, and a book-to-bill ratio of 1.04x compared to 1.17x, excluding MSCA in FY '23. Next on to Global Solutions. Total orders grew 56%, driven by the full-year contribution of Avantus. Orders grew 7% on an organic basis. As explained earlier, strong U.S. unfunded orders of GBP 578 million support our confidence and visibility in Global Solutions. Global Solutions overall saw a 23% revenue growth with a small organic decline of 3%. As Steve mentioned earlier, we were impacted by the continuing resolution in the U.S. and a planned ramp-down in projects coming to an end. Global Solutions, excluding Avantus, delivered broadly flat revenue due to the decline in revenue from the CRS-I ramp-down, offset by the highest-ever production levels in QinetiQ target systems. Avantus saw a high single-digit organic revenue decline over the course of the year and a modest revenue growth in H2 versus H1. Despite these headwinds, we've delivered double-digit operating profit margins of 10.5% with double-digit margins in both Global Solutions and Avantus. We have a strongly funded backlog of GBP 321 million, further supported by our unfunded backlog from contract awards not yet authorized and appropriated. Our book-to-bill ratio of 1.1x and Avantus' book-to-bill ratio of 1.2x gives us confidence heading into FY '25 and beyond. Now, if we move to cash, we've delivered excellent underlying net cash flow from operations at GBP 320 million, materially ahead of guidance, which equates to a cash conversion ratio of 104%. This cash conversion is as a result of our strong underlying cash performance and continued focus and discipline on working capital management. We've invested GBP 96 million in capital expenditure, investing in infrastructure improvements and capability enhancement. GBP 37 million of this relates to investments in the LTPA, reduced from the prior year. The LTPA CapEx is funded through the contract, which means that although QinetiQ funds upfront investment, it is paid back through depreciation over the life of the contracts. A key component of delivering our strategic ambition is to have a robust financial framework which ensures efficient use of our balance sheet. Our net debt position improved from GBP 207 million to GBP 151 million through the year as we saw a strong cash conversion and working capital management, particularly in the second half. In FY '24, we also returned GBP 62 million to shareholders in the form of dividends and buybacks, with GBP 16 million of the GBP 100 million buyback being executed during FY '24. We continue to see a buyback as being a compelling component of shareholder return. Following a year of strong cash generation, prudent investments in the business, and the introduction of the share buyback program, we're pleased to end the year with a leverage ratio of 0.5x, an improvement from 0.8x last year. This gives us flexibility for growth and enables the potential for future shareholder returns. Following this strong set of results, we're increasing our FY '25 guidance and are on track to deliver our FY '27 outlook. We enter FY '25 with strong momentum, a healthy order book, and increased visibility with 64% revenue under contract. We expect FY '25 to deliver high single-digit organic revenue growth compared to FY '24 at a stable operating profit margin. We are on track to deliver GBP 2.4 billion of organic revenue at approximately 12% margin by FY '27. This will deliver an attractive return on capital employed at or above the upper end of the 15% to 20% plus range. Cash conversion will remain high at 90% plus with capital expenditure within the GBP 90 million to GBP 120 million range. Our strength in balance sheet provides optionality through the disciplined deployment of capital for bolt-on acquisitions to compound growth at 11% to 12% margin and further shareholder returns. Thank you. Back to you, Steve.

Great job, Heather. Thank you. So now let me take you through our strategic outlook. The world is experiencing the highest and most rapidly evolving threat environment for generation. Russian forces remain entrenched within Ukraine. In the Middle East, the Israel-Hamas conflict is ongoing and tensions continue to rise with China. As a result, Australia, the U.K., and the U.S. are increasing spending over the long term and focused on developing next-generation capabilities and having greater collaboration. In the U.S., the defense budget for research and development, R&D, and test and evaluation, T&E is the largest ever at $145 billion. The U.K. and Australia have committed to approximately 2.5% of GDP with the U.K. increasing R&D to more than 5% of a growing defense budget. Their evolving capability and investment priorities are driving increasing spending to build resilience and achieve technological superiority in our areas of strength. These areas include R&D, T&E, training and mission rehearsal, and cyber and intelligence. Our strategy and unique value proposition enable our customers to rapidly create, test, and use capability to stay ahead of this threat. By aligning our distinctive offerings to their areas of high-priority spending, we are well positioned to continue to grow sustainably into our addressable market worth more than GBP 30 billion per year. Within this geopolitical context, we are a differentiated company driven by our purpose, protecting lives by serving the national security interests of our customers. This has never been more relevant. Since launching our strategy in 2016, we have been building a disruptive and integrated global defense and security company, uniquely relevant to modern warfare. Our track record has been achieved through the disciplined execution of our strategy to ensure we build our global platform coherently with sustainable growth and attractive returns. We have increased revenue by more than 2.5x, stabilized margin, and doubled earnings. By focusing on our customers' needs and partnering with industry, we have on larger, longer-term programs, expanding our revenue visibility and securing an order backlog of GBP 3.7 billion, including GBP 0.8 billion of U.S. unfunded backlog, as Heather described earlier. We also have an exceptionally robust pipeline of future growth opportunities with more than GBP 11 billion over the next 5 years. A current example is the entry into the U.S. market with our differentiated threat representation capabilities. Our strategy and distinctive offerings are uniquely relevant and aligned to our customers' needs, underpinning confidence in our ability to continue delivering organic growth at double the rate of national defense budgets. In order to stay relevant for the long term, we remain focused on building our global platform to deliver for our AUKUS customers and their allies. In April, I made 3 key appointments to our leadership team: Martin Cooper as Group CFO; Iain Stevenson as Chief Operating Officer; and Will Blamey as Chief Exec U.K. Defense. These changes strengthen our capability as we continue to scale and grow globally. In delivering for our customers, the single biggest contributor will be our people. We've made significant progress creating an environment where they can all thrive with our highest-ever level of employee engagement. To stay at the forefront of cutting-edge technology and innovation, we continue to invest approximately GBP 20 million per year in research and development aligned to their customer priorities such as trusted AI. To deliver for our customers and generate even greater returns for our shareholders, we leverage our skills and products across the company through collaboration. A great example is the transfer of our unique T&E skills from the U.K. to build sovereign T&E capability in Australia. Last month, our AUKUS customers began consultation with the industry on new regulations to support greater pooling and sharing of their resources by improving the exchange of technology and information. Whilst these changes will take time to come into effect, there will be a significant shift for our industry. The investment in our digital platform that Heather described earlier, will enable us to benefit from these changes by increasing collaboration to create more value for our customers and support further growth. The fundamentals of our strategy are robust, enabling our AUKUS customers to deliver their evolving capability and investment priorities. Let me give you 4 examples where their priorities shown on the left, are driving increasing spending in our areas of core strength. R&D, T&E, training mission rehearsal, and cyber and intelligence. The proliferation of drones, as we've seen in Ukraine is driving the need for laser-directed energy weapons with low cost per shot and unlimited resupply. These next-generation systems are as a result of long-term R&D into disruptive technologies as seen by our pivotal role in the DragonFire program. Capability modernization such as the new Australian submarine program is driving the need for state-of-the-art physical and digital T&E to share information and assure sovereignty, leveraging our world-leading role in test and evaluation. The need to maintain an operational edge requires training and mission rehearsal against highly representative threat scenarios. As a global leader in airborne training and targets, we are seeing increasing demand. Finally, modern warfare requires an edge in cyberspace to enable superiority in the battle space. As an embedded partner of scale in the U.K. and now also in the U.S., we have a critical role to support our defense and intelligence customers with our cyber and data intelligence solutions. Building on our successful performance and increasing relevance to our AUKUS customers' mission, our strategy is on track to deliver GBP 2.4 billion of organic revenue at approximately 12% margin by FY '27. Our strategy is underpinned by our enhanced focus on disciplined capital allocation and execution. As a highly cash-generative business, we deploy our capital consistently with our policy to deliver value-accretive investments and attractive returns for shareholders, whilst maintaining a prudent balance sheet. During the year, we've decided to increase shareholder returns. In January, we launched a GBP 100 million share buyback program, which is on track. And today, we've announced an increase to the growth of our progressive dividend from 5% to 7%. In the near term, our priority for capital deployment is to execute our organic growth plan. We continue to invest in our people, technology, and capability to enable our AUKUS strategy, including delivering U.S. growth from our newly integrated U.S. platform driven by Avantus synergies. Finally, our strengthened balance sheet gives us optionality for additional investment in sustainable growth and further shareholder returns. Stepping back, we have a clear investment case, which is unchanged. 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. By continuing to execute this strategy, we will achieve our guidance, as shown on the right of this slide, delivering high single-digit organic revenue growth at a stable operating margin with high cash conversion and attractive return on capital employed. We are well-positioned for sustainable growth with compelling value creation for our shareholders. So in summary, as the world continues to experience the highest threat environment for a generation, I'm incredibly proud of the outstanding skills and capabilities of our people working in partnership to enable our customers' mission. Building on our excellent track record, we have delivered a further year of strong group financial results. We enter FY '25 with momentum and increasing spending in our major markets, giving us the confidence to increase our guidance and underpinning the delivery of GBP 2.4 billion of organic revenue at approximately 12% margin by FY '27. With a strengthened balance sheet and an enhanced focus on disciplined capital allocation, we have optionality for additional investment in sustainable growth and further shareholder returns. In summary, we're well-positioned and have a clear strategy to deliver another year of growth and compelling value for our shareholders. Thank you, and Heather and I would be happy to take any questions.

Thank you, Steve. Thank you, Heather. So we'll start with questions in the room before we go to questions that are online. [Operator Instructions]

Sash Tusa from Agency Partners. I wondered if you could just talk about cash flow and particularly where the beat came compared to your expectations. Is it reasonable to think that because your performance in terms of your performance -- your revenue performance at EMEA Services was better, a disproportionate amount of the extra cash came because of that? Or is it more broadly split between the 2 divisions?

Okay. Maybe I could say a few words and then Heather happy to be. I mean, I think if you just look back over history, Sash, we've actually had strong cash conversion. It's one of the fundamentals of the business, which I think is well-regarded. And I think we've been consistent in delivering high cash conversion over many years. Our rolling guidance is always at 90% plus. But I think this year, we delivered 104%, last year, it was 106%. So yes, a beat to our rolling guidance but just based on our consistent and rigorous program management and cash management. So nothing different to just good solid program execution in my mind. But Heather, do you want to add anything on segmental?

I think -- I mean, we manage our cash on a group basis. I think you'd expect rather than looking particularly segmentally. I think all business units continue to contribute to cash performance on a very strong basis.

Does that answer your question, Tusa?

Not really. I think I may have phrased it wrongly. Cash flow was very, very tilted to the second half, so I wondered what changed in the second half and where did it change the most?

Yes. I think over the whole year, there was no change. It's consistent with our track record. I think in the half, yes, we were down at the half. And I think we said there was just some timing issues around some program deliveries and some cash receipts. So I think as we said at the time, there was no concern or worry to be had at the half, and I think we've just proven that out. And I wouldn't expect any fundamental repeat of that in future years. We have got consistent delivery in our programs, and we'd expect our normal split half to half.

Okay. So the first half of this last year was very much a one-off.

That's exactly the way to think about it. Sorry, I missed the point of your question.

Richard Paige from Deutsche Numis. A couple from me, please. First of all, U.K. Intelligence's contribution within a really strong performance of media services stepped up again. Could you just give us a bit more on that and outlook there? And on the -- by the same token on the U.S., lots of moving parts within their CRS-I roll-off Avantus and what's happened ultimately in FY '24 and what the outlook is within the U.S., particularly, obviously, post the continuing resolution roll-off election year, please?

Two simple questions, how long have you got?

I am trying to think of a difficult financial one for Heather.

Okay, Rich. Well, if you have got one, can you say it now so she can think about it. Well, first of all, I mean, if you go back to our Capital Markets Day in New York, and we had James Willis, our Chief Exec for U.K. Intelligence on the stage, I think we started to reveal a lot more about our U.K. intelligence sector. I can't remember exactly the number, but it's a 20-plus percent growth in its period or over the last 5 years, sorry. And I think that team in U.K. Intelligence is doing a really great job. It's really, as I said in my presentation, embedded both with our defense customer and our Intel customer, some really strong programs delivering further momentum, specific that I mentioned was what's called the society's program where we're transforming the production and mission data for all U.K. platforms, and that program is doing exceptionally well. So I think the underlying position that we have got in our U.K. Intel business is exceptionally strong. In fact, if I bridge from that to your second question, if you actually step back and think about U.K. Intelligence and U.S., and you may have noted, I used the phrase yet, and we now have an embedded position in the U.S. If you actually add up our Intel business in this similarity between U.K. intelligence and what we do in the U.S. with something of the order of GBP 900 million plus of our revenue is what you might want to call a data intel -- or cyber and data intelligence business or C5ISR, which have terminology you want to refer to. So we are now big in both the U.K. and the U.S. And I think that as you grow in scale, maybe some of the sort of high rates that we've had at 20% plus organic growth, will peter out. But with 2 strong embedded positions, we'd expect that to really underpin the sustainable growth that we've got within our outlook and really give us confidence in the contribution to the GBP 2.4 billion organic growth through to FY '27. Maybe specifically on the U.S. comment and gives me the opportunity to expand a little bit about what happened in the year. I mean, I think we all recognize and we've discussed openly that Avantus was lower than we all expected. And I think we addressed that in the first half results. A large factor in that was, as I said in the presentation, a longer and deeper continuing resolution than a very long period of time and one of the longest on record. But the business has done really well. And the team there has worked really hard. Avantus secured, as I said, $977 million of total contract awards. You can effectively think that it worked through a recompete season and one, all bar, one I believe, of its recompetes. That creates a really strong foundation. With that backlog, it ended with a book-to-bill, as I said, just over 1.2. The second half grew on the first half modest growth in the second half versus the first half. And with that backlog and book-to-bill that I'd mentioned, now establishes Avantus back on its trajectory, mid-single digit, as Heather said in her presentation for the year we're now in, and back to double-digit in '26 and beyond. So Avantus really sort of integrated and now on its growth trajectory. And I think now we need to look at it completely as an integrated U.S. platform. We have a really strong team. We strengthened the business development team during the course of the year that I mentioned. We have a really clear strategy, 4 primary revenue streams that are directly aligned to the U.S. National Defense Strategy. The first of those revenue streams is really what we would call persistent surveillance. The TARS program is a brilliant example of that. As I mentioned in the presentation, there is no way that our Avantus in its own would have won that program. The U.S. team couldn't have it part of the combination, the power of the combination, really enabled us to win that program. And whilst our guidance, I would say, if the U.S. is prudent, if I take that example, and I mentioned on contract growth, we can see on that particular program, approximately 50% on contract growth coming in the next couple of years. That's the first revenue stream. I think the second revenue stream is we're sort of focused on our core DNA in the U.S., which is R&D. If you go all the way back to the origin of our U.S. when the company well before I was here, acquired Foster-Miller, it was an R&D and innovation. You may have heard that theme coming through in today's presentation. And the leverage of our technology solutions part of the team up in Boston and what we acquired with MTEQ and its advanced sensors. We're focused on core R&D, really good news this week. One of our programs that we announced last year, NGAS, to Heather's point, about incremental funding has just landed its major block of incremental funding. So that's R&D. The third area of our focus in the U.S. is really around autonomous systems, something we've got to strength on in the U.K. And the example that I gave at the beginning, robotic combat vehicle is a great example, and we're well positioned. And then the final one is exactly where we just started the question, cyber and intelligence. And in fact, we've had some positive news there based on the platform. We've just won 2 IDIQ positions with 2 completely new intel customers, NRO and NGA, which is really great to start to see the benefits of why we acquired Avantus, a great business, why we've fully integrated it, and why we're confident in the growth coming through. I could talk all day about this, Rich. Does that answer your question?

I think that's pretty comprehensive.

[Operator Instructions]

David Farrell from Jefferies. A couple of questions from me. I can't help but notice you were stripping out the MSCA contract. Do you have kind of a view of the underlying performance? Then when we look at Global Solutions, there's quite a few large contracts in there, a few hundred million dollars for 5-year contracts. Just wondering what the repeatability is of securing contracts like that in Global Solutions.

Would you like to describe the MSCA point first, Heather?

So I'll probably go to that first. So I think there is a key difference in the way that we -- the orders are won and funded between the U.K. and the U.S. So on the MSCA piece, we won the GBP 260 million order last year when we booked and hence it's within the orders. With those larger U.S. orders, they are large 5-year deals. However, we only fund -- they're only funded incrementally year by year. So within the order number, there is only 1 year worth of the 1 year being funded. So I think that's probably the key difference to start with in terms of those big U.S. orders.

Yes. And I think, David, if I could just sort of make a couple of points and maybe build back up to the future. Yes, EMEA is in a really great position. As Heather presented, I think it does make sense to do a comp of the 1.04 to the 1.17 because a 10-year contract is a distorting factor. And I think we all know that order intake is a lumpy business. So I think that gives a better comparison for EMEA. And I think that if you look at some of the positions that we have within EMEA, we are absolutely growing. You can see it on some of the data that we've given. We are growing the number of larger long-term contracts. So our position on those big service contracts is expanding. So we're very confident in the underlying sustainable growth of EMEA in line with the guidance that we're giving. I think secondly, to Heather's point about the additional disclosure in the U.S. And I remember in this forum describing this at least for about 2 years when we were much smaller in the U.S. maybe when we were like $100 million, $150 million. This concept that -- not concept, this practice that the U.S. fundamentally contracts in a different way to the U.K. So this notion of you win a multiyear contract, and then you have this incremental funding that has to get appropriated and authorized each year. It's completely normal practice. So we consciously decided that after the full year, the first full year of integration of Avantus, and now we have scale in the U.S. We don't want shareholders to have a distorted understanding of either our backlog or our pipeline opportunity by only seeing the value of our funded first year of contract awards. And some of the numbers are quite material. You take our current backlog of completely funded at 2.9. If you add in perhaps the really great progress of U.S. order intake, you get to 3.7. So I think in terms of that repeatability and onward momentum, we're in a very strong position. And then just add because I don't say come up once in this presentation, at the pipeline. The pipeline was over GBP 11 billion, and that's just what we're seeing in terms of funded. We haven't given an unfunded number on that. So if you start to factor in that on top of the backlog, you sort of more than get the cover to both the EMEA and the Global Solutions guidance that we've given.

Okay. Perfect. Second question, you referenced a couple of times the continuing resolution in the U.S. and how that impacted the business. Are there any learnings you can take for the next almost inevitable continuous-resolution as to how you would manage the business?

Yes. I think the answer is quite simple. We did learn from it, and we factored prudency into our guidance. And if you look at the guidance for Global Solutions and our U.S. business sits within Global Solutions, stable performance is about building in prudency on a strong finish to the year in terms of backlog and book-to-bill to make sure that we've got an election in the U.S. may go into another continuing resolution. So we've built more prudency into our guidance. That's the primary learning.

It's more about kind of financial guidance as opposed to the day-to-day running of the business that you could take something away from?

Yes. Well, that's the guidance comment. So in terms of the business, I think I've referred to the 2 primary learning points. We've absolutely integrated. We've strengthened the BD and the focus of our programs is more directly aligned to the U.S. national defense strategy. So we're part of budget streams that are growing, they're coherent with our overall group strategy. So yes, there's learning in terms of strategy and business operation, and at the same time, is learning in terms of prudency within our financial guidance.

It's Joel Spungin here from Investec. I'm not as familiar as many of the other people in this room with your business, I'm still getting to learn it. So forgive me. But I was wondering if I could stop asking about M&A. I guess, specifically, with the integration of Avantus now complete, do you feel that you are ready to take on another material deal? And maybe related to that, is there any comments you can make about pricing for potential targets in the market?

Yes. That's a really easy question because I think I said it in our presentation, during the course of the year, we've really enhanced our focus on capital allocation. And our near-term focus is absolutely on organic growth and making sure that we deliver all the way through to our GBP 2.4 billion target by FY '27. It's true that we have a strengthened balance sheet and part of the enhanced focus on capital allocation, that does give us optionality to invest in the business but it also provides optionality for further returns to shareholders. And as I mentioned, during the course of the year, we consciously chose to increase shareholder return. We launched a GBP 100 million buyback. As Heather said, we continue to see buybacks as part of our ongoing consideration of options within our capital allocation. And we've also increased that we've announced today the increase in our progressive dividend. So I think if we step back and look at the year, whilst we might have got a long-term strategy for further growth, our clear near-term focus is on the organic plan.

Is there any comment you can make about pricing on potential targets or anything like that? Has that changed at all?

More generically, I mean, I don't think the dynamics on pricing of targets have really changed in the last few years, you tend to see high multiples in the U.S. versus Europe. I think those dynamics broadly remain constant.

Just maybe one quick one. You mentioned about LTPA. Is there any risk around that? Or is it highly likely that, that will be extended to 2033?

So if you're sort of new to the story, the current contract, which was a 25-year contract currently runs through to 2028. And in November, just gone, we announced that we had signed a principles agreement with the U.K. government to work through a negotiation that would take that through to 2033. And as I mentioned in the presentation, those discussions are going well. We're absolutely on track. And I would expect early in 2025 that, that contract extension would be signed, and that will provide services through 2033.

It's Sash Tusa again. I wonder if I could just ask a question about robotics and sort of compare and contrast with targets. The targets business is clearly a production business, and you said volumes are extraordinarily high at the moment. Robotics still seems to be, and there seems to be a generic across the industry. I think this is a kinetic issue, but it's a series of one-off contracts that occur, vanish, occur, vanish. And there doesn't seem to be stability in the business. Is that if this customer still hasn't worked out what to do with these things?

Yes. I think you actually make a fair point. And actually, as I'm thinking about the answer, I think we're actually seeing a changing dynamic between robotics and targets, such. I think if you look at some of the dynamics, I think in one of the questions earlier, we've seen our small robot program called CRS-I, its ramp down. It sort of reached sort of peak production and then faded down. That's one of the sort of underlying drivers for some of the sort of reduction in revenue in our legacy U.S. business. And that will continue and come to a conclusion, in fact, already has in this year. So we'll see that step down to completion when we compare FY '24 results to what we deliver in FY '25. But I think what we are seeing in robotics, and it's also a conscious choice for ourselves, that we're progressively moving up the value chain to the higher layers of intelligence of -- and you see it, we're actually calling autonomous systems more than robotics. And if you look at our role with Oshkosh on the robotic combat vehicle, we're doing the autonomous systems layer, the networks, the algorithms, the integration, the safety, those are the higher value. We're not doing the core manufacturers of the platform. So I think it's true to say that the lumpy nature, as you are sort of alluding to of the core robotic platform, I mean, is a feature of this marketplace. But we're offsetting that by moving up the value chain into a more enduring role around autonomous systems. I think with targets, I think it is a little bit different. I think we're actually seeing exceptional demand in targets, which I would broaden out to threat representation. We have airborne training services. We have targets. We have digital and simulated training services. I think that current conflicts are really underpinning the need aligned with our value proposition that you have to test, you have to know that the kit that you're taking into the field is going to work as you expect, it performs, it's safe, it's interoperable. And therefore, the demand on training and mission rehearsal is growing, both from a production and a service-based point of view. And it's partly why we've try to simplify the understanding of QinetiQ again today by talking about core R&D, where all nations, particularly in AUKUS, are putting more and more into R&D because R&D is the way that you overmatch the enemy. They're putting more into T&E because you have to know that the kit is going to work safely and at the level it's going to give you the operational edge. You have to be prepared and ready to fight. That's what training and mission rehearsal is. And cyber and intelligence is just growing. It's not just the physical world. So there are the 2 dynamics. So I think it's a good spot, Sash, is something of a dynamic that's changing in the company.

David Farrell from Jefferies again. One, I think for Heather. I just want to unpick the organic revenue growth in EMEA Services a little bit. Firstly, kind of what element of that was pricing versus activity level? And then kind of second question is, what kind of headcount growth was there in EMEA Services last year?

Headcount growth in EMEA services? You say a few words while I just find my backup.

I mean the first thing I would say is that, I mean, we're really pleased with EMEA growth. I mean EMEA delivered a really good performance. And the primary drivers for that were an exceptionally strong prior year. I think if you go back to our FY '23 results, we had an overall book-to-bill of 1.4. So during the course of the year, EMEA, the teams did an outstanding job executing those orders. We also, on the back of operational tempo, had increasing demands during the course of the year that, again, the team did execute. Part of that was delivered through and we'll see some increases in headcount. And those are the primary drivers. There were some inflationary benefits as we talked about before, we have got contracts where we get some inflationary benefits. But the primary driver for the growth really was the strong prior year orders and some of the increasing demand that came through in the year.

Yes. So I mean to build on that, in terms of the growth, I think probably only sort of a couple of percent, 2% to 4% probably coming through inflation. In terms of the underlying delivery, a lot of it was through delivery from our people back to that headcount question, headcount actually increased 8% year-on-year within EMEA Services. So a lot of it coming through core project delivery through our people.

Okay. Thank you. I can see that there are no questions online. So if there are no final questions in the room, then Steve, maybe a closing remark, if you fancy.

Yes. Great. Well, thank you, everyone, for your questions. I mean maybe we should just finish here. We're really pleased with the results. We've got really good momentum. We're absolutely on track for GBP 2.4 billion. The level of organic growth that we need to achieve, if you've done your sums is now 8%. It's bang on in the middle of our guidance. Last year, it was 9%. So confidence is increasing. Also, we've got a much greater focus on capital allocation, it's all about optionality to invest in the business and options for further shareholder returns. So thank you for your time, and if you've got any follow-up questions, Heather and I will both be very happy to answer them. Thank you.