Cohort (CHRT) - Andy Thomis, Chief Executive

Right, good evening everyone. So, as Chris said, I'm Andy Thomis, I'm Chief Executive at Cohort PLC. It's great to have this opportunity to talk to you, talk a bit about who we are, what we do, our most recent set of results as well, which for the half year that ended 31st of October last. So let me start with who we are and what we do and how we provide value for investors. Cohort is a group of seven businesses providing technology-based defense products and services to the UK and to its allies around the world. We're particularly focused on maritime and land systems, but we also do some work in the airborne field. Our business model aims to maximize the autonomy and independence of our businesses consistent with good financial and regulatory governance, and that means that decisions are taken close to the customer and they're taken quickly, they're not taken by me for the most part, as there are very clear delegated authorities to the managing directors and management teams of our businesses. So that maximizes agility and innovation, while at the same time we support our businesses with a strong balance sheet, with the market reach that we have as a larger group, and of course the ability to form alliances and to share information between our seven operating businesses. And it's also relevant that we've got no layer of overhead sitting between my small headquarters team and the operational management of our businesses, and that gives us a real structural cost advantage as compared to some of our large international defense prime contractor competitors.

Now, we've got, I think it's fair to say, a strong record of growth, both organically and by acquisition since our IPO which was back in 2006. And in November we announced the acquisition of our seventh business, EM Solutions, and we expect that to push our growth to the next stage, and I'll say more about that in a moment. Perhaps unsurprisingly, our organic growth has accelerated since 2022, and the Russian invasion of Ukraine and other worldwide tensions are contributing to what is a strengthening demand picture. And one result of that was our largest ever contract win last year, which was £135 million to provide a system called Anilia, which is a missile defense system for the Royal Navy's surface ships. And another result of that strong demand picture is a good pipeline of opportunities, and I'll give you some examples of that in a moment. But the ultimate hard evidence of growing demand is our growing order book, and as you'll see in a moment it hit a new record at the end of our first half in this financial year, and it's had a further significant boost with the acquisition of EM Solutions. That acquisition was funded using a combination of our existing cash resources, some bank debt, and support from our investors in the form of a £40 million placing. And the result of that is that we've been able to maintain post-acquisition a very strong balance sheet with low gearing, and that gives our customers confidence to place large contracts with us, and it allows us to invest in product development, in capacity building, and potentially in due course in further acquisitions. And finally, I should mention our progressive dividend policy. We've grown the dividend every year since our IPO back in 2006, and in recent years by 10% per annum. And of course that's valuable income for our shareholders, but we see it very importantly as a signal that we're not just developing interesting technology, but we're also a successful and cash-generative business.

A little bit of background on our development. As I said, we IPOed in 2006. Since then we've made a number of acquisitions as well as a few divestments to ensure that we focus on our core markets. And some of the most important transactions you can see there: the acquisition of MASS in 2006, SEA in 2007, our business MCL Communications in 2014, EID in 2016, Elac Zonar in 2020, and by the end of 2024 we developed into a group of six businesses with revenue exceeding £200 million and adjusted operating profit of a bit over £22 million. And that compares to adjusted operating profit of about £3 million on revenue of £34 million in our first full year on the AIM market. And I should emphasize that we've been very parsimonious with our equity in this period. We issued no new shares at all from 2008 through the last year and funded all the acquisitions in that period through a combination of operating cash and bank debt. But as I mentioned, last year we announced the acquisition of EM Solutions and we did do a £40 million equity placing in November to support that. And so a word or two more about that. It is a very significant transaction for us. It'll have a big impact on our product range, our technological capability, our geographical footprint, as well as our financial performance. EM Solutions provides highly capable satellite communications terminals primarily for naval surface ships, and that is a challenging technology to develop. They've got some real technical competitive advantage because the terminals need to stay locked on to satellites, potentially moving satellites, as a ship rolls and pitches in heavy seas. Demand for their products is growing, particularly for advanced blue-water navies like those in Australia and the NATO countries. And this acquisition is our first exposure to this technology area, and so it gives us access for the first time to this important growth stream. Over time, the balance of our output has moved more and more towards maritime, and this acquisition gives us another important member of the family of naval products that we can offer as a package to shipbuilders and integrators. And very importantly, that geography brings real advantages both to EM Solutions because they have important markets in NATO Europe, and because of our position in three NATO European countries we can enhance that relationship. And similarly in the opposite direction, Australia is a growing market, particularly for maritime defense products, and having a real foothold there, a position in the sovereign Australian defense industry, greatly enhances our ability to access that growth. And as we've recently announced, that acquisition completed at the end of January, and we're already well into the process of integrating what is a really exciting new member of the group.

So I should let you know briefly about what our other businesses actually do. We've got two reporting divisions: Communications and Intelligence, and Sensors and Effectors. Taking Communications and Intelligence first: EID is our business based in Portugal, just outside Lisbon, focused on communications management for naval surface ships, also land vehicles and deployed army headquarters. Our business MASS provides highly specialized services including electronic warfare operational support, cyber defense, and large-scale simulation-based training for the UK's Strategic Command. MCL works with overseas and UK partners to supply a wide range of communications and intelligence equipment to the UK, especially for urgent operational requirements, of which you can imagine there's quite a lot at the moment. And in our other division, Sensors and Effectors: Chess provides optical tracking, surveillance, and weapon control systems for land and sea applications, especially for countering drones. Elac Zonar, based in Kiel in Northern Germany, is a world-leading provider of sonar for ships and submarines. And our business SEA provides systems for protecting ships from both submarine and missile threats, as well as the communications used by the Royal Navy's submarines. And in total across those businesses, we've got over 1,500 employees, a very large proportion of whom are highly qualified scientists, engineers, and mathematicians. And overall, we offer a complementary and extensive range of technology-based products and services for defense customers.

So that's a bit of background about the business. Now for how well this has actually all worked out in practice in our most recent reporting period. And the summary is it was a good first half, much stronger than last year's. Revenue and operating profit, as you can see, were up materially. A new record order book as I mentioned, well over half a billion pounds there. And our prospects look good, and we expect to continue that growth in the four-year and beyond. Yeah, and a very strong period for new orders, which are the best leading indicator of future growth. And that increase in the order book was simply because our order intake exceeded the revenue that we recognized in the period. And that order book covers well effectively all, more than 99% of the consensus forecast of revenue for the full year, and will be generating revenue for us well into the 2030s. And finally worth mentioning, the cash flow was very strong as well, significantly exceeding profit, helping us to push our net cash position up to near £38 million. And that of course is before the placing and the acquisition. And also I mentioned the interim dividend was up by 10%, as the board approved that dividend, again growing by the same amount as it has recently.

So why is it that demand for these products and services is growing? Well, the two main driving forces for demand in defense are the continuing conflict in Ukraine and the influence of growing Chinese assertiveness from the Indian Ocean right across to Australasia. The conflict in Central Europe has driven demand directly as the NATO countries seek to help Ukraine resist the Russian invasion, and many of the lessons learned are very relevant to us, increasing demand for example for electronic warfare equipment, the need to counter drones of all kinds, the need for accurate and timely battlefield intelligence as well. As you'll have noticed, there's been a lot of talk recently about the prospects for a ceasefire in Ukraine, and that is something that we should all welcome if it happens, if it stops the appalling waste of thousands of lives every week. But whether or not the current Trump initiative is successful, in the end I'm sure that that will happen. But absent a complete defeat of Russia and an occupation of Russia, which you know seems like perhaps on the edge of the least likely outcomes at the moment, that will not mean a reversal of the increases in defense spending that we've seen across NATO Europe, because that persistent Russian threat pressure, we've seen very visibly and vocally in recent days from a much more transactional US presidency, are going to be powerful forces for sustained high levels of spending. And the days of the 1990s peace dividend are sadly behind us. Similarly, with Chinese aggression and investment in its defense forces, that's had an impact on our prospects right across the Indo-Pacific region. The AUKUS alliance is one example. We've also seen strong demand from Thailand, Indonesia, and the Philippines. Japan remains committed to a doubling of its historic level of defense spending up to 2% of GDP by 2027, and it's joined the Anglo-Italian combat aircraft program, which signals a move away from reliance purely on the United States for its defense. We've seen similar impacts in our domestic markets of the UK, Germany where there's been a step change in defense spending, and even in Portugal, one of the lower spending NATO members, we saw some very strong order intake early in 2024 and we're optimistic of quite a bit more to come. Worth mentioning as well that our revenue continues to grow. We expect to see a gradual improvement in our overall operating margin as our overheads remain constant or at least don't grow at the same rate as our revenue does.

I mentioned that we continue to see good opportunities and prospects. I wanted to share a few of those with you. In fact, as I drafted this slide, some of them started to come in, so this has got a slightly historical flavor to it. Because at Elac, we've actually just received an order for the sonar last week for the fourth of the four new Italian submarines that we're supplying, and that brings that total contract value now to over €100 million. And we're just starting discussions now about two further possible boats as well as upgrades to some in-service vessels, which will increase the value of that contract even further. And they're also in discussions with the German Navy about upgrades to the anti-submarine sonar on some of its surface ships, and that would be a really good step forward with that domestic customer because most of Elac's output has been for export customers in recent years. EID, having won some good orders early in the year, is in discussion with the Portuguese Navy to provide communications for its new fleet of offshore patrol vessels, and sees some promising export opportunities through a partnership with the Dutch shipyard Damen. SEA, following some very strong initial success in Asia, has got multiple opportunities to provide its specialized lightweight towed array sonar known as CrateSense to export customers, and is in discussions with BAE Systems and others about contributing to the next generation of nuclear submarines for the UK and Australia. Recently they've announced a partnership with the Danish company Terma to offer a complete anti-missile system for naval ships based on Anilia. MCL has many opportunities, alas too sensitive to go into any detail about, as you can imagine there's a very intense level of urgent operational requirements at the moment. MASS has actually just won a £17 million extension to its training contract with the UK. Chess is supplying many counter-UAS systems, counter-drone systems, through its partnership with Ryal, and it's building other partnerships. And EM Solutions, our new business, has a very promising list of opportunities in Australia, Europe, and East Asia. It's about to begin deliveries for almost the entirety of the Australian service fleet, and there's a lot more in the pipeline. Yeah, very briefly, as time is moving on, I've talked in broad terms about markets and opportunities, but that shows the tangible results of the demand picture. Over £540 million that covers obviously a huge amount of this year of order cover, but over £280 million for 26/27 and beyond, guaranteeing a very solid flow of revenue well into the next decade. And that will be enhanced further by the addition of EM Solutions.

And a very quick word about our shareholder register. Our largest shareholder is one of the founders of the business, Stanley Carter, who's a long-term holder. Our chairman, Nick Prest, also remains a significant shareholder. But the backbone of our shareholding is a highly reputable list of institutions, the largest being Schroders, Liontrust, and Canaccord Genuity. Others include City Asset Management, Herald, and Unicorn. It was very good to see some new institutions coming in at the placing, and those included BlackRock, Lazards, and Royal London. That is almost all I wanted to say. It's been another pleasing period in terms of performance, sets us up well for the year as a whole. I'll leave you with that summary and a reminder really of that record order book and pipeline of opportunities to enable us to continue the growth that we've been seeing over recent years. And if anyone has any questions, I'll be very happy to try.

Okay, well those two questions are linked. I mean, as I've described, the demand picture has developed in a very positive way for the business in recent years. But I mean, of course that's always where uncertainty lies. I mean, at the moment we don't know exactly how much the UK is going to spend on defense. There's a lot of talk about perhaps increasing it beyond the 2.5% that Keir Starmer has talked about so far. You know, potentially that's an opportunity, but there are plenty of competing priorities for them. I would see in aggregate though, although you know individual countries it's hard to predict exactly what they're going to do, that pressure that's coming from the US and the need to deal with an aggressor on the European continent for the first time in many decades is really going to continue to push demand. Of course we deal with delivery risks in our business as well. It's one of the strengths of our model that we're able to focus on those and help our businesses deliver, so we're not without risk of course. But as I say, you know, the picture is pretty positive at the moment. Is the Strategic Defence Review causing a big issue to our business? It's made some little changes around the edges. Some, for example, the MOD has put pauses on some research work while they consider how they're going to spend their money in future, but it hasn't at this stage, and I don't foresee this happening because we expect to see the results of the review in the next few months, made a material difference to us at all.

Um, do you mean are we thinking about a move to the main market? Yes, we've certainly thought about it. I think we were ready with an announcement actually the day of the budget. And if they'd taken the inheritance tax relief away as seemed possible, I think we may well have come out with an announcement the next day that that was our intention. At the moment, I would say on the balance of advantage, it makes sense for us to stay on the AIM market. The lower level of intrusive regulation and reporting requirements help us to keep central costs down. The inheritance tax relief is a real benefit to our shareholders as well, even at the lower level that it is now. Thank you.

Well, yeah. A factor actually that was relevant in the answer to the earlier question about should we move to the main market. I mean, we are less visible as an AIM stock, and so we're not moved directly by the same forces, although things do tend to even out in the long run. I mean, advice from our brokers was that the fall in defense stocks earlier was primarily a reaction to Donald Trump, everything's going to stop in Ukraine, and then there was a bit of a realization that that wasn't quite as straightforward as people thought. I mean, our share price has recovered over the last few days, but you know, there's volatility in these things. There are factors other than what's happening in the world. You know, buyers and sellers.

Um, the answer is that I can't give you a precise number for this year, but typically it's between 10 and 20 million pounds a year on R&D. It's been going up recently as we've seen more opportunities to exploit demand requirements in the market. But yeah, I mean innovation is a really important part of what we do. There are many strange things about the defense market. One of the positive ones is that actually customers are prepared to finance quite a lot of R&D when they see that you've got something but they want something that perhaps performs in a slightly different way. So that's one of the benefits that we don't have to expend large proportions of our cash generation on self-funded R&D.

There are some small non-defense activities within our portfolio. One example would be that we have a small business, a small part of one of our businesses, providing equipment for traffic management. And I have to apologize in advance for anyone who's been caught by one of our yellow box cameras or bus lane cameras as a result. It's nothing to do with me, I can tell you that. And I mean, there's a certain amount of technology overlap there. The sort of artificial intelligence technology that goes into those things, for example the software that goes into those things, video analytics and so on, is relevant to some of our defense products, and it doesn't hurt us, and so we're happy to keep doing it, but it's not really core. We are fundamentally a defense business.

Yes and yes, both. We'd be very happy to add another business to our portfolio if the right one comes along. We're equally happy to merge businesses into our existing businesses, and we've done both over recent years. You'll see that if you have a look at that slide that I flashed up earlier. But we are very picky. You know, we're not a helmer that does ten acquisitions a year or whatever. We are very fundamentally focused on value, and acquisitions are done by myself and the finance director taking a very active role.

Almost everything we do requires export licenses, and some of what we do requires trade control licenses as well. So yes, we are regulated in that sense, but the UK government is generally very happy that we export to our allies because not only is it generating prosperity here, it's helping to protect them. In terms of our most important regions, the UK is about half of our output. The rest goes very widely to the Indo-Pacific, I was talking earlier about Southeast Asia, also to South America and to the Middle East as well. All of those are important areas for us.