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Article Excerpt
GRAHAM LOVE, CEO, QINETIQ GROUP: Good morning, everyone. Good morning and welcome to the QinetiQ interim results presentation. I thought I'd better say that in case you've come to the wrong place. For those of you I haven't met before, my name is Graham Love. I am the Company Chief Executive. I'm delighted to be joined by some very important members of our team this morning. Over here David Mellors, our CFO. This is David's first results presentation, and I've told him that you will all be giving him very tough questions on pension calculations, deferred tax accounting, and all the usual things, and he's really looking forward to answering those.
Here on the front row we also have some key members of our team. We have our two senior non-executives, Sir John Chisholm and Sir David Lees, who are here with us today. And also the two key executives who run our businesses worldwide, Duane Andrews, Chief Executive QinetiQ North America, and Clive Richardson who runs the EMEA region. So they will be available to answer questions at the end of the presentation should you have questions, particularly on how we are doing in those regions.
Running order very similar to usual. I'm going to give you a very brief introduction. I'm going to hand over to David to do the boring bits with the numbers. And then I'm going to come back and talk about the exciting bits, which obviously are the operational highlights. And that will take us probably 20, 25 minutes, and then as always there will be an opportunity for questions at the end. So that's the running order. Thanks very much for being here and we will kick off.
That's the usual boring disclaimer. That's what we're going to do. I just want to give you a very brief overview. I know you've seen the statement. You've got the presentation in front of you. The first thing to say is, obviously, we are very pleased with the performance in the first half. Overall, it's been a strong first half for us.
Some particular highlights I just want to flag out before we get into the detail. Obviously, the US business continues to be a major driver for growth in our organization. And in particular, we demonstrate a continuing ability to integrate the acquisitions we've made to drive strong organic growth out of those acquisitions, and to continue to mine the acquisition pipeline that we have in the United States. We'll say some more about that later, but that's clearly been an important driver for growth in the period.
The EMEA restructuring, which we announced at the full year, is now complete. It's been completed to time and to cost. It's delivered significant benefits to the bottom line. On a run rate basis we expect at least GBP12 million of cost reduction in a full year. And obviously, you're seeing some of the impact of that beginning to come through in the margin in the first half, but most of that will obviously flow through in the second half, given the timing of the restructuring.
A lot of press coverage recently about defense budgets, obviously on both sides of the Atlantic, what's going to happen here in the UK given the well-publicized pressures on the Ministry of Defense budget; what's going to happen in the US given the change of administration. We will argue -- and we will say some more about this later -- but we will argue that QinetiQ is actually ideally positioned to deal with that transitionary pressure, given our focus on support to current operations in the UK, and our very, very careful focus in the United States on those high-growth areas, particularly in television security; and again, support to current operations in Afghanistan and Iraq. That's why you see these strong results coming through in times of challenge for our customers.
Finally, just to flag up, but obviously we've increased the dividend by some 13%. And that reflects the board's underlying confidence in the performance of the business as exemplified by these figures.
With that, I'm going to hand over to David to take us through the numbers in detail.
DAVID MELLORS, CFO, QINETIQ GROUP: Thank you, Graham. Good morning, everyone. It is a pleasure to be here and announce a strong set of interim numbers. The headline financials for the period are as follows. Revenue increased 13.9% to GBP727.4 million, representing 8.6% organic growth at constant currency. This was fueled by a particularly strong growth in North America.
Underlying operating profit increased 19.8% with a 40 basis point improvement in the margin to 7.6%. EMEA margins increased to 7.3% in the period.
Underlying earnings-per-share increased 20.7% to 5.6p, and the dividend increases 12.8% to 1.5p. Cash conversion post CapEx was very strong at 125%.
Now let's look at the performance in more detail. This slide illustrates the dynamics behind the revenue growth. The strengthening dollar had the impact of increasing reported revenues by GBP10.7 million over prior year. The average exchange rate for the period was 1.93 compared to 2.01 last time. A GBP20.1 million pro forma variance arises from adjusting the prior period revenues for the acquired entities to reflect the same duration of ownership as the current period.
The resulting organic growth at constant currency is, therefore, GBP57.8 million or 8.6%, which we can now look at by individual business. QNA reported 18.9% organic growth at constant currency. As a result, strong performances in all divisions. The Technology Solutions division grew 23.9%, reflecting continued demand for the Talon robots suite, which generated $84 million of revenue and a significant increase in demand for LAST Armor kits, generating $54 million of revenue.
Mission Solutions revenue grew 18.3%, driven by the higher level of business with NASA and continued progress in homeland security and intelligence. The DTRI acquisition completed in October will be incorporated into the Mission Solutions business.
Systems Engineering reported a 14.9% organic growth, reflecting increased work for the US Army and the commencement of the Iraqi pilot training program won in the prior year. EMEA reported growth of 4.5% on the prior period, of which 1.1% was organic. This more modest growth rate was the combination of a good performance in consulting and managed services, being largely offset by declines in Applied Technologies and Integrated Systems.
Consulting benefited from generally good demand and the contribution from the e-Borders program won last year. The Commerce Decisions acquisition completed in October will be incorporated into consulting.
Managed Services entered into the second five-year term of the LTPA in H1 and began the ramp-up of the CATS contract. The continuing decline in research work, coupled with the general delay within MOD in letting contracts weighed on the Integrated Systems and Applied Technology businesses.
Turning now to underlying operating profit. The QNA profit grew to GBP34.9 million in the period, a 13.7% increase in reported terms, 9.4% at constant currency. As expected, the margin came in at 10.7%, down from 12% in the prior period, reflecting the large amount of Talon spares shipped last year during the surge. We now have a more normal level of margin for QNA, which we'll aim to achieve even though our revenue mix is likely to shift in favor of services as we concentrate on the high potential markets we've chosen.
The EMEA profit grew to GBP28.8 million. This benefited from the first-time contribution of Australia, which is seasonally stronger in H1. We also exercised tight discretionary cost control and had a small benefit from the early completion of the reorganization and changes to the terms of the defined benefit pension scheme, both announced last year.
The reorganization will generate GBP12 million of cost savings on an annualized basis. These will help to protect margins from the effect of increasing partnering and research, which will increase the proportion of pass-through revenues. The Ventures business reported an GBP8.6 million loss in the period, GBP3.2 million of which was the share of equity accounted losses in the Ventures fund as the investment in the businesses is made.
The cash contribution to the fund in the period was also GBP3.2 million, leaving GBP8.7 million remaining of our commitment, approximately half of which we expect to contribute in H2. The Tarsier business completed the development of the day/night camera system during the period, and installations progressed at four airports.
Moving to operating cash conversion, I've set out on this slide the derivation of the cash conversion percentage. As you can see, it is after taking account of CapEx and DTR bid costs. Each one is normally strong for cash conversion, due to receipts from the MOD post year-end. We are very pleased with the strong cash conversion of 125%, which is an excellent result, notwithstanding the seasonal pattern.
I have added my full-year guidance on the right-hand side for the bid costs and CapEx. We expect to spend around GBP20 million on the DTR bid this year as we approach Main Gate 2. The CapEx guidance assumes a slightly higher level of LTPA CapEx in H2.
Moving down the cash flow statement, you can see the interest and tax outflows leading us to free cash flow for the period of GBP59.7 million. The prior year cash tax was high as a result of a disposal capital gain. The cash outflow on the reorganization of EMEA announced last year was GBP27 million in the period, which completes the spend on this process.
The strengthening US dollar increased our reported borrowing number by GBP43...
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