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Article Excerpt
Original Source: FD (FAIR DISCLOSURE) WIRE
GRAHAM LOVE, CEO, QINETIQ GROUP PLC: Well good morning everyone. Thank you very much for coming. For anyone I haven't previously met, I'm Graham Love, Chief Executive of QinetiQ. I'm joined today by my colleague Doug Webb. And since this is a results presentation, Doug of course will be doing most of the hard work and certainly answering all the difficult questions. So my job is really just to give you an initial summary before we go into the figures of how we've done in this first half through to September. And then I'll come back and say something about the operational results a little bit later on.
It's always -- so this is what we're going to do. I'll run through the highlights, Doug will run through the financial review and then I'll come back for the operational review at the end.
In terms of highlights, it's always a pleasant task as a Chief Executive to stand up and announce a positive set of results and I think we've got a very positive set of results to talk about today; very strong growth from right across the Group. Order growth 13%, revenue growth 18.5%. And very importantly within that growth, very strong organic growth as well across the business, particularly in North America where we have, as you know, invested over the past three years in 11 acquisitions. We've built a substantial platform now in North America and those businesses are really performing very, very well for us, 24% organic revenue growth. And we'll come back and say a little bit more about that later.
EPS obviously, as a result of that, a very positive growth in EPS. Good cash conversion.
Good progress on DTR. DTR as you know is the single largest contract that we're currently working on and I'll say a bit more about that later but you will have seen the ministerial announcement recently that we are making good progress with the MOD on closing down Package 1 of DTR.
In the period we also established a venture fund, a joint venture fund with Coller Capital. This is an important step forward in the commercialization of our technology and in crystallizing value out of defense technology by taking it into the commercial sector.
And we're also, as a result of a real strategic review of our UK business, we've identified opportunities to brigade the UK business into larger business units to go after some of the larger opportunities we believe are really within our grasp. And, as a result of that, we're going to be carrying out a restructuring program which will drive cost savings, over time, of something like GBP10 million to the bottom line of the UK business. And, as a result of that, we're able to increase our long-term margin target from 10% to 11%. So some very, very positive work going on right across the Group to drive improved shareholder returns.
And last but not least, we're announcing an increase in the interim dividend of 10.8%.
So with that brief introduction, I'll hand over to Doug to take you through the detail.
DOUG WEBB, CFO, QINETIQ GROUP PLC: Thank you, Graham. Well, good morning, ladies and gentlemen. As Graham said, delighted to be here to take you through the financials which, I think, do represent a very strong first half to the year. Just before I get into the numbers, just to remind you that, as normal, I'll really talk through the underlying performance of the business, so excluding the one-off transactions which obviously distort some of the statutory headline numbers.
So if we start with the overall summary. Obviously, very good revenue growth, GBP100 million of revenue growth half-on-half, 18.5%, of which 8.4% came from organic growth. Stronger than we've had previously, which is very pleasing. Operating profit up 34.5%, almost GBP12 million, and again, very strong organic growth within that of almost 22%.
Operating margin improving by 90 basis points, really reflecting the changing mix in the business as we get a greater contribution from the higher margin North American operations, which themselves had a very strong first half margin-wise. And then profit before tax and earnings per share up by around 30%. They include within that GBP3 million of additional net interest cost reflecting the additional debt we've taken on over the last year to fund the acquisition program.
Let me now work through some of those numbers and give you a little more granularity, starting with revenue. As I've already mentioned, revenue grew by GBP100 million in the half and that's even after taking a GBP19 million effective hit from the 7% decline in the US dollar; the hit against the translation of our North American results. So very strong growth even allowing for that.
On a sector basis, EMEA returned to growth in the period, up GBP7 million, 2% organic growth. And very strong growth in North America, the organic growth there 24% in the period on the revenue line. Last year, you may recall that the second half in North America was particularly strong. Even if we look at North America on a sequential basis, so comparing the first half of this year with the second half of last year, the organic growth in North America is still well above 10%. So we're continuing to make strong forward progress in that business.
It's perhaps worth just reminding you on the North American side, clearly, we do get affected by the dollar movement but a reminder that it's a translation impact for us only. Our transaction exposure to the dollar is very limited and to partially hedge the translation exposure, all of our debt is maintained in dollars and so we get a partial hedge through the interest line.
Finally, you can see that about 60% of our revenue growth in this period came through from acquisitions. We've got a first time contribution from Analex, which was acquired in March; from ITS, which was acquired in April; and a smaller first time contribution from 3H, which was acquired in June.
If we look a little more closely at the drivers of the organic growth, you can see the technology stream in North America grew at 50% in the period. Particularly strong growth coming through from TALON, shipments were up some 21% over the comparative period last year. And we also had very strong spares revenues coming through on the TALON side, but technology is more than just TALON. We also had good performance out of the LAST Armor product for instance, and also out of our Precision Airdrop System.
We've got good forward visibility still on the TALON shipments in particular, and we're pleased that we've had an indication of a $400 million IDIQ that is going to come our way shortly for further TALON support over the next year or so.
But North America is more than just technology and you see good growth coming through also from the Systems Engineering business, 21% organic growth from that business, and also from IT Services, which grew organically 5.3%. And particularly, we had good growth within that stream from the Department of Homeland Securities, so our security business is growing well reflecting our positioning at the higher end of the IT Services market.
Now, you'll notice that missing from this chart is Mission Solutions, the fourth stream in North America. We only formed that in April with the acquisition of Analex so we haven't had it in our portfolio yet for a long enough period for us to measure organic growth, but I'm pleased to say that the Mission Solutions business is performing to the upper end of our expectations at the time of acquisition.
Looking at EMEA, you can see that the Procurement and Capability Support stream has returned to growth. The downward trend that we saw in UOR revenue last year has ceased and now we're seeing the underlying performance of that stream come through quite strongly. And similarly, Managed Services continues to grow well on the back of the very successful long-term partnering agreement. Technology Supply and Security and Dual Use didn't grow so well this year. Graham is going to talk a little bit more about those in a minute. But MOD Research was very pleasing for us. As you know, the MOD Research business is being opened up for competition and to shrink by only 2.5% shows the continuing success we are having in winning research business through the competitions that are being let.
Progress against our strategic goal to deliver 50% of our revenue from North America is shown here. So North America now contributing 40% of total Group revenue in the first half. And, as a result of that, you can see also that the share of revenue from the Ministry of Defense has continued to decline down to 43%. I'm pleased to say, however, though that the absolute amount of revenue that we generated from the MOD actually increased during the period, up GBP7 million. So a very virtuous reduction in its proportion. The DoD, as you can see, is up to almost 30% of Group revenue, and it's worth mentioning civil and other government agencies remain an important part of our business and this year now include NASA for the first time following the acquisition of Analex.
If I turn now to profit. As you can see, overall profit growth has been very good in the period both through acquisitions and through the organic growth. Margins in EMEA were, essentially, at the same level as last year at 5.9%, and they include GBP6 million of our normal ongoing restructuring costs that we've talked about in the past.
North America shows margin improvement up to 12% in the period, reflecting the higher product content in that business, and helped a little bit in this half as well by the very strong spares revenue from the TALON product. Spares tend to have a somewhat higher margin than the shipments and we suspect there'll be a slight rebalancing back in favor of shipments of core units again in the second half of the year. We remain very confident in our North American margins.
As we indicated six months ago, the level of investment through the ventures has increased this year, up from GBP4.9 million last year to GBP6.8 million, and we see that sort of level of investment continuing through the second half of the year.
Breaking down the drivers of the operating profit improvement, you can see it's broadly balanced between the organic growth of the business and the benefit from acquisitions. And like revenue, the strong growth comes despite some headwind from the effect of the decline in the dollar, which reduced like-for-like profit by GBP2.3 million in the period.
If we move on now to orders and backlog, see further encouragement for the future from our orders performance; orders up 12.9% in the half. And I think particularly encouraging is the overall book to bill ratio, that's the ratio of orders to revenue, excluding the LTPA, was at 1.1 to 1, and that's absolutely in line with our long-term target for book to bill.
EMEA had a book-to-bill ratio of 0.9 to 1 reflecting some delays in orders coming through on the technology supply part of our business, while QNA has a book to bill ratio of 1.2 to 1, a very strong performance right across that business but particularly through new order intake on the TALON robot side.
We closed the year with a total backlog of GBP5.7 -- sorry GBP5.6 billion and encouragingly the...
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